FORM 10-Q
  UNITED STATES
 SECURITIES AND EXCHANGE
    COMMISSION
 WASHINGTON, DC 20549
  x
    Quarterly Report Pursuant to
    Section 13 or 15(d) of the Securities Exchange Act
    of 1934  For The Quarterly
    Period
 Ended March 31,
    2008
  o
    Transition Report Pursuant to
    Section 13 or 15(d) of the Securities Exchange Act of
    1934  Commission File
    Number:
 0-22832
  ALLIED CAPITAL
    CORPORATION
 (Exact Name of Registrant as
    Specified in its Charter)
  Maryland(State or Jurisdiction of
    Incorporation or Organization)

52-1081052(IRS Employer
    Identification No.)   1919 Pennsylvania Avenue,
    N.W.
 Washington, DC 20006
 (Address of Principal Executive
    Offices)
  Registrants telephone number, including area code:
    (202) 721-6100
    x o
  Rule 12b-2
  Large
    accelerated
    filer x
    Accelerated
    filer o
    Non-accelerated
    filer o
    Smaller
    reporting
    company o   o x




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##### 





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

1Consolidated Statement of Operations (unaudited)  For the
    Three Months Ended March 31, 2008 and 2007

2Consolidated Statement of Changes in Net Assets (unaudited)
     For the Three Months Ended March 31, 2008 and 2007

3Consolidated Statement of Cash Flows (unaudited)  For the
    Three Months Ended March 31, 2008 and 2007

4Consolidated Statement of Investments as of March 31,
    2008
    (unaudited)

5Consolidated Statement of Investments as of December 31,
    2007

22Notes to Consolidated Financial Statements

37Report of Independent Registered Public Accounting Firm

69Item 2. Managements Discussion and Analysis of
    Financial Condition and Results of Operations

73Item 3. Quantitative and Qualitative Disclosures About
    Market Risk

110Item 4. Controls and Procedures

110PART II. OTHER INFORMATIONItem 1. Legal Proceedings

111Item 1A. Risk Factors

112Item 2. Unregistered Sales of Equity Securities and
    Use of Proceeds

118Item 3. Defaults Upon Senior Securities

119Item 4. Submission of Matters to a Vote of Security
    Holders

119Item 5. Other Information

120Item 6. Exhibits

120Signatures

124




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##### 



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

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

2008

2007(unaudited)ASSETSPortfolio at value:Private financeCompanies more than 25% owned (cost:
    2008-$1,656,009;
    2007-$1,622,094)

$
1,157,473

$
1,279,080Companies 5% to 25% owned (cost:
    2008-$361,410;
    2007-$426,908)


381,758


389,509Companies less than 5% owned (cost:
    2008-$3,001,894;
    2007-$2,994,880)


2,980,548


2,990,732Total private finance (cost:
    2008-$5,019,313;
    2007-$5,043,882)


4,519,779


4,659,321Commercial real estate finance (cost:
    2008-$89,707;
    2007-$96,942)


115,854


121,200Total portfolio at value (cost:
    2008-$5,109,020;
    2007-$5,140,824)


4,635,633


4,780,521Investments in U.S. Treasury bills, money market and other
    securities


120,406


201,222Accrued interest and dividends receivable


73,709


71,429Other assets


171,327


157,864Cash


81,167


3,540Total assets

$
5,082,242

$
5,214,576LIABILITIES AND SHAREHOLDERS EQUITYLiabilities:Notes payable and debentures (maturing within one year:
    2008-$170,813;
    2007-$153,000)

$
1,922,813

$
1,922,220Revolving line of credit


268,750


367,250Accounts payable and other liabilities


62,261


153,259Total liabilities


2,253,824


2,442,729Commitments and contingenciesShareholders equity:Common stock, $0.0001 par value, 400,000 shares authorized;
    166,472 and 158,002 shares issued and outstanding at
    March 31, 2008, and December 31, 2007, respectively


16


16Additional paid-in capital


2,823,218


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





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


(2,549)


(2,692)Net unrealized appreciation (depreciation)


(492,731)


(379,327)Undistributed earnings


500,464


535,853Total shareholders equity


2,828,418


2,771,847Total liabilities and shareholders equity

$
5,082,242

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

$
16.99

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




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##### 



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

2008


2007(unaudited)Interest and Related Portfolio Income:Interest and dividendsCompanies more than 25% owned

$
28,624


$
27,157Companies 5% to 25% owned


12,674



11,861Companies less than 5% owned


93,362



62,965Total interest and dividends


134,660



101,983Fees and other incomeCompanies more than 25% owned


5,465



3,989Companies 5% to 25% owned


53



28Companies less than 5% owned


4,766



1,952Total fees and other income


10,284



5,969Total interest and related portfolio income


144,944



107,952Expenses:Interest


37,560



30,288Employee


22,652



21,928Employee stock options


4,195



3,661Administrative


9,019



13,224Total operating expenses


73,426



69,101Net investment income before income taxes


71,518



38,851Income tax expense (benefit), including excise tax


1,969



(649
)Net investment income


69,549



39,500Net Realized and Unrealized Gains (Losses):Net realized gains (losses)Companies more than 25% owned


(303
)


(1,350
)Companies 5% to 25% owned


1,243



166Companies less than 5% owned


2,203



28,850Total net realized gains


3,143



27,666Net change in unrealized appreciation or depreciation


(113,404
)


65,920Total net gains (losses)


(110,261
)


93,586Net increase (decrease) in net assets resulting from operations

$
(40,712
)

$
133,086Basic earnings (loss) per common share

$
(0.25
)

$
0.89Diluted earnings (loss) per common share

$
(0.25
)

$
0.87Weighted average common shares outstanding  basic


161,507



149,503Weighted average common shares outstanding  diluted


161,507



152,827   The accompanying notes are an
    integral part of these consolidated financial statements.
 2




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##### 



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

2008


2007(unaudited)Operations:Net investment income

$
69,549


$
39,500Net realized gains


3,143



27,666Net change in unrealized appreciation or depreciation


(113,404
)


65,920Net increase (decrease) in net assets resulting from operations


(40,712
)


133,086Shareholder distributions:Common stock dividends


(108,081
)


(95,753
)Net decrease in net assets resulting from shareholder
    distributions


(108,081
)


(95,753
)Capital share transactions:Sale of common stock


170,883



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


3,751



4,266Issuance of common stock upon the exercise of stock options






1,366Stock option expense


4,195



3,661Net decrease in notes receivable from sale of common stock


143



135Purchase of common stock held in deferred compensation trusts


(943
)


(3,089
)Distribution of common stock held in deferred compensation trusts


27,335



53Other






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


205,364



99,700Total increase in net assets


56,571



137,033Net assets at beginning of period


2,771,847



2,841,244Net assets at end of period

$
2,828,418


$
2,978,277Net asset value per common share

$
16.99


$
19.58Common shares outstanding at end of period


166,472



152,124   The accompanying notes are an
    integral part of these consolidated financial statements.
 3




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##### 






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

2008


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

$
(40,712
)

$
133,086Adjustments:Portfolio investments


(275,130
)


(170,216
)Principal collections related to investment repayments or sales


264,777



235,509Payment-in-kind interest and dividends, net of cash collections


(13,392
)


(8,143
)Change in accrued interest and dividends


(2,280
)


(3,124
)Net collection (amortization) of discounts and fees


(3,748
)


(1,844
)Redemption of (investments in) U.S. Treasury bills, money market
    and other securities


80,834



(66,335
)Stock option expense


4,195



3,661Changes in other assets and liabilities


(46,218
)


(40,453
)Depreciation and amortization


528



507Realized gains from the receipt of notes and other consideration
    from sale of investments, net of collections


(565
)


(2,814
)Realized losses


29,597



5,515Net change in unrealized (appreciation) or depreciation


113,404



(65,920
)Net cash provided by operating activities


111,290



19,429Cash flows from financing activities:Sale of common stock


170,883



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






1,366Collections of notes receivable from sale of common stock


143



135Borrowings under notes payable






200,000Net borrowings under (repayments on) revolving line of credit


(98,500
)


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


(943
)


(3,089
)Other financing activities


(916
)


(6,325
)Common stock dividends and distributions paid


(104,330
)


(98,910
)Net cash provided by (used in) financing activities


(33,663
)


(20,789
)Net increase (decrease) in cash


77,627



(1,360
)Cash at beginning of period


3,540



1,687Cash at end of period

$
81,167


$
327   The accompanying notes are an
    integral part of these consolidated financial statements.
 4




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ALLIED
    CAPITAL CORPORATION AND SUBSIDIARIES
  CONSOLIDATED
    STATEMENT OF INVESTMENTS
  Private Finance



March 31, 2008Portfolio Company



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

Investment(1)(2)

Principal


Cost


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

Equity Interests





$
860


$
860(Private Equity Fund)

Total Investment






860



860Alaris Consulting, LLC

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

$
27,055



26,986



(Business Services)

Equity Interests






6,400



Total Investment






33,386



Guaranty ($1,100)Standby Letters of Credit ($231)AllBridge Financial, LLC

Equity Interests






21,744



15,470(Asset Management)

Total Investment






21,744



15,470Standby Letter of Credit ($30,000)Allied Capital Senior Debt Fund,
    L.P.(5)

Equity Interests (See Note 3)






31,800



32,605(Private Debt Fund)

Total Investment






31,800



32,605Avborne,
    Inc.(7)

Preferred Stock (12,500 shares)






611



1,684(Business Services)

Common Stock (27,500 shares)










Total Investment






611



1,684Avborne Heavy Maintenance,
    Inc.(7)

Preferred Stock (1,568 shares)










157(Business Services)

Common Stock (2,750 shares)










1,037Total Investment










1,194Aviation Properties Corporation

Common Stock (100 shares)






65



(Business Services)

Total Investment






65



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

Preferred Stock (100,000 shares)






12,721



3,141(Consumer Products)

Common Stock (148,838 shares)






3,847



Total Investment






16,568



3,141Calder Capital Partners,
    LLC(5)

Senior Loan (9.4%, Due
    5/09)(6)


2,880



2,880



3,073(Asset Management)

Equity Interests






2,397



3,534Total Investment






5,277



6,607Callidus Capital Corporation

Senior Loan (12.0%, Due 12/08)


1,500



1,500



1,500(Asset Management)

Subordinated Debt (16.6%, Due 10/08  2/14)


11,180



11,180



11,180Common Stock (100 shares)






2,067



40,022Total Investment






14,747



52,702  (1)

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

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

Non-registered investment company.(6)

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

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




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



March 31, 2008Portfolio Company



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

Investment(1)(2)

Principal


Cost


ValueCiena Capital LLC

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

$
99,044


$
99,044


$
29,291(Financial Services)

Class B Equity Interests






119,436



Class C Equity Interests






109,301



Total Investment






327,781



29,291Guaranty ($384,819  See Note 3)Standby Letters of Credit ($59,500  
      See Note 3)CitiPostal Inc.

Senior Loan (6.1%, Due 12/13)


691



680



680(Business Services)

Unitranche Debt (12.0%, Due 12/13)


51,369



51,126



51,126Subordinated Debt (16.0%, Due 12/15)


8,092



8,092



8,092Common Stock (37,024 shares)






12,726



16,777Total Investment






72,624



76,675Coverall North America, Inc.

Unitranche Debt (12.0%, Due 7/11)


32,035



31,923



31,923(Business Services)

Subordinated Debt (15.0%, Due 7/11)


5,563



5,545



5,545Common Stock (763,333 shares)






14,362



28,008Total Investment






51,830



65,476CR Holding, Inc.

Subordinated Debt (16.6%, Due 2/13)


38,306



38,180



38,180(Consumer Products)

Common Stock (32,090,696 shares)






28,744



27,482Total Investment






66,924



65,662Crescent Equity
    Corp.(8)

Senior Loan (10.0%, Due 12/07)


433



433



433(Business Services/

Subordinated Debt (11.0%, Due 1/10  6/17)


31,095



30,979



30,979Broadcasting & Cable)

Subordinated Debt (12.5%, Due 11/07 
    3/08)(6)


1,450



1,450



1,683Common Stock (174 shares)






80,571



24,313Total Investment






113,433



57,408Guaranty ($900)Standby Letters of Credit ($200)Direct Capital Corporation

Subordinated Debt (16.0%, Due 3/13)


49,841



49,706



49,706(Financial Services)

Common Stock (1,809,159 shares)






22,644



11,006Total Investment






72,350



60,712Financial Pacific Company

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


68,056



67,898



67,898(Financial Services)

Preferred Stock (9,458 shares)






8,865



17,551Common Stock (12,711 shares)






12,783



24,021Total Investment






89,546



109,470  (1)

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

Common stock, preferred stock, warrants, options, and equity
    interests are generally non-income producing and restricted.(6)

Loan or debt security is on non-accrual status and therefore is
    considered non-income producing.(8)

Crescent Equity Corp. had a cost basis of $113.4 million
    and holds investments in Crescent Hotels & Resorts,
    LLC and affiliates (Business Services) with a value of
    $54.9 million, and Longview Cable & Data, LLC
    (Broadcasting & Cable) with a value of $2.6 million,
    for a total value of $57.4 million.   The accompanying notes are an
    integral part of these consolidated financial statements.
 6




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##### 



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



March 31, 2008Portfolio Company



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

Investment(1)(2)

Principal


Cost


ValueForeSite Towers, LLC

Equity Interest





$



$
803(Tower Leasing)

Total Investment










803Global Communications, LLC

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

$
1,350



1,350



1,350(Business Services)

Total Investment






1,350



1,350Hot Light Brands, Inc.

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


29,277



29,277



29,628(Retail)

Common Stock (93,500 shares)






5,151



1,150Total Investment






34,428



30,778Hot Stuff Foods, LLC

Senior Loan (6.2%, Due 2/11-2/12)


52,414



52,238



52,238(Consumer Products)

Subordinated Debt (9.9%, Due 8/12)


30,540



30,452



20,399Subordinated Debt (15.4%, Due
    2/13)(6)


52,373



52,151



Common Stock (1,147,453 shares)






56,187



Total Investment






191,028



72,637Huddle House, Inc.

Subordinated Debt (15.0%, Due 12/12)


55,927



55,717



55,717(Retail)

Common Stock (358,428 shares)






35,828



36,824Total Investment






91,545



92,541Impact Innovations Group, LLC

Equity Interests in Affiliate










321(Business Services)

Total Investment










321Insight Pharmaceuticals Corporation

Subordinated Debt (15.0%, Due 9/12)


45,554



45,441



45,441(Consumer Products)

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


16,181



16,130



16,967Preferred Stock (25,000 shares)






25,000



10,561Common Stock (620,000 shares)






6,325



Total Investment






92,896



72,969Jakel, Inc.

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


748



748



748(Industrial Products)

Total Investment






748



748Legacy Partners Group, Inc.

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


843



843



843(Financial Services)

Equity Interests






4,261



1,145Total Investment






5,104



1,988Litterer
    Beteiligungs-GmbH(4)

Subordinated Debt (8.0%, Due 3/07)


828



828



828(Business Services)

Equity Interest






1,809



850Total Investment






2,637



1,678  (1)

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

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

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

Loan or debt security is on non-accrual status and therefore is
    considered non-income producing.   The accompanying notes are an
    integral part of these consolidated financial statements.
 7




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



March 31, 2008Portfolio Company



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

Investment(1)(2)

Principal


Cost


ValueMHF Logistical Solutions, Inc.

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

$
49,841


$
49,613


$
9,319(Business Services)

Preferred Stock (10,000 shares)










Common Stock (20,934 shares)






20,942



Total Investment






70,555



9,319MVL Group, Inc.

Senior Loan (12.0%, Due 6/09  7/09)


30,674



30,645



30,645(Business Services)

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


40,447



40,239



40,239Common Stock (559,377 shares)






555



4,373Total Investment






71,439



75,257Old Orchard Brands, LLC

Subordinated Debt (18.0%, Due 7/14)


18,402



18,325



18,325(Consumer Products)

Equity Interests






15,857



25,302Total Investment






34,182



43,627Penn Detroit Diesel Allison, LLC

Subordinated Debt (15.5%, Due 8/13)


37,145



37,011



37,011(Business Services)

Equity Interests






18,850



33,522Total Investment






55,861



70,533Service Champ, Inc.

Subordinated Debt (15.5%, Due 4/12)


26,542



26,461



26,461(Business Services)

Common Stock (55,112 shares)






11,785



23,751Total Investment






38,246



50,212Startec Equity, LLC

Equity Interests






191



397(Telecommunications)

Total Investment






191



397Sweet Traditions, Inc.

Senior Loan (10.0%, Due
    9/08)(6)


694



694



427(Retail)

Total Investment






694



427Unitranche Fund LLC

Subordinated Certificates (12.4%)






31,491



31,491(Private Debt Fund)

Equity Interests






1



1Total Investment






31,492



31,492Worldwide Express Operations, LLC

Subordinated Debt (14.0%, Due 2/14)


2,695



2,539



2,539(Business Services)

Equity Interests






11,384



18,664Warrants






144



236Total Investment






14,067



21,439Total
    companies more than 25% owned





$
1,656,009


$
1,157,473  (1)

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

Common stock, preferred stock, warrants, options, and equity
    interests are generally non-income producing and restricted.(6)

Loan or debt security is on non-accrual status and therefore is
    considered non-income producing.   The accompanying notes are an
    integral part of these consolidated financial statements.
 8




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##### 



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



March 31, 2008Portfolio Company



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

Investment(1)(2)

Principal


Cost


ValueCompanies 5% to 25% Owned10th
    Street, LLC

Subordinated Debt (13.0%, Due 11/14)

$
20,774


$
20,650


$
20,774(Business Services)

Equity Interests






421



1,075Option






25



25Total Investment






21,096



21,874Advantage Sales & Marketing, Inc.

Subordinated Debt (12.0%, Due 3/14)


156,218



155,663



157,443(Business Services)

Equity Interests










10,200Total Investment






155,663



167,643Air Medical Group Holdings LLC

Senior Loan (5.2%, Due 3/11)


4,023



3,977



3,865(Healthcare Services)

Equity Interests






2,993



9,900Total Investment






6,970



13,765Alpine ESP Holdings, Inc.

Preferred Stock (536 shares)






536



622(Business Services)

Common Stock (11,657 shares)






12



Total Investment






548



622Amerex Group, LLC

Subordinated Debt (12.0%, Due 1/13)


7,789



7,789



7,789(Consumer Products)

Equity Interests






3,509



12,772Total Investment






11,298



20,561BB&T Capital Partners/WindsorMezzanine Fund,
    LLC(5)

Equity Interests






11,739



11,475(Private Equity Fund)

Total Investment






11,739



11,475Becker Underwood, Inc.

Subordinated Debt (14.5%, Due 8/12)


25,023



24,960



25,524(Industrial Products)

Common Stock (4,376 shares)






5,014



4,000Total Investment






29,974



29,524BI Incorporated

Subordinated Debt (13.5%, Due 2/14)


30,615



30,504



30,921(Business Services)

Common Stock (34,506 shares)






3,451



6,200Total Investment






33,955



37,121Creative Group, Inc.

Subordinated Debt (14.0%, Due
    9/13)(6)


15,000



13,686



5,185(Business Services)

Common Stock (20,000 shares)










Warrant






1,387



Total Investment






15,073



5,185Drew Foam Companies, Inc.

Preferred Stock (622,555 shares)






623



270(Business Services)

Common Stock (6,286 shares)






6



Total Investment






629



270  (1)

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

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

Non-registered investment company.(6)

Loan or debt security is on non-accrual status and therefore is
    considered non-income producing.   The accompanying notes are an
    integral part of these consolidated financial statements.
 9




---



##### 



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


Private Finance



March 31, 2008Portfolio Company



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

Investment(1)(2)

Principal

Cost

ValueHilden America, Inc.

Common Stock (19 shares)





$
454


$
445(Consumer Products)

Total Investment






454



445MedBridge Healthcare, LLC

Senior Loan (8.0%, Due
    8/09)(6)

$
7,164



7,164



7,164(Healthcare Services)

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


5,184



5,184



2,601Convertible Subordinated Debt (2.0%, Due
    8/14)(6)


2,970



984



Equity Interests






1,416



Total Investment






14,748



9,765Multi-Ad Services, Inc.

Unitranche Debt (11.3%, Due 11/11)


19,750



19,660



19,732(Business Services)

Equity Interests






1,725



1,014Total Investment






21,385



20,746Progressive InternationalCorporation

Subordinated Debt (16.0%, Due 12/09)


1,576



1,565



1,576(Consumer Products)

Preferred Stock (500 shares)






500



1,059Common Stock (197 shares)






13



5,800Warrants










Total Investment






2,078



8,435Regency Healthcare Group, LLC

Unitranche Debt (11.1%, Due 6/12)


12,000



11,944



12,297(Healthcare Services)

Equity Interests






1,294



1,497Total Investment






13,238



13,794SGT India Private
    Limited(4)

Common Stock (150,596 shares)






4,099



2,580(Business Services)

Total Investment






4,099



2,580Soteria Imaging Services, LLC

Subordinated Debt (11.9%, Due 11/10)


15,750



15,029



15,750(Healthcare Services)

Equity Interests






1,872



2,203Total Investment






16,901



17,953Universal Environmental Services, LLC

Equity Interests






1,562



(Business Services)

Total Investment






1,562



Total
    companies 5% to 25% owned





$
361,410


$
381,758Companies Less Than 5% Owned3SI Security Systems, Inc.

Subordinated Debt (14.5%, Due 8/13)

$
28,234


$
28,139


$
27,836(Consumer Products)

Total Investment






28,139



27,836AgData, L.P.

Senior Loan (10.3%, Due 7/12)


1,843



1,836



1,862(Consumer Services)

Unitranche Debt (10.3%, Due 7/12)


4,120



4,080



4,161Total Investment






5,916



6,023  (1)

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

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

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

Loan or debt security is on non-accrual status and therefore is
    considered non-income producing.   The accompanying notes are an
    integral part of these consolidated financial statements.
 10




---



##### 



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



March 31, 2008Portfolio Company



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

Investment(1)(2)

Principal

Cost

ValueAugusta Sportswear Group, Inc.

