##### 









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 June 30, 2006




|  |                                                                                             
|- | --------------------------------------------------------------------------------------------
|o | Transition Report Pursuant to Section 13 or 15(d) of the
    Securities Exchange Act of 1934

Commission File Number:


0-22832


ALLIED CAPITAL CORPORATION


(Exact Name of Registrant as Specified in its Charter)


|                                                                     |  |                                                
|-------------------------------------------------------------------- |  | -----------------------------------------------
|                                                                    
|Maryland(State or Jurisdiction of
    Incorporation or Organization) |  | 52-1081052(IRS Employer
    Identification No.)

1919 Pennsylvania Avenue, N.W.


Washington, DC 20006


(Address of Principal Executive Offices)


Registrants telephone number, including area code:
(202) 721-6100





x o


12b-2 x o Non-Accelerated o


o x












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##### 



ALLIED CAPITAL CORPORATION


FORM 10-Q TABLE OF CONTENTS


|                              |                                                                                                   |                                                                                                                       |     |   
|----------------------------- | ------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------- | --- | --
|PART I. FINANCIAL INFORMATION |                                                                                                   |                                                                                                                      
|                              | Item 1. Financial Statements                                                                      |                                                                                                                       |    
|                              |                                                                                                   | Consolidated Balance Sheet as of June 30, 2006 (unaudited)
    and
    December 31, 2005                              |     | 1 
|                              |                                                                                                   | Consolidated Statement of Operations (unaudited)  For
    the Three and Six Months Ended June 30, 2006 and 2005      |     | 2 
|                              |                                                                                                   | Consolidated Statement of Changes in Net Assets
    (unaudited)  For the Six Months Ended June 30,
    2006 and 2005 |     | 3 
|                              |                                                                                                   | Consolidated Statement of Cash Flows (unaudited)  For
    the Six Months Ended June 30, 2006 and 2005                |     | 4 
|                              |                                                                                                   | Consolidated Statement of Investments as of June 30, 2006
    (unaudited)                                             |     | 5 
|                              |                                                                                                   | Consolidated Statement of Investments as of December 31,
    2005                                                     |     | 15
|                              |                                                                                                   | Notes to Consolidated Financial Statements                                                                            |     | 25
|                              |                                                                                                   | Report of Independent Registered Public Accounting Firm                                                               |     | 52
|                              | Item 2. Managements Discussion and Analysis of
    Financial Condition and Results of Operations |                                                                                                                       | 56 
|                              | Item 3. Quantitative and Qualitative Disclosures About
    Market Risk                            |                                                                                                                       | 88 
|                              | Item 4. Controls and Procedures                                                                   |                                                                                                                       | 88 
|                             
|PART II. OTHER INFORMATION    |                                                                                                   |                                                                                                                      
|                              | Item 1. Legal Proceedings                                                                         |                                                                                                                       | 89 
|                              | Item 1A. Risk Factors                                                                             |                                                                                                                       | 90 
|                              | Item 2. Unregistered Sales of Equity Securities and
    Use of Proceeds                           |                                                                                                                       | 96 
|                              | Item 3. Defaults Upon Senior Securities                                                           |                                                                                                                       | 97 
|                              | Item 4. Submission of Matters to a Vote of Security
    Holders                                   |                                                                                                                       | 98 
|                              | Item 5. Other Information                                                                         |                                                                                                                       | 98 
|                              | Item 6. Exhibits                                                                                  |                                                                                                                       | 98 
|                              | Signatures                                                                                        |                                                                                                                       | 103





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##### 



PART I: FINANCIAL INFORMATION


Item 1.  Financial Statements


ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


CONSOLIDATED BALANCE SHEET


|                                                                |                                                                                                                                                                             |                                                                            |                                                                   |           |              |           |         |           |           |           | 
|--------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------- | ----------------------------------------------------------------- | --------- | ------------ | --------- | ------- | --------- | --------- | --------- | 
|                                                                |                                                                                                                                                                             | June 30,                                                                   |                                                                   |           | December 31, |          
|                                                                |                                                                                                                                                                             | 2006                                                                       |                                                                   |           | 2005         |          
|                                                                |                                                                                                                                                                             |                                                                            |                                                                   |           |              |          
|(in thousands, except per share amounts)                        |                                                                                                                                                                             | (unaudited)                                                                |                                                                   |           |             
|ASSETS                                                         
|Portfolio at value:                                             |                                                                                                                                                                             |                                                                            |                                                                   |           |              |           |         |          
|                                                                | Private finance                                                                                                                                                             |                                                                            |                                                                   |           |              |           |         |           |          
|                                                                |                                                                                                                                                                             | Companies more than 25% owned (cost: 2006-$1,282,768;
    2005-$1,489,782) |                                                                   | $         | 1,188,131    |           |         | $         | 1,887,651 |          
|                                                                |                                                                                                                                                                             | Companies 5% to 25% owned (cost: 2006-$371,550; 2005-$168,373)             |                                                                   |           | 371,156      |           |         |           | 158,806   |          
|                                                                |                                                                                                                                                                             | Companies less than 5% owned (cost: 2006-$1,933,932;
    2005-$1,448,268)  |                                                                   |           | 1,901,139    |           |         |           | 1,432,833 |          
|                                                                |                                                                                                                                                                             |                                                                            |                                                                   |           |              |          
|                                                                |                                                                                                                                                                             |                                                                            | Total private finance (cost: 2006-$3,588,250; 2005-$3,106,423)    |           |              | 3,460,426 |         |           |           | 3,479,290 | 
|                                                                | Commercial real estate finance (cost: 2006-$127,748;
    2005-$131,695)                                                                                                     |                                                                            |                                                                   | 133,051   |              |           |         | 127,065   |          
|                                                                |                                                                                                                                                                             |                                                                            |                                                                   |           |              |          
|                                                                |                                                                                                                                                                             |                                                                            | Total portfolio at value (cost: 2006-$3,715,998; 2005-$3,238,118) |           |              | 3,593,477 |         |           |           | 3,606,355 | 
|U.S. Treasury bills                                             |                                                                                                                                                                             |                                                                            | 125,940                                                           |           |              |           | 100,305 |          
|Investments in money market and other securities                |                                                                                                                                                                             |                                                                            | 97,810                                                            |           |              |           | 121,967 |          
|Deposits of proceeds from sales of borrowed Treasury securities |                                                                                                                                                                             |                                                                            | 17,156                                                            |           |              |           | 17,666  |          
|Accrued interest and dividends receivable                       |                                                                                                                                                                             |                                                                            | 49,270                                                            |           |              |           | 60,366  |          
|Other assets                                                    |                                                                                                                                                                             |                                                                            | 124,448                                                           |           |              |           | 87,858  |          
|Cash                                                            |                                                                                                                                                                             |                                                                            | 3,106                                                             |           |              |           | 31,363  |          
|                                                                |                                                                                                                                                                             |                                                                            |                                                                   |           |              |          
|                                                                |                                                                                                                                                                             |                                                                            | Total assets                                                      |           | $            | 4,011,207 |         |           | $         | 4,025,880 | 
|                                                                |                                                                                                                                                                             |                                                                            |                                                                   |           |              |          
|LIABILITIES AND SHAREHOLDERS EQUITY                           
|Liabilities:                                                    |                                                                                                                                                                             |                                                                            |                                                                   |           |              |           |         |          
|                                                                | Notes payable and debentures (maturing within one year:
    2006-$150,000; 2005-$175,000)                                                                                   |                                                                            | $                                                                 | 1,207,137 |              |           | $       | 1,193,040 |          
|                                                                | Revolving line of credit                                                                                                                                                    |                                                                            |                                                                   | 1,750     |              |           |         | 91,750    |          
|                                                                | Obligations to replenish borrowed Treasury securities                                                                                                                       |                                                                            |                                                                   | 17,156    |              |           |         | 17,666    |          
|                                                                | Accounts payable and other liabilities                                                                                                                                      |                                                                            |                                                                   | 95,145    |              |           |         | 102,878   |          
|                                                                |                                                                                                                                                                             |                                                                            |                                                                   |           |              |          
|                                                                |                                                                                                                                                                             |                                                                            | Total liabilities                                                 |           |              | 1,321,188 |         |           |           | 1,405,334 | 
|                                                                |                                                                                                                                                                             |                                                                            |                                                                   |           |              |          
|Commitments and contingencies                                   |                                                                                                                                                                             |                                                                            |                                                                   |           |              |           |         |          
|Shareholders equity:                                           |                                                                                                                                                                             |                                                                            |                                                                   |           |              |           |         |          
|                                                                | Common stock, $0.0001 par value, 200,000 shares authorized;
    140,312 and 136,697 shares issued and outstanding at
    June 30, 2006, and December 31, 2005, respectively |                                                                            |                                                                   | 14        |              |           |         | 14        |          
|                                                                | Additional paid-in capital                                                                                                                                                  |                                                                            |                                                                   | 2,284,117 |              |           |         | 2,177,283 |          
|                                                                | Common stock held in deferred compensation trust                                                                                                                            |                                                                            |                                                                   | (24,003   | )            |           |         | (19,460   | )        
|                                                                | Notes receivable from sale of common stock                                                                                                                                  |                                                                            |                                                                   | (3,370    | )            |           |         | (3,868    | )        
|                                                                | Net unrealized appreciation (depreciation)                                                                                                                                  |                                                                            |                                                                   | (136,929  | )            |           |         | 354,325   |          
|                                                                | Undistributed earnings                                                                                                                                                      |                                                                            |                                                                   | 570,190   |              |           |         | 112,252   |          
|                                                                |                                                                                                                                                                             |                                                                            |                                                                   |           |              |          
|                                                                |                                                                                                                                                                             |                                                                            | Total shareholders equity                                        |           |              | 2,690,019 |         |           |           | 2,620,546 | 
|                                                                |                                                                                                                                                                             |                                                                            |                                                                   |           |              |          
|                                                                |                                                                                                                                                                             |                                                                            | Total liabilities and shareholders equity                        |           | $            | 4,011,207 |         |           | $         | 4,025,880 | 
|                                                                |                                                                                                                                                                             |                                                                            |                                                                   |           |              |          
|Net asset value per common share                                |                                                                                                                                                                             | $                                                                          | 19.17                                                             |           |              | $         | 19.17   |          
|                                                                |                                                                                                                                                                             |                                                                            |                                                                   |           |              |          



1



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##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