Subordinated Debt (13.0%, Due 1/15)

$
53,000


$
52,807


$
52,807(Consumer Products)

Common Stock (2,500 shares)






2,500



2,227Total Investment






55,307



55,034Axium Healthcare Pharmacy, Inc.

Senior Loan (14.0%, Due 12/12)


3,750



3,719



3,750(Healthcare Services)

Unitranche Debt (14.0%, Due 12/12)


8,500



8,465



8,500Common Stock (22,860 shares)






2,286



800Total Investment






14,470



13,050Baird Capital Partners IV
    Limited(5)

Limited Partnership Interest






2,630



2,492(Private Equity Fund)

Total Investment






2,630



2,492BenefitMall, Inc.

Subordinated Debt (14.9%, Due 10/13-10/14)


76,189



75,978



75,978(Business Services)

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






39,274



82,250Warrants(12)










Total Investment






115,252



158,228Broadcast Electronics, Inc.

Senior Loan (8.0%, Due
    7/12)(6)


4,913



4,884



2,781(Business Services)

Total Investment






4,884



2,781Bushnell, Inc.

Subordinated Debt (9.2%, Due 2/14)


41,325



39,862



38,206(Consumer Products)

Total Investment






39,862



38,206Callidus Debt PartnersCDO Fund I,
    Ltd.(4)(10)

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


18,800



18,924



18,988(CDO)

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


9,400



9,462



9,494Total Investment






28,386



28,482Callidus Debt PartnersCLO Fund III,
    Ltd.(4)(10)

Preferred Shares (23,600,000 shares,
    15.3%)(11)






21,435



20,029(CLO)

Total Investment






21,435



20,029Callidus Debt PartnersCLO Fund IV,
    Ltd.(4)(10)

Class D Notes (7.6%, Due 4/20)


3,000



1,953



2,627(CLO)

Income Notes
    (18.6%)(11)






15,192



14,929Total Investment






17,145



17,556  (1)

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

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

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

Non-registered investment company.(6)

Loan or debt security is on non-accrual status and therefore is
    considered non-income producing.(10)

The fund is managed by Callidus Capital, a portfolio company of
    Allied Capital.(11)

Represents the effective interest yield earned on the cost basis
    of these preferred equity investments and income notes. The
    yield is included in interest income from companies less than 5%
    owned in the consolidated statement of operations.(12)

Common stock is non-voting. In addition to non-voting stock
    ownership, the Company has an option to acquire a majority of
    the voting securities of the portfolio company at fair market
    value.   The accompanying notes are an
    integral part of these consolidated financial statements.
 11




---



##### 



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



March 31, 2008Portfolio Company



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

Investment(1)(2)

Principal


Cost


ValueCallidus Debt PartnersCLO Fund V,
    Ltd.(4)(10)

Income Notes
    (20.3%)(11)





$
13,838


$
13,818(CLO)

Total Investment






13,838



13,818Callidus Debt PartnersCLO Fund VI,
    Ltd.(4)(10)

Class D Notes (11.4%) Due 10/21)

$
5,000



4,341



4,487(CLO)

Income Notes
    (18.0%)(11)






28,308



26,540Total Investment






32,649



31,027Callidus Debt PartnersCLO Fund VII,
    Ltd.(4)(10)

Income Notes
    (16.6%)(11)






23,041



23,041(CLO)

Total Investment






23,041



23,041Callidus MAPS CLO Fund I
    LLC(10)

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


17,000



17,000



15,497(CLO)

Income Notes
    (3.7%)(11)






48,422



31,530Total Investment






65,422



47,027Callidus MAPS CLO Fund II,
    Ltd.(4)(10)

Income Notes
    (15.7%)(11)






18,755



16,741(CLO)

Total Investment






18,755



16,741Carlisle Wide Plank Floors, Inc.

Senior Loan (7.8%, Due 6/11)


500



497



496(Consumer Products)

Unitranche Debt (10.0%, Due 6/11)


3,161



3,132



3,161Preferred Stock (345,056 Shares)






345



362Total Investment






3,974



4,019Catterton Partners VI,
    L.P.(5)

Limited Partnership Interest






2,536



2,477(Private Equity Fund)

Total Investment






2,536



2,477Centre Capital Investors V,
    L.P.(5)

Limited Partnership Interest






720



720(Private Equity Fund)

Total Investment






720



720  (1)

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

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

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

Non-registered investment company.(10)

The fund is managed by Callidus Capital, a portfolio company of
    Allied Capital.(11)

Represents the effective interest yield earned on the cost basis
    of these preferred equity investments and income notes. The
    yield is included in interest income from companies less than 5%
    owned in the consolidated statement of operations.   The accompanying notes are an
    integral part of these consolidated financial statements.
 12




---



##### 



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



March 31, 2008Portfolio Company



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

Investment(1)(2)

Principal


Cost


ValueCK Franchising, Inc.

Senior Loan (5.9%, Due 7/12)

$
8,150


$
8,066


$
8,066(Consumer Services)

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


21,038



20,951



20,951Preferred Stock (1,281,887 shares)






1,282



1,422Common Stock (7,585,549 shares)






7,586



7,600Total Investment






37,885



38,039Commercial Credit Group, Inc.

Subordinated Debt (14.8%, Due 2/11)


12,000



12,021



12,021(Financial Services)

Preferred Stock (64,679 shares)






15,543



9,073Warrants










Total Investment






27,564



21,094Community Education Centers, Inc.

Subordinated Debt (13.5%, Due 11/13)


35,145



35,074



34,211(Education Services)

Total Investment






35,074



34,211Component Hardware Group, Inc.

Subordinated Debt (13.5%, Due 1/13)


18,501



18,435



18,666(Industrial Products)

Total Investment






18,435



18,666Cook Inlet Alternative Risk, LLC

Unitranche Debt (10.8%, Due 4/13)


90,000



89,552



90,954(Business Services)

Equity Interests






552



700Total Investment






90,104



91,654Cortec Group Fund IV,
    L.P.(5)

Limited Partnership Interest






3,470



2,998(Private Equity)

Total Investment






3,470



2,998Diversified Mercury

Senior Loan (6.1%, Due 3/13)


233



218



220Communications, LLC(Business Services)

Total Investment






218



220Digital VideoStream, LLC

Unitranche Debt (11.0%, Due 2/12)


17,257



17,177



17,528(Business Services)

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


4,220



4,207



5,894Total Investment






21,384



23,422DirectBuy Holdings, Inc.

Subordinated Debt (14.5%, Due 5/13)


75,000



74,648



72,744(Consumer Products)

Equity Interests






8,000



5,400Total Investment






82,648



78,144Distant Lands Trading Co.

Senior Loan (10.3%, Due 11/11)


9,000



8,968



8,736(Consumer Products)

Unitranche Debt (13.0%, Due 11/11)


42,375



42,235



42,423Common Stock (3,451 shares)






3,451



905Total Investment






54,654



52,064Driven Brands, Inc.

Senior Loan (8.2%, Due 6/11)


40,270



40,148



40,148d/b/a Meineke and Econo Lube

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


82,960



82,715



82,715(Consumer Services)

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






26,398



6,079Warrants(12)










Total Investment






149,261



128,942  (1)

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

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

Non-registered investment company.(12)

Common stock is non-voting. In addition to non-voting stock
    ownership, the Company has an option to acquire a majority of
    the voting securities of the portfolio company at fair market
    value.    The accompanying notes are an
    integral part of these consolidated financial statements.
 13




---



##### 



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



March 31, 2008Portfolio Company



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

Investment(1)(2)

Principal


Cost


ValueDryden XVIII LeveragedLoan 2007
    Limited(4)

Class B Notes (9.7%, Due 10/19)

$
9,000


$
7,420


$
8,257(CLO)

Income Notes
    (12.7%)(11)






22,727



19,803Total Investment






30,147



28,060Dynamic India Fund
    IV(4)(5)

Equity Interests






9,350



11,524(Private Equity Fund)

Total Investment






9,350



11,524EarthColor, Inc.

Subordinated Debt (15.0%, Due 11/13)


117,759



117,284



117,284(Business Services)

Common Stock
    (63,438 shares)(12)






63,438



66,434Warrants(12)










Total Investment






180,722



183,718eCentury Capital Partners,
    L.P.(5)

Limited Partnership Interest






7,274



2,076(Private Equity Fund)

Total Investment






7,274



2,076eInstruction Corporation

Subordinated Debt (12.0%, Due 7/14-1/15)


47,000



46,774



45,738(Education Services)

Common Stock (2,406 shares)






2,500



2,700Total Investment






49,274



48,438Farleys & Sathers Candy Company, Inc.

Subordinated Debt (12.7%, Due 3/11)


18,000



17,937



17,100(Consumer Products)

Total Investment






17,937



17,100FCP-BHI Holdings, LLC

Subordinated Debt (12.5%, Due 9/13)


24,939



24,831



24,241d/b/a Bojangles

Equity Interests






863



1,400(Retail)

Total Investment






25,694



25,641Fidus Mezzanine Capital,
    L.P.(5)

Limited Partnership Interest






6,357



6,357(Private Equity Fund)

Total Investment






6,357



6,357Freedom Financial Network, LLC

Senior Loan (6.8%, Due 2/13)


12,968



12,968



12,968(Financial Services)

Subordinated Debt (13.5%, Due 2/14)


13,000



12,936



12,936Total Investment






25,904



25,904Frozen Specialties, Inc.

Warrants






375



(Consumer Products)

Total Investment






375



Garden Ridge Corporation

Subordinated Debt (7.0%, Due
    5/12)(6)


20,500



20,500



20,500(Retail)

Total Investment






20,500



20,500Geotrace Technologies, Inc.

Subordinated Debt (10.0%, Due 6/09)


6,198



6,068



6,260(Energy Services)

Warrants






2,027



2,700Total Investment






8,095



8,960  (1)

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

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

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

Non-registered investment company.(6)

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

Represents the effective interest yield earned on the cost basis
    of these preferred equity investments and income notes. The
    yield is included in interest income from companies less than 5%
    owned in the consolidated statement of operations.(12)

Common stock is non-voting. In addition to non-voting stock
    ownership, the Company has an option to acquire a majority of
    the voting securities of the portfolio company at fair market
    value.   The accompanying notes are an
    integral part of these consolidated financial statements.
 14




---



##### 



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



March 31, 2008Portfolio Company



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

Investment(1)(2)

Principal


Cost


ValueGilchrist & Soames, Inc.

Senior Loan (8.4%, Due 10/13)

$
5,000


$
4,956


$
4,756(Consumer Products)

Subordinated Debt (13.4%, Due 10/13)


25,800



25,682



25,342Total Investment






30,638



30,098Havco Wood Products LLC

Unitranche Debt (11.5%, Due 8/11)


5,100



4,293



5,208(Industrial Products)

Equity Interests






910



2,900Total Investment






5,203



8,108Haven Eldercare of New England, LLC

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


1,439



1,439



(Healthcare Services)

Total Investment






1,439



Higginbotham Insurance Agency, Inc.

Senior Loan (7.2%, Due 8/12)


17,546



17,459



17,459(Business Services)

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


46,883



46,669



46,669Common Stock
    (22,020 shares)(12)






22,020



22,887Warrant(12)










Total Investment






86,148



87,015The Hillman Companies,
    Inc.(3)

Subordinated Debt (10.0%, Due 9/11)


44,580



44,466



44,580(Consumer Products)

Total Investment






44,466



44,580The Homax Group, Inc.

Senior Loan (8.7%, Due 10/12)


10,940



10,940



10,508(Consumer Products)

Subordinated Debt (12.0%, Due 4/14)


14,000



13,283



13,571Preferred Stock (76 shares)






76



5Common Stock (24 shares)






5



Warrants






954



80Total Investment






25,258



24,164Ideal Snacks Corporation

Senior Loan (7.0%, Due 6/10)


545



545



535(Consumer Products)

Total Investment






545



535Integrity Interactive Corporation

Unitranche Debt (10.5%, Due 2/12)


11,952



11,860



12,175(Business Services)

Total Investment






11,860



12,175International Fiber Corporation

Subordinated Debt (14.0%, Due 6/12)


24,697



24,607



25,438(Industrial Products)

Preferred Stock (21,566 shares)






2,157



2,157Total Investment






26,764



27,595  (1)

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

Common stock, preferred stock, warrants, options, and equity
    interests are generally non-income producing and restricted.(3)

Public company.(6)

Loan or debt security is on non-accrual status and therefore is
    considered non-income producing.(12)

Common stock is non-voting. In addition to non-voting stock
    ownership, the Company has an option to acquire a majority of
    the voting securities of the portfolio company at fair market
    value.   The accompanying notes are an
    integral part of these consolidated financial statements.
 15




---



##### 



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



March 31, 2008Portfolio Company



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

Investment(1)(2)

Principal


Cost


ValueJones Stephens Corporation

Senior Loan (7.5%, Due 9/12)

$
5,516


$
5,505


$
5,272(Consumer Products)

Total Investment






5,505



5,272Knightsbridge CLO 2007-1
    Limited(4)

Class E Notes (14.1%, Due 1/22)


22,000



22,000



21,983(CLO)

Income Notes
    (18.5%)(11)






32,413



30,985Total Investment






54,413



52,968Kodiak Fund
    LP(5)

Equity Interests






9,423



2,835(Private Equity Fund)

Total Investment






9,423



2,835Line-X, Inc.

Senior Loan (15.0%, Due 8/11)


900



886



886(Consumer Products)

Unitranche Debt (15.0% Due 8/11)


48,204



48,055



42,810Total Investment






48,941



43,696Standby Letter of Credit ($1,500)MedAssets,
    Inc.(3)

Common Stock (224,817 shares)






2,289



3,332(Business Services)

Total Investment






2,289



3,332Milestone AV Technologies, Inc.

Subordinated Debt (9.2%, Due 6/13)


37,500



37,500



37,500(Business Services)

Total Investment






37,500



37,500NetShape Technologies, Inc.

Senior Loan (6.5%, Due 2/13)


5,820



5,792



5,282(Industrial Products)

Total Investment






5,792



5,282Network Hardware Resale, Inc.

Unitranche Debt (10.5%, Due 12/11)


20,219



20,314



20,624(Business Services)

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


14,533



14,591



16,560Total Investment






34,905



37,184Norwesco, Inc.

Subordinated Debt (12.4%, Due 1/12  7/12)


61,866



61,558



61,558(Industrial Products)

Common Stock (482,736
    shares)(12)






3,676



64,854Warrants(12)










Total Investment






65,234



126,412Novak Biddle Venture Partners III,
    L.P.(5)

Limited Partnership Interest






1,910



1,496(Private Equity Fund)

Total Investment






1,910



1,496  (1)

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

Common stock, preferred stock, warrants, options, and equity
    interests are generally non-income producing and restricted.(3)

Public company.(4)

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

Non-registered investment company.(11)

Represents the effective interest yield earned on the cost basis
    of these preferred equity investments and income notes. The
    yield is included in interest income from companies less than 5%
    owned in the consolidated statement of operations.(12)

Common stock is non-voting. In addition to non-voting stock
    ownership, the Company has an option to acquire a majority of
    the voting securities of the portfolio company at fair market
    value.   The accompanying notes are an
    integral part of these consolidated financial statements.
 16




---



##### 



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



March 31, 2008Portfolio Company



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

Investment(1)(2)

Principal


Cost


ValueOahu Waste Services, Inc.

Stock Appreciation Rights





$
206


$
1,000(Business Services)

Total Investment






206



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

Class D Notes (8.7%, Due 10/21)

$
15,000



11,594



10,760(CLO)

Total Investment






11,594



10,760Passport HealthCommunications, Inc.

Preferred Stock (561,908 shares)






1,725



2,207(Healthcare Services)

Common Stock (16,977 shares)






42



54Total Investment






1,767



2,261PC Helps Support, LLC

Senior Loan (6.6%, Due 12/13)


19,214



19,206



18,732(Business Services)

Subordinated Debt (13.3%, Due 12/13)


29,681



29,535



29,196Total Investment






48,741



47,928Pendum, Inc.

Subordinated Debt (17.0%, Due
    1/11)(6)


34,028



34,028



(Business Services)

Preferred Stock (82,715 shares)










Warrants










Total Investment






34,028



Performant Financial Corporation

Common Stock (478,816 shares)






734



(Business Services)

Total Investment






734



Peter Brasseler Holdings, LLC

Equity Interests






2,500



2,279(Business Services)

Total Investment






2,500



2,279PharMEDium Healthcare Corporation

Senior Loan (6.6%, Due 10/13)


20,042



20,042



19,356(Healthcare Services)

Total Investment






20,042



19,356Postle Aluminum Company, LLC

Unitranche Debt (11.0%, Due 10/12)


61,250



61,015



60,104(Industrial Products)

Equity Interests






2,157



2,202Total Investment






63,172



62,306  (1)

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

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

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

Loan or debt security is on non-accrual status and therefore is
    considered non-income producing.   The accompanying notes are an
    integral part of these consolidated financial statements.
 17




---



##### 



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



March 31, 2008Portfolio Company



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

Investment(1)(2)

Principal


Cost


ValuePro Mach, Inc.

Subordinated Debt (13.0%, Due 6/12)

$
14,598


$
14,545


$
14,781(Industrial Products)

Equity Interests






1,294



1,600Total Investment






15,839



16,381Promo Works, LLC

Unitranche Debt (10.3%, Due 12/11)


25,899



25,702



25,985(Business Services)

Total Investment






25,702



25,985Guaranty ($300)Reed Group, Ltd.

Senior Loan (8.5%, Due 12/13)


21,000



20,970



20,044(Healthcare Services)

Subordinated Debt (13.8%, Due 12/13)


18,000



17,914



17,258Equity Interests






1,800



900Total Investment






40,684



38,202S.B. Restaurant Company

Unitranche Debt (9.8%, Due 4/11)


38,501



38,232



38,127(Retail)

Preferred Stock (46,690 shares)






117



117Warrants






534



1,000Total Investment






38,883



39,244Standby Letters of Credit ($2,540)Service Center Metals, LLC

Subordinated Debt (15.5%, Due 9/11)


5,000



4,982



4,948(Industrial Products)

Equity Interests






270



302Total Investment






5,252



5,250Snow Phipps Group,
    L.P.(5)

Limited Partnership Interest






2,329



2,329(Private Equity Fund)

Total Investment






2,329



2,329SPP Mezzanine Funding II,
    L.P.(5)

Limited Partnership Interest






5,223



4,897(Private Equity Fund)

Total Investment






5,223



4,897Stag-Parkway, Inc.

Unitranche Debt (10.8%, Due 7/12)


50,096



49,916



50,096(Business Services)

Total Investment






49,916



50,096STS Operating, Inc.

Subordinated Debt (11.0%, Due 1/13)


30,386



30,279



30,994(Industrial Products)

Total Investment






30,279



30,994Summit Energy Services, Inc.

Senior Loan (8.0%, Due 8/13)


9,179



9,179



8,903(Business Services)

Subordinated  Debt (11.6%, Due 8/13)


35,765



35,603



36,029Common Stock (385,626 shares)






1,725



1,600Total Investment






46,507



46,532  (1)

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

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

Non-registered investment company.   The accompanying notes are an
    integral part of these consolidated financial statements.
 18




---



##### 



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



March 31, 2008Portfolio Company



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

Investment(1)(2)

Principal


Cost


ValueTappan Wire and Cable Inc.

Unitranche Debt (15.0%, Due 8/14)

$
22,346


$
22,235


$
22,235(Business Services)

Common Stock
    (12,940 shares)(12)






1,941



6,201Warrant(12)










Total Investment






24,176



28,436The Step2 Company, LLC

Unitranche Debt (11.0%, Due 4/12)


95,801



95,473



96,465(Consumer Products)

Equity Interests






2,142



2,419Total Investment






97,615



98,884Tradesmen International, Inc.

Subordinated Debt (12.0%, Due 12/12)


49,124



48,489



47,820(Business Services)

Total Investment






48,489



47,820TransAmerican Auto Parts, LLC

Subordinated Debt (14.0%, Due 11/12)


24,195



24,035



23,235(Consumer Products)

Equity Interests






1,034



576Total Investment






25,069



23,811Triax Holdings, LLC

Subordinated Debt (19.0%, Due 2/12)


10,193



10,150



10,334(Consumer Products)

Equity Interests






16,528



41,093Total Investment






26,678



51,427Trover Solutions, Inc.

Subordinated Debt (12.0%, Due 11/12)


60,230



59,983



59,987(Business Services)

Total Investment






59,983



59,987Universal Air Filter Company

Subordinated Debt (12.0%, Due 11/12)


14,625



14,566



14,728(Industrial Products)

Total Investment






14,566



14,728United Road Towing, Inc.

Subordinated Debt (10.4%, Due 1/14)


44,000



43,787



43,787(Consumer Services)

Total Investment






43,787



43,787Venturehouse-Cibernet Investors, LLC

Equity Interest










(Business Services)

Total Investment










VICORP Restaurants, Inc.

Warrants






33



(Retail)

Total Investment






33



Walker Investment Fund II,
    LLLP(5)

Limited Partnership Interest






1,330



333(Private Equity Fund)

Total Investment






1,330



333WMA Equity Corporation and Affiliates

Subordinated Debt (14.0%, Due 4/13)


125,323



124,380



121,395d/b/a Wear Me Apparel

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


11,151



11,151



11,749(Consumer Products)

Common Stock (86 shares)






39,721



5,349Total Investment






175,252



138,493  (1)

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

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

Non-registered investment company.(6)

Loan or debt security is on non-accrual status and therefore is
    considered non-income producing.(12)

Common stock is non-voting. In addition to non-voting stock
    ownership, the Company has an option to acquire a majority of
    the voting securities of the portfolio company at fair market
    value.   The accompanying notes are an
    integral part of these consolidated financial statements.
 19




---



##### 



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



March 31, 2008Portfolio Company



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

Investment(1)(2)

Principal


Cost


ValueWebster Capital II,
    L.P.(5)

Limited Partnership Interest





$
897


$
897(Private Equity Fund)

Total Investment






897



897Woodstream Corporation

Subordinated Debt (12.0%, Due 2/15)

$
90,000



89,588



85,374(Consumer Products)

Common Stock (6,470 shares)






6,470



4,200Total Investment






96,058



89,574York Insurance Services Group, Inc.

Subordinated Debt (14.5%, Due 1/14)


45,367



45,199



45,236(Business Services)

Common Stock (12,939 shares)






1,294



1,600Total Investment






46,493



46,836Other companies

Other debt investments


3,236



3,142



3,169Other equity investments






8



Total Investment






3,150



3,169Total companies less than 5% owned





$
3,001,894


$
2,980,548Total private finance (152 portfolio investments)





$
5,019,313


$
4,519,779  (1)

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

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

Non-registered investment company.   The accompanying notes are an
    integral part of these consolidated financial statements.
 20




---



##### 



ALLIED CAPITAL CORPORATION AND
    SUBSIDIARIES
  CONSOLIDATED STATEMENT OF
    INVESTMENTS  (Continued)
  Commercial
    Real Estate Finance
    (in thousands, except number of loans)
  March 31, 2008(unaudited)Stated Interest

Number ofRate Ranges

Loans

Cost

ValueCommercial Mortgage LoansUp to 6.99%



1


$
13,702


$
13,7027.00%8.99%



7



17,411



16,7639.00%10.99%



1



6,455



6,45511.00%12.99%



1



10,459



10,45915.00% and above



2



3,970



6,109Total commercial mortgage
    loans(13)









$
51,997


$
53,488Real Estate Owned









$
23,531


$
30,220Equity
    Interests(2) 
    Companies more than 25% owned





$
14,179


$
32,146Guarantees ($6,871)Standby Letter of Credit ($1,295)Total commercial real estate finance









$
89,707


$
115,854Total portfolio









$
5,109,020


$
4,635,633   Yield

Cost

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


1.6%


$
119,842


$
119,976Blackrock Liquidity Funds


3.3%



344



344SEI Daily Income Tr Prime Obligation Money Market Fund


3.1%



59



59American Beacon Money Market Fund


3.1%



20



20Columbia Treasury Reserves Money Market Fund


3.2%



7



7Total





$
120,272


$
120,406  (2)

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

Commercial mortgage loans totaling $7.4 million at value
    were on non-accrual status and therefore were considered
    non-income producing.   The accompanying notes are an
    integral part of these consolidated financial statements.
 21




---



##### 



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



December 31, 2007(in thousands, except number of shares)

Investment(1)(2)

Principal


Cost


ValueCompanies More Than 25% OwnedAlaris Consulting, LLC

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

$
27,055


$
26,987


$
(Business Services)

Equity Interests






5,189



Total Investment






32,176



Guaranty ($1,100)AllBridge Financial, LLC

Equity Interests






7,800



7,800(Asset Management)

Total Investment






7,800



7,800Standby Letter of Credit ($30,000)Allied Capital Senior Debt Fund,
    L.P.(5)

Equity Interests (See Note 3)






31,800



32,811(Private Debt Fund)

Total Investment






31,800



32,811Avborne,
    Inc.(7)

Preferred Stock (12,500 shares)






611



1,633(Business Services)

Common Stock (27,500 shares)










Total Investment






611



1,633Avborne Heavy Maintenance,
    Inc.(7)

Preferred Stock (1,568 shares)






2,401



2,557(Business Services)

Common Stock (2,750 shares)










370Total Investment






2,401



2,927Guaranty ($2,401)Aviation Properties Corporation

Common Stock (100 shares)






65



(Business Services)

Total Investment






65



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

Preferred Stock (100,000 shares)






12,721



4,648(Consumer Products)

Common Stock (148,838 shares)






3,847



Total Investment






16,568



4,648Calder Capital Partners,
    LLC(5)

Senior Loan (9.4%, Due
    5/09)(6)


2,907



2,907



3,035(Asset Management)

Equity Interests






2,396



3,559Total Investment






5,303



6,594Callidus Capital Corporation

Subordinated Debt (18.0%, Due 10/08)


6,871



6,871



6,871(Asset Management)

Common Stock (100 shares)






2,067



44,587Total Investment






8,938



51,458Ciena Capital LLC

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


99,044



99,044



68,609(Financial Services)

Class B Equity Interests






119,436



Class C Equity Interests






109,301



Total Investment






327,781



68,609Guaranty ($258,707  See Note 3)Standby Letters of Credit ($18,000  
      See Note 3)  (1)

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

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

Non-registered investment company.(6)

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

Avborne, Inc. and Avborne Heavy Maintenance, Inc. are affiliated
    companies.   The accompanying notes are an
    integral part of these consolidated financial statements.
 22




---



##### 



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



December 31, 2007(in thousands, except number of shares)

Investment(1)(2)

Principal


Cost


ValueCitiPostal Inc.

Senior Loan (8.4%, Due 12/13)

$
692


$
679


$
679(Business Services)

Unitranche Debt (12.0%, Due 12/13)


50,852



50,597



50,597Subordinated Debt (16.0%, Due 12/15)


8,049



8,049



8,049Common Stock (37,024 shares)






12,726



12,726Total Investment






72,051



72,051Coverall North America, Inc.

Unitranche Debt (12.0%, Due 7/11)


35,054



34,923



34,923(Business Services)

Subordinated Debt (15.0%, Due 7/11)


6,000



5,979



5,979Common Stock (884,880 shares)






16,648



27,597Total Investment






57,550



68,499CR Holding, Inc.

Subordinated Debt (16.6%, Due 2/13)


40,956



40,812



40,812(Consumer Products)

Common Stock (37,200,551 shares)






33,321



40,934Total Investment






74,133



81,746Direct Capital Corporation

Subordinated Debt (16.0%, Due 3/13)


39,184



39,030



39,030(Financial Services)

Common Stock (2,097,234 shares)






19,250



6,906Total Investment






58,280



45,936Financial Pacific Company

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


73,031



72,850



72,850(Financial Services)

Preferred Stock (10,964 shares)






10,276



19,330Common Stock (14,735 shares)






14,819



38,544Total Investment






97,945



130,724ForeSite Towers, LLC

Equity Interest










878(Tower Leasing)Total Investment










878Global Communications, LLC

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


1,822



1,822



1,822(Business Services)

Total Investment






1,822



1,822Hot Stuff Foods, LLC

Senior Loan (8.4%, Due 2/11-2/12)


50,940



50,752



50,752(Consumer Products)

Subordinated Debt (12.1%, Due 8/12)


30,000



29,907



29,907Subordinated Debt (15.4%, Due
    2/13)(6)


52,373



52,150



1,337Common Stock (1,147,453 shares)






56,187



Total Investment






188,996



81,996Huddle House, Inc.

Subordinated Debt (15.0%, Due 12/12)


59,857



59,618



59,618(Retail)

Common Stock (415,328 shares)






41,533



44,154Total Investment






101,151



103,772Impact Innovations Group, LLC

Equity Interests in Affiliate










320(Business Services)

Total Investment










320  (1)

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

Common stock, preferred stock, warrants, options, and equity
    interests are generally non-income producing and restricted.(6)

Loan or debt security is on non-accrual status and therefore is
    considered non-income producing.   The accompanying notes are an
    integral part of these consolidated financial statements.
 23




---



##### 



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



December 31, 2007(in thousands, except number of shares)

Investment(1)(2)

Principal


Cost


ValueInsight Pharmaceuticals Corporation

Subordinated Debt (15.0%, Due 9/12)

$
44,257


$
44,136


$
45,041(Consumer Products)

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


16,181



16,130



16,796Preferred Stock (25,000 shares)






25,000



1,462Common Stock (620,000 shares)






6,325



Total Investment






91,591



63,299Jakel, Inc.

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


1,563



1,563



1,563(Industrial Products)

Total Investment






1,563



1,563Legacy Partners Group, Inc.

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


3,843



3,843



3,843(Business Services)

Equity Interests






4,261



1,332Total Investment






8,104



5,175Litterer
    Beteiligungs-GmbH(4)

Subordinated Debt (8.0%, Due 12/08)


772



772



772(Business Services)

Equity Interest






1,809



700Total Investment






2,581



1,472MVL Group, Inc.

Senior Loan (12.0%, Due 6/09  7/09)


30,674



30,639



30,639(Business Services)

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


40,191



39,943



39,943Common Stock (648,661 shares)






643



4,949Total Investment






71,225



75,531Old Orchard Brands, LLC

Subordinated Debt (18.0%, Due 7/14)


19,632



19,544



19,544(Consumer Products)

Equity Interests






18,767



25,419Total Investment






38,311



44,963Penn Detroit Diesel Allison, LLC

Subordinated Debt (15.5%, Due 8/13)


39,331



39,180



39,180(Business Services)

Equity Interests






21,128



37,965Total Investment






60,308



77,145Powell Plant Farms, Inc.

Senior Loan (15.0%, Due
    12/07)(6)


1,350



1,350



1,534(Consumer Products)

Total Investment






1,350



1,534Service Champ, Inc.

Subordinated Debt (15.5%, Due 4/12)


28,443



28,351



28,351(Business Services)

Common Stock (63,888 shares)






13,662



26,292Total Investment






42,013



54,643Staffing Partners HoldingCompany, Inc.

Subordinated Debt (13.5%,
    Due 1/07)(6)


509



509



223(Business Services)

Total Investment






509



223Startec Equity, LLC

Equity Interests






190



430(Telecommunications)

Total Investment






190



430Sweet Traditions, Inc.

Senior Loan (13.0%, Due 9/08 
    8/11)(6)


39,692



36,052



35,229(Retail)

Preferred Stock (961 shares)






950



Common Stock (10,000 shares)






50



Total Investment






37,052



35,229  (1)

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

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

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

Loan or debt security is on non-accrual status and therefore is
    considered non-income producing.   The accompanying notes are an
    integral part of these consolidated financial statements.
 24




---



##### 



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



December 31, 2007(in thousands, except number of shares)

Investment(1)(2)

Principal


Cost


ValueTriview Investments,
    Inc.(8)

Senior Loan (10.0%, Due 12/07)

$
433


$
433


$
433(Broadcasting & Cable/Business

Subordinated Debt (12.9%, Due 1/10  6/17)


43,157



42,977



42,977Services/Consumer Products)

Subordinated Debt (12.5%, Due 11/07 
    3/08)(6)


1,400



1,400



1,583Common Stock (202 shares)






120,638



83,453Total Investment






165,448



128,446Guaranty ($900)Standby Letter of Credit ($200)Unitranche Fund LLC

Subordinated Certificates






744



744(Private Debt Fund)

Equity Interests






1



1Total Investment






745



745Worldwide Express Operations, LLC

Subordinated Debt (14.0%, Due 2/14)


2,845



2,670



2,670(Business Services)

Equity Interests






12,900



21,516Warrants






163



272Total Investment






15,733



24,458Total
    companies more than 25% owned





$
1,622,094


$
1,279,080Companies 5% to 25% Owned10th
    Street, LLC

Subordinated Debt (13.0%, Due 12/14)

$
20,774


$
20,645


$
20,645(Business Services)

Equity Interests






446



1,100Total Investment






21,091



21,745Advantage Sales & Marketing, Inc.

Subordinated Debt (12.0%, Due 3/14)


155,432



154,854



154,854(Business Services)

Equity Interests










10,973Total Investment






154,854



165,827Air Medical Group Holdings LLC

Senior Loan (7.8%, Due 3/11)


3,030



2,980



2,980(Healthcare Services)

Equity Interests






3,470



10,800Total Investment






6,450



13,780Alpine ESP Holdings, Inc.

Preferred Stock (622 shares)






622



749(Business Services)

Common Stock (13,513 shares)






14



262Total Investment






636



1,011Amerex Group, LLC

Subordinated Debt (12.0%, Due 1/13)


8,400



8,400



8,400(Consumer Products)

Equity Interests






3,509



13,713Total Investment






11,909



22,113BB&T Capital Partners/WindsorMezzanine Fund,
    LLC(5)

Equity Interests






11,739



11,467(Private Equity Fund)

Total Investment






11,739



11,467  (1)

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

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

Non-registered investment company.(6)

Loan or debt security is on non-accrual status and therefore is
    considered non-income producing.(8)

Triview Investments, Inc. had a cost basis of
    $165.4 million and holds investments in Longview Cable
    & Data, LLC (Broadcasting & Cable) with a value of
    $7.0 million, Triax Holdings, LLC (Consumer Products) with
    a value of $62.0 million, and Crescent Hotels &
    Resorts, LLC and affiliates (Business Services) with a value of
    $59.4 million, for a total value of $128.4 million.   The accompanying notes are an
    integral part of these consolidated financial statements.
 25




---



##### 



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



December 31, 2007(in thousands, except number of shares)

Investment(1)(2)

Principal


Cost


ValueBecker Underwood, Inc.

Subordinated Debt (14.5%, Due 8/12)

$
24,865


$
24,798


$
24,798(Industrial Products)

Common Stock (5,073 shares)






5,813



4,190Total Investment






30,611



28,988BI Incorporated

Subordinated Debt (13.5%, Due 2/14)


30,615



30,499



30,499(Business Services)

Common Stock (40,000 shares)






4,000



7,382Total Investment






34,499



37,881Creative Group, Inc.

Subordinated Debt (14.0%, Due
    9/13)(6)


15,000



13,686



6,197(Business Services)

Common Stock (20,000 shares)










Warrant






1,387



Total Investment






15,073



6,197Drew Foam Companies, Inc.

Preferred Stock (722 shares)






722



396(Business Services)

Common Stock (7,287 shares)






7



Total Investment






729



396MedBridge Healthcare, LLC

Senior Loan (8.0%, Due
    8/09)(6)


7,164



7,164



7,164(Healthcare Services)

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


5,184



5,184



2,406Convertible Subordinated Debt (2.0%,
    Due
    8/14)(6)


2,970



984



Equity Interests






1,416



Total Investment






14,748



9,570MHF Logistical Solutions, Inc.

Subordinated Debt (11.5%, Due
    6/12)(6)


33,600



33,448



9,280(Business Services)

Subordinated Debt (18.0%, Due
    6/13)(6)


11,211



11,154



Common Stock (20,934
    shares)(12)






20,942



Warrants(12)










Total Investment






65,544



9,280Multi-Ad Services, Inc.

Unitranche Debt (11.3%, Due 11/11)


19,800



19,704



19,704(Business Services)

Equity Interests






2,000



940Total Investment






21,704



20,644Progressive InternationalCorporation

Subordinated Debt (16.0%, Due 12/09)


1,557



1,545



1,545(Consumer Products)

Preferred Stock (500 shares)






500



1,038Common Stock (197 shares)






13



4,900Warrants










Total Investment






2,058



7,483Regency Healthcare Group, LLC

Unitranche Debt (11.1%, Due 6/12)


12,000



11,941



11,941(Healthcare Services)

Equity Interests






1,500



1,681Total Investment






13,441



13,622  (1)

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

Common stock, preferred stock, warrants, options, and equity
    interests are generally non-income producing and restricted.(6)

Loan or debt security is on non-accrual status and therefore is
    considered non-income producing.(12)

Common stock is non-voting. In addition to non-voting stock
    ownership, the Company has an option to acquire a majority of
    the voting securities of the portfolio company at fair market
    value.   The accompanying notes are an
    integral part of these consolidated financial statements.
 26




---



##### 



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



December 31, 2007(in thousands, except number of shares)

Investment(1)(2)

Principal


Cost


ValueSGT India Private
    Limited(4)

Common Stock (150,596 shares)





$
4,098


$
3,075(Business Services)

Total Investment






4,098



3,075Soteria Imaging Services, LLC

Subordinated Debt (12.0%, Due 11/10)

$
14,500



13,744



13,744(Healthcare Services)

Equity Interests






2,170



2,686Total Investment






15,914



16,430Universal Environmental Services, LLC

Equity Interests






1,810



(Business Services)

Total Investment






1,810



Total
    companies 5% to 25% owned





$
426,908


$
389,509Companies Less Than 5% Owned3SI Security Systems, Inc.

Subordinated Debt (14.5%, Due 8/13)

$
27,937


$
27,837


$
27,837(Consumer Products)

Total Investment






27,837



27,837AgData, L.P.

Senior Loan (10.3%, Due 7/12)


843



815



815(Consumer Services)

Total Investment






815



815Axium Healthcare Pharmacy, Inc.

Senior Loan (12.5%, Due 12/12)


2,600



2,567



2,567(Healthcare Services)

Unitranche Debt (12.5%, Due 12/12)


8,500



8,463



8,463Common Stock (26,500 shares)






2,650



1,097Total Investment






13,680



12,127Baird Capital Partners IV Limited
    Partnership(5)(Private Equity Fund)

Limited Partnership Interest






2,234



2,114Total Investment






2,234



2,114BenefitMall, Inc.

Subordinated Debt (14.9%, Due 10/13-10/14)


82,167



81,930



81,930(Business Services)

Common Stock (45,528,000
    shares)(12)






45,528



82,404Warrants(12)










Standby Letters of Credit ($3,961)Total Investment






127,458



164,334Broadcast Electronics, Inc.

Senior Loan (9.0%, Due
    7/12)(6)


4,913



4,884



3,273(Business Services)

Total Investment






4,884



3,273Bushnell, Inc.

Subordinated Debt (11.3%, Due 2/14)


41,325



39,821



39,821(Consumer Products)

Total Investment






39,821



39,821  (1)

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

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

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

Non-registered investment company.(6)

Loan or debt security is on non-accrual status and therefore is
    considered non-income producing.(12)

Common stock is non-voting. In addition to non-voting stock
    ownership, the Company has an option to acquire a majority of
    the voting securities of the portfolio company at fair market
    value.   The accompanying notes are an
    integral part of these consolidated financial statements.
 27




---



##### 



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


Private FinancePortfolio Company



December 31, 2007(in thousands, except number of shares)

Investment(1)(2)

Principal


Cost


ValueCallidus Debt PartnersCDO Fund I,
    Ltd.(4)(10)

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

$
18,800


$
18,929


$
18,988(CDO)

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


9,400



9,465



9,494Total Investment






28,394



28,482Callidus Debt PartnersCLO Fund III,
    Ltd.(4)(10)

Preferred Shares (23,600,000 shares,(CLO)

12.9%)(11)






21,783



19,999Total Investment






21,783



19,999Callidus Debt PartnersCLO Fund IV,
    Ltd.(4)(10)

Income Notes
    (14.8%)(11)






12,298



11,290(CLO)

Total Investment






12,298



11,290Callidus Debt PartnersCLO Fund V,
    Ltd.(4)(10)

Income Notes
    (20.3%)(11)






13,977



14,658(CLO)

Total Investment






13,977



14,658Callidus Debt PartnersCLO Fund VI,
    Ltd.(4)(10)

Class D Notes (11.3%, Due 10/21)


5,000



4,329



4,329(CLO)

Income Notes
    (19.3%)(11)






26,985



26,985Total Investment






31,314



31,314Callidus Debt
    Partners(4)(10)CLO Fund VII, Ltd.

Income Notes
    (16.6%)(11)






22,113



22,113(CLO)

Total Investment






22,113



22,113Callidus MAPS CLO Fund I
    LLC(10)

Class E Notes (10.4%, Due 12/17)


17,000



17,000



16,119(CLO)

Income Notes
    (5.6%)(11)






49,252



36,085Total Investment






66,252



52,204Callidus MAPS CLO Fund II,
    Ltd.(4)(10)

Income Notes
    (14.7%)(11)






18,753



18,753(CLO)

Total Investment






18,753



18,753Camden Partners Strategic Fund II,
    L.P.(5)

Limited Partnership Interest






997



1,350(Private Equity Fund)

Total Investment






997



1,350Carlisle Wide Plank Floors, Inc.

Senior Loan (9.8%, Due 6/11)


500



497



497(Consumer Products)

Unitranche Debt (10.0%, Due 6/11)


3,161



3,129



3,129Preferred Stock (400,000 Shares)






400



507Total Investment






4,026



4,133Catterton Partners V,
    L.P.(5)

Limited Partnership Interest






3,624



2,952(Private Equity Fund)

Total Investment






3,624



2,952  (1)

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

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

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

Non-registered investment company.(10)

The fund is managed by Callidus Capital, a portfolio company of
    Allied Capital.(11)

Represents the effective interest yield earned on the cost basis
    of these preferred equity investments and income notes. The
    yield is included in interest income from companies less than 5%
    owned in the consolidated statement of operations.   The accompanying notes are an
    integral part of these consolidated financial statements.
 28




---



##### 



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



December 31, 2007(in thousands, except number of shares)

Investment(1)(2)

Principal


Cost


ValueCatterton Partners VI,
    L.P.(5)

Limited Partnership Interest





$
2,259


$
2,103(Private Equity Fund)

Total Investment






2,259



2,103Centre Capital Investors IV,
    L.P.(5)

Limited Partnership Interest






2,215



2,276(Private Equity Fund)

Total Investment






2,215



2,276Centre Capital Investors V,
    L.P.(5)

Limited Partnership Interest






628



628(Private Equity Fund)

Total Investment






628



628CK Franchising, Inc.

Senior Loan (8.7%, Due 7/12)

$
9,000



8,911



8,911(Consumer Services)

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


21,000



20,908



20,908Preferred Stock (1,486,004 shares)






1,486



1,586Common Stock (8,793,408 shares)






8,793



8,654Total Investment






40,098



40,059Commercial Credit Group, Inc.