CONSOLIDATED STATEMENT OF OPERATIONS


|                                                     |                                                       |                               |                                             |          |                    |         |         |        |         |         |         |          |         |         |         |         |         |         | 
|---------------------------------------------------- | ----------------------------------------------------- | ----------------------------- | ------------------------------------------- | -------- | ------------------ | ------- | ------- | ------ | ------- | ------- | ------- | -------- | ------- | ------- | ------- | ------- | ------- | ------- | 
|                                                     |                                                       | For the Three Months          |                                             |          | For the Six Months |        
|                                                     |                                                       | Ended June 30,                |                                             |          | Ended June 30,     |        
|                                                     |                                                       |                               |                                             |          |                    |        
|                                                     |                                                       | 2006                          |                                             |          | 2005               |         |         | 2006   |         |         | 2005    |         
|(in thousands, except per share amounts)             |                                                       |                               |                                             |          |                    |         |         |        |         |         |         |         
|                                                     |                                                       | (unaudited)                   |                                             |          | (unaudited)        |        
|Interest and Related Portfolio Income:               |                                                       |                               |                                             |          |                    |         |         |        |         |         |         |          |         |         |         |        
|                                                     | Interest and dividends                                |                               |                                             |          |                    |         |         |        |         |         |         |          |         |         |         |         |        
|                                                     |                                                       | Companies more than 25% owned |                                             | $        | 23,419             |         |         | $      | 30,199  |         |         | $        | 53,565  |         |         | $       | 58,450  |        
|                                                     |                                                       | Companies 5% to 25% owned     |                                             |          | 11,419             |         |         |        | 5,597   |         |         |          | 17,069  |         |         |         | 11,518  |        
|                                                     |                                                       | Companies less than 5% owned  |                                             |          | 60,595             |         |         |        | 35,534  |         |         |          | 113,680 |         |         |         | 86,307  |        
|                                                     |                                                       |                               |                                             |          |                    |         |         |        |         |         |         |         
|                                                     |                                                       |                               | Total interest and dividends                |          |                    | 95,433  |         |        |         | 71,330  |         |          |         | 184,314 |         |         |         | 156,275 | 
|                                                     |                                                       |                               |                                             |          |                    |         |         |        |         |         |         |         
|                                                     | Loan prepayment premiums                              |                               |                                             |          |                    |         |         |        |         |         |         |          |         |         |         |         |        
|                                                     |                                                       | Companies more than 25% owned |                                             |          | 134                |         |         |        |        |         |         |          | 5,094   |         |         |         |        |        
|                                                     |                                                       | Companies 5% to 25% owned     |                                             |          |                   |         |         |        |        |         |         |          |        |         |         |         |        |        
|                                                     |                                                       | Companies less than 5% owned  |                                             |          | 1,611              |         |         |        | 853     |         |         |          | 1,937   |         |         |         | 2,530   |        
|                                                     |                                                       |                               |                                             |          |                    |         |         |        |         |         |         |         
|                                                     |                                                       |                               | Total loan prepayment premiums              |          |                    | 1,745   |         |        |         | 853     |         |          |         | 7,031   |         |         |         | 2,530   | 
|                                                     |                                                       |                               |                                             |          |                    |         |         |        |         |         |         |         
|                                                     | Fees and other income                                 |                               |                                             |          |                    |         |         |        |         |         |         |          |         |         |         |         |        
|                                                     |                                                       | Companies more than 25% owned |                                             |          | 5,515              |         |         |        | 7,877   |         |         |          | 12,642  |         |         |         | 12,758  |        
|                                                     |                                                       | Companies 5% to 25% owned     |                                             |          | 1,282              |         |         |        | 55      |         |         |          | 3,998   |         |         |         | 125     |        
|                                                     |                                                       | Companies less than 5% owned  |                                             |          | 6,481              |         |         |        | 6,092   |         |         |          | 13,482  |         |         |         | 9,438   |        
|                                                     |                                                       |                               |                                             |          |                    |         |         |        |         |         |         |         
|                                                     |                                                       |                               | Total fees and other income                 |          |                    | 13,278  |         |        |         | 14,024  |         |          |         | 30,122  |         |         |         | 22,321  | 
|                                                     |                                                       |                               |                                             |          |                    |         |         |        |         |         |         |         
|                                                     |                                                       |                               | Total interest and related portfolio income |          |                    | 110,456 |         |        |         | 86,207  |         |          |         | 221,467 |         |         |         | 181,126 | 
|                                                     |                                                       |                               |                                             |          |                    |         |         |        |         |         |         |         
|Expenses:                                            |                                                       |                               |                                             |          |                    |         |         |        |         |         |         |          |         |         |         |        
|                                                     | Interest                                              |                               |                                             | 21,607   |                    |         |         | 19,154 |         |         |         | 45,907   |         |         |         | 39,379  |        
|                                                     | Employee                                              |                               |                                             | 20,398   |                    |         |         | 22,877 |         |         |         | 41,826   |         |         |         | 38,333  |        
|                                                     | Stock options                                         |                               |                                             | 4,597    |                    |         |         |       |         |         |         | 8,203    |         |         |         |        |        
|                                                     | Administrative                                        |                               |                                             | 9,861    |                    |         |         | 23,048 |         |         |         | 21,380   |         |         |         | 43,802  |        
|                                                     |                                                       |                               |                                             |          |                    |         |         |        |         |         |         |         
|                                                     |                                                       |                               | Total operating expenses                    |          |                    | 56,463  |         |        |         | 65,079  |         |          |         | 117,316 |         |         |         | 121,514 | 
|                                                     |                                                       |                               |                                             |          |                    |         |         |        |         |         |         |         
|Net investment income before income taxes            |                                                       |                               | 53,993                                      |          |                    |         | 21,128  |        |         |         | 104,151 |          |         |         | 59,612  |        
|Income tax expense, including excise tax             |                                                       |                               | 3,798                                       |          |                    |         | 5,861   |        |         |         | 12,656  |          |         |         | 5,593   |        
|                                                     |                                                       |                               |                                             |          |                    |         |         |        |         |         |         |         
|Net investment income                                |                                                       |                               | 50,195                                      |          |                    |         | 15,267  |        |         |         | 91,495  |          |         |         | 54,019  |        
|                                                     |                                                       |                               |                                             |          |                    |         |         |        |         |         |         |         
|Net Realized and Unrealized Gains (Losses):          |                                                       |                               |                                             |          |                    |         |         |        |         |         |         |          |         |         |         |        
|                                                     | Net realized gains (losses)                           |                               |                                             |          |                    |         |         |        |         |         |         |          |         |         |         |         |        
|                                                     |                                                       | Companies more than 25% owned |                                             |          | 95,212             |         |         |        | (17,884 | )       |         |          | 528,399 |         |         |         | (17,485 | )      
|                                                     |                                                       | Companies 5% to 25% owned     |                                             |          | (74                | )       |         |        | 4,711   |         |         |          | (417    | )       |         |         | 4,708   |        
|                                                     |                                                       | Companies less than 5% owned  |                                             |          | 5,102              |         |         |        | 220,669 |         |         |          | 5,093   |         |         |         | 230,558 |        
|                                                     |                                                       |                               |                                             |          |                    |         |         |        |         |         |         |         
|                                                     |                                                       |                               | Total net realized gains                    |          |                    | 100,240 |         |        |         | 207,496 |         |          |         | 533,075 |         |         |         | 217,781 | 
|                                                     | Net change in unrealized appreciation or depreciation |                               |                                             | (116,706 | )                  |         |         | 89,122 |         |         |         | (491,254 | )       |         |         | 159,706 |        
|                                                     |                                                       |                               |                                             |          |                    |         |         |        |         |         |         |         
|                                                     |                                                       |                               | Total net gains (losses)                    |          |                    | (16,466 | )       |        |         | 296,618 |         |          |         | 41,821  |         |         |         | 377,487 | 
|                                                     |                                                       |                               |                                             |          |                    |         |         |        |         |         |         |         
|Net increase in net assets resulting from operations |                                                       | $                             | 33,729                                      |          |                    | $       | 311,885 |        |         | $       | 133,316 |          |         | $       | 431,506 |        
|                                                     |                                                       |                               |                                             |          |                    |         |         |        |         |         |         |         
|Basic earnings per common share                      |                                                       | $                             | 0.24                                        |          |                    | $       | 2.33    |        |         | $       | 0.96    |          |         | $       | 3.23    |        
|                                                     |                                                       |                               |                                             |          |                    |         |         |        |         |         |         |         
|Diluted earnings per common share                    |                                                       | $                             | 0.24                                        |          |                    | $       | 2.29    |        |         | $       | 0.94    |          |         | $       | 3.17    |        
|                                                     |                                                       |                               |                                             |          |                    |         |         |        |         |         |         |         
|Weighted average common shares outstanding  basic   |                                                       |                               | 140,024                                     |          |                    |         | 133,701 |        |         |         | 139,395 |          |         |         | 133,493 |        
|                                                     |                                                       |                               |                                             |          |                    |         |         |        |         |         |         |         
|Weighted average common shares outstanding  diluted |                                                       |                               | 143,213                                     |          |                    |         | 136,381 |        |         |         | 142,466 |          |         |         | 135,982 |        
|                                                     |                                                       |                               |                                             |          |                    |         |         |        |         |         |         |         



2



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##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


CONSOLIDATED STATEMENT OF CHANGES IN NET ASSETS


|                                           |                                                                  |                                                                          |           |          |          |   |           |          |          |  
|------------------------------------------ | ---------------------------------------------------------------- | ------------------------------------------------------------------------ | --------- | -------- | -------- | - | --------- | -------- | -------- | -
|                                           |                                                                  | For the Six Months                                                       |          
|                                           |                                                                  | Ended June 30,                                                           |          
|                                           |                                                                  |                                                                          |          
|                                           |                                                                  | 2006                                                                     |           |          | 2005     |  
|(in thousands, except per share amounts)   |                                                                  |                                                                          |           |          |          |  
|                                           |                                                                  | (unaudited)                                                              |          
|Operations:                                |                                                                  |                                                                          |           |          |          |   |           |         
|                                           | Net investment income                                            |                                                                          | $         | 91,495   |          |   | $         | 54,019   |         
|                                           | Net realized gains                                               |                                                                          |           | 533,075  |          |   |           | 217,781  |         
|                                           | Net change in unrealized appreciation or depreciation            |                                                                          |           | (491,254 | )        |   |           | 159,706  |         
|                                           |                                                                  |                                                                          |           |          |          |  
|                                           |                                                                  | Net increase in net assets resulting from operations                     |           |          | 133,316  |   |           |          | 431,506  |  
|                                           |                                                                  |                                                                          |           |          |          |  
|Shareholder distributions:                 |                                                                  |                                                                          |           |          |          |   |           |         
|                                           | Common stock dividends                                           |                                                                          |           | (166,632 | )        |   |           | (152,329 | )       
|                                           |                                                                  |                                                                          |           |          |          |  
|                                           |                                                                  | Net decrease in net assets resulting from shareholder
    distributions  |           |          | (166,632 | ) |           |          | (152,329 | )
|                                           |                                                                  |                                                                          |           |          |          |  
|Capital share transactions:                |                                                                  |                                                                          |           |          |          |   |           |         
|                                           | Sale of common stock                                             |                                                                          |           | 82,970   |          |   |           |         |         
|                                           | Issuance of common stock for portfolio investments               |                                                                          |           |         |          |   |           | 7,200    |         
|                                           | Issuance of common stock in lieu of cash distributions           |                                                                          |           | 7,199    |          |   |           | 4,163    |         
|                                           | Issuance of common stock upon the exercise of stock options      |                                                                          |           | 8,226    |          |   |           | 12,689   |         
|                                           | Stock option expense                                             |                                                                          |           | 8,439    |          |   |           |         |         
|                                           | Net decrease in notes receivable from sale of common stock       |                                                                          |           | 498      |          |   |           | 200      |         
|                                           | Purchase of common stock held in deferred compensation trust     |                                                                          |           | (4,649   | )        |   |           | (3,976   | )       
|                                           | Distribution of common stock held in deferred compensation trust |                                                                          |           | 106      |          |   |           |         |         
|                                           | Other                                                            |                                                                          |           |         |          |   |           | 2,056    |         
|                                           |                                                                  |                                                                          |           |          |          |  
|                                           |                                                                  | Net increase in net assets resulting from capital share
    transactions |           |          | 102,789  |   |           |          | 22,332   |  
|                                           |                                                                  |                                                                          |           |          |          |  
|                                           |                                                                  | Total increase in net assets                                             |           |          | 69,473   |   |           |          | 301,509  |  
|Net assets at beginning of period          |                                                                  |                                                                          | 2,620,546 |          |          |   | 1,979,778 |         
|                                           |                                                                  |                                                                          |           |          |          |  
|Net assets at end of period                |                                                                  | $                                                                        | 2,690,019 |          |          | $ | 2,281,287 |         
|                                           |                                                                  |                                                                          |           |          |          |  
|Net asset value per common share           |                                                                  | $                                                                        | 19.17     |          |          | $ | 17.01     |         
|                                           |                                                                  |                                                                          |           |          |          |  
|Common shares outstanding at end of period |                                                                  |                                                                          | 140,312   |          |          |   | 134,131   |         
|                                           |                                                                  |                                                                          |           |          |          |  