Subordinated Debt (14.8%, Due 2/11)


12,000



12,023



12,023(Financial Services)

Preferred Stock (74,978 shares)






18,018



19,421Warrants










Total Investment






30,041



31,444Community Education Centers, Inc.

Subordinated Debt (13.5%, Due 11/13)


35,011



34,936



34,936(Education Services)

Total Investment






34,936



34,936Component Hardware Group, Inc.

Subordinated Debt (13.5%, Due 1/13)


18,432



18,363



18,363(Industrial Products)

Total Investment






18,363



18,363Cook Inlet Alternative Risk, LLC

Unitranche Debt (10.8%, Due 4/13)


95,000



94,530



94,530(Business Services)

Equity Interests






640



1,696Total Investment






95,170



96,226Cortec Group Fund IV,
    L.P.(5)

Limited Partnership Interest






3,383



2,922(Private Equity)

Total Investment






3,383



2,922Diversified MercuryCommunications, LLC

Senior Loan (8.5%, Due 3/13)


233



217



217(Business Services)

Total Investment






217



217Digital VideoStream, LLC

Unitranche Debt (11.0%, Due 2/12)


17,213



17,128



17,128(Business Services)

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


4,118



4,103



5,397Total Investment






21,231



22,525DirectBuy Holdings, Inc.

Subordinated Debt (14.5%, Due 5/13)


75,000



74,631



74,631(Consumer Products)

Equity Interests






8,000



8,000Total Investment






82,631



82,631  (1)

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

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

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




---



##### 



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



December 31, 2007(in thousands, except number of shares)

Investment(1)(2)

Principal


Cost


ValueDistant Lands Trading Co.

Senior Loan (10.3%, Due 11/11)

$
10,000


$
9,966


$
$9,966(Consumer Products)

Unitranche Debt (11.0%, Due 11/11)


42,375



42,226



42,226Common Stock (4,000 shares)






4,000



2,645Total Investment






56,192



54,837Driven Brands, Inc.

Senior Loan (8.7%, Due 6/11)


37,070



36,951



36,951d/b/a Meineke and Econo Lube

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


83,000



82,754



82,754(Consumer Services)

Common Stock (11,675,331
    shares)(12)






29,455



15,977Warrants(12)










Total Investment






149,160



135,682Dryden XVIII LeveragedLoan 2007
    Limited(4)

Subordinated Debt (9.7%, Due 10/19)


9,000



7,406



7,406(CLO)

Income Notes
    (14.2%)(11)






21,940



21,940Total Investment






29,346



29,346Dynamic India Fund
    IV(4)(5)

Equity Interests






6,050



6,215(Private Equity Fund)

Total Investment






6,050



6,215EarthColor, Inc.

Subordinated Debt (15.0%, Due 11/13)


127,000



126,463



126,463(Business Services)

Common Stock
    (73,540 shares)(12)






73,540



62,675Warrants(12)










Total Investment






200,003



189,138eCentury Capital Partners,
    L.P.(5)

Limited Partnership Interest






6,899



2,176(Private Equity Fund)

Total Investment






6,899



2,176eInstruction Corporation

Subordinated Debt (13.5%, Due 7/14-1/15)


47,000



46,765



46,765(Education Services)

Common Stock (2,406 shares)






2,500



2,500Total Investment






49,265



49,265Farleys & Sathers Candy Company, Inc.

Subordinated Debt (13.7%, Due 3/11)


18,000



17,932



17,932(Consumer Products)

Total Investment






17,932



17,932FCP-BHI Holdings, LLC

Subordinated Debt (12.8%, Due 9/13)


24,000



23,887



23,887d/b/a Bojangles

Equity Interests






1,000



998(Retail)

Total Investment






24,887



24,885Fidus Mezzanine Capital,
    L.P.(5)

Limited Partnership Interest






6,357



6,357(Private Equity Fund)

Total Investment






6,357



6,357Frozen Specialties, Inc.

Warrants






435



229(Consumer Products)

Total Investment






435



229Garden Ridge Corporation

Subordinated Debt (7.0%, Due
    5/12)(6)


20,500



20,500



20,500(Retail)

Total Investment






20,500



20,500  (1)

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

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

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

Non-registered investment company.(6)

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

Represents the effective interest yield earned on the cost basis
    of these preferred equity investments and income notes. The
    yield is included in interest income from companies less than 5%
    owned in the consolidated statement of operations.(12)

Common stock is non-voting. In addition to non-voting stock
    ownership, the Company has an option to acquire a majority of
    the voting securities of the portfolio company at fair market
    value.   The accompanying notes are an
    integral part of these consolidated financial statements.
 30




---



##### 



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



December 31, 2007(in thousands, except number of shares)

Investment(1)(2)

Principal


Cost


ValueGeotrace Technologies, Inc.

Subordinated Debt (10.0%, Due 6/09)

$
6,772


$
6,616


$
6,616(Energy Services)

Warrants






2,350



2,993Total Investment






8,966



9,609Gilchrist & Soames, Inc.

Senior Loan (9.0%, Due 10/13)


20,000



19,954



19,954(Consumer Products)

Subordinated Debt (13.4%, Due 10/13)


25,800



25,676



25,676Total Investment






45,630



45,630Grotech Partners, VI,
    L.P.(5)

Limited Partnership Interest






8,808



8,252(Private Equity Fund)

Total Investment






8,808



8,252Havco Wood Products LLC

Senior Loan (9.7%, Due 8/11)


600



585



585(Industrial Products)

Unitranche Debt (11.5%, Due 8/11)


5,100



4,248



4,248Equity Interests






1,055



3,192Total Investment






5,888



8,025Haven Eldercare of New England, LLC

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


1,927



1,927



(Healthcare Services)

Total Investment






1,927



Higginbotham Insurance Agency, Inc.

Senior Loan (7.7%, Due 8/12)


15,033



14,942



14,942(Business Services)

Subordinated Debt (13.5%,
    Due 8/13  8/14)


46,356



46,136



46,136Common Stock
    (23,926 shares)(12)






23,926



23,868Warrant(12)










Total Investment






85,004



84,946The Hillman Companies,
    Inc.(3)

Subordinated Debt (10.0%, Due 9/11)


44,580



44,458



44,458(Consumer Products)

Total Investment






44,458



44,458The Homax Group, Inc.

Senior Loan (8.7%, Due 10/12)


10,969



10,969



10,969(Consumer Products)

Subordinated Debt (12.0%, Due 4/14)


14,000



13,244



13,244Preferred Stock (89 shares)






89



13Common Stock (28 shares)






6



Warrants






1,106



194Total Investment






25,414



24,420Ideal Snacks Corporation

Senior Loan (9.0%, Due 6/10)


288



288



288(Consumer Products)

Total Investment






288



288Integrity Interactive Corporation

Unitranche Debt (10.5%, Due 2/12)


12,193



12,095



12,095(Business Services)

Total Investment






12,095



12,095International Fiber Corporation

Subordinated Debt (14.0%, Due 6/12)


24,572



24,476



24,476(Industrial Products)

Preferred Stock (25,000 shares)






2,500



2,194Total Investment






26,976



26,670  (1)

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

Common stock, preferred stock, warrants, options, and equity
    interests are generally non-income producing and restricted.(3)

Public company.(5)

Non-registered investment company.(6)

Loan or debt security is on non-accrual status and therefore is
    considered non-income producing.(12)

Common stock is non-voting. In addition to non-voting stock
    ownership, the Company has an option to acquire a majority of
    the voting securities of the portfolio company at fair market
    value.   The accompanying notes are an
    integral part of these consolidated financial statements.
 31




---



##### 



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



December 31, 2007(in thousands, except number of shares)

Investment(1)(2)

Principal


Cost


ValueJones Stephens Corporation

Senior Loan (8.8%, Due 9/12)

$
5,537


$
5,525


$
5,525(Consumer Products)

Total Investment






5,525



5,525Knightsbridge CLO 2007-1
    Limited(4)

Subordinated Debt (14.1%, Due 1/22)


22,000



22,000



22,000(CLO)

Income Notes
    (15.2%)(11)






31,211



31,211Total Investment






53,211



53,211Kodiak Fund
    LP(5)

Equity Interests






9,423



2,853(Private Equity Fund

Total Investment






9,423



2,853Line-X, Inc.

Senior Loan (12.0%, Due 8/11)


900



885



885(Consumer Products)

Unitranche Debt (12.0% Due 8/11)


48,198



48,039



42,784Total Investment






48,924



43,669Standby Letter of Credit ($1,500)MedAssets,
    Inc.(3)

Common Stock (224,817 shares)






2,049



6,652(Business Services)

Total Investment






2,049



6,652Mid-Atlantic Venture Fund IV,
    L.P.(5)

Limited Partnership Interest






6,975



1,791(Private Equity Fund)

Total Investment






6,975



1,791Milestone AV Technologies, Inc.

Subordinated Debt (11.3%, Due 6/13)


37,500



37,500



36,750(Business Services)

Total Investment






37,500



36,750NetShape Technologies, Inc.

Senior Loan (8.6%, Due 2/13)


5,802



5,773



5,773(Industrial Products)

Total Investment






5,773



5,773Network Hardware Resale, Inc.

Unitranche Debt (10.5%, Due 12/11)


20,512



20,614



20,614(Business Services)

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


13,242



13,302



15,586Total Investment






33,916



36,200Norwesco, Inc.

Subordinated Debt (12.7%, Due 1/12  7/12)


82,924



82,674



82,674(Industrial Products)

Common Stock (559,603
    shares)(12)






38,313



117,831Warrants(12)










Total Investment






120,987



200,505Novak Biddle Venture Partners III,
    L.P.(5)

Limited Partnership Interest






1,910



1,256(Private Equity Fund)

Total Investment






1,910



1,256Oahu Waste Services, Inc.

Stock Appreciation Rights






239



998(Business Services)

Total Investment






239



998  (1)

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

Common stock, preferred stock, warrants, options, and equity
    interests are generally non-income producing and restricted.(3)

Public company.(4)

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

Non-registered investment company.(11)

Represents the effective interest yield earned on the cost basis
    of these preferred equity investments and income notes. The
    yield is included in interest income from companies less than 5%
    owned in the consolidated statement of operations.(12)

Common stock is non-voting. In addition to non-voting stock
    ownership, the Company has an option to acquire a majority of
    the voting securities of the portfolio company at fair market
    value.   The accompanying notes are an
    integral part of these consolidated financial statements.
 32




---



##### 



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



December 31, 2007(in thousands, except number of shares)

Investment(1)(2)

Principal


Cost


ValueOdyssey Investment Partners Fund III,
    LP(5)

Limited Partnership Interest





$
2,276


$
2,567(Private Equity Fund)

Total Investment






2,276



2,567Pangaea CLO 2007-1
    Ltd.(4)

Subordinated Debt (10.2%, Due 10/21)

$
15,000



11,570



11,570(CLO)

Total Investment






11,570



11,570Passport HealthCommunications, Inc.

Preferred Stock (651,381 shares)






2,000



2,433(Healthcare Services)

Common Stock (19,680 shares)






48



7Total Investment






2,048



2,440PC Helps Support, LLC

Senior Loan (8.9%, Due 12/13)


20,000



20,000



20,000(Business Services)

Subordinated Debt (13.3%, Due 12/13)


30,895



30,743



30,743Total Investment






50,743



50,743Pendum, Inc.

Subordinated Debt (17.0%, Due
    1/11)(6)


34,028



34,028



(Business Services)

Preferred Stock (82,715 shares)










Warrants










Total Investment






34,028



Performant Financial Corporation

Common Stock (478,816 shares)






734



(Business Services)

Total Investment






734



PharMEDium Healthcare Corporation

Senior Loan (8.6%, Due 10/13)


19,577



19,577



19,577(Healthcare Services)

Total Investment






19,577



19,577Postle Aluminum Company, LLC

Unitranche Debt (11.0%, Due 10/12)


61,500



61,252



61,252(Industrial Products)

Equity Interests






2,500



3,092Total Investment






63,752



64,344Pro Mach, Inc.

Subordinated Debt (13.0%, Due 6/12)


14,562



14,506



14,506(Industrial Products)

Equity Interests






1,500



1,596Total Investment






16,006



16,102Promo Works, LLC

Unitranche Debt (10.3%, Due 12/11)


26,215



26,006



26,006(Business Services)

Guaranty ($600)Total Investment






26,006



26,006Reed Group, Ltd.

Senior Loan (8.7%, Due 12/13)


21,000



20,970



20,970(Healthcare Services)

Subordinated Debt (13.8%, Due 12/13)


18,000



17,910



17,910Equity Interests






1,800



1,800Total Investment






40,680



40,680S.B. Restaurant Company

Unitranche Debt (9.8%, Due 4/11)


34,001



33,733



33,733(Retail)

Preferred Stock (54,125 shares)






135



135Warrants






619



2,095Standby Letters of Credit ($2,540)Total Investment






34,487



35,963  (1)

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

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

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

Non-registered investment company.(6)

Loan or debt security is on non-accrual status and therefore is
    considered non-income producing.   The accompanying notes are an
    integral part of these consolidated financial statements.
 33




---



##### 



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



December 31, 2007(in thousands, except number of shares)

Investment(1)(2)

Principal


Cost


ValueSBBUT, LLC

Equity Interests





$



$
(Consumer Products)

Total Investment










Service Center Metals, LLC

Subordinated Debt (15.5%, Due 9/11)

$
5,000



4,981



4,981(Industrial Products)

Equity Interests






313



343Total Investment






5,294



5,324Snow Phipps Group,
    L.P.(5)

Limited Partnership Interest






2,288



2,288(Private Equity Fund)

Total Investment






2,288



2,288SPP Mezzanine Funding,
    L.P.(5)

Limited Partnership Interest






2,268



1,942(Private Equity Fund)

Total Investment






2,268



1,942SPP Mezzanine Funding II,
    L.P.(5)

Limited Partnership Interest






4,077



3,731(Private Equity Fund)

Total Investment






4,077



3,731Stag-Parkway, Inc.

Unitranche Debt (10.8%, Due 7/12)


51,000



50,810



50,810(Business Services)

Total Investment






50,810



50,810STS Operating, Inc.

Subordinated Debt (11.0%, Due 1/13)


30,386



30,273



30,273(Industrial Products)

Total Investment






30,273



30,273Summit Energy Services, Inc.

Senior Loan (8.5%, Due 8/13)


24,239



24,239



23,512(Business Services)

Subordinated  Debt (11.6%, Due 8/13)


35,765



35,596



35,596Common Stock (89,406 shares)






2,000



1,995Total Investment






61,835



61,103Tappan Wire and Cable Inc.

Unitranche Debt (15.0%, Due 8/14)


24,100



23,975



23,975(Business Services)

Common Stock
    (15,000 shares)(12)






2,250



5,810Warrant(12)










Total Investment






26,225



29,785The Step2 Company, LLC

Unitranche Debt (11.0%, Due 4/12)


96,041



95,693



95,693(Consumer Products)

Equity Interests






2,483



2,987Total Investment






98,176



98,680Tradesmen International, Inc.

Subordinated Debt (12.0%, Due 12/12)


49,124



48,431



48,431(Business Services)

Total Investment






48,431



48,431TransAmerican Auto Parts, LLC

Subordinated Debt (14.0%, Due 11/12)


24,076



23,907



23,907(Consumer Products)

Equity Interests






1,198



1,014Total Investment






25,105



24,921Trover Solutions, Inc.

Subordinated Debt (12.0%, Due 11/12)


60,000



59,740



59,740(Business Services)

Total Investment






59,740



59,740Universal Air Filter Company

Subordinated Debt (12.0%, Due 11/12)


14,750



14,688



14,688(Industrial Products)

Total Investment






14,688



14,688  (1)

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

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

Non-registered investment company.(12)

Common stock is non-voting. In addition to non-voting stock
    ownership, the Company has an option to acquire a majority of
    the voting securities of the portfolio company at fair market
    value.   The accompanying notes are an
    integral part of these consolidated financial statements.
 34




---



##### 



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


Private FinancePortfolio Company



December 31, 2007(in thousands, except number of shares)

Investment(1)(2)

Principal


Cost


ValueUpdata Venture Partners II,
    L.P.(5)

Limited Partnership Interest





$
4,465


$
4,306(Private Equity Fund)

Total Investment






4,465



4,306Venturehouse-Cibernet Investors, LLC

Equity Interest










54(Business Services)

Total Investment










54Venturehouse Group,
    LLC(5)

Equity Interest










613(Private Equity Fund)

Total Investment










613VICORP Restaurants, Inc.

Warrants






33



(Retail)

Total Investment






33



Walker Investment Fund II,
    LLLP(5)

Limited Partnership Interest






1,330



(Private Equity Fund)

Total Investment






1,330



WMA Equity Corporation and Affiliates

Subordinated Debt (13.6%, Due 4/13)

$
125,000



124,010



124,010d/b/a Wear Me Apparel

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


13,033



13,033



13,302(Consumer Products)

Common Stock (100 shares)






46,046



13,726Total Investment






183,089



151,038Webster Capital II,
    L.P.(5)

Limited Partnership Interest






897



897(Private Equity Fund)

Total Investment






897



897Woodstream Corporation

Subordinated Debt (12.0%, Due 2/15)


90,000



89,574



89,574(Consumer Products)

Common Stock (7,500 shares)






7,500



7,482Total Investment






97,074



97,056York Insurance Services Group, Inc.

Subordinated Debt (14.5%, Due 1/14)


45,141



44,966



44,966(Business Services)

Common Stock (15,000 shares)






1,500



1,995Total Investment






46,466



46,961Other companies

Other debt investments


159



57



62Other equity investments






8



Total Investment






65



62Total
    companies less than 5% owned





$
2,994,880


$
2,990,732Total
    private finance (156 portfolio investments)





$
5,043,882


$
4,659,321  (1)

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

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

Non-registered investment company.(6)

Loan or debt security is on non-accrual status and therefore is
    considered non-income producing.   The accompanying notes are an
    integral part of these consolidated financial statements.
 35




---



##### 



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

Number of

December 31, 2007Rate Ranges

Loans

Cost

ValueCommercial Mortgage LoansUp to 6.99%



3


$
20,361


$
19,8427.00%8.99%



8



22,768



22,7689.00%10.99%



3



8,372



8,37211.00%12.99%



1



10,456



10,45615.00% and above



2



3,970



3,970Total commercial mortgage
    loans(13)






17


$
65,927


$
65,408Real Estate Owned









$
15,272


$
21,253Equity
    Interests(2) 
    Companies more than 25% owned





$
15,743


$
34,539Guarantees ($6,871)Standby Letter of Credit ($1,295)Total commercial real estate finance









$
96,942


$
121,200Total portfolio









$
5,140,824


$
4,780,521   Yield

Cost

ValueInvestments in U.S. Treasury Bills, Money Market and Other
    SecuritiesAmerican Beacon Money Market Select FD Fund


4.5%


$
126,910


$
126,910American Beacon Money Market Fund


4.8%



40,163



40,163SEI Daily Income Tr Prime Obligation Money Market Fund


4.9%



34,143



34,143Columbia Treasury Reserves Money Market Fund


4.6%



6



6Total





$
201,222


$
201,222  (2)

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

Commercial mortgage loans totaling $14.3 million at value
    were on non-accrual status and therefore were considered
    non-income producing.   The accompanying notes are an
    integral part of these consolidated financial statements.
 36




---



##### 



ALLIED
    CAPITAL CORPORATION AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Information at and for the three months ended March 31,
    2008 and 2007 is unaudited)
  Note 1. Organization
       Regulation S-X,
     Note 2. Summary
    of Significant Accounting Policies
  Basis
    of Presentation
       37




---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
  Note 2. Summary of Significant Accounting Policies,
    continued
  where the Company holds one or
    more seats on the portfolio companys board of directors
    and, therefore, are deemed to be an affiliated person under the
    1940 Act; and companies less than 5% owned which represent
    portfolio companies where the Company directly or indirectly
    owns less than 5% of the outstanding voting securities of such
    portfolio company and where the Company has no other
    affiliations with such portfolio company. The interest and
    related portfolio income and net realized gains (losses) from
    the commercial real estate finance portfolio and other sources,
    including investments in U.S. treasury bills, money market and
    other securities, are included in the companies less than 5%
    owned category on the consolidated statement of operations.
    Valuation
    Of Portfolio Investments
  Fair Value
    Measurements
     38




---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
  Note 2. Summary of Significant Accounting Policies,
    continued
  of the portfolio companys
    equity securities, liquidation events, or other events. The
    Company allocates the enterprise value to these securities in
    order of the legal priority of the securities.
      and/or security-by-security
   39




---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
  Note 2. Summary of Significant Accounting Policies,
    continued
    Net
    Realized Gains or Losses and Net Change in Unrealized
    Appreciation or Depreciation
    Interest
    and Dividend Income
         40




---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
  Note 2. Summary of Significant Accounting Policies,
    continued
    Fee
    Income    Guarantees
  Guarantors Accounting and
    Disclosure Requirements for Guarantees, Including Indirect
    Guarantees of Indebtedness of Others
  Financing
    Costs
    Dividends
    to Shareholders
    Stock
    Compensation Plans
  Share-Based Payment
 41




---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
  Note 2. Summary of Significant Accounting Policies,
    continued
    ($ in millions, except per share
    amounts)

2008


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

$
1.7


$
3.2Options granted on or after January 1, 2006


2.5



0.5Total employee stock option expense

$
4.2


$
3.7Per basic share

$
0.03


$
0.02Per diluted share

$
0.03


$
0.02     2008


2007(1)Expected term (in years)


5.0



Risk-free interest rate


2.7
%



%Expected volatility


27.6
%



%Dividend yield


8.5
%



%Weighted average fair value per option

$
2.19


$
   (1)
    The Company did not grant any
    options during the three months ended March 31, 2007.     42




---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
  Note 2. Summary of Significant Accounting Policies,
    continued
    Federal
    and State Income Taxes and Excise Tax
        Per
    Share Information
    Use of
    Estimates in the Preparation of Financial
    Statements
     43