3



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##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


CONSOLIDATED STATEMENT OF CASH FLOWS


|                                      |                                                               |                                                                                                                                 |                                                     |          |            |          |         |          |           |          |  
|------------------------------------- | ------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------- | -------- | ---------- | -------- | ------- | -------- | --------- | -------- | -
|                                      |                                                               | For the Six Months Ended                                                                                                        |                                                    
|                                      |                                                               | June 30,                                                                                                                        |                                                    
|                                      |                                                               |                                                                                                                                 |                                                    
|                                      |                                                               | 2006                                                                                                                            |                                                     |          | 2005       |         
|(in thousands)                        |                                                               |                                                                                                                                 |                                                     |          |            |         
|                                      |                                                               | (unaudited)                                                                                                                     |                                                    
|Cash flows from operating activities: |                                                               |                                                                                                                                 |                                                     |          |            |          |         |         
|                                      | Net increase in net assets resulting from operations          |                                                                                                                                 | $                                                   | 133,316  |            |          | $       | 431,506  |          
|                                      | Adjustments:                                                  |                                                                                                                                 |                                                     |          |            |          |         |          |          
|                                      |                                                               | Portfolio investments                                                                                                           |                                                     |          | (1,071,243 | )        |         |          | (647,248  | )       
|                                      |                                                               | Principal collections related to investment repayments or sales                                                                 |                                                     |          | 769,598    |          |         |          | 1,090,813 |         
|                                      |                                                               | Change in accrued or reinvested interest and dividends                                                                          |                                                     |          | 9,064      |          |         |          | 3,567     |         
|                                      |                                                               | Amortization of discounts and fees                                                                                              |                                                     |          | (3,094     | )        |         |          | (3,334    | )       
|                                      |                                                               | Redemption of (investments in) U.S. Treasury bills                                                                              |                                                     |          | (22,875    | )        |         |          |          |         
|                                      |                                                               | Redemption of (investments in) money market securities                                                                          |                                                     |          | 25,581     |          |         |          | (74,200   | )       
|                                      |                                                               | Stock option expense                                                                                                            |                                                     |          | 8,439      |          |         |          |          |         
|                                      |                                                               | Changes in other assets and liabilities                                                                                         |                                                     |          | (1,410     | )        |         |          | 8,136     |         
|                                      |                                                               | Depreciation and amortization                                                                                                   |                                                     |          | 870        |          |         |          | 963       |         
|                                      |                                                               | Realized gains from the receipt of notes and other securities as
    consideration from sale of investments, net of collections |                                                     |          | (217,086   | )        |         |          | (916      | )       
|                                      |                                                               | Realized losses                                                                                                                 |                                                     |          | 4,405      |          |         |          | 41,643    |         
|                                      |                                                               | Net change in unrealized (appreciation) or depreciation                                                                         |                                                     |          | 491,254    |          |         |          | (159,706  | )       
|                                      |                                                               |                                                                                                                                 |                                                     |          |            |         
|                                      |                                                               |                                                                                                                                 | Net cash provided by (used in) operating activities |          |            | 126,819  |         |          |           | 691,224  |  
|                                      |                                                               |                                                                                                                                 |                                                     |          |            |         
|Cash flows from financing activities: |                                                               |                                                                                                                                 |                                                     |          |            |          |         |         
|                                      | Sale of common stock                                          |                                                                                                                                 |                                                     | 82,970   |            |          |         |         |          
|                                      | Sale of common stock upon the exercise of stock options       |                                                                                                                                 |                                                     | 8,226    |            |          |         | 12,689   |          
|                                      | Collections of notes receivable from sale of common stock     |                                                                                                                                 |                                                     | 498      |            |          |         | 200      |          
|                                      | Borrowings under notes payable and debentures                 |                                                                                                                                 |                                                     | 50,000   |            |          |         |         |          
|                                      | Repayments on notes payable and debentures                    |                                                                                                                                 |                                                     | (37,000  | )          |          |         | (76,700  | )        
|                                      | Net borrowings under (repayments on) revolving line of credit |                                                                                                                                 |                                                     | (90,000  | )          |          |         | (112,000 | )        
|                                      | Purchase of common stock held in deferred compensation trust  |                                                                                                                                 |                                                     | (4,649   | )          |          |         | (3,976   | )        
|                                      | Other financing activities                                    |                                                                                                                                 |                                                     | (1,590   | )          |          |         | (1,958   | )        
|                                      | Common stock dividends and distributions paid                 |                                                                                                                                 |                                                     | (163,531 | )          |          |         | (150,826 | )        
|                                      |                                                               |                                                                                                                                 |                                                     |          |            |         
|                                      |                                                               |                                                                                                                                 | Net cash provided by (used in) financing activities |          |            | (155,076 | )       |          |           | (332,571 | )
|                                      |                                                               |                                                                                                                                 |                                                     |          |            |         
|Net increase (decrease) in cash       |                                                               |                                                                                                                                 | (28,257                                             | )        |            |          | 358,653 |         
|Cash at beginning of period           |                                                               |                                                                                                                                 | 31,363                                              |          |            |          | 57,160  |         
|                                      |                                                               |                                                                                                                                 |                                                     |          |            |         
|Cash at end of period                 |                                                               | $                                                                                                                               | 3,106                                               |          |            | $        | 415,813 |         
|                                      |                                                               |                                                                                                                                 |                                                     |          |            |         



4



---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


CONSOLIDATED STATEMENT OF INVESTMENTS


|                                        |                       |                                                       |                                            |               |        |       |      |   |         |         |  |   |         |         | 
|--------------------------------------- | --------------------- | ----------------------------------------------------- | ------------------------------------------ | ------------- | ------ | ----- | ---- | - | ------- | ------- |  | - | ------- | ------- | 
|                                        |                       |                                                       |                                            | June 30, 2006 |       
|                                        |                       |                                                       |                                            |               |       
|Private Finance                         |                       |                                                       |                                            |              
|Portfolio Company                       |                       |                                                       |                                            | (unaudited)   |       
|(in thousands, except number of shares) |                       | Investment(1)(2)                                      |                                            | Principal     |        |       | Cost |   |         | Value   | 
|                                        |                       |                                                       |                                            |               |        |       |      |   |         |         | 
|Companies More Than 25% Owned           |                       |                                                       |                                            |               |        |       |      |   |         |         |  |  
|                                       
|Acme Paging,
    L.P.(4)                |                       | Senior Loan (6.0%, Due
    12/07)(6)                  |                                            | $             | 3,750  |       |      | $ | 3,750   |         |  | $ |        |        
|                                        | (Telecommunications)  |                                                       | Subordinated Debt (10.0%, Due
    1/08)(6) |               |        | 881   |      |   |         | 881     |  |   |         |        | 
|                                        |                       |                                                       | Common Stock (23,513 shares)               |               |        |       |      |   |         | 27      |  |   |         |        | 
|                                       
|Alaris Consulting, LLC                  |                       | Senior Loan (16.5%, Due 12/05 
    12/07)(6)         |                                            |               | 27,055 |       |      |   | 27,018  |         |  |   |        |        
|                                        | (Business Services)   |                                                       | Equity Interests                           |               |        |       |      |   |         | 5,305   |  |   |         |        | 
|                                        |                       | Guaranty ($1,100)                                     |                                            |               |        |       |      |   |         |         |  |   |         |        
|                                       
|American Healthcare Services, Inc.      |                       | Senior Loan (0.7%, Due 12/04 
    12/05)(6)          |                                            |               | 4,997  |       |      |   | 4,599   |         |  |   | 4,329   |        
|                                        | and Affiliates        |                                                       |                                            |               |        |       |      |   |         |         |  |   |         |         | 
|                                        | (Healthcare Services) |                                                       |                                            |               |        |       |      |   |         |         |  |   |         |         | 
|                                       
|Avborne,
    Inc.(7)                    |                       | Preferred Stock (12,500 shares)                       |                                            |               |        |       |      |   | 658     |         |  |   | 773     |        
|                                        | (Business Services)   |                                                       | Common Stock (27,500 shares)               |               |        |       |      |   |         |        |  |   |         |        | 
|                                       
|Avborne Heavy Maintenance,
    Inc.(7)  |                       | Preferred Stock (1,568 shares)                        |                                            |               |        |       |      |   | 2,401   |         |  |   |        |        
|                                        | (Business Services)   |                                                       | Common Stock (2,750 shares)                |               |        |       |      |   |         |        |  |   |         |        | 
|                                        |                       |                                                       | Guaranty ($2,401)                          |               |        |       |      |   |         |         |  |   |         |         | 
|                                       
|Business Loan Express, LLC              |                       | Class A Equity Interests                              |                                            |               | 64,427 |       |      |   | 64,427  |         |  |   | 64,427  |        
|                                        | (Financial Services)  |                                                       | Class B Equity Interests                   |               |        |       |      |   |         | 119,436 |  |   |         | 130,890 | 
|                                        |                       | Class C Equity Interests                              |                                            |               |        |       |      |   | 109,301 |         |  |   | 121,900 |        
|                                        |                       | Guaranty ($149,162  See Note 3)                      |                                            |               |        |       |      |   |         |         |  |   |         |        
|                                        |                       | Standby Letters of Credit
    ($32,000   See Note 3) |                                            |               |        |       |      |   |         |         |  |   |         |        
|                                       
|Callidus Capital Corporation            |                       | Senior Loan (12.0%, Due 12/06)                        |                                            |               | 1,650  |       |      |   | 1,650   |         |  |   | 1,650   |        
|                                        | (Financial Services)  |                                                       | Subordinated Debt (18.0%, Due 10/08)       |               |        | 5,276 |      |   |         | 5,276   |  |   |         | 5,276   | 
|                                        |                       | Common Stock (10 shares)                              |                                            |               |        |       |      |   | 2,058   |         |  |   | 12,093  |        
|                                       
|Cambridge Capital
    Partners(5)       |                       | Senior Loan (8.0%, Due
    5/09)(6)                   |                                            |               | 250    |       |      |   | 250     |         |  |   | 250     |        
|                                        | (Financial Services)  |                                                       | Equity Interests                           |               |        |       |      |   |         | 1,751   |  |   |         | 1,751   | 
|                                       
|CR Brands, Inc.                         |                       | Subordinated Debt (16.6%, Due 2/13)                   |                                            |               | 38,898 |       |      |   | 38,712  |         |  |   | 38,712  |        
|                                        | (Consumer Products)   |                                                       | Common Stock (37,200,551 shares)           |               |        |       |      |   |         | 33,321  |  |   |         | 37,431  | 
|                                       
|Diversified Group Administrators, Inc.  |                       | Preferred Stock (1,000,000 shares)                    |                                            |               |        |       |      |   | 700     |         |  |   | 728     |        
|                                        | (Business Services)   |                                                       | Preferred Stock (1,451,380 shares)         |               |        |       |      |   |         | 841     |  |   |         | 841     | 
|                                        |                       |                                                       | Common Stock (1,451,380 shares)            |               |        |       |      |   |         |        |  |   |         | 322     | 
|                                       
|Financial Pacific Company               |                       | Subordinated Debt (17.4%, Due 2/12  8/12)            |                                            |               | 70,878 |       |      |   | 70,630  |         |  |   | 70,630  |        
|                                        | (Financial Services)  |                                                       | Preferred Stock (10,964 shares)            |               |        |       |      |   |         | 10,276  |  |   |         | 14,460  | 
|                                        |                       |                                                       | Common Stock (14,735 shares)               |               |        |       |      |   |         | 14,819  |  |   |         | 44,418  | 
|                                       
|ForeSite Towers, LLC                    |                       | Equity Interests                                      |                                            |               |        |       |      |   | 7,620   |         |  |   | 12,818  |        
|                                        | (Tower Leasing)       |                                                       |                                            |               |        |       |      |   |         |         |  |   |         |         | 
|                                       

|    |  |                                                                                                                                                                                                                                                                
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) |  | Interest rates represent the weighted average annual stated
    interest rate on loans and debt securities, which are presented
    by nature of indebtedness for a single issuer. The maturity
    dates represent the earliest and the latest maturity dates.
|(2) |  | Common stock, preferred stock, warrants, options, and equity
    interests are generally non-income producing and restricted.                                                                                                                                  
|(3) |  | Public company.                                                                                                                                                                                                                                                
|(4) |  | Non-U.S. company or principal place of business outside the
    U.S.                                                                                                                                                                                           
|(5) |  | Non-registered investment company.                                                                                                                                                                                                                             
|(6) |  | Loan or debt security is on non-accrual status and therefore is
    considered non-income producing.                                                                                                                                                           
|(7) |  | Avborne, Inc. and Avborne Heavy Maintenance, Inc. are affiliated
    companies.                                                                                                                                                                                





5



---



##### 



|                                        |                       |                                              |                                                    |               |        |        |      |   |        |        |  |   |        |        | 
|--------------------------------------- | --------------------- | -------------------------------------------- | -------------------------------------------------- | ------------- | ------ | ------ | ---- | - | ------ | ------ |  | - | ------ | ------ | 
|                                        |                       |                                              |                                                    | June 30, 2006 |       
|                                        |                       |                                              |                                                    |               |       
|Private Finance                         |                       |                                              |                                                    |              
|Portfolio Company                       |                       |                                              |                                                    | (unaudited)   |       
|(in thousands, except number of shares) |                       | Investment(1)(2)                             |                                                    | Principal     |        |        | Cost |   |        | Value  | 
|                                        |                       |                                              |                                                    |               |        |        |      |   |        |        | 
|Global Communications, LLC              |                       | Senior Loan (10.7%, Due 9/02 
    11/07)(6) |                                                    | $             | 15,957 |        |      | $ | 15,957 |        |  | $ | 15,957 |       
|                                        | (Business Services)   |                                              | Subordinated Debt (17.0%, Due
    12/03  9/05)(6) |               |        | 11,339 |      |   |        | 11,336 |  |   |        | 9,648  | 
|                                        |                       | Preferred Equity Interest                    |                                                    |               |        |        |      |   | 14,067 |        |  |   |       |       
|                                        |                       | Options                                      |                                                    |               |        |        |      |   | 1,639  |        |  |   |       |       
|                                       
|Gordian Group, Inc.                     |                       | Senior Loan (10.0%, Due 6/06 
    12/08)(6) |                                                    |               | 11,792 |        |      |   | 11,812 |        |  |   |       |       
|                                        | (Business Services)   |                                              | Common Stock (1,000 shares)                        |               |        |        |      |   |        | 6,762  |  |   |        |       | 
|                                       
|Healthy Pet Corp.                       |                       | Senior Loan (9.5%, Due 8/10)                 |                                                    |               | 15,938 |        |      |   | 15,938 |        |  |   | 15,938 |       
|                                        | (Consumer Services)   |                                              | Subordinated Debt (15.0%, Due 8/10)                |               |        | 43,286 |      |   |        | 43,125 |  |   |        | 43,125 | 
|                                        |                       |                                              | Common Stock (30,142 shares)                       |               |        |        |      |   |        | 30,142 |  |   |        | 28,152 | 
|                                       
|HMT, Inc.                               |                       | Preferred Stock (554,052 shares)             |                                                    |               |        |        |      |   | 2,637  |        |  |   | 2,637  |       
|                                        | (Energy Services)     |                                              | Common Stock (300,000 shares)                      |               |        |        |      |   |        | 3,000  |  |   |        | 7,942  | 
|                                        |                       | Warrants                                     |                                                    |               |        |        |      |   | 1,155  |        |  |   | 3,058  |       
|                                       
|Impact Innovations Group, LLC           |                       | Equity Interests in Affiliate                |                                                    |               |        |        |      |   |       |        |  |   | 870    |       
|                                        | (Business Services)   |                                              |                                                    |               |        |        |      |   |        |        |  |   |        |        | 
|                                       
|Insight Pharmaceuticals Corporation     |                       | Subordinated Debt (16.1%, Due 9/12)          |                                                    |               | 59,284 |        |      |   | 59,067 |        |  |   | 59,067 |       
|                                        | (Consumer Products)   |                                              | Preferred Stock (25,000 shares)                    |               |        |        |      |   |        | 25,000 |  |   |        | 26,249 | 
|                                        |                       | Common Stock (620,000 shares)                |                                                    |               |        |        |      |   | 6,325  |        |  |   | 218    |       
|                                       
|Jakel, Inc.                             |                       | Subordinated Debt (15.5%, Due
    3/08)(6)   |                                                    |               | 14,442 |        |      |   | 14,442 |        |  |   | 2,533  |       
|                                        | (Industrial Products) |                                              | Preferred Stock (6,460 shares)                     |               |        |        |      |   |        | 6,460  |  |   |        |       | 
|                                        |                       |                                              | Common Stock (158,061 shares)                      |               |        |        |      |   |        | 9,347  |  |   |        |       | 
|                                       
|Legacy Partners Group, LLC              |                       | Senior Loan (14.0%, Due
    5/09)(6)         |                                                    |               | 7,646  |        |      |   | 7,646  |        |  |   | 5,048  |       
|                                        | (Financial Services)  |                                              | Subordinated Debt (18.0%, Due
    5/09)(6)         |               |        | 2,952  |      |   |        | 2,952  |  |   |        |       | 
|                                        |                       | Equity Interests                             |                                                    |               |        |        |      |   | 4,248  |        |  |   |       |       
|                                       
|Litterer
    Beteiligungs-GmbH(4)       |                       | Subordinated Debt (8.0%, Due 3/07)           |                                                    |               | 658    |        |      |   | 658    |        |  |   | 658    |       
|                                        | (Business Services)   |                                              | Equity Interest                                    |               |        |        |      |   |        | 1,809  |  |   |        | 1,615  | 
|                                       
|Mercury Air Centers, Inc.               |                       | Subordinated Debt (16.0%, Due 4/09          |                                                    |               |        |        |      |   |        |        |  |   |        |       
|                                        | (Business Services)   |                                              | 11/12)                                             |               |        | 48,369 |      |   |        | 48,198 |  |   |        | 48,198 | 
|                                        |                       |                                              | Common Stock (57,970 shares)                       |               |        |        |      |   |        | 35,053 |  |   |        | 93,188 | 
|                                        |                       |                                              | Standby Letters of Credit ($1,968)                 |               |        |        |      |   |        |        |  |   |        |        | 
|                                       
|MVL Group, Inc.                         |                       | Senior Loan (12.0%, Due 10/07  7/09)        |                                                    |               | 26,498 |        |      |   | 26,324 |        |  |   | 26,324 |       
|                                        | (Business Services)   |                                              | Subordinated Debt (14.5%, Due 6/09)                |               |        | 34,354 |      |   |        | 33,921 |  |   |        | 33,921 | 
|                                        |                       | Common Stock (648,661 shares)                |                                                    |               |        |        |      |   | 643    |        |  |   | 1,262  |       
|                                       
|Powell Plant Farms, Inc.                |                       | Senior Loan (15.0%, Due 12/06)               |                                                    |               | 30,490 |        |      |   | 21,642 |        |  |   | 21,642 |       
|                                        | (Consumer Products)   |                                              | Subordinated Debt (20.0%, Due
    6/03)(6)         |               |        | 19,291 |      |   |        | 19,223 |  |   |        |       | 
|                                        |                       |                                              | Preferred Stock (1,483 shares)                     |               |        |        |      |   |        |       |  |   |        |       | 
|                                        |                       |                                              | Warrants                                           |               |        |        |      |   |        |       |  |   |        |       | 
|                                       