---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
  Note 2. Summary of Significant Accounting Policies,
    continued
    Recent
    Accounting Pronouncements
  Fair Value Measurements.
  The
    Fair Value Option for Financial Assets and Financial
    Liabilities  Including an Amendment of FASB Statement
    No. 115.
 44




---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
  Note 3. Portfolio
  Private
    Finance
     2008


2007($ in millions)

Cost


Value


Yield(1)


Cost


Value


Yield(1)Loans and debt securities:Senior loans

$
358.5


$
325.7



7.0%


$
374.1


$
344.3



7.7%Unitranche
    debt(2)


656.5



655.7



11.8%



659.2



653.9



11.5%Subordinated debt


2,655.6



2,430.4



13.0%



2,576.4



2,416.4



12.8%Total loans and debt
    securities(3)


3,670.6



3,411.8



12.2%



3,609.7



3,414.6



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


224.1



197.4



15.8%



218.3



203.0



14.6%Subordinated certificates in Unitranche Fund
    LLC(4)


31.5



31.5



12.4%



0.7



0.7



12.4%Other equity securities


1,093.1



879.1







1,215.2



1,041.0Total equity securities


1,348.7



1,108.0







1,434.2



1,244.7Total

$
5,019.3


$
4,519.8






$
5,043.9


$
4,659.3   (1)
    The weighted average yield on loans and debt securities is
    computed as the (a) annual stated interest on accruing
    loans and debt securities plus the annual amortization of loan
    origination fees, original issue discount, and market discount
    on accruing loans and debt securities less the annual
    amortization of loan origination costs, divided by
    (b) total loans and debt securities at value. At
    March 31, 2008, and December 31, 2007, the cost and
    value of subordinated debt included the Class A equity
    interests in Ciena Capital LLC, which were placed on non-accrual
    status during the fourth quarter of 2006. The weighted average yield on the
    preferred shares/income notes of CLOs is calculated as the
    (a) effective interest yield on the preferred shares/income
    notes of CLOs, divided by (b) total preferred shares/income
    notes of CLOs at value. The weighted average yields are computed
    as of the balance sheet date. The yield on the CLO assets
    represents the yield used for recording interest income. The
    market yield used in the valuation of the CLO assets may be
    different than the interest yields.
 The weighted average yield on the
    subordinated certificates in the Unitranche Fund LLC is
    computed as the (a) annual stated interest (LIBOR plus
    7.5%) divided by (b) total investment at value.
 (2)
    Unitranche debt is an investment that combines both senior and
    subordinated financing, generally in a first lien position.(3)
    The total principal balance outstanding on loans and debt
    securities was $3,697.4 million and $3,639.6 million
    at March 31, 2008, and December 31, 2007, respectively. The
    difference between principal and cost is represented by
    unamortized loan origination fees and costs, original issue
    discounts, and market discounts totaling $26.8 million and
    $29.9 million at March 31, 2008, and December 31,
    2007, respectively.(4)
    Investments in the preferred shares/income notes of CLOs and the
    subordinated certificates in Unitranche Fund LLC earn a current
    return that is included in interest income in the accompanying
    consolidated statement of operations.     45




---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
  Note 3. Portfolio, continued
        Ciena Capital LLC.
     46




---



##### 



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

2008


2007Interest income on subordinated debt and Class A equity
    interests

$



$
Fees and other income






1.4Total interest and related portfolio income

$



$
1.4        47




---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
  Note 3. Portfolio, continued
  No. 2:06-CR-20662
         48




---



##### 



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

2007Interest income

$
2.0Fees and other income


0.1Total interest and related portfolio income

$
2.1    49




---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
  Note 3. Portfolio, continued
  Collateralized Loan Obligations (CLOs) and
    Collateralized Debt Obligations
    (CDOs).
  2008


2007($ in millions)

Cost


Value


Yield(1)


Cost


Value


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

$
28.4


$
28.5



14.0%


$
28.4


$
28.5



14.0%Callidus Debt Partners CLO Fund IV, Ltd.


2.0



2.6



10.1%











Callidus Debt Partners CLO Fund VI, Ltd.


4.3



4.5



13.1%



4.3



4.3



13.4%Callidus MAPS CLO Fund I LLC


17.0



15.5



8.9%



17.0



16.1



11.0%Dryden XVIII Leveraged Loan 2007 Limited


7.4



8.2



11.4%



7.4



7.4



12.7%Knightsbridge CLO 2007-1 Limited


22.0



22.0



14.1%



22.0



22.0



14.1%Pangaea CLO 2007-1 Ltd.


11.6



10.8



13.1%



11.6



11.6



13.9%Total bonds


92.7



92.1



12.7%



90.7



89.9



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


21.4



20.0



16.4%



21.8



20.0



14.1%Callidus Debt Partners CLO Fund IV, Ltd.


15.2



14.9



17.5%



12.3



11.3



16.1%Callidus Debt Partners CLO Fund V, Ltd.


13.8



13.8



20.3%



14.0



14.7



19.3%Callidus Debt Partners CLO Fund VI, Ltd.


28.3



26.5



19.2%



27.0



27.0



19.3%Callidus Debt Partners CLO Fund VII, Ltd.


23.1



23.1



16.6%



22.1



22.1



16.6%Callidus MAPS CLO Fund I LLC


48.4



31.5



5.6%



49.3



36.1



7.6%Callidus MAPS CLO Fund II, Ltd.


18.8



16.8



17.6%



18.7



18.7



14.7%Dryden XVIII Leveraged Loan 2007 Limited


22.7



19.8



14.6%



21.9



21.9



14.2%Knightsbridge CLO
    2007-1
    Limited


32.4



31.0



19.3%



31.2



31.2



15.2%Total preferred shares/income notes


224.1



197.4



15.8%



218.3



203.0



14.6%Total

$
316.8


$
289.5






$
309.0


$
292.9   (1)
    The weighted average yield is calculated as the (a) annual
    stated interest or the effective interest yield on the accruing
    bonds or the effective interest yield on the preferred
    shares/income notes, divided by (b) CLO and CDO assets at
    value.  The yield on these debt and equity securities is
    included in interest income in the accompanying consolidated
    statement of operations. The market yield used in the
    valuation of the CLO and CDO assets may be different than the
    interest yields shown above.
 (2)
    These securities are included in private finance subordinated
    debt.     50




---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
  Note 3. Portfolio, continued
  the preferred shares/income notes.
    At both March 31, 2008, and December 31, 2007, the
    face value of the CLO and CDO assets held by the Company was
    subordinate to as much as 94% of the face value of the
    securities outstanding in these CLOs and CDO.
    ($ in millions)

2008


2007Bonds

$
286.1


$
288.5Syndicated loans


4,206.5



4,122.7Cash(1)


101.4



104.4Total underlying collateral
    assets(2)

$
4,594.0


$
4,515.6   (1)
    Includes undrawn liability amounts.(2)
    At March 31, 2008, and December 31, 2007, the total
    face value of defaulted obligations was $42.3 million and
    $18.4 million, respectively, or approximately 0.9% and 0.4%
    respectively, of the total underlying collateral assets.  Loans and Debt Securities on Non-Accrual
    Status.
  ($ in millions)

2008


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

$
62.4


$
114.1Companies 5% to 25% owned


2.6



11.7Companies less than 5% owned


23.3



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


31.0



21.4Companies 5% to 25% owned


12.3



13.4Companies less than 5% owned


11.7



13.3Total

$
143.3


$
197.7  51




---



##### 



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


2007IndustryBusiness services


36
%


37
%Consumer products


25



25Industrial products


8



10Financial services


5



6CLO/CDO(1)


6



6Retail


5



4Consumer services


5



4Healthcare services


3



3Asset management


2



1Other


5



4Total


100
%


100
%Geographic
    Region(2)Mid-Atlantic


35
%


36
%Midwest


31



32Southeast


18



17West


14



14Northeast


2



1Total


100
%


100
%   (1)
    These funds primarily invest in senior corporate loans. Certain
    of these funds are managed by Callidus Capital, a portfolio
    company of Allied Capital.(2)
    The geographic region for the private finance portfolio depicts
    the location of the headquarters for the Companys
    portfolio companies. The portfolio companies may have a number
    of other locations in other geographic regions.  Commercial
    Real Estate Finance
   2008


2007Cost


Value


Yield(1)


Cost


Value


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

$
52.0


$
53.5



7.9%


$
65.9


$
65.4



6.8%Real estate owned


23.5



30.2







15.3



21.3Equity interests


14.2



32.1







15.7



34.5Total

$
89.7


$
115.8






$
96.9


$
121.2   (1)
    The weighted average yield on the commercial mortgage loans is
    computed as the (a) annual stated interest on accruing
    loans plus the annual amortization of loan origination fees,
    original issue discount, and market discount on accruing loans
    less the annual amortization of origination costs, divided by
    (b) total interest-bearing investments at value. The
    weighted average yield is computed as of the balance sheet date. 52




---



##### 



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


2007Property TypeHospitality


44
%


44
%Office


20



21Retail


18



18Recreation


16



15Other


2



2Total


100
%


100
%Geographic RegionSoutheast


44
%


40
%Midwest


25



31West


21



20Northeast


8



7Mid-Atlantic


2



2Total


100
%


100
%   Fair
    Value Measurements
  Fair Value Measurements
   53




---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
  Note 3. Portfolio, continued
  and the provisions of the
    Investment Company Act of 1940 and SFAS 157. The Company
    determines fair value to be the price that would be received for
    an investment in a current sale, which assumes an orderly
    transaction between market participants on the measurement date.
    The Companys valuation policy considers the fact that no
    ready market exists for substantially all of the securities in
    which it invests and that fair value for its investments must
    typically be determined using unobservable inputs.
    
    Level 1  Quoted prices (unadjusted) in active
    markets for identical assets
    Level 2  Inputs other than quoted prices that
    are observable to the market participant for the asset or quoted
    prices in a market that is not active
    Level 3  Unobservable inputs      Fair Value


Quoted Prices in


Significant Other


SignificantMeasurement


Active Markets for


Observable


Unobservableas of March 31,


Identical Assets


Inputs


Inputs($ in millions)

2008


(Level 1)


(Level 2)


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

$
120.0


$
120.0


$



$
PortfolioPrivate finance

$
4,519.8


$
3.3


$



$
4,516.5Commercial real estate finance


115.8











115.8Total portfolio

$
4,635.6


$
3.3


$



$
4,632.3  54




---



##### 



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


Real Estate($ in millions)

Finance


Finance


TotalBalance at December 31, 2007

$
4,652.7


$
121.2


$
4,773.9Total gains or lossesNet realized gains
    (losses)(1)


12.8



(0.2
)


12.5Net change in unrealized appreciation or
    depreciation(2)


(111.4
)


1.9



(109.5
)Purchases, issuances, repayments and exits,
    net(3)


(37.6
)


(7.1
)


(44.6
)Transfers in and/or out of level 3










Balance at March 31, 2008

$
4,516.5


$
115.8


$
4,632.3Net unrealized appreciation (depreciation) during the period
    relating to assets still held at the reporting
    date(2)

$
(93.5
)

$
1.5


$
(92.0
)   (1)
    Includes net realized gains
    (losses) (recorded as realized gains or losses in the
    accompanying consolidated statement of operations), and
    amortization of discounts and closing points (recorded as
    interest income in the accompanying consolidated statement of
    operations).(2)
    Included in change in net
    unrealized appreciation or depreciation in the accompanying
    consolidated statement of operations. Net change in unrealized
    appreciation or depreciation includes net unrealized
    appreciation (depreciation) resulting from changes in portfolio
    investment values during the reporting period and the reversal
    of previously recorded unrealized appreciation or depreciation
    when gains or losses are realized.
 (3)
    Includes interest and dividend
    income reinvested through the receipt of a debt or equity
    security
    (payment-in-kind
    income) (recorded as interest and dividend income in the
    accompanying consolidated statement of operations).    Managed
    Funds
    Accounting for Transfers and Servicing of
    Financial Assets and Extinguishments of Liabilities
 55




---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
  Note 3. Portfolio, continued
   Allied Capital Senior Debt Fund,
    L.P.
      Unitranche Fund LLC.
  AGILE Fund I, LLC.
   56




---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
  Note 3. Portfolio, continued
          Knightsbridge CLO
    2007-1
    Ltd. 2007-1 2007-1
  Note 4. Debt
    2008


2007Annual






AnnualFacility

Amount


Interest


Facility

Amount

InterestAmount

Drawn


Cost(1)


Amount

Drawn

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

$1,042.8


$1,042.8



6.1
%

$1,042.2

$1,042.2


6.1
%Publicly issued unsecured notes payable

880.0


880.0



6.7
%

880.0

880.0


6.7
%Total notes payable and debentures

1,922.8


1,922.8



6.4
%

1,922.2

1,922.2


6.4
%Revolving line of credit

922.5


268.8
(4)


3.8
%(2)

922.5

367.3


5.9
%(2)Total debt

$2,845.3


$2,191.6



6.2
%(3)

$2,844.7

$2,289.5


6.5
%(3)   (1)
    The weighted average annual
    interest cost is computed as the (a) annual stated interest on
    the debt plus the annual amortization of commitment fees, other
    facility fees and amortization of debt financing costs that are
    recognized into interest expense over the contractual life of
    the respective borrowings, divided by (b) debt outstanding on
    the balance sheet date.(2)
    The annual interest cost reflects
    the interest rate payable for borrowings under the revolving
    line of credit in effect at the balance sheet date. In addition
    to the current interest payable, there were annual costs of
    commitment fees, other facility fees and amortization of debt
    financing costs of $3.7 million at both March 31,
    2008, and December 31, 2007.(3)
    The annual interest cost for total
    debt includes the annual cost of commitment fees, other facility
    fees and amortization of debt financing costs on the revolving
    line of credit regardless of the amount outstanding on the
    facility as of the balance sheet date. The annual interest cost
    reflects the facilities in place on the balance sheet date.(4)
    On April 9, 2008, the Company
    entered into a three-year unsecured revolving line of credit
    with total commitments of $632.5 million, which replaced
    the Companys previous line of credit. Under this new
    revolving line of credit, in addition to the current interest
    rate payable, the annual costs of commitment fees, other
    facility fees and amortization of debt financing costs will be
    approximately $6.7 million. See discussion below. 57




---



##### 



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

Amount

Maturity Date6.625% Notes due 2011

$400.0

July 15, 20116.000% Notes due 2012

250.0

April 1, 20126.875% Notes due 2047

230.0

April 15, 2047Total

$880.0        58




---



##### 



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

Amount Maturing($ in millions)2008

$
153.02009


270.32010


408.02011


472.52012


339.0Thereafter


280.0Total

$
1,922.8   Revolving
    Line of Credit    LIBOR-based
     three-year
   59




---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
  Note 4. Debt, continued
     Covenant
    Compliance
      Note 5. Guarantees
    and Commitments
     (in millions)

Total


2008


2009


2010


2011


2012


After 2012Guarantees

$
394.0


$
0.3


$
387.3


$



$
4.4


$
0.1


$
1.9Standby letters of
    credit(1)


96.3



96.3



















Total(2)

$
490.3


$
96.6


$
387.3


$



$
4.4


$
0.1


$
1.9   (1)
    Standby letters of credit are
    issued under the Companys revolving line of credit that
    expires in September 2008. Therefore, unless a standby letter of
    credit is set to expire at an earlier date, it is assumed that
    the standby letters of credit will expire contemporaneously with
    the expiration of the Companys line of credit that was in
    effect at March 31, 2008, which was scheduled to expire in
    September 2008. In April 2008, the Company entered into a new
    three-year revolving line of credit that expires in April 2011.(2)
    The Companys most significant
    commitments relate to its investment in Ciena Capital LLC
    (Ciena), which commitments totaled $444.3 million at
    March 31, 2008. At March 31, 2008, the Company
    guaranteed 100% of the outstanding total obligations on
    Cienas revolving line of credit, which matures in March
    2009, for a total guaranteed amount of $384.8 million and
    had standby letters of credit issued totaling $59.5 million
    in connection with term securitizations completed by Ciena. See
    Note 3. 60




---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
  Note 5. Guarantees and Commitments, continued
       Note 6. Shareholders
    Equity
     (in millions)

2008


2007Number of common shares


8.3



3.3Gross proceeds

$
175.5


$
97.3Less costs, including underwriting fees


4.6



3.5Net proceeds

$
170.9


$
93.8        For the ThreeMonths EndedMarch 31,2008

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

0.2

0.1Average price per share

$19.49

$29.23  61




---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
  Note 7. Earnings
    Per Common Share
     For the ThreeMonths EndedMarch 31,(in millions, except per share
    amounts)

2008


2007Net increase (decrease) in net assets resulting from operations

$
(40.7)


$
133.1Weighted average common shares
    outstanding  basic


161.5



149.5Dilutive options outstanding






3.3Weighted average common shares outstanding  diluted


161.5



152.8Basic earnings (loss) per common share

$
(0.25)


$
0.89Diluted earnings (loss) per common share

$
(0.25)


$
0.87   Note 8. Employee
    Compensation Plans
          62




---



##### 



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

2008


2007IPA

$
2.4


$
2.5IPA mark to market expense (benefit)


(4.1
)


(4.0
)Total IPA expense (benefit)

$
(1.7
)

$
(1.5
)     Note 9. Stock
    Option Plan
        63




---



##### 



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

AggregateWeighted

Average

IntrinsicAverage

Contractual

Value atExercise Price

Remaining

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

Shares


Per Share

Term (Years)

2008(1)Options outstanding at January 1, 2008


18.5


$
28.36Granted


7.1


$
22.96Exercised





$
Forfeited


(0.3
)

$
27.46Options outstanding at March 31, 2008


25.3


$
26.86

6.35

$Exercisable at March 31,
    2008(2)


11.7


$
27.99

6.13

$Exercisable and expected to be exercisable at March 31,
    2008(3)


23.5


$
27.02

6.33

$   (1)
    Represents the difference between
    the market value of the options at March 31, 2008, and the
    cost for the option holders to exercise the options.(2)
    Represents vested options.(3)
    The amount of options expected to
    be exercisable at March 31, 2008, is calculated based on an
    estimate of expected forfeitures.      Note 10. Dividends
    and Distributions and Taxes
          64




---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
  Note 10. Dividends and Distributions and Taxes,
    continued
  Company expects that a majority of
    the 2008 dividend payments will be made from excess 2007 taxable
    earnings. The Company currently expects that the excess taxable
    income carried over from 2007 plus its estimated annual taxable
    income for 2008 will be in excess of its estimated dividend
    distributions to shareholders in 2008, therefore, the Company
    expects to carry over excess taxable income earned in 2008 for
    distribution to shareholders in 2009. The Company will generally
    be required to pay a nondeductible excise tax equal to 4% of the
    amount by which 98% of the Companys annual taxable income
    exceeds the distributions from such taxable income for the year.
    The Company has accrued an excise tax on the estimated excess
    taxable income earned for the respective periods. For the three
    months ended March 31, 2008 and 2007, the Company recorded
    an excise tax of $2.3 million and $3.6 million,
    respectively.
          Note 11. Supplemental
    Disclosure of Cash Flow Information
        65




---



##### 



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


for theThree Months Ended


Year EndedMarch 31,


December 31,2008(1)


2007


2007Per Common Share DataNet asset value, beginning of period

$
17.54


$
19.12


$
19.12Net investment
    income(2)


0.43



0.26



0.91Net realized
    gains(2)(3)


0.02



0.18



1.74Net investment income plus net realized
    gains(2)


0.45



0.44



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


(0.70
)


0.43



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


(0.25
)


0.87



0.99Net decrease in net assets from shareholder distributions


(0.65
)


(0.63
)


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


0.35



0.22



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










(0.34
)Net asset value, end of period

$
16.99


$
19.58


$
17.54Market value, end of period

$
18.43


$
28.81


$
21.50Total
    return(5)


(11.4
)%


(9.9
)%


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

$
2,828.4


$
2,978.3


$
2,771.8Common shares outstanding at end of period


166.5



152.1



158.0Diluted weighted average common shares outstanding


161.5



152.8



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


1.28
%


1.33
%


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


2.62
%


2.37
%


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


0.07
%


(0.02
)%


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


2.48
%


1.36
%


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


(1.45
)%


4.57
%


5.34
%Portfolio turnover
    rate(7)


5.62
%


3.78
%


26.84
%Average debt outstanding

$
2,209.5


$
1,841.2


$
1,924.2Average debt per
    share(2)

$
13.68


$
12.05


$
12.44   (1)
    The results for the three months ended March 31, 2008, are
    not necessarily indicative of the operating results to be
    expected for the full year.(2)
    Based on diluted weighted average number of common shares
    outstanding for the period.(3)
    Net realized gains and net change in unrealized appreciation or
    depreciation can fluctuate significantly from period to period.
    As a result, quarterly comparisons may not be meaningful.(4)
    Excludes capital share transactions related to the cash portion
    of the option cancellation payment.(5)
    Total return assumes the reinvestment of all dividends paid for
    the periods presented.(6)
    On July 18, 2007, the Company completed a tender offer, which
    resulted in a total option cancellation payment of approximately
    $105.6 million, of which $52.8 million was paid in cash and
    $52.8 million was paid through the issuance of unregistered
    shares of the Companys common stock.(7)
    The ratios for the three months ended March 31, 2008 and
    2007, do not represent annualized results.  66




---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
  Note 13. Litigation
        CA 001060-07,
 67




---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
   Note 13. Litigation,
    continued
    Rule 10b-5
     68




---



##### 



Report of
    Independent Registered Public Accounting Firm  The Board
    of Directors and Shareholders
 Allied Capital Corporation:
          
    69




---



##### 





Schedule 12-14
  ALLIED
    CAPITAL CORPORATION AND SUBSIDIARIES
  SCHEDULE OF INVESTMENTS IN AND ADVANCES TO AFFILIATES
  PRIVATE FINANCE



Amount of Interest or Dividends


December 31,








March 31,Portfolio Company



Credited





2007


Gross


Gross


2008(in thousands)

Investment(1)

to
    Income(6)


Other(2)


Value


Additions(3)


Reductions(4)


ValueCompanies More Than 25% OwnedAGILE Fund I, LLC

Equity Interests









$



$
860


$



$
860(Private Equity Fund)Alaris Consulting, LLC

Senior
    Loan(5)






















(Business Services)

Equity Interests














1,211



(1,211
)


AllBridge Financial, LLC

Equity Interests










7,800



13,944



(6,274
)


15,470(Asset Management)Allied Capital Senior Debt Fund, L.P.

Equity Interests










32,811







(206
)


32,605(Private Debt Fund)Avborne, Inc.

Preferred Stock










1,633



51







1,684(Business Services)

Common Stock






















Avborne Heavy Maintenance, Inc.

Preferred Stock










2,557







(2,400
)


157(Business Services)

Common Stock










370



667







1,037Aviation Properties Corporation

Common Stock






















(Business Services)Border Foods, Inc.

Preferred Stock










4,648







(1,507
)


3,141(Consumer Products)

Common Stock






















Calder Capital Partners, LLC

Senior
    Loan(5)





$
65



3,035



540



(502
)


3,073(Asset Management)

Equity Interests










3,559







(25
)


3,534Callidus Capital Corporation

Senior Loan

$
4











1,500







1,500(Asset Management)

Subordinated Debt


348







6,871



4,309







11,180Common Stock


3,000







44,587







(4,565
)


40,022Ciena Capital LLC

Class A Equity(f/k/a Business Loan

Interests(5)










68,609







(39,318
)


29,291Express, LLC)

Class B Equity Interests






















(Financial Services)

Class C Equity Interests






















CitiPostal Inc.

Senior Loan


13







679



1







680(Business Services)

Unitranche Debt


1,561







50,597



529







51,126Subordinated Debt


327







8,049



43







8,092Common Stock










12,726



4,051







16,777Coverall North America, Inc.

Unitranche Debt


1,013







34,923



19



(3,019
)


31,923(Business Services)

Subordinated Debt


216







5,979



3



(437
)


5,545Common Stock










27,597



2,698



(2,287
)


28,008CR Holding, Inc.

Subordinated Debt


1,645







40,812



374



(3,006
)


38,180(Consumer Products)

Common Stock










40,934







(13,452
)


27,482Crescent Equity Corp.

Senior Loan


11







433











433(Business Services/

Subordinated Debt


892







42,977



488



(12,486
)


30,979Broadcasting & Cable)

Subordinated
    Debt(5)










1,583



100







1,683Common Stock


36







83,453



5,622



(64,762
)


24,313Direct Capital Corporation

Subordinated Debt


1,661







39,030



13,641



(2,965
)


49,706(Financial Services)

Common Stock










6,906



6,744



(2,644
)


11,006Financial Pacific Company

Subordinated Debt


3,027







72,850



362



(5,314
)


67,898(Financial Services)

Preferred Stock


1,281







19,330







(1,779
)


17,551Common Stock










38,544



−



(14,523
)


24,021ForeSite Towers, LLC

Equity Interest










878







(75
)


803(Tower Leasing)Global Communications, LLC

Senior
    Loan(5)










1,822







(472
)


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

Senior
    Loan(5)














29,628







29,628(Retail)

Common Stock














5,151



(4,001
)


1,150  See related footnotes at the end of
    this schedule.
 70




---



##### 



PRIVATE FINANCE



Amount of Interest or Dividends


December 31,








March 31,Portfolio Company



Credited





2007


Gross


Gross


2008(in thousands)

Investment(1)

to
    Income(6)


Other(2)


Value


Additions(3)


Reductions(4)


ValueHot Stuff Foods, LLC

Senior Loan

$
956






$
50,752


$
1,596


$
(110
)

$
52,238(Consumer Products)

Subordinated Debt


826







29,907



545



(10,053
)


20,399Subordinated
    Debt(5)










1,337







(1,337
)


Common Stock






















Huddle House, Inc.

Subordinated Debt


2,165







59,618



454



(4,355
)


55,717(Retail)

Common Stock










44,154







(7,330
)


36,824Impact Innovations Group, LLC

Equity Interests in(Business Services)

Affiliate










320



1







321Insight Pharmaceuticals

Subordinated Debt


2,633







45,041



1,304



(904
)


45,441Corporation

Subordinated
    Debt(5)










16,796



171







16,967(Consumer Products)

Preferred Stock










1,462



9,099







10,561Common Stock






















Jakel, Inc.

Subordinated
    Debt(5)










1,563







(815
)


748(Industrial Products)Legacy Partners Group, Inc.

Senior
    Loan(5)










3,843







(3,000
)


843(Business Services)

Equity Interests










1,332







(187
)


1,145Litterer Beteiligungs-GmbH

Subordinated Debt


16







772



56







828(Business Services)

Equity Interest










700



150







850MHF Logistical Solutions,
    Inc.(7)

Subordinated
    Debt(5)














14,310



(4,991
)


9,319(Business Services)

Preferred Stock






















Common Stock






















MVL Group, Inc.

Senior Loan


922







30,639



6







30,645(Business Services)

Subordinated Debt


1,518







39,943



296







40,239Common Stock










4,949







(576
)


4,373Old Orchard Brands, LLC

Subordinated Debt


838







19,544



209



(1,428
)


18,325(Consumer Products)

Equity Interests










25,419



2,793



(2,910
)


25,302Penn Detroit Diesel Allison, LLC

Subordinated Debt


1,457







39,180



714



(2,883
)


37,011(Business Services)

Equity Interests










37,965







(4,443
)


33,522Powell Plant Farms, Inc.

Senior Loan










1,534







(1,534
)


(Consumer Products)Service Champ, Inc.

Subordinated Debt


1,086







28,351



193



(2,083
)


26,461(Business Services)

Common Stock










26,292







(2,541
)


23,751Staffing Partners Holding

Subordinated Debt










223



286



(509
)


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

Equity Interests










430







(33
)


397(Telecommunications)Sweet Traditions, Inc.

Senior
    Loan(5)










35,229



4,597



(39,399
)


427(Retail)

Preferred Stock














950



(950
)


Common Stock














50



(50
)


Unitranche Fund LLC

Subordinated Certificates


274







744



30,747







31,491(Private Debt Fund)

Equity Interests










1











1Worldwide Express Operations, LLC

Subordinated Debt


102







2,670



81



(212
)


2,539(Business Services)

Equity Interests


796







21,516







(2,852
)


18,664Warrants










272







(36
)


236Total companies more than 25% owned

$
28,624






$
1,279,080










$
1,157,473Companies 5% to 25% Owned10th Street, LLC

Subordinated Debt

$
680






$
20,645


$
129






$
20,774(Business Services)

Equity Interests










1,100







(25
)


1,075Option














25







25Advantage Sales &Marketing, Inc.

Subordinated Debt


4,738







154,854



2,589







157,443(Business Services)

Equity Interests










10,973







(773
)


10,200Air Medical Group Holdings LLC

Senior Loan


63







2,980



3,217



(2,332
)


3,865(Healthcare Services)

Equity Interests


1,011







10,800







(900
)


9,900Alpine ESP Holdings, Inc.

Preferred Stock


19







749







(127
)


622(Business Services)

Common Stock










262







(262
)


Amerex Group, LLC

Subordinated Debt


241







8,400







(611
)


7,789(Consumer Products)

Equity Interests


2,349







13,713







(941
)


12,772BB&T CapitalPartners/WindsorMezzanine Fund, LLC

Equity Interests










11,467



8







11,475(Private Equity Fund)  See related footnotes at the end of
    this schedule.
 71




---



##### 



PRIVATE FINANCE



Amount of Interest or Dividends


December 31,








March 31,Portfolio Company



Credited





2007


Gross


Gross


2008(in thousands)

Investment(1)

to
    Income(6)


Other(2)


Value


Additions(3)


Reductions(4)


ValueBecker Underwood, Inc.

Subordinated Debt


921







24,798



726







25,524(Industrial Products)

Common Stock










4,190



609



(799
)


4,000BI Incorporated

Subordinated Debt

$
1,049






$
30,499


$
422


$



$
30,921(Business Services)

Common Stock










7,382







(1,182
)


6,200Creative Group, Inc.

Subordinated
    Debt(5)










6,197







(1,012
)


5,185(Business Services)

Common Stock






















Warrant






















Drew Foam Companies, Inc.

Preferred Stock










396







(126
)


270(Business Services)

Common Stock














1



(1
)


Hilden America, Inc.

Common Stock














454



(9
)


445(Consumer Products)MedBridge Healthcare, LLC

Senior
    Loan(5)










7,164











7,164(Healthcare Services)

Subordinated
    Debt(5)










2,406



195







2,601ConvertibleSubordinated
    Debt(5)






















Equity Interests






















MHF Logistical Solutions, Inc.

Subordinated Debt










9,280







(9,280
)


(Business Services)

Common Stock






















Warrants






















Multi-Ad Services, Inc.

Unitranche Debt


568







19,704



78



(50
)


19,732(Business Services)

Equity Interests










940



348



(274
)


1,014Progressive InternationalCorporation

Subordinated Debt


65







1,545



31







1,576(Consumer Products)

Preferred Stock










1,038



21







1,059Common Stock










4,900



900







5,800Warrants






















Regency Healthcare Group, LLC

Senior Loan


1



















(Healthcare Services)

Unitranche Debt


340







11,941



356







12,297Equity Interests


25







1,681



22



(206
)


1,497SGT India Private Limited

Common Stock










3,075







(495
)


2,580(Business Services)Soteria Imaging Services, LLC

Subordinated Debt


530







13,744



2,006







15,750(Healthcare Services)

Equity Interests


74







2,686







(483
)


2,203Universal Environmental

Equity Interests














249



(249
)


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

$
12,674






$
389,509










$
381,758      (1)
    Common stock, preferred stock, warrants, options, and equity
    interests are generally non-income producing and restricted. The
    principal amount for loans and debt securities and the number of
    shares of common stock and preferred stock is shown in the
    consolidated statement of investments as of March 31, 2008.(2)
    Other includes interest, dividend, or other income which was
    applied to the principal of the investment and therefore reduced
    the total investment. These reductions are also included in the
    Gross Reductions for the investment, as applicable.(3)
    Gross additions include increases in the cost basis of
    investments resulting from new portfolio investments,
    paid-in-kind
    interest or dividends, the amortization of discounts and closing
    fees, the exchange of one or more existing securities for one or
    more new securities and the movement of an existing portfolio
    company into this category from a different category. Gross
    additions also include net increases in unrealized appreciation
    or net decreases in unrealized depreciation.(4)
    Gross reductions include decreases in the cost basis of
    investments resulting from principal collections related to
    investment repayments or sales, the exchange of one or more
    existing securities for one or more new securities and the
    movement of an existing portfolio company out of this category
    into a different category. Gross reductions also include net
    increases in unrealized depreciation or net decreases in
    unrealized appreciation.(5)
    Loan or debt security is on non-accrual status at March 31,
    2008, and is therefore considered non-income producing. Loans or
    debt securities on non-accrual status at the end of the period
    may or may not have been on non-accrual status for the full
    period.(6)
    Represents the total amount of interest or dividends credited to
    income for the portion of the year an investment was included in
    the companies more than 25% owned or companies 5% to 25% owned
    categories, respectively.(7)
    In the first quarter of 2008, the Company exercised its option
    to acquire a majority of the voting securities of MHF Logistical
    Solutions, Inc. (MHF). Therefore, MHF was reclassified to
    companies more than 25% owned in the first quarter of 2008. At
    December 31, 2007, the Companys investment in MHF was
    included in the companies 5% to 25% owned category. 72




---



##### 





Item 2.
    Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations  The following analysis of the financial condition and results
    of operations of the Company should be read in conjunction with
    the Companys Consolidated Financial Statements and the
    Notes thereto included herein and in the Companys annual
    report on
    Form 10-K
    for the year ended December 31, 2007. In addition, this
    quarterly report on Form 10-Q contains certain forward-looking
    statements. These statements include the plans and objectives of
    management for future operations and financial objectives and
    can be identified by the use of forward-looking terminology such
    as may, will, expect,
    intend, anticipate,
    estimate, or continue or the negative
    thereof or other variations thereon or comparable terminology.
    These forward-looking statements are subject to the inherent
    uncertainties in predicting future results and conditions.
    Certain factors that could cause actual results and conditions
    to differ materially from those projected in these
    forward-looking statements are set forth below in the Risk
    Factors section. Other factors that could cause actual results
    to differ materially include:
  
    changes in the economy, including economic downturns or
    recessions;
    risks associated with possible disruption in our operations
    due to terrorism;
    future changes in laws or regulations or changes in
    accounting principles; and
    other risks and uncertainties as may be detailed from time to
    time in our public announcements and SEC filings.  Financial or other information presented for private finance
    portfolio companies has been obtained from the portfolio
    companies, and the financial information presented may represent
    unaudited, projected or pro forma financial information, and
    therefore may not be indicative of actual results. In addition,
    the private equity industry uses financial measures such as
    EBITDA or EBITDAM (Earnings Before Interest, Taxes,
    Depreciation, Amortization and, in some instances, Management
    fees) in order to assess a portfolio companys financial
    performance and to value a portfolio company. EBITDA and EBITDAM
    are not intended to represent cash flow from operations as
    defined by U.S. generally accepted accounting principles and
    such information should not be considered as an alternative to
    net income, cash flow from operations or any other measure of
    performance prescribed by U.S. generally accepted accounting
    principles.
  OVERVIEW
      March 31,


December 31,2008


2007


2007Private finance


98
%


97%



97%Commercial real estate finance


2
%


3%



3%    73




---



##### 



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


At and for theThree Months Ended


Year EndedMarch 31,


December 31,($ in millions)

2008


2007


2007Portfolio at value

$
4,635.6


$
4,498.8


$
4,780.5Investments funded

$
275.1


$
170.2


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

$
13.4


$
8.1


$
12.0Principal collections related to investment repayments
    or sales(1)

$
264.8


$
235.5


$
1,211.6Yield on interest-bearing portfolio
    investments(2)


12.3
%


11.6
%


12.1
%   (1)
    Principal collections related to investment repayments or sales
    for the three months ended March 31, 2008, and year ended
    December 31, 2007, included collections of
    $30.0 million and $224.2 million, respectively, related to
    the sale of loans to the Allied Capital Senior Debt Fund, L.P.
    See discussion below.(2)
    The weighted average yield on interest-bearing investments is
    computed as the (a) annual stated interest on accruing
    loans and debt securities plus the annual amortization of loan
    origination fees, original issue discount, and market discount
    on accruing loans and debt securities less the annual
    amortization of loan origination costs, plus the effective
    interest yield on the preferred shares/income notes of CLOs,
    plus the annual stated interest (LIBOR plus 7.5%) on the
    subordinated certificates in the Unitranche Fund LLC
    divided by (b) total interest-bearing investments at value.
    The weighted average yield is computed as of the balance sheet
    date. 74




---



##### 



Private
    Finance
    At and for


At and for theThree Months Ended March 31,


Year Ended December 31,2008


2007


2007($ in millions)

Value


Yield(1)


Value


Yield(1)


Value


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

$
325.7



7.0%


$
365,0



8.4%


$
344.3



7.7%Unitranche debt


655.7



11.8%



780.2



11.4%



653.9



11.5%Subordinated debt


2,430.4



13.0%



1,946.1



12.5%



2,416.4



12.8%Total loans and debt securities


3,411.8



12.2%



3,091.3



11.7%



3,414.6



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


197.4



15.8%



96.1



13.5%



203.0



14.6%Subordinated certificates in Unitranche
    Fund LLC(2)


31.5



12.4%











0.7



12.4%Other equity securities


879.1







1,188.9







1,041.0Total equity securities


1,108.0







1,285.0







1,244.7Total portfolio

$
4,519.8






$
4,376.3






$
4,659.3Investments funded

$
274.6






$
170.2






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

$
13.2






$
5.3






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

$
256.4






$
235.1






$
1,188.2   (1)
    The weighted average yield on loans and debt securities is
    computed as the (a) annual stated interest on accruing
    loans and debt securities plus the annual amortization of loan
    origination fees, original issue discount, and market discount
    on accruing loans and debt securities less the annual
    amortization of loan origination costs, divided by
    (b) total loans and debt securities at value. The weighted
    average yield on the preferred shares/income notes of CLOs is
    calculated as the (a) effective interest yield on the
    preferred shares/income notes of CLOs, divided by (b) preferred
    shares/income notes of CLOs at value. The weighted average yield
    on the subordinated certificates in the Unitranche Fund LLC
    is computed as the (a) annual stated interest (LIBOR plus
    7.5%) divided by (b) total investment at value. The
    weighted average yields are computed as of the balance sheet
    date.(2)
    Investments in the preferred shares/income notes of CLOs and the
    subordinated certificates in the Unitranche Fund LLC earn a
    current return that is included in interest income in the
    consolidated statement of operations.(3)
    Includes collections from the sale or repayment of senior loans
    totaling $48.6 million, $94.7 million, and
    $393.4 million for the three months ended March 31,
    2008 and 2007, and for the year ended December 31, 2007,
    respectively.   75




---



##### 



76




---



##### 



Investments Funded.
  For the Three Months Ended March 31, 2008Debt Investments


Buyout Investments


TotalWeighted





Weighted





WeightedAverage





Average





Average($ in millions)

Amount


Yield(1)


Amount


Yield(1)


Amount


Yield(1)Loans and debt securities:Senior loans

$
26.8



7.4%


$
10.4



6.7%


$
37.2



7.2%Unitranche
    debt(2)


4.5



10.3%



0.5



6.6%



5.0



9.9%Subordinated debt


129.9
(3)


12.0%



31.3



14.2%



161.2



12.4%Total loans and debt securities


161.2



11.2%



42.2



12.3%



203.4



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


3.0



27.6%











3.0



27.6%Subordinated certificates in Unitranche Fund LLC


30.7



12.4%











30.7



12.4%Equity


13.6







23.9







37.5Total

$
208.5






$
66.1






$
274.6   For the Three Months Ended March 31, 2007Debt Investments


Buyout Investments


TotalWeighted





Weighted





WeightedAverage





Average





Average($ in millions)

Amount


Yield(1)


Amount


Yield(1)


Amount


Yield(1)Loans and debt securities:Senior loans

$
41.2



8.8%


$
12.7



10.4%


$
53.9



9.2%Unitranche
    debt(2)


5.3



11.0%











5.3



11.0%Subordinated debt


14.4



9.3%



62.1



10.5%



76.5



10.3%Total loans and debt securities


60.9



9.1%



74.8



10.5%



135.7



9.9%Equity


9.7







24.8







34.5Total

$
70.6






$
99.6






$
170.2   For the Year Ended December 31, 2007Debt Investments


Buyout Investments


TotalWeighted





Weighted





WeightedAverage





Average





Average($ in millions)

Amount


Yield(1)


Amount


Yield(1)


Amount


Yield(1)Loans and debt securities:Senior loans

$
249.0



9.2%


$
63.1



8.8%


$
312.1



9.1%Unitranche
    debt(2)


109.1



10.8%



74.9



13.0%



184.0



11.7%Subordinated debt


719.4
(3)


12.8%



197.6



12.1%



917.0



12.6%Total loans and debt securities


1,077.5



11.7%



335.6



11.7%



1,413.1



11.7%Preferred shares/income notes of
    CLOs(4)


116.2



16.4%











116.2



16.4%Subordinated certificates in Unitranche Fund LLC


0.7



12.4%











0.7



12.4%Equity


152.0
(5)






146.0







298.0Total

$
1,346.4






$
481.6






$
1,828.0    (1)
    The weighted average yield on interest-bearing investments is
    computed as the (a) annual stated interest on accruing
    interest-bearing investments, divided by (b) total
    interest-bearing investments funded. The weighted average yield
    on the preferred shares/income notes of CLOs is calculated as
    the (a) effective interest yield on the preferred
    shares/income notes of CLOs, divided by (b) preferred
    shares/income notes of CLOs funded. The weighted average yield
    on the subordinated certificates in the Unitranche Fund LLC
    is computed as the (a) annual stated interest (LIBOR plus
    7.5%) divided by (b) total investment at value. The
    weighted average yield is calculated using yields as of the date
    an investment is funded.(2)
    Unitranche debt is an investment that combines both senior and
    subordinated financing, generally in a first lien position. The
    yield on a unitranche investment reflects the blended yield of
    senior and subordinated debt.(3)
    Subordinated debt investments for the three months ended
    March 31, 2008, and year ended December 31, 2007,
    included $2.0 million and $45.3 million, respectively,
    in investments in the bonds of collateralized loan obligations
    (CLOs). Certain of these CLOs are managed by Callidus Capital
    Corporation (Callidus), a portfolio company controlled by us.
    These CLOs primarily invest in senior corporate loans.(4)
    CLO equity investments included preferred shares/income notes of
    CLOs that primarily invest in senior corporate loans. Certain of
    these CLOs are managed by Callidus.(5)
    Equity investments for the year ended December 31, 2007,
    included $31.8 million invested in the Allied Capital
    Senior Debt Fund, L.P. See Managed Funds below. 77




---



##### 



Yield.
 78




---



##### 



Outstanding Investment Commitments.
  Companies





CompaniesMore Than


Companies 5%


Less Than($ in millions)

25%
    Owned(1)


to 25% Owned


5% Owned


TotalSenior loans

$
8.6


$
12.0


$
98.5


$
119.1
(2)Unitranche debt


3.0







44.6



47.6Subordinated debt


23.0



4.3







27.3Total loans and debt securities


34.6



16.3



143.1



194.0Unitranche
    Fund(3)