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





6



---



##### 



|                                        |                            |                                            |                                      |               |         |        |           |   |         |        |           |   |         |        | 
|--------------------------------------- | -------------------------- | ------------------------------------------ | ------------------------------------ | ------------- | ------- | ------ | --------- | - | ------- | ------ | --------- | - | ------- | ------ | 
|                                        |                            |                                            |                                      | June 30, 2006 |        
|                                        |                            |                                            |                                      |               |        
|Private Finance                         |                            |                                            |                                      |              
|Portfolio Company                       |                            |                                            |                                      | (unaudited)   |        
|(in thousands, except number of shares) |                            | Investment(1)(2)                           |                                      | Principal     |         |        | Cost      |   |         | Value  |          
|                                        |                            |                                            |                                      |               |         |        |           |   |         |        |          
|Service Champ, Inc.                     |                            | Subordinated Debt (15.5%, Due 4/12)        |                                      | $             | 27,384  |        |           | $ | 27,260  |        |           | $ | 27,260  |       
|                                        | (Business Services)        |                                            | Common Stock (63,888 shares)         |               |         |        |           |   |         | 13,662 |           |   |         | 16,322 | 
|                                       
|Staffing Partners Holding               |                            | Subordinated Debt (13.5%,
    Due 1/07)(6) |                                      |               | 5,987   |        |           |   | 5,987   |        |           |   | 1,160   |       
|                                        | Company, Inc.              |                                            | Preferred Stock (439,600 shares)     |               |         |        |           |   |         | 4,968  |           |   |         |       | 
|                                        | (Business Services)        |                                            | Common Stock (69,773 shares)         |               |         |        |           |   |         | 50     |           |   |         |       | 
|                                        |                            | Warrants                                   |                                      |               |         |        |           |   | 10      |        |           |   |        |       
|                                        |                            | Guaranty ($1,300)                          |                                      |               |         |        |           |   |         |        |           |   |         |       
|                                       
|Startec Global Communications           |                            | Senior Loan (10.0%, Due 5/07  5/09)       |                                      |               | 21,926  |        |           |   | 21,926  |        |           |   | 21,926  |       
|                                        | Corporation                |                                            | Common Stock (19,180,000 shares)     |               |         |        |           |   |         | 37,255 |           |   |         | 6,480  | 
|                                        | (Telecommunications)       |                                            |                                      |               |         |        |           |   |         |        |           |   |         |        | 
|                                       
|Triview Investments,
    Inc.(8)        |                            | Senior Loan (9.4%, Due 6/07)               |                                      |               | 14,325  |        |           |   | 14,301  |        |           |   | 14,301  |       
|                                        | (Broadcasting & Cable/     |                                            | Subordinated Debt (15.0%, Due 7/12)  |               |         | 37,877 |           |   |         | 37,687 |           |   |         | 37,687 | 
|                                        | Consumer Products)         |                                            | Subordinated Debt (16.8%, Due 7/08  |               |         |        |           |   |         |        |           |   |         |        | 
|                                        |                            |                                            | 7/12)(6)                             |               |         | 19,600 |           |   |         | 19,520 |           |   |         | 19,520 | 
|                                        |                            |                                            | Common Stock (202 shares)            |               |         |        |           |   |         | 93,907 |           |   |         | 32,526 | 
|                                        |                            | Guaranty ($800)                            |                                      |               |         |        |           |   |         |        |           |   |         |       
|                                        |                            | Standby Letter of Credit ($200)            |                                      |               |         |        |           |   |         |        |           |   |         |       
|                                       
|Total
    companies more than 25% owned |                            |                                            |                                      |               |         | $      | 1,282,768 |   |         | $      | 1,188,131 |  
|                                       
|Companies 5% to 25% Owned               |                            |                                            |                                      |              
|                                       
|Advantage Sales & Marketing, Inc.       |                            | Subordinated Debt (12.0%, Due 3/14)        |                                      | $             | 150,775 |        |           | $ | 150,056 |        |           | $ | 150,056 |       
|                                        | (Business Services)        |                                            | Equity Interests                     |               |         |        |           |   |         | 2,048  |           |   |         | 15,000 | 
|                                       
|Air Medical Group Holdings LLC          |                            | Senior Loan (8.7%, Due 3/11  3/12)        |                                      |               | 1,584   |        |           |   | 1,512   |        |           |   | 1,512   |       
|                                        | (Healthcare Services)      |                                            | Subordinated Debt (14.0%, Due 11/12) |               |         | 34,646 |           |   |         | 34,590 |           |   |         | 34,590 | 
|                                        |                            | Equity Interests                           |                                      |               |         |        |           |   | 3,470   |        |           |   | 4,200   |       
|                                       
|Amerex Group, LLC                       |                            | Subordinated Debt (12.0%, Due 1/13)        |                                      |               | 8,400   |        |           |   | 8,400   |        |           |   | 8,400   |       
|                                        | (Consumer Products)        |                                            | Equity Interests                     |               |         |        |           |   |         | 3,583  |           |   |         | 3,583  | 
|                                       
|BB&T Capital Partners/Windsor           |                            |                                            |                                      |               |         |        |           |   |         |        |           |   |         |       
|                                        | Mezzanine Fund,
    LLC(5) |                                            | Equity Interests                     |               |         |        |           |   |         | 5,867  |           |   |         | 5,867  | 
|                                        | (Private Equity Fund)      |                                            |                                      |               |         |        |           |   |         |        |           |   |         |        | 
|                                       
|Becker Underwood, Inc.                  |                            | Subordinated Debt (14.5%, Due 8/12)        |                                      |               | 23,939  |        |           |   | 23,850  |        |           |   | 23,850  |       
|                                        | (Industrial Products)      |                                            | Common Stock (5,073 shares)          |               |         |        |           |   |         | 5,813  |           |   |         | 2,400  | 
|                                       
|BI Incorporated                         |                            | Subordinated Debt (13.5%, Due 2/14)        |                                      |               | 30,000  |        |           |   | 29,856  |        |           |   | 29,856  |       
|                                        | (Business Services)        |                                            | Common Stock (40,000 shares)         |               |         |        |           |   |         | 4,000  |           |   |         | 4,000  | 
|                                       

|    |  |                                                                                                                                                                                                                                                                                                                                                                        
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) |  | Interest rates represent the weighted average annual stated
    interest rate on loans and debt securities, which are presented
    by nature of indebtedness for a single issuer. The maturity
    dates represent the earliest and the latest maturity dates.                                                                                                        
|(2) |  | Common stock, preferred stock, warrants, options, and equity
    interests are generally non-income producing and restricted.                                                                                                                                                                                                                                          
|(3) |  | Public company.                                                                                                                                                                                                                                                                                                                                                        
|(4) |  | Non-U.S. company or principal place of business outside the
    U.S.                                                                                                                                                                                                                                                                                                   
|(5) |  | Non-registered investment company.                                                                                                                                                                                                                                                                                                                                     
|(6) |  | Loan or debt security is on non-accrual status and therefore is
    considered non-income producing.                                                                                                                                                                                                                                                                   
|(8) |  | Triview Investments, Inc. holds investments in Longview Cable
    & Data, LLC (Broadcasting & Cable) with a cost of
    $66.5 million and value of $14.3 million and Triax
    Holdings, LLC (Consumer Products) with a cost of
    $98.9 million and a value of $89.7 million. The
    guaranty and standby letter of credit relate to Longview
    Cable & Data, LLC.





7



---



##### 



|                                        |                       |                                                           |                                            |               |        |        |         |   |        |        |         |   |        |        | 
|--------------------------------------- | --------------------- | --------------------------------------------------------- | ------------------------------------------ | ------------- | ------ | ------ | ------- | - | ------ | ------ | ------- | - | ------ | ------ | 
|                                        |                       |                                                           |                                            | June 30, 2006 |       
|                                        |                       |                                                           |                                            |               |       
|Private Finance                         |                       |                                                           |                                            |              
|Portfolio Company                       |                       |                                                           |                                            | (unaudited)   |       
|(in thousands, except number of shares) |                       | Investment(1)(2)                                          |                                            | Principal     |        |        | Cost    |   |        | Value  |        
|                                        |                       |                                                           |                                            |               |        |        |         |   |        |        |        
|MedBridge Healthcare, LLC               |                       | Senior Loan (4.0%, Due
    8/09)(6)                       |                                            | $             | 7,164  |        |         | $ | 7,164  |        |         | $ | 6,595  |       
|                                        | (Healthcare Services) |                                                           | Subordinated Debt (10.0%, Due
    8/14)(6) |               |        | 5,184  |         |   |        | 5,184  |         |   |        |       | 
|                                        |                       | Convertible Subordinated Debt (2.0%,
    Due
    8/14)(6) |                                            |               | 2,970  |        |         |   | 984    |        |         |   |       |       
|                                        |                       | Equity Interests                                          |                                            |               |        |        |         |   | 1,306  |        |         |   |       |       
|                                       
|Nexcel Synthetics, LLC                  |                       | Subordinated Debt (14.5%, Due 6/09)                       |                                            |               | 10,805 |        |         |   | 10,781 |        |         |   | 10,781 |       
|                                        | (Consumer Products)   |                                                           | Equity Interests                           |               |        |        |         |   |        | 1,742  |         |   |        | 1,730  | 
|                                       
|Pres Air Trol LLC                       |                       | Unitranche Debt (12.0%, Due
    4/10)(6)                  |                                            |               | 5,911  |        |         |   | 5,593  |        |         |   | 3,312  |       
|                                        | (Industrial Products) |                                                           | Equity Interests                           |               |        |        |         |   |        | 1,361  |         |   |        |       | 
|                                       
|Progressive International               |                       | Subordinated Debt (16.0%, Due 12/09)                      |                                            |               | 7,476  |        |         |   | 7,454  |        |         |   | 7,454  |       
|                                        | Corporation           |                                                           | Preferred Stock (500 shares)               |               |        |        |         |   |        | 500    |         |   |        | 920    | 
|                                        | (Consumer Products)   |                                                           | Common Stock (197 shares)                  |               |        |        |         |   |        | 13     |         |   |        | 500    | 
|                                        |                       | Warrants                                                  |                                            |               |        |        |         |   |       |        |         |   |       |       
|                                       
|Regency Healthcare Group, LLC           |                       | Senior Loan (11.1%, Due 6/12)                             |                                            |               | 1,000  |        |         |   | 980    |        |         |   | 980    |       
|                                        | (Healthcare Services) |                                                           | Unitranche Debt (11.1%, Due 6/12)          |               |        | 20,000 |         |   |        | 19,900 |         |   |        | 19,900 | 
|                                        |                       |                                                           | Equity Interests                           |               |        |        |         |   |        | 1,500  |         |   |        | 1,500  | 
|                                       
|SGT India Private
    Limited(4)        |                       | Common Stock (109,524 shares)                             |                                            |               |        |        |         |   | 3,608  |        |         |   | 3,608  |       
|                                        | (Business Services)   |                                                           |                                            |               |        |        |         |   |        |        |         |   |        |        | 
|                                       
|Soteria Imaging Services, LLC           |                       | Subordinated Debt (11.7%, Due 11/10)                      |                                            |               | 16,500 |        |         |   | 15,505 |        |         |   | 15,505 |       
|                                        | (Healthcare Services) |                                                           | Equity Interests                           |               |        |        |         |   |        | 2,163  |         |   |        | 2,400  | 
|                                       
|Universal Environmental Services, LLC   |                       | Unitranche Debt (13.5%, Due 2/09)                         |                                            |               | 10,989 |        |         |   | 10,956 |        |         |   | 10,956 |       
|                                        | (Business Services)   |                                                           | Equity Interests                           |               |        |        |         |   |        | 1,811  |         |   |        | 1,701  | 
|                                       
|Total
    companies 5% to 25% owned     |                       |                                                           |                                            |               |        | $      | 371,550 |   |        | $      | 371,156 |  
|                                       
|Companies Less Than 5% Owned            |                       |                                                           |                                            |               |        |        |         |   |        |        |         |   |        |       
|                                       
|3SI Security Systems, Inc.              |                       | Senior Loan (10.9%, Due 2/12  2/13)                      |                                            | $             | 1,650  |        |         | $ | 1,640  |        |         | $ | 1,640  |       
|                                        | (Consumer Products)   |                                                           | Subordinated Debt (14.4%, Due 8/13)        |               |        | 26,377 |         |   |        | 26,252 |         |   |        | 26,252 | 
|                                       
|Anthony, Inc.                           |                       | Subordinated Debt (13.2%, Due 8/11                       |                                            |               |        |        |         |   |        |        |         |   |        |       
|                                        | (Industrial Products) |                                                           | 9/12)                                      |               |        | 14,743 |         |   |        | 14,688 |         |   |        | 14,688 | 
|                                       
|Benchmark Medical, Inc.                 |                       | Warrants                                                  |                                            |               |        |        |         |   | 18     |        |         |   |       |       
|                                        | (Healthcare Services) |                                                           |                                            |               |        |        |         |   |        |        |         |   |        |        | 
|                                       
|Border Foods, Inc.                      |                       | Subordinated Debt (13.0%, Due
    12/10)(6)               |                                            |               | 13,428 |        |         |   | 12,721 |        |         |   |       |       
|                                        | (Consumer Products)   |                                                           | Preferred Stock (140,214 shares)           |               |        |        |         |   |        | 2,893  |         |   |        |       | 
|                                        |                       | Common Stock (1,810 shares)                               |                                            |               |        |        |         |   | 45     |        |         |   |       |       
|                                        |                       | Warrants                                                  |                                            |               |        |        |         |   | 910    |        |         |   |       |       
|                                       
|Broadcast Electronics, Inc.             |                       | Senior Loan (8.9%, Due 7/12)                              |                                            |               | 4,988  |        |         |   | 4,953  |        |         |   | 4,953  |       
|                                        | (Business Services)   |                                                           |                                            |               |        |        |         |   |        |        |         |   |        |        | 
|                                       