493.5











493.5Equity securities


91.7



9.8



56.3



157.8
(4)Total

$
619.8


$
26.1


$
199.4


$
845.3   (1)
    Includes various commitments to
    Callidus Capital Corporation (Callidus), a portfolio company
    controlled by us, which owns 80% (subject to dilution) of
    Callidus Capital Management, LLC, an asset management company
    that structures and manages collateralized loan obligations
    (CLOs), collateralized debt obligations (CDOs), and other
    related investments, as follows:  AmountCommitted


Amount


Available($ in millions)

Amount


Drawn


to be DrawnRevolving line of credit for working capital

$
4.0


$
1.6


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


18.0



4.0



14.0Total

$
22.0


$
5.6


$
16.4   (*)
    Callidus has a synthetic credit
    facility with a third party for up to approximately
    $55 million. We have agreed to designate our subordinated
    debt commitment for Callidus to draw upon to provide first loss
    capital as needed to support this facility.  (2)
    Includes $113.2 million in the
    form of revolving senior debt facilities to 33 companies.(3)
    Represents our commitment to the
    Unitranche Fund LLC (see discussion below), which we estimate
    will be funded over a two to three year period as investments
    are made by the Unitranche Fund.(4)
    Includes $66.1 million to
    13 private equity and venture capital funds, including
    $3.9 million in co-investment commitments to one private
    equity fund.    Investments in Collateralized Loan Obligations and
    Collateralized Debt Obligations (CLO/CDO
    Assets).
  2008


2007($ in millions)

Cost


Value


Yield(1)


Cost


Value


Yield(1)CLO/CDO bonds

$
92.7


$
92.1



12.7%


$
90.7


$
89.9



13.3%Preferred shares/income notes of CLOs


224.1



197.4



15.8%



218.3



203.0



14.6%Total

$
316.8


$
289.5






$
309.0


$
292.9Percentage of total assets






5.7%











5.6%   (1)
    The weighted average yield is calculated as the (a) annual
    stated interest or the effective interest yield on the accruing
    bonds or the effective interest yield on the preferred
    shares/income notes, divided by (b) CLO/CDO Assets at value. The market yield used in the
    valuation of the CLO/CDO Assets may be different than the
    interest yields shown above. See discussion below.
   79




---



##### 



($ in millions)

2008


2007Bonds

$
286.1


$
288.5Syndicated loans


4,206.5



4,122.7Cash(1)


101.4



104.4Total underlying collateral
    assets(2)

$
4,594.0


$
4,515.6   (1)
    Includes undrawn liability amounts.(2)
    At March 31, 2008, and December 31, 2007, the total
    face value of defaulted obligations was $42.3 million and
    $18.4 million, respectively, or approximately 0.9% and
    0.4%, respectively, of the total underlying collateral assets.    Ciena Capital LLC.
      80




---



##### 



($ in millions)

2008


2007Interest income on subordinated debt and Class A equity
    interests

$



$
Fees and other income






1.4Total interest and related portfolio income

$



$
1.4          81




---



##### 



the investigating agencies with
    respect to this matter. On October 1, 2007, the former
    Ciena employee pled guilty to one count of conspiracy to
    fraudulently originate SBA-guaranteed loans and one count of
    making a false statement before a grand jury.
          Mercury Air Centers, Inc.
     82




---



##### 



($ in millions)

2007Interest income

$
2.0Fees and other income


0.1Total interest and related portfolio income

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


Year EndedThree Months Ended March 31,


December 31,2008


2007


2007($ in millions)

Value


Yield(1)


Value


Yield(1)


Value


Yield(1)Portfolio at value:Commercial mortgage loans

$
53.5



7.9%


$
72.2



7.5%


$
65.4



6.8%Real estate owned


30.2







21.0







21.3Equity interests


32.1







29.3







34.5Total portfolio

$
115.8






$
122.5






$
121.2Investments funded

$
0.5






$







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

$
0.2






$
0.2






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

$
8.4






$
0.4






$
23.4   (1)
    The weighted average yield on the interest-bearing investments
    is computed as the (a) annual stated interest on accruing
    loans plus the annual amortization of loan origination fees,
    original issue discount, and market discount on accruing
    interest-bearing investments less the annual amortization of
    origination costs, divided by (b) total interest-bearing
    investments at value. The weighted average yield is computed as
    of the balance sheet date. Interest-bearing investments for the
    commercial real estate finance portfolio include all investments
    except for real estate owned and equity interests.    Managed
    Funds
   83




---



##### 



investments may be senior, pari
    passu or junior to the debt and equity investments held by us.
    We may or may not participate in investments made by investment
    funds managed by us or one of our affiliates. We expect to
    continue to grow our managed capital base and have identified
    other private equity-related funds that we intend to develop. By
    growing our privately managed capital base, we are seeking to
    diversify our sources of capital, leverage our core investment
    expertise and increase fees and other income from asset
    management activities. See Risk Factors  There
    are potential conflicts of interest between us and the funds
    managed by us under Item 1A.
  Allied Capital Senior Debt Fund,
    L.P.
      Unitranche Fund LLC.
    AGILE Fund I, LLC.
   84




---



##### 



realized gain of $8.8 million
    and dividend income of $5.4 million. In addition, we sold
    approximately $63 million in debt investments, which
    represented 7.3% of our unitranche, second lien and subordinated
    debt investments in the buyout investments included in the
    equity sale. AGILE generally has the right to co-invest in its
    proportional share of any future follow-on investment
    opportunities presented by the companies in its portfolio.
        Knightsbridge CLO 2007-1 Ltd. 2007-1 2007-1
   85




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##### 



PORTFOLIO ASSET
    QUALITY
  Portfolio by Grade.
    2008


2007Portfolio

Percentage of


Portfolio

Percentage ofGrade

at Value

Total Portfolio


at Value

Total Portfolio($ in millions)1

$
1,301.7


28.1
%

$
1,539.6


32.2
%2


3,079.8


66.4



2,915.7


61.03


141.1


3.1



122.5


2.64


61.6


1.3



157.2


3.35


51.4


1.1



45.5


0.9$
4,635.6


100.0
%

$
4,780.5


100.0
%       Loans and Debt Securities on Non-Accrual
    Status.
 86




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##### 



($ in millions)

2008


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

$
62.4



$114.1Companies 5% to 25% owned


2.6



11.7Companies less than 5% owned


23.3



23.8Commercial real estate finance


5.9



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


31.0



21.4Companies 5% to 25% owned


12.3



13.4Companies less than 5% owned


11.7



13.3Commercial real estate finance


1.5



1.9Total

$
150.7



$212.0Percentage of total portfolio


3.3
%


4.4
%   (1)
    Workout loans and debt securities
    exclude equity securities that are included in the total
    Grade 4 and 5 assets above.  non-accruals.
  Loans and Debt Securities Over 90 Days
    Delinquent.
  ($ in millions)

2008


2007Private finance


$54.0



$139.9Commercial mortgage loans


15.4



9.2Total


$69.4



$149.1Percentage of total portfolio


1.5
%


3.1
%   non-accrual
  and
  PORTFOLIO
    RETURNS
   87




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##### 



investments exited during this
    period. The IRR is calculated using the aggregate portfolio cash
    flow for all investments exited over this period. For
    investments exited during this period, we invested capital
    totaling $4.7 billion. The weighted average holding period
    of these investments was 39 months. Investments are
    considered to be exited when the original investment objective
    has been achieved through the receipt of cash and/or non-cash
    consideration upon the repayment of our debt investment or sale
    of an equity investment, or through the determination that no
    further consideration was collectible and, thus, a loss may have
    been realized. The aggregate cash flow IRR for private finance
    investments was approximately 20% and for CMBS/CDO investments
    was approximately 24% for the same period. The weighted average
    holding period of the private finance and CMBS/CDO investments
    was 49 months and 22 months, respectively, for the
    same period. These IRR results represent historical results.
    Historical results are not necessarily indicative of future
    results.
   OTHER ASSETS AND
    OTHER LIABILITIES
     88




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##### 



RESULTS OF
    OPERATIONS
  Comparison of the
    Three Months Ended March 31, 2008 and 2007
    For the Three MonthsEnded March 31,





Percent(in thousands, except per share
    amounts)

2008


2007


Change


Change(unaudited)Interest and Related Portfolio IncomeInterest and dividends

$
134,660


$
101,983


$
32,677



32
%Fees and other income


10,284



5,969



4,315



72
%Total interest and related portfolio income


144,944



107,952



36,992



34
%ExpensesInterest


37,560



30,288



7,272



24
%Employee


22,652



21,928



724



3
%Employee stock options


4,195



3,661



534



15
%Administrative


9,019



13,224



(4,205
)


(32
)%Total operating expenses


73,426



69,101



4,325



6
%Net investment income before income taxes


71,518



38,851



32,667



84
%Income tax expense (benefit), including excise tax


1,969



(649
)


2,618



403
%Net investment income


69,549



39,500



30,049



76
%Net Realized and Unrealized Gains (Losses)Net realized gains


3,143



27,666



(24,523
)


*Net change in unrealized appreciation or depreciation


(113,404
)


65,920



(179,324
)


*Total net gains (losses)


(110,261
)


93,586



(203,847
)


*Net income

$
(40,712
)

$
133,086


$
(173,798
)


(131
)%Diluted earnings per common share

$
(0.25
)

$
0.87


$
(1.12
)


(129
)%Weighted average common shares outstanding  diluted


161,507



152,827



8,686



6
%   *
    Net change in unrealized appreciation or depreciation and net
    gains (losses) can fluctuate significantly from period to
    period. As a result, comparisons may not be meaningful. 89




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##### 



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

2008

2007InterestPrivate finance loans and debt securities

$
107.0

$
92.9Preferred shares/income notes of CLOs


7.5


3.7Subordinated certificates in Unitranche Fund LLC


0.3


Commercial mortgage loans


1.2


1.3Cash, U.S. Treasury bills, money market and other securities


1.8


2.8Total interest


117.8


100.7Dividends


16.9


1.3Total interest and dividends

$
134.7

$
102.0     2008


2007($ in millions)

Value

Yield(1)


Value

Yield(1)Loans and debt securities:Private finance

$3,411.8


12.2
%

$3,091.3


11.7
%Commercial mortgage loans

53.5


7.9
%

72.2


7.5
%Total loans and debt securities

3,465.3


12.1
%

$3,163.5


11.6
%Equity securities:Preferred shares/income notes of CLOs

197.4


15.8
%

96.1


13.5
%Subordinated certificates in Unitranche Fund LLC

31.5


12.4
%




Total

$3,694.2


12.3
%

$3,259.6


11.7
%   (1)
    The weighted average yield on loans and debt securities is
    computed as the (a) annual stated interest on accruing
    loans and debt securities plus the annual amortization of loan
    origination fees, original issue discount, and market discount
    on accruing loans and debt securities less the annual
    amortization of loan origination costs, divided by
    (b) total interest-bearing investments at value. The weighted average yield on the
    preferred shares/income notes of CLOs is calculated as the
    (a) effective interest yield on the preferred shares/income
    notes of CLOs, divided by (b) preferred shares/income notes
    of CLOs at value.
 The weighted average yield on the
    subordinated certificates in the Unitranche Fund LLC is
    computed as the (a) annual stated interest (LIBOR plus
    7.5%) divided by (b) total investment at value.
 The weighted average yields are
    computed as of the balance sheet date.
     90




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##### 



Fees and Other Income.
   ($ in millions)

2008


2007Structuring and diligence


$5.1



$1.8Management, consulting and other services provided to portfolio
    companies


2.9



1.8Commitment, guaranty and other fees from portfolio
    companies(1)


1.7



2.0Fund management
    fees(2)


0.6



Loan prepayment premiums






0.3Other income






0.1Total fees and other income


$10.3



$ 6.0   (1)
    Includes guaranty and other fees from Ciena of $1.4 million
    for 2007. See  Private Finance, Ciena Capital,
    LLC above.(2)
    See Portfolio and Investment Activity  Managed
    Funds above.       91




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##### 



Operating Expenses.
  Interest Expense.
  ($ in millions)

2008


2007Total outstanding debt

$
2,191.6


$
1,891.5Average outstanding debt

$
2,209.5


$
1,841.2Weighted average
    cost(1)


6.2%



6.5%   (1)
    The weighted average annual interest cost is computed as the (a)
    annual stated interest rate on the debt plus the annual
    amortization of commitment fees, other facility fees and debt
    financing costs that are recognized into interest expense over
    the contractual life of the respective borrowings, divided by
    (b) debt outstanding on the balance sheet date.    Employee Expense.
  ($ in millions)

2008


2007Salaries and employee benefits

$
22.7


$
21.4Individual performance award (IPA)


2.4



2.5IPA mark to market expense (benefit)


(4.1
)


(4.0
)Individual performance bonus (IPB)


1.7



2.0Total employee
    expense(1)

$
22.7


$
21.9Number of employees at end of period


186



170   (1)
    Excludes stock options expense. See below.     92




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##### 



Stock Options Expense. Share-Based Payment
      ($ in millions)

2008


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

$
1.7


$
3.2Options granted on or after January 1, 2006


2.5



0.5Total employee stock option expense

$
4.2


$
3.7  93




---



##### 



Administrative Expense.
    Income Tax Expense (Benefit), Including Excise
    Tax.
  ($ in millions)

2008


2007Income tax expense (benefit)

$
(0.3
)

$
(4.2
)Excise tax
    expense(1)


2.3



3.6Income tax expense (benefit), including excise tax

$
2.0


$
(0.6
)     (1)
    While excise tax expense is presented in the Consolidated
    Statement of Operations as a reduction to net investment income,
    excise tax relates to both net investment income and net
    realized gains.      Realized Gains and Losses.
  ($ in millions)

2008


2007Realized gains

$
32.7


$
33.2Realized losses


(29.6
)


(5.5
)Net realized gains

$
3.1


$
27.7    94




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##### 



($ in millions)

2008


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

$
(32.5
)

$
(32.1
)Reversal of previously recorded net unrealized appreciation
    associated with dividends received


(13.5
)


Reversal of previously recorded net unrealized depreciation
    associated with realized losses


28.5



5.8Total reversal

$
(17.5
)

$
(26.3
)     ($ in
    millions)
 2008Portfolio Company

AmountPrivate Finance:Norwesco, Inc.

$
10.7BenefitMall, Inc.


4.9Financial Pacific Company


3.1Penn Detroit Diesel Allison, LLC


1.7Service Champ, Inc.


1.7Advantage Sales & Marketing,
    Inc.(1)


3.2Coverall North America, Inc.


1.4CR Holding, Inc.


1.0Other


4.9Total private finance


32.6Commercial Real Estate:Other


0.1Total commercial real estate


0.1Total realized gains

$
32.7   2007Portfolio Company

AmountPrivate Finance:Palm Coast Data, LLC

$
20.0Mogas Energy, LLC


4.5Tradesmen International, Inc.


3.8ForeSite Towers, LLC


3.8Other


1.1Total realized gains

$
33.2


(1) Includes
    an additional realized gain of $1.7 million related to the
    release of escrowed funds from the sale of our majority equity
    investment in 2006.
 95




---



##### 



($ in
    millions)
 2008Portfolio Company

AmountPrivate Finance:Crescent Equity Corp.  Longview Cable &
    Data, LLC

$
8.4Mid-Atlantic Venture Fund IV, L.P.


5.2WMA Equity Corporation and Affiliates


4.5Driven Brands, Inc.


1.9Direct Capital Corporation


1.7EarthColor, Inc.


1.7Sweet Traditions, Inc.


1.0Other


4.9Total private finance


29.3Commercial Real Estate:Other


0.3Total commercial real estate


0.3Total realized losses

$
29.6   2007Portfolio Company

AmountPrivate Finance:Legacy Partners Group, LLC

$
5.8Other


(0.3
)Total realized losses

$
5.5


Change in Unrealized Appreciation or
    Depreciation. Fair Value Measurements
     96




---



##### 



rights, and put or call rights.
    Our investments may be subject to certain restrictions on resale
    and generally have no established trading market.
    Valuation Methodology.
       97




---



##### 



and/or security-by-security
     98




---



##### 



2008


2007Number of private finance portfolio companies reviewed


124



88Percentage of private finance portfolio reviewed at value


94.0
%


91.8
%     Net Change in Unrealized Appreciation or
    Depreciation.
  ($ in millions)

2008(1)


2007(1)Net unrealized appreciation (depreciation)

$
(95.9
)

$
92.2Reversal of previously recorded unrealized appreciation
    associated with realized gains


(32.5
)


(32.1
)Reversal of previously recorded net unrealized appreciation
    associated with dividends received


(13.5
)


Reversal of previously recorded unrealized depreciation
    associated with realized losses


28.5



5.8Net change in unrealized appreciation or depreciation

$
(113.4
)

$
65.9   (1)
    The net change in unrealized appreciation or depreciation can
    fluctuate significantly from period to period. As a result,
    quarterly comparisons may not be meaningful.    Valuation of Ciena Capital LLC.
   99




---



##### 



Per Share Amounts.
  OTHER
    MATTERS
  Regulated Investment Company Status.
       100




---



##### 



DIVIDENDS AND
    DISTRIBUTIONS
             101




---



##### 



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

2008


2007Cash, U.S. Treasury bills and investments in money market and
    other securities (including U.S. treasury bills, money
    market and other securities: 2008-$120.4; 2007-$201.2)

$
201.6


$
204.8Total assets

$
5,082.2


$
5,214.6Total debt outstanding

$
2,191.6


$
2,289.5Total shareholders equity

$
2,828.4


$
2,771.8Debt to equity ratio


0.77



0.83Asset coverage
    ratio(1)


229
%


221
%    (1)
    As a business development company, we are generally required to
    maintain a minimum ratio of 200% of total assets to total
    borrowings.    ($ in millions)

2008


2007Net cash provided by operating activities

$
111.3


$
19.4Add: portfolio investments funded


275.1



170.2Total cash provided by operating activities before new
    investments

$
386.4


$
189.6    102




---



##### 



2008


2007($ in millions)

Value


Yield


Value


YieldU.S. Treasury
    bills(1)

$
120.0



1.6
%






Money market securities


0.4



3.2
%


201.2



4.6
%Cash


81.2



1.5
%


3.6



2.9
%Total

$
201.6



1.5
%

$
204.8



4.6
%   (1)
    The Treasury bills matured in April 2008. We reinvested the
    proceeds from the matured Treasury bills in short-term Treasury
    bills of $100 million and cash of $20 million.           103




---



##### 



2008


2007Annual








AnnualFacility


Amount


Interest


Facility


Amount


Interest($ in millions)

Amount


Outstanding


Cost(1)


Amount


Outstanding


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

$
1,042.8



$1,042.8



6.1%


$
1,042.2


$
1,042.2



6.1%Publicly issued unsecured notes payable


880.0



880.0



6.7%



880.0



880.0



6.7%Total notes payable and debentures


1,922.8



1,922.8



6.4%



1,922.2



1,922.2



6.4%Revolving line of credit


922.5



268.8
(4)


3.8%
(2)


922.5



367.3



5.9%
(2)Total debt

$
2,845.3



$2,191.6



6.2%
(3)

$
2,844.7


$
2,289.5



6.5%
(3)   (1)
    The weighted average annual interest cost is computed as the
    (a) annual stated interest on the debt plus the annual
    amortization of commitment fees, other facility fees and the
    amortization of debt financing costs that are recognized into
    interest expense over the contractual life of the respective
    borrowings, divided by (b) debt outstanding on the balance
    sheet date.(2)
    The annual interest cost reflects the interest rate payable for
    borrowings under the revolving line of credit in effect at the
    balance sheet date. In addition to the current interest rate
    payable, there were annual costs of commitment fees, other
    facility fees and amortization of debt financing costs of
    $3.7 million at both March 31, 2008, and
    December 31, 2007.(3)
    The annual interest cost for total debt includes the annual cost
    of commitment fees and the amortization of debt financing costs
    on the revolving line of credit and other facility fees
    regardless of the amount outstanding on the facility as of the
    balance sheet date. The annual interest cost reflects the
    facilities in place on the balance sheet date.(4)
    On April 9, 2008, we entered into a three-year unsecured
    revolving line of credit with total commitments of
    $632.5 million, which replaced our previous line of credit.
    Under this new revolving line of credit, in addition to the
    current interest rate payable, the annual costs of commitment
    fees, other facility fees and amortization of debt financing
    costs will be approximately $6.7 million. See discussion
    below.  Privately Issued Unsecured
    Notes Payable.
    Publicly Issued Unsecured Notes
    Payable.
  ($ in millions)

Amount


Maturity Date6.625% Notes due 2011

$
400.0



July 15, 20116.000% Notes due 2012


250.0



April 1, 20126.875% Notes due 2047


230.0



April 15, 2047Total

$
880.0      104




---



##### 



Revolving Line of Credit.
        Covenant Compliance.
   105




---



##### 



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

Total


2008


2009


2010


2011


2012


2012Unsecured notes payable

$
1,922.8


$
153.0


$
270.3


$
408.0


$
472.5


$
339.0


$
280.0Revolving line of
    credit(1)


268.8



268.8



















Operating leases


19.1



3.3



4.6



4.5



1.8



1.8



3.1Total contractual obligations

$
2,210.7


$
425.1


$
274.9


$
412.5


$
474.3


$
340.8


$
283.1    (1)
    At March 31, 2008, $268.8 million was borrowed on the
    revolving line of credit and $96.3 million of standby
    letters of credit were issued under the credit facility. In
    April 2008, we entered into a new unsecured revolving line
    of credit, which replaced the previous revolving line of credit,
    with total commitments of $632.5 million. See
    Revolving Line of Credit above.  Off-Balance
    Sheet Arrangements
    Amount of Commitment Expiration Per YearAfter($ in millions)

Total


2008


2009


2010


2011


2012


2012Guarantees

$
394.0


$
0.3


$
387.3


$



$
4.4


$
0.1


$
1.9Standby letters of
    credit(1)