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





8



---



##### 



|                                          |                               |                                      |                                      |               |        |        |      |   |        |        |  |   |        |        | 
|----------------------------------------- | ----------------------------- | ------------------------------------ | ------------------------------------ | ------------- | ------ | ------ | ---- | - | ------ | ------ |  | - | ------ | ------ | 
|                                          |                               |                                      |                                      | June 30, 2006 |       
|                                          |                               |                                      |                                      |               |       
|Private Finance                           |                               |                                      |                                      |              
|Portfolio Company                         |                               |                                      |                                      | (unaudited)   |       
|(in thousands, except number of shares)   |                               | Investment(1)(2)                     |                                      | Principal     |        |        | Cost |   |        | Value  | 
|                                          |                               |                                      |                                      |               |        |        |      |   |        |        | 
|C&K Market, Inc.                          |                               | Subordinated Debt (14.0%, Due 12/08) |                                      | $             | 25,744 |        |      | $ | 25,651 |        |  | $ | 25,651 |       
|                                          | (Retail)                      |                                      |                                      |               |        |        |      |   |        |        |  |   |        |        | 
|                                         
|Callidus Debt Partners                    |                               |                                      |                                      |               |        |        |      |   |        |        |  |   |        |       
|                                          | CDO Fund I,
    Ltd.(4)(9)    |                                      | Class C Notes (12.9%, Due 12/13)     |               |        | 18,800 |      |   |        | 18,962 |  |   |        | 18,962 | 
|                                          | (Senior Debt Fund)            |                                      | Class D Notes (17.0%, Due 12/13)     |               |        | 9,400  |      |   |        | 9,481  |  |   |        | 9,481  | 
|                                         
|Callidus Debt Partners                    |                               |                                      |                                      |               |        |        |      |   |        |        |  |   |        |       
|                                          | CLO Fund III, Ltd.
    (4)(9) |                                      | Preferred Shares (23,600,000 shares) |               |        |        |      |   |        | 23,804 |  |   |        | 23,804 | 
|                                          | (Senior Debt Fund)            |                                      |                                      |               |        |        |      |   |        |        |  |   |        |        | 
|                                         
|Callidus Debt Partners                    |                               |                                      |                                      |               |        |        |      |   |        |        |  |   |        |       
|                                          | CLO Fund IV,
    Ltd.(4)(9)   |                                      | Income Notes                         |               |        |        |      |   |        | 12,883 |  |   |        | 12,883 | 
|                                          | (Senior Debt Fund)            |                                      |                                      |               |        |        |      |   |        |        |  |   |        |        | 
|                                         
|Callidus MAPS CLO Fund I
    LLC(9)       |                               | Class E Notes (10.9%, Due 12/17)     |                                      |               | 17,000 |        |      |   | 17,000 |        |  |   | 17,000 |       
|                                          | (Senior Debt Fund)            |                                      | Income Notes                         |               |        |        |      |   |        | 50,584 |  |   |        | 50,584 | 
|                                         
|Camden Partners Strategic Fund II,        |                               |                                      |                                      |               |        |        |      |   |        |        |  |   |        |       
|                                          | L.P.(5)                       |                                      | Limited Partnership Interest         |               |        |        |      |   |        | 2,142  |  |   |        | 3,273  | 
|                                          | (Private Equity Fund)         |                                      |                                      |               |        |        |      |   |        |        |  |   |        |        | 
|                                         
|Carlisle Wide Plank Floors, Inc.          |                               | Unitranche Debt (10.5%, Due 6/11)    |                                      |               | 14,000 |        |      |   | 13,889 |        |  |   | 13,889 |       
|                                          | (Consumer Products)           |                                      | Preferred Stock (400,000 Shares)     |               |        |        |      |   |        | 400    |  |   |        | 400    | 
|                                         
|Catterton Partners V,
    L.P.(5)         |                               | Limited Partnership Interest         |                                      |               |        |        |      |   | 3,065  |        |  |   | 3,150  |       
|                                          | (Private Equity Fund)         |                                      |                                      |               |        |        |      |   |        |        |  |   |        |        | 
|                                         
|Centre Capital Investors IV,
    LP(5)    |                               | Limited Partnership Interest         |                                      |               |        |        |      |   | 1,753  |        |  |   | 1,655  |       
|                                          | (Private Equity Fund)         |                                      |                                      |               |        |        |      |   |        |        |  |   |        |        | 
|                                         
|Commercial Credit Group, Inc.             |                               | Subordinated Debt (14.8%, Due 2/11)  |                                      |               | 5,000  |        |      |   | 4,954  |        |  |   | 4,954  |       
|                                          | (Financial Services)          |                                      | Preferred Stock (32,500 shares)      |               |        |        |      |   |        | 3,900  |  |   |        | 3,900  | 
|                                          |                               |                                      | Warrants                             |               |        |        |      |   |        |       |  |   |        |       | 
|                                         
|Community Education Centers, Inc.         |                               | Subordinated Debt (16.0%, Due 12/10) |                                      |               | 33,643 |        |      |   | 33,540 |        |  |   | 33,540 |       
|                                          | (Education Services)          |                                      |                                      |               |        |        |      |   |        |        |  |   |        |        | 
|                                         
|Component Hardware Group, Inc.            |                               | Preferred Stock (18,000 shares)      |                                      |               |        |        |      |   | 2,605  |        |  |   | 3,000  |       
|                                          | (Industrial Products)         |                                      | Common Stock (2,000 shares)          |               |        |        |      |   |        | 200    |  |   |        | 3,001  | 
|                                         
|Cook Inlet Alternative Risk, LLC          |                               | Unitranche Debt (10.5%, Due 4/12)    |                                      |               | 74,800 |        |      |   | 74,412 |        |  |   | 74,412 |       
|                                          | (Business Services)           |                                      | Equity Interests                     |               |        |        |      |   |        | 2,000  |  |   |        | 2,000  | 
|                                         
|Cooper Natural Resources, Inc.            |                               | Subordinated Debt (0%, Due 11/07)    |                                      |               | 559    |        |      |   | 559    |        |  |   | 866    |       
|                                          | (Industrial Products)         |                                      | Preferred Stock (6,316 shares)       |               |        |        |      |   |        | 1,424  |  |   |        | 20     | 
|                                          |                               | Warrants                             |                                      |               |        |        |      |   | 830    |        |  |   |       |       
|                                         
|Coverall North America, Inc.              |                               | Subordinated Debt (14.6%, Due 2/11)  |                                      |               | 27,664 |        |      |   | 27,621 |        |  |   | 27,621 |       
|                                          | (Business Services)           |                                      | Preferred Stock (6,500 shares)       |               |        |        |      |   |        | 6,500  |  |   |        | 7,073  | 
|                                          |                               | Warrants                             |                                      |               |        |        |      |   | 2,950  |        |  |   | 3,890  |       
|                                         
|Deluxe Entertainment Services Group, Inc. |                               | Subordinated Debt (13.7%, Due 7/11)  |                                      |               | 30,000 |        |      |   | 30,000 |        |  |   | 30,000 |       
|                                          | (Business Services)           |                                      |                                      |               |        |        |      |   |        |        |  |   |        |        | 
|                                         

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





9



---



##### 



|                                             |                        |                                            |                                                     |               |        |        |      |   |        |        |  |   |        |        | 
|-------------------------------------------- | ---------------------- | ------------------------------------------ | --------------------------------------------------- | ------------- | ------ | ------ | ---- | - | ------ | ------ |  | - | ------ | ------ | 
|                                             |                        |                                            |                                                     | June 30, 2006 |       
|                                             |                        |                                            |                                                     |               |       
|Private Finance                              |                        |                                            |                                                     |              
|Portfolio Company                            |                        |                                            |                                                     | (unaudited)   |       
|(in thousands, except number of shares)      |                        | Investment(1)(2)                           |                                                     | Principal     |        |        | Cost |   |        | Value  | 
|                                             |                        |                                            |                                                     |               |        |        |      |   |        |        | 
|Distant Lands Trading Co.                    |                        | Senior Loan (9.2%, Due 1/11)               |                                                     | $             | 500    |        |      | $ | 477    |        |  | $ | 477    |       
|                                             | (Consumer Products)    |                                            | Unitranche Debt (10.3%, Due 1/11)                   |               |        | 25,000 |      |   |        | 24,888 |  |   |        | 24,888 | 
|                                             |                        |                                            | Common Stock (1,500 shares)                         |               |        |        |      |   |        | 1,500  |  |   |        | 1,500  | 
|                                            
|Drilltec Patents & Technologies              |                        | Subordinated Debt (18.0%, Due 8/06)        |                                                     |               | 4,119  |        |      |   | 4,119  |        |  |   | 4,119  |       
|                                             | Company, Inc.          |                                            | Subordinated Debt (10.0%, Due
    8/06)(6)          |               |        | 10,994 |      |   |        | 10,918 |  |   |        | 16,018 | 
|                                             | (Energy Services)      |                                            |                                                     |               |        |        |      |   |        |        |  |   |        |        | 
|                                            
|DVS VideoStream, LLC                         |                        | Unitranche Debt (11.0%, Due 2/12)          |                                                     |               | 19,529 |        |      |   | 19,413 |        |  |   | 19,413 |       
|                                             | (Business Services)    |                                            | Convertible Subordinated Debt
    (10.0%, Due 2/16) |               |        | 3,551  |      |   |        | 3,534  |  |   |        | 3,534  | 
|                                            
|Dynamic India Fund
    IV(4)(5)              |                        | Equity Interests                           |                                                     |               |        |        |      |   | 3,850  |        |  |   | 3,850  |       
|                                             | (Private Equity Fund)  |                                            |                                                     |               |        |        |      |   |        |        |  |   |        |        | 
|                                            
|eCentury Capital Partners,
    L.P.(5)       |                        | Limited Partnership Interest               |                                                     |               |        |        |      |   | 5,649  |        |  |   | 194    |       
|                                             | (Private Equity Fund)  |                                            |                                                     |               |        |        |      |   |        |        |  |   |        |        | 
|                                            
|Elexis Beta
    GmbH(4)                      |                        | Options                                    |                                                     |               |        |        |      |   | 426    |        |  |   | 50     |       
|                                             | (Industrial Products)  |                                            |                                                     |               |        |        |      |   |        |        |  |   |        |        | 
|                                            
|Event Rentals, Inc.
    (Consumer Services)  |                        | Senior Loan (10.8%, Due 11/11)             |                                                     |               | 23,739 |        |      |   | 23,631 |        |  |   | 23,631 |       
|                                            
|Farleys & Sathers Candy Company, Inc.       |                        | Subordinated Debt (11.6%, Due 3/11)        |                                                     |               | 20,000 |        |      |   | 19,905 |        |  |   | 19,905 |       
|                                             | (Consumer Products)    |                                            |                                                     |               |        |        |      |   |        |        |  |   |        |        | 
|                                            
|Frozen Specialties, Inc.                     |                        | Warrants                                   |                                                     |               |        |        |      |   | 435    |        |  |   | 320    |       
|                                             | (Consumer Products)    |                                            |                                                     |               |        |        |      |   |        |        |  |   |        |        | 
|                                            
|Garden Ridge Corporation
    (Retail)        |                        | Subordinated Debt (7.0%, Due
    5/12)(6)  |                                                     |               | 22,500 |        |      |   | 22,500 |        |  |   | 8,455  |       
|                                            
|Geotrace Technologies, Inc.                  |                        | Subordinated Debt (10.0%, Due 6/09)        |                                                     |               | 24,844 |        |      |   | 23,235 |        |  |   | 23,235 |       
|                                             | (Energy Services)      |                                            | Warrants                                            |               |        |        |      |   |        | 2,350  |  |   |        | 2,100  | 
|                                            
|Ginsey Industries, Inc.                      |                        | Subordinated Debt (12.5%, Due 3/07)        |                                                     |               | 3,225  |        |      |   | 3,225  |        |  |   | 3,225  |       
|                                             | (Consumer Products)    |                                            |                                                     |               |        |        |      |   |        |        |  |   |        |        | 
|                                            
|Grant Broadcasting Systems II                |                        | Subordinated Debt (5.0%, Due 6/09)         |                                                     |               | 2,896  |        |      |   | 2,896  |        |  |   | 2,896  |       
|                                             | (Broadcasting & Cable) |                                            |                                                     |               |        |        |      |   |        |        |  |   |        |        | 
|                                            
|Grotech Partners, VI,
    L.P.(5)            |                        | Limited Partnership Interest               |                                                     |               |        |        |      |   | 8,279  |        |  |   | 5,695  |       
|                                             | (Private Equity Fund)  |                                            |                                                     |               |        |        |      |   |        |        |  |   |        |        | 
|                                            
|Havco Wood Products LLC                      |                        | Senior Loan (11.3%, Due 8/11)              |                                                     |               | 2,000  |        |      |   | 1,978  |        |  |   | 1,978  |       
|                                             | (Industrial Products)  |                                            | Unitranche Debt (10.7%, Due 8/11)                   |               |        | 24,054 |      |   |        | 22,950 |  |   |        | 22,950 | 
|                                             |                        |                                            | Equity Interests                                    |               |        |        |      |   |        | 1,049  |  |   |        | 1,800  | 
|                                            
|Haven Eldercare of New England, LLC
    (10) |                        | Subordinated Debt (12.0%, Due
    8/09)(6) |                                                     |               | 3,573  |        |      |   | 3,573  |        |  |   | 3,573  |       
|                                             | (Healthcare Services)  |                                            |                                                     |               |        |        |      |   |        |        |  |   |        |        | 
|                                            
|Haven Healthcare Management,
    LLC(10)     |                        | Subordinated Debt (18.0%, Due
    4/07)(6) |                                                     |               | 76     |        |      |   | 160    |        |  |   | 125    |       
|                                             | (Healthcare Services)  |                                            |                                                     |               |        |        |      |   |        |        |  |   |        |        | 
|                                            
|HealthASPex Services Inc.                    |                        | Senior Loan (4.0%, Due 7/08)               |                                                     |               | 500    |        |      |   | 500    |        |  |   | 468    |       
|                                             | (Business Services)    |                                            |                                                     |               |        |        |      |   |        |        |  |   |        |        | 
|                                            

| |      |  |  |                                                                                                                                                                                                                                                                
| | ---- |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1)  |  |  | Interest rates represent the weighted average annual stated
    interest rate on loans and debt securities, which are presented
    by nature of indebtedness for a single issuer. The maturity
    dates represent the earliest and the latest maturity dates.
| | (2)  |  |  | Common stock, preferred stock, warrants, options, and equity
    interests are generally non-income producing and restricted.                                                                                                                                  
| | (3)  |  |  | Public company.                                                                                                                                                                                                                                                
| | (4)  |  |  | Non-U.S. company or principal place of business outside the
    U.S.                                                                                                                                                                                           
| | (5)  |  |  | Non-registered investment company.                                                                                                                                                                                                                             
| | (6)  |  |  | Loan or debt security is on non-accrual status and therefore is
    considered non-income producing.                                                                                                                                                           
| | (10) |  |  | Haven Eldercare of New England, LLC and Haven Healthcare
    Management, LLC are affiliated companies.                                                                                                                                                         





10



---



##### 



|                                               |                       |                                            |                                                 |               |        |        |      |   |        |        |  |   |        |        | 
|---------------------------------------------- | --------------------- | ------------------------------------------ | ----------------------------------------------- | ------------- | ------ | ------ | ---- | - | ------ | ------ |  | - | ------ | ------ | 
|                                               |                       |                                            |                                                 | June 30, 2006 |       
|                                               |                       |                                            |                                                 |               |       
|Private Finance                                |                       |                                            |                                                 |              
|Portfolio Company                              |                       |                                            |                                                 | (unaudited)   |       
|(in thousands, except number of shares)        |                       | Investment(1)(2)                           |                                                 | Principal     |        |        | Cost |   |        | Value  | 
|                                               |                       |                                            |                                                 |               |        |        |      |   |        |        | 
|The Hillman Companies,
    Inc.(3)             |                       | Subordinated Debt (10.0%, Due 9/11)        |                                                 | $             | 44,496 |        |      | $ | 44,327 |        |  | $ | 44,327 |       
|                                               | (Consumer Products)   |                                            |                                                 |               |        |        |      |   |        |        |  |   |        |        | 
|                                              
|Homax Holdings, Inc.                           |                       | Subordinated Debt (12.0%, Due 8/11)        |                                                 |               | 14,000 |        |      |   | 13,110 |        |  |   | 13,110 |       
|                                               | (Consumer Products)   |                                            | Preferred Stock (89 shares)                     |               |        |        |      |   |        | 89     |  |   |        | 77     | 
|                                               |                       |                                            | Common Stock (28 shares)                        |               |        |        |      |   |        | 6      |  |   |        | 6      | 
|                                               |                       |                                            | Warrants                                        |               |        |        |      |   |        | 1,106  |  |   |        | 1,261  | 
|                                              
|Hot Stuff Foods, LLC                           |                       | Senior Loan (8.7%, Due 2/11-2/12)          |                                                 |               | 47,080 |        |      |   | 47,080 |        |  |   | 47,080 |       
|                                               | (Consumer Products)   |                                            | Subordinated Debt (13.9%, Due 8/12  2/13)      |               |        | 72,967 |      |   |        | 72,688 |  |   |        | 72,688 | 
|                                               |                       |                                            | Common Stock
    (375,000 shares)(11)           |               |        |        |      |   |        | 37,445 |  |   |        | 8,791  | 
|                                               |                       |                                            | Warrants                                        |               |        |        |      |   |        |       |  |   |        |       | 
|                                              
|Integrity Interactive Corporation              |                       | Unitranche Debt (10.5%, Due 2/12)          |                                                 |               | 30,000 |        |      |   | 29,795 |        |  |   | 29,795 |       
|                                               | (Business Services)   |                                            |                                                 |               |        |        |      |   |        |        |  |   |        |        | 
|                                              
|International Fiber Corporation                |                       | Subordinated Debt (14.0%, Due 6/12)        |                                                 |               | 21,764 |        |      |   | 21,685 |        |  |   | 21,685 |       
|                                               | (Industrial Products) |                                            | Preferred Stock (25,000 shares)                 |               |        |        |      |   |        | 2,500  |  |   |        | 2,100  | 
|                                              
|Kodiak Fund
    LP(5)                          |                       | Equity Interests                           |                                                 |               |        |        |      |   | 4,975  |        |  |   | 4,975  |       
|                                               | (Private Equity Fund) |                                            |                                                 |               |        |        |      |   |        |        |  |   |        |        | 
|                                              
|Line-X, Inc.                                   |                       | Senior Loan (9.0%, Due 8/11)               |                                                 |               | 3,000  |        |      |   | 2,978  |        |  |   | 2,978  |       
|                                               | (Consumer Products)   |                                            | Unitranche Debt (10.0% Due 8/11)                |               |        | 50,225 |      |   |        | 50,001 |  |   |        | 50,001 | 
|                                               |                       |                                            | Standby Letter of Credit ($1,500)               |               |        |        |      |   |        |        |  |   |        |        | 
|                                              
|MedAssets, Inc.                                |                       | Preferred Stock (227,865 shares)           |                                                 |               |        |        |      |   | 2,049  |        |  |   | 3,485  |       
|                                               | (Business Services)   |                                            | Warrants                                        |               |        |        |      |   |        |       |  |   |        | 200    | 
|                                              
|Meineke Car Care Centers, Inc.                 |                       | Senior Loan (8.8%, Due 6/11)               |                                                 |               | 28,000 |        |      |   | 27,877 |        |  |   | 27,877 |       
|                                               | (Consumer Services)   |                                            | Subordinated Debt (11.9%, Due 6/12  6/13)      |               |        | 72,000 |      |   |        | 71,705 |  |   |        | 71,705 | 
|                                               |                       |                                            | Common Stock (10,696,308
    shares)(11)        |               |        |        |      |   |        | 26,985 |  |   |        | 23,152 | 
|                                               |                       |                                            | Warrants                                        |               |        |        |      |   |        |       |  |   |        |       | 
|                                              
|MHF Logistical Solutions, Inc.                 |                       | Subordinated Debt (13.2%, Due 6/12  6/13) |                                                 |               | 45,075 |        |      |   | 44,853 |        |  |   | 44,853 |       
|                                               | (Business Services)   |                                            | Common Stock (21,425
    shares)(11)            |               |        |        |      |   |        | 21,425 |  |   |        | 21,425 | 
|                                               |                       |                                            | Warrants                                        |               |        |        |      |   |        |       |  |   |        |       | 
|                                              
|Mid-Atlantic Venture Fund IV,
    L.P.(5)      |                       | Limited Partnership Interest               |                                                 |               |        |        |      |   | 6,600  |        |  |   | 2,908  |       
|                                               | (Private Equity Fund) |                                            |                                                 |               |        |        |      |   |        |        |  |   |        |        | 
|                                              
|Mogas Energy, LLC                              |                       | Subordinated Debt (9.5%, Due 3/12  4/12)  |                                                 |               | 16,570 |        |      |   | 15,259 |        |  |   | 15,259 |       
|                                               | (Energy Services)     |                                            | Warrants                                        |               |        |        |      |   |        | 1,774  |  |   |        | 2,900  | 
|                                              
|Network Hardware Resale, Inc.                  |                       | Unitranche Debt (10.5%, Due 12/11)         |                                                 |               | 38,060 |        |      |   | 38,283 |        |  |   | 38,283 |       
|                                               | (Business Services)   |                                            | Convertible Subordinated Debt (9.8%, Due 12/15) |               |        | 12,000 |      |   |        | 12,072 |  |   |        | 12,072 | 
|                                              
|N.E.W. Customer Service Companies, Inc.        |                       | Subordinated Debt (11.6%, Due 7/12)        |                                                 |               | 40,000 |        |      |   | 40,013 |        |  |   | 40,013 |       
|                                               | (Business Services)   |                                            |                                                 |               |        |        |      |   |        |        |  |   |        |        | 
|                                              
|Norwesco, Inc.                                 |                       | Subordinated Debt (12.6%, Due 1/12  7/12) |                                                 |               | 82,271 |        |      |   | 81,925 |        |  |   | 81,925 |       
|                                               | (Industrial Products) |                                            | Common Stock (559,603
    shares)(11)           |               |        |        |      |   |        | 38,313 |  |   |        | 55,992 | 
|                                               |                       | Warrants                                   |                                                 |               |        |        |      |   |       |        |  |   |       |       
|                                              
|Novak Biddle Venture Partners III,
    L.P.(5) |                       | Limited Partnership Interest               |                                                 |               |        |        |      |   | 1,595  |        |  |   | 1,700  |       
|                                               | (Private Equity Fund) |                                            |                                                 |               |        |        |      |   |        |        |  |   |        |        | 
|                                              