96.3



96.3



















Total
    commitments(2)

$
490.3


$
96.6


$
387.3


$



$
4.4


$
0.1


$
1.9    (1)
    Standby letters of credit are issued under our revolving line of
    credit that expires in September 2008. Therefore, unless a
    standby letter of credit is set to expire at an earlier date, we
    have assumed that the standby letters of credit will expire
    contemporaneously with the expiration of our line of credit that
    was in effect at March 31, 2008, which was scheduled to
    expire in September 2008. In April 2008, we entered
    into a new three-year revolving line of credit that expires in
    April 2011.(2)
    Our most significant commitments relate to our investment in
    Ciena Capital LLC (Ciena), which commitments totaled
    $444.3 million at March 31, 2008. At March 31,
    2008, the principal components of these guarantees included a
    guarantee of 100% of the outstanding total obligations on
    Cienas revolving line of credit, which matures in March
    2009, for a total guaranteed amount of $384.8 million and
    standby letters of credit issued totaling $59.5 million in
    connection with term securitizations completed by Ciena. See
     Private Finance, Ciena Capital LLC above
    for further discussion.    CRITICAL
    ACCOUNTING POLICIES
   106




---



##### 



are both important to the
    presentation of our financial condition and results of
    operations and require managements most difficult,
    complex, or subjective judgments. Our critical accounting
    policies are those applicable to the valuation of investments,
    certain revenue recognition matters and certain tax matters as
    discussed below.
  Valuation of Portfolio
    Investments. Fair Value Measurements
       107




---



##### 



a loan or debt security, including
    the value attributable to the loan or debt security from the
    enterprise value of the portfolio company or the proceeds that
    would be received in a liquidation analysis.
    and/or security-by-security
        Net Realized Gains or Losses and Net Change in Unrealized
    Appreciation or Depreciation.
  Interest and Dividend Income.
   108




---



##### 



Fee Income.
  Federal and State Income Taxes and Excise
    Tax.
      Recent Accounting Pronouncements. Fair
    Value Measurements.
 109




---



##### 



Item 3.  Quantitative
    and Qualitative Disclosures About Market Risk   Item 4.  Controls
    and Procedures  Form 10-Q, Rules 13a-15 15d-15
   110




---



##### 



PART II.
    OTHER INFORMATION Item 1.  Legal
    Proceedings          Rule 10b-5
 111




---



##### 



Item 1A.
    Risk Factors.  Investing in Allied Capital involves a number of significant
    risks relating to our business and investment objective. As a
    result, there can be no assurance that we will achieve our
    investment objective.
  Our portfolio of investments is illiquid.
  Investing in private companies involves a high degree of
    risk.
  Substantially all of our portfolio investments, which are
    generally illiquid, are recorded at fair value as determined in
    good faith by our Board of Directors and, as a result, there is
    uncertainty regarding the value of our portfolio
    investments.
   112




---



##### 



valuation, the fair value of our
    investments determined in good faith by the Board of Directors
    may differ significantly from the values that would have been
    used had a ready market existed for the investments, and the
    differences could be material. Our net asset value could be
    affected if our determination of the fair value of our
    investments is materially different than the value that we
    ultimately realize.
    Fair Value
    Measurements
  Economic recessions or downturns could impair our portfolio
    companies and harm our operating results.
    Our borrowers may default on their payments, which may have a
    negative effect on our financial performance.
  Our private finance investments may not produce current
    returns or capital gains. co-investments,
 113




---



##### 



the case of buyout transactions.
    Our private finance debt investments are generally structured to
    generate interest income from the time they are made and our
    equity investments may also produce a realized gain. We cannot
    be sure that our portfolio will generate a current return or
    capital gains.
  Our financial results could be negatively affected if a
    significant portfolio investment fails to perform as
    expected.
      We borrow money, which magnifies the potential for gain or
    loss on amounts invested and may increase the risk of investing
    in us.
 114




---



##### 



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.
    We will continue to need additional capital to grow because
    we must distribute our income.
  Loss of regulated investment company tax treatment would
    substantially reduce net assets and income available for debt
    service and dividends.
 115




---



##### 



There is a risk that our common stockholders may not receive
    dividends or distributions.
  We operate in a competitive market for investment
    opportunities.
  There are potential conflicts of interest between us and the
    funds managed by us.
     116




---



##### 



Our business depends on our key personnel.
  Changes in the law or regulations that govern us could have a
    material impact on us or our operations.
  Failure to invest a sufficient portion of our assets in
    qualifying assets could preclude us from investing in accordance
    with our current business strategy.
  Results may fluctuate and may not be indicative of future
    performance.
  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; 117




---



##### 




    actual or anticipated changes in our earnings or fluctuations in
    our operating results or changes in the expectations of
    securities analysts;
    general economic conditions and trends;
    loss of a major funding source; or
    departures of key personnel.  The trading market or market value of our publicly issued
    debt securities may be volatile.
  
    the time remaining to the maturity of these debt securities;
    the outstanding principal amount of debt securities with terms
    identical to these debt securities;
    the supply of debt securities trading in the secondary market,
    if any;
    the redemption or repayment features, if any, of these debt
    securities;
    the level, direction and volatility of market interest rates
    generally; and
    market rates of interest higher or lower than rates borne by the
    debt securities.    Our credit ratings may not reflect all risks of an investment
    in the debt securities.
  Terms relating to redemption may materially adversely affect
    the return on the debt securities.
 Item 2.  Unregistered
    Sales of Equity Securities and Use of Proceeds   118




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##### 



Issuer
    Purchases of Equity Securities
   Total Number


Weighted Averageof Shares


Price PaidPurchased


Per ShareDCPs
    I(1)1/1/2008  1/31/2008


173


$
22.172/1/2008  2/29/2008






3/1/2008  3/31/2008






DCPs
    II(2)1/1/2008  1/31/2008


42,354


$
22.172/1/2008  2/29/2008






3/1/2008  3/31/2008






Total


42,527


$
22.17     (1)
    The DCPs I are unfunded plans, as defined by the Code, that
    provide for the deferral of compensation by our directors,
    employees, and consultants. In addition, we made contributions
    to DCPs I on compensation deemed ineligible for a 401(k)
    contribution. Our directors, employees, or consultants were
    eligible to participate in the plan at such time and for such
    period as designated by the Board of Directors. The DCPs I
    were administered through a trust by a third-party trustee, and
    we funded this plan through cash contributions. Directors were
    able to choose to defer directors fees through the
    DCPs I, and to invest such deferred income in shares of our
    common stock. To the extent a director elected to invest in our
    common stock, the trustee of the DCPs I were required to
    use such deferred directors fees to purchase shares of our
    common stock in the market.(2)
    We have a long-term incentive compensation program whereby we
    will generally determine an individual performance award (IPA)
    for certain officers annually at the beginning of each year.
    The Compensation Committee may adjust the IPAs as needed, or
    make new awards as new officers are hired. In conjunction with
    the program, we instituted the DCP II plans, which were
    unfunded plans as defined by the Code that were administered
    through a trust by a third-party trustee. The IPAs were
    deposited in the trust in four equal installments, generally on
    a quarterly basis in the form of cash and the DCPs II
    required the trustee to use the cash to purchase shares of our
    common stock in the market. See discussion below on the
    termination of the deferred compensation arrangements. For 2008,
    the Compensation Committee has determined that the IPAs will be
    paid in cash in two equal installments during the year to
    eligible officers, as long as the recipient remains employed by
    us.   Item 3.  Defaults
    Upon Senior Securities   Item 4.  Submission
    of Matters to a Vote of Security Holders   119




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##### 



Item 5.  Other
    Information   Item 6.  Exhibits    ExhibitNumber

Description3.1

Restated Articles of Incorporation. (Incorporated by
    reference to Exhibit a.2 filed with Allied Capitals
    Post-Effective Amendment No. 1 to registration statement on
    Form N-2
    (File
    No. 333-141847)
    filed on June 1, 2007).3.2

Amended and Restated Bylaws. (Incorporated by reference to
    Exhibit 3.1. filed with Allied Capitals
    Form 8-K
    on July 30, 2007).4.1

Specimen Certificate of Allied Capitals Common Stock, par
    value $0.0001 per share. (Incorporated by reference to
    Exhibit d. filed with Allied Capitals registration
    statement on
    Form N-2
    (File
    No. 333-51899)
    filed on May 6, 1998).4.3

Form of Note under the Indenture relating to the issuance of
    debt securities. (Contained in Exhibit 4.4).
    (Incorporated by reference to Exhibit d.1 filed with Allied
    Capitals registration statement on
    Form N-2/A
    (File
    No. 333-133755)
    filed on June 21, 2006).4.4

Indenture by and between Allied Capital Corporation and The Bank
    of New York, dated June 16, 2006. (Incorporated by
    reference to Exhibit d.2 filed with Allied Capitals
    registration statement on
    Form N-2/A
    (File
    No. 333-133755)
    filed on June 21, 2006).4.5

Statement of Eligibility of Trustee on Form T-1.
    (Incorporated by reference to Exhibit d.3 filed with
    Allied Capitals registration statement on Form N-2
    (File No. 333-133755) filed on May 3, 2006).4.6

Form of First Supplemental Indenture by and between Allied
    Capital Corporation and the Bank of New York, dated as of
    July 25, 2006. (Incorporated by reference to
    Exhibit d.4 filed with Allied Capitals Post-Effective
    Amendment No. 1 to the registration statement on
    Form N-2/A
    (File No. 333-133755) filed on July 25, 2006).4.7

Form of 6.625% Note due 2011. (Incorporated by reference to
    Exhibit d.5 filed with Allied Capitals Post-Effective
    Amendment No. 1 to the registration statement on
    Form N-2/A (File No. 333-133755) filed on July 25,
    2006).4.8

Form of Second Supplemental Indenture by and between Allied
    Capital Corporation and The Bank of New York, dated as of
    December 8, 2006. (Incorporated by reference to
    Exhibit d.6 filed with Allied Capitals Post-Effective
    Amendment No. 2 to the registration statement on
    Form N-2/A
    (File
    No. 333-133755)
    filed on December 8, 2006).4.9

Form of 6.000% Notes due 2012. (Incorporated by reference to
    Exhibit d.7 filed with Allied Capitals Post-Effective
    Amendment No. 2 to the registration statement on
    Form N-2/A
    (File
    No. 333-133755)
    filed on December 8, 2006).4.10

Form of Third Supplemental Indenture by and between Allied
    Capital Corporation and The Bank of New York, dated as of
    March 28, 2007. (Incorporated by reference to
    Exhibit d.8 filed with Allied Capitals Post-Effective
    Amendment No. 3 to the registration statement on
    Form N-2/A
    (File
    No. 333-133755)
    filed on March 28, 2007).4.11

Form of 6.875% Notes due 2047. (Incorporated by
    reference to Exhibit d.9 filed with Allied Capitals
    Post-Effective Amendment No. 3 to the registration
    statement on
    Form N-2/A
    (File
    No. 333-133755)
    filed on March 28, 2007).4.11(a)

Form of 6.875% Notes due 2047. (Incorporated by
    reference to Exhibit d.9(a) filed with Allied
    Capitals Post-Effective Amendment No. 4 to the
    registration statement on
    Form N-2/A
    (File
    No. 333-133755)
    filed on April 2, 2007).10.1

Dividend Reinvestment Plan, as amended. (Incorporated by
    reference to Exhibit e. filed with Allied Capitals
    registration statement on
    Form N-2
    (File
    No. 333-87862)
    filed on May 8, 2002).10.2

Credit Agreement, dated April 9, 2008. (Incorporated by
    reference to Exhibit 10.1 filed with Allied Capitals
    Form 8-K
    on April 10, 2008). 120




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##### 



ExhibitNumber

Description10.3

Note Agreement, dated October 13, 2005. (Incorporated by
    reference to Exhibit 10.1 filed with Allied Capitals
    Form 8-K
    on October 14, 2005).10.3(a)

Amendment dated February 29, 2008, to Note Agreement dated as of
    October 13, 2005. (Incorporated by reference to Exhibit
    f.3(a) filed with Allied Capitals Form N-2 (File No.
    333-150006) filed on April 1, 2008).10.4

Note Agreement, dated May 1, 2006. (Incorporated by
    reference to Exhibit 10.1 filed with Allied Capitals
    Form 8-K
    on May 1, 2006).10.4(a)

Amendment dated February 29, 2008, to Note Agreement dated as of
    May 1, 2006.  (Incorporated by reference to Exhibit f.11(a)
    filed with Allied Capitals Form N-2 (File No. 333-150006)
    filed on April 1, 2008).10.15

Second Amended and Restated Control Investor Guaranty, dated as
    of January 30, 2008, between Allied Capital and CitiBank,
    N.A., as Administrative Agent. (Incorporated by reference to
    Exhibit 10.1 filed with Allied Capitals Form 8-K
    filed on February 5, 2008).10.17

The 2005 Allied Capital Corporation
    Non-Qualified
    Deferred Compensation Plan II. (Incorporated by
    reference to Exhibit 10.2 filed with Allied Capitals
    Form 8-K
    filed on December 21, 2005).10.17(a)

Amendment to The 2005 Allied Capital Corporation Non-Qualified
    Deferred Compensation Plan II, dated January 20, 2006.
    (Incorporated by reference to Exhibit 10.17(a) filed
    with Allied Capitals Form 10-K for the year ended
    December 31, 2005).10.17(b)

Amendment to The 2005 Allied Capital Corporation Non-Qualified
    Deferred Compensation Plan II, dated December 14, 2007.
    (Incorporated by reference to Exhibit 10.2 filed with
    Allied Capitals
    Form 8-K
    filed on December 19, 2007).10.18

The 2005 Allied Capital Corporation Non-Qualified Deferred
    Compensation Plan. (Incorporated by reference to
    Exhibit 10.1 filed with Allied Capitals
    Form 8-K
    filed on December 21, 2005).10.18(a)

Amendment to The 2005 Allied Capital Corporation Non-Qualified
    Deferred Compensation Plan, dated January 20, 2006.
    (Incorporated by reference to Exhibit 10.18(a) filed
    with Allied Capitals Form 10-K for the year ended
    December 31, 2005).10.18(b)

Amendment to The 2005 Allied Capital Corporation Non-Qualified
    Deferred Compensation Plan, dated December 14, 2007.
    (Incorporated by reference to Exhibit 10.1 filed with
    Allied Capitals
    Form 8-K
    filed on December 19, 2007).10.19

Amended Stock Option Plan. (Incorporated by reference to
    Appendix B of Allied Capitals definitive proxy
    statement for Allied Capitals 2007 Annual Meeting of
    Stockholders filed on April 3, 2007).10.20(a)

Allied Capital Corporation 401(k) Plan, dated September 1,
    1999. (Incorporated by reference to Exhibit 4.4 filed
    with Allied Capitals registration statement on
    Form S-8
    (File
    No. 333-88681)
    filed on October 8, 1999).10.20(b)

Amendment to Allied Capital Corporation 401(k) Plan, dated
    April 15, 2004. (Incorporated by reference to
    Exhibit 10.20(b) filed with Allied Capitals
    Form 10-Q
    for the period ended June 30, 2004).10.20(c)

Amendment to Allied Capital Corporation 401(k) plan, dated
    November 1, 2005. (Incorporated by reference to Exhibit
    10.20(c) filed with Allied Capitals
    Form 10-Q
    for the quarter ended September 30, 2005).10.20(d)

Amendment to Allied Capital Corporation 401(k) plan, dated
    April 21, 2006. (Incorporated by reference to
    Exhibit i.4(c) filed with Allied Capitals
    Form N-2
    (File
    No. 333-133755)
    filed on May 3, 2006).10.20(e)

Amendment to Allied Capital Corporation 401(k) plan, adopted
    December 18, 2006. (Incorporated by reference to
    Exhibit 10.20(e) filed with Allied Capitals
    Form 10-K
    for the year ended December 31, 2006).10.20(f)

Amendment to Allied Capital Corporation 401(k) plan, dated
    June 21, 2007. (Incorporated by reference to Exhibit
    10.20(f) filed with Allied Capitals Form 10-Q for the
    quarter ended June 30, 2007).10.20(g)

Amendment to Allied Capital Corporation 401(k) plan, dated
    June 21, 2007. (Incorporated by reference to Exhibit
    10.20(g) filed with Allied Capitals Form 10-Q for the
    quarter ended June 30, 2007). 121




---



##### 



ExhibitNumber

Description10.20(h)

Amendment to Allied Capital Corporation 401(k) plan, dated
    September 14, 2007, with an effective date of
    January 1, 2008. (Incorporated by reference to
    Exhibit 10.20(h) filed with Allied Capitals
    Form 10-Q
    for the quarter ended September 30, 2007).10.21

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

Amendment to Employment Agreement, dated March 29, 2007,
    between Allied Capital and William L. Walton.
    (Incorporated by reference to Exhibit 10.1 filed with
    Allied Capitals
    Form 8-K
    filed on April 3, 2007).10.22

Employment Agreement, dated January 1, 2004, between Allied
    Capital and Joan M. Sweeney. (Incorporated by reference
    to Exhibit 10.22 filed with Allied Capitals
    Form 10-K
    for the year ended December 31, 2003).10.22(a)

Amendment to Employment Agreement, dated March 29, 2007,
    between Allied Capital and Joan M. Sweeney. (Incorporated by
    reference to Exhibit 10.2 filed with Allied Capitals
    Form 8-K
    filed on April 3, 2007).10.23

Employment Agreement, dated January 1, 2004, between Allied
    Capital and Penelope F. Roll. (Incorporated by reference to
    Exhibit 10.23 filed with Allied Capitals
    Form 10-K
    for the year ended December 31, 2006).10.23(a)

Amendment to Employment Agreement, dated March 29, 2007,
    between Allied Capital and Penelope F. Roll. (Incorporated by
    reference to Exhibit 10.3 filed with Allied Capitals
    Form 8-K
    filed on April 3, 2007).10.25

Form of Custody Agreement with Riggs Bank N.A., which was
    assumed by PNC Bank through merger. (Incorporated by
    reference to Exhibit j.1 filed with Allied Capitals
    registration statement on
    Form N-2
    (File
    No. 333-51899)
    filed on May 6, 1998).10.26

Custodian Agreement with Chevy Chase Trust. (Incorporated by
    reference to Exhibit 10.26 filed with Allied Capitals
    Form 10-K for the year ended December 31, 2005).10.27

Custodian Agreement with Bank of America. (Incorporated by
    reference to Exhibit 10.27 filed with Allied Capitals
    Form 10-K
    for the year ended December 31, 2005).10.28

Code of Ethics. (Incorporated by reference to
    Exhibit 10.28 filed with Allied Capitals
    Form 10-K
    for the year ended December 31, 2006).10.29

Custodian Agreement with Union Bank of California.
    (Incorporated by reference to Exhibit 10.29 filed with
    Allied Capitals
    Form 10-Q
    for the quarter ended June 30, 2006).10.30

Custodian Agreement with M&T Bank. (Incorporated by
    reference to Exhibit 10.30 filed with Allied Capitals
    Form 10-Q
    for the quarter ended June 30, 2006).10.31

Note Agreement, dated as of May 14, 2003. (Incorporated
    by reference to Exhibit 10.31 filed with Allied
    Capitals
    Form 10-Q
    for the quarter ended March 31, 2003).10.31(a)

Amendment dated February 29, 2008, to Note Agreement dated as of
    May 14, 2003. (Incorporated by reference to Exhibit f.19(a)
    filed with Allied Capitals Form N-2 (File No. 333-150006)
    filed on April 1, 2008).10.32*

Custodian Agreement with Branch Banking and Trust Company.10.37

Form of Indemnification Agreement between Allied Capital and its
    directors and certain officers. (Incorporated by reference to
    Exhibit 10.37 filed with Allied Capitals
    Form 10-K
    for the year ended December 31, 2003).10.38

Note Agreement, dated as of March 25, 2004.
    (Incorporated by reference to Exhibit 10.38 filed with
    Allied Capitals
    Form 10-Q
    for the period ended March 31, 2004.)10.38(a)

Amendment dated February 29, 2008, to Note Agreement dated as of
    March 25, 2004. (Incorporated by reference to Exhibit f.25(a)
    filed with Allied Capitals Form N-2 (File No. 333-150006)
    filed on April 1, 2008).10.39

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.) 122




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##### 



ExhibitNumber

Description10.39(a)

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

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

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

Transition Services Agreement. (Incorporated by reference to
    Exhibit 10.1 filed with Allied Capitals Form 8-K
    filed on May 4, 2005.)11

Statement regarding computation of per share earnings is
    included in Note 7 to Allied Capitals Notes to the
    Consolidated Financial Statements.15*

Letter regarding unaudited interim financial information.21

Subsidiaries of Allied Capital and jurisdiction of
    incorporation/organization:A.C. Corporation

DelawareAllied Capital REIT, Inc.

MarylandAllied Capital Holdings, LLC

DelawareAllied Investment Holdings, LLC

DelawareAllied Capital Beteiligungsberatung GmbH (inactive)

Germany31.1*

Certification of the Chief Executive Officer pursuant to Rule
    13a-14 of the Securities Exchange Act of 1934.31.2*

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

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

Certification of the Chief Financial Officer pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C.
    Section 1350.     *
    Filed herewith. 123




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##### 





SIGNATURES       Dated: May 12, 2008

/s/  William
    L. WaltonWilliam
    L. Walton
    Chairman and Chief Executive Officer/s/  Penni
    F. RollPenni
    F. Roll
    Chief Financial Officer  124




---



##### 



EXHIBIT
    INDEX
  ExhibitNumber

Description10
.32

Custodian Agreement with Branch Banking and Trust Company.15


Letter regarding Unaudited Interim Financial Information.31
.1

Certification of the Chief Executive Officer pursuant to Rule
    13a-14 of the Securities Exchange Act of 1934.31
.2

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

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

Certification of the Chief Financial Officer pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C.
    Section 1350.  125