| |      |  |  |                                                                                                                                                                                                                                                                
| | ---- |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1)  |  |  | Interest rates represent the weighted average annual stated
    interest rate on loans and debt securities, which are presented
    by nature of indebtedness for a single issuer. The maturity
    dates represent the earliest and the latest maturity dates.
| | (2)  |  |  | Common stock, preferred stock, warrants, options, and equity
    interests are generally non-income producing and restricted.                                                                                                                                  
| | (3)  |  |  | Public company.                                                                                                                                                                                                                                                
| | (4)  |  |  | Non-U.S. company or principal place of business outside the
    U.S.                                                                                                                                                                                           
| | (5)  |  |  | Non-registered investment company.                                                                                                                                                                                                                             
| | (6)  |  |  | Loan or debt security is on non-accrual status and therefore is
    considered non-income producing.                                                                                                                                                           
| | (11) |  |  | Common stock is non-voting. In addition to non-voting stock
    ownership, the Company has an option to acquire a majority of
    the voting securities of the portfolio company at fair market
    value.                                                     





11



---



##### 



|                                        |                       |                                     |                                            |               |        |        |      |   |        |        |  |   |        |        | 
|--------------------------------------- | --------------------- | ----------------------------------- | ------------------------------------------ | ------------- | ------ | ------ | ---- | - | ------ | ------ |  | - | ------ | ------ | 
|                                        |                       |                                     |                                            | June 30, 2006 |       
|                                        |                       |                                     |                                            |               |       
|Private Finance                         |                       |                                     |                                            |              
|Portfolio Company                       |                       |                                     |                                            | (unaudited)   |       
|(in thousands, except number of shares) |                       | Investment(1)(2)                    |                                            | Principal     |        |        | Cost |   |        | Value  | 
|                                        |                       |                                     |                                            |               |        |        |      |   |        |        | 
|Oahu Waste Services, Inc.               |                       | Stock Appreciation Rights           |                                            |               |        |        |      | $ | 239    |        |  | $ | 1,200  |       
|                                        | (Business Services)   |                                     |                                            |               |        |        |      |   |        |        |  |   |        |        | 
|                                       
|Odyssey Investment Partners Fund III,   |                       |                                     |                                            |               |        |        |      |   |        |        |  |   |        |       
|                                        | LP(5)                 |                                     | Limited Partnership Interest               |               |        |        |      |   |        | 1,832  |  |   |        | 1,688  | 
|                                        | (Private Equity Fund) |                                     |                                            |               |        |        |      |   |        |        |  |   |        |        | 
|                                       
|Opinion Research
    Corporation(3)     |                       | Warrants                            |                                            |               |        |        |      |   | 996    |        |  |   | 166    |       
|                                        | (Business Services)   |                                     |                                            |               |        |        |      |   |        |        |  |   |        |        | 
|                                       
|Oriental Trading Company, Inc.          |                       | Common Stock (13,820 shares)        |                                            |               |        |        |      |   |       |        |  |   | 6,995  |       
|                                        | (Consumer Products)   |                                     |                                            |               |        |        |      |   |        |        |  |   |        |        | 
|                                       
|Palm Coast Data, LLC                    |                       | Senior Loan (8.5%, Due 8/10)        |                                            | $             | 15,569 |        |      |   | 15,501 |        |  |   | 15,501 |       
|                                        | (Business Services)   |                                     | Subordinated Debt (15.5%, Due 8/12  8/15) |               |        | 30,126 |      |   |        | 29,997 |  |   |        | 29,997 | 
|                                        |                       |                                     | Common Stock (21,743
    shares)(11)       |               |        |        |      |   |        | 21,743 |  |   |        | 19,003 | 
|                                        |                       |                                     | Warrants                                   |               |        |        |      |   |        |       |  |   |        |       | 
|                                       
|Passport Health                         |                       |                                     |                                            |               |        |        |      |   |        |        |  |   |        |       
|                                        | Communications, Inc.  |                                     | Subordinated Debt (14.0%, Due 4/12)        |               |        | 10,000 |      |   |        | 9,952  |  |   |        | 9,952  | 
|                                        | (Healthcare Services) |                                     | Preferred Stock (651,381 shares)           |               |        |        |      |   |        | 2,000  |  |   |        | 2,000  | 
|                                       
|Performant Financial Corporation        |                       | Common Stock (478,816 shares)       |                                            |               |        |        |      |   | 734    |        |  |   | 150    |       
|                                        | (Business Services)   |                                     |                                            |               |        |        |      |   |        |        |  |   |        |        | 
|                                       
|Pro Mach, Inc.                          |                       | Subordinated Debt (13.8%, Due 6/12) |                                            |               | 14,471 |        |      |   | 14,396 |        |  |   | 14,396 |       
|                                        | (Industrial Products) |                                     | Equity Interests                           |               |        |        |      |   |        | 1,500  |  |   |        | 2,650  | 
|                                       
|Promo Works, LLC                        |                       | Senior Loan (9.1%, Due 12/11)       |                                            |               | 3,000  |        |      |   | 2,953  |        |  |   | 2,953  |       
|                                        | (Business Services)   |                                     | Unitranche Debt (10.3%, Due 12/11)         |               |        | 31,000 |      |   |        | 30,751 |  |   |        | 30,751 | 
|                                        |                       |                                     | Guaranty ($1,500)                          |               |        |        |      |   |        |        |  |   |        |        | 
|                                       
|Red Hawk Industries, LLC                |                       | Unitranche Debt (11.0%, Due 4/11)   |                                            |               | 56,342 |        |      |   | 56,088 |        |  |   | 56,088 |       
|                                        | (Business Services)   |                                     |                                            |               |        |        |      |   |        |        |  |   |        |        | 
|                                       
|S.B. Restaurant Company                 |                       | Unitranche Debt (10.3%, Due 4/11)   |                                            |               | 33,501 |        |      |   | 33,088 |        |  |   | 33,088 |       
|                                        | (Retail)              |                                     | Preferred Stock (54,125 shares)            |               |        |        |      |   |        | 135    |  |   |        | 135    | 
|                                        |                       | Warrants                            |                                            |               |        |        |      |   | 619    |        |  |   | 1,200  |       
|                                        |                       | Standby Letters of Credit ($2,611)  |                                            |               |        |        |      |   |        |        |  |   |        |       
|                                       
|SBBUT, LLC                              |                       | Equity Interests                    |                                            |               |        |        |      |   |       |        |  |   |       |       
|                                        | (Consumer Products)   |                                     |                                            |               |        |        |      |   |        |        |  |   |        |        | 
|                                       
|Soff-Cut Holdings, Inc.                 |                       | Preferred Stock (300 shares)        |                                            |               |        |        |      |   | 300    |        |  |   | 300    |       
|                                        | (Industrial Products) |                                     | Common Stock (2,000 shares)                |               |        |        |      |   |        | 200    |  |   |        | 114    | 
|                                       
|SPP Mezzanine Fund,
    L.P.(5)         |                       | Limited Partnership Interest        |                                            |               |        |        |      |   | 2,594  |        |  |   | 2,675  |       
|                                        | (Private Equity Fund) |                                     |                                            |               |        |        |      |   |        |        |  |   |        |        | 
|                                       
|STS Operating, Inc.                     |                       | Subordinated Debt (15.0%, Due 1/13) |                                            |               | 30,000 |        |      |   | 29,854 |        |  |   | 29,854 |       
|                                        | (Industrial Products) |                                     |                                            |               |        |        |      |   |        |        |  |   |        |        | 
|                                       

| |      |  |  |                                                                                                                                                                                                                                                                
| | ---- |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1)  |  |  | Interest rates represent the weighted average annual stated
    interest rate on loans and debt securities, which are presented
    by nature of indebtedness for a single issuer. The maturity
    dates represent the earliest and the latest maturity dates.
| | (2)  |  |  | Common stock, preferred stock, warrants, options, and equity
    interests are generally non-income producing and restricted.                                                                                                                                  
| | (3)  |  |  | Public company.                                                                                                                                                                                                                                                
| | (4)  |  |  | Non-U.S. company or principal place of business outside the
    U.S.                                                                                                                                                                                           
| | (5)  |  |  | Non-registered investment company.                                                                                                                                                                                                                             
| | (6)  |  |  | Loan or debt security is on non-accrual status and therefore is
    considered non-income producing.                                                                                                                                                           
| | (11) |  |  | Common stock is non-voting. In addition to non-voting stock
    ownership, the Company has an option to acquire a majority of
    the voting securities of the portfolio company at fair market
    value.                                                     





12



---



##### 



|                                                    |                       |                                             |                              |               |        |   |           |   |        |       |           |   |        |       | 
|--------------------------------------------------- | --------------------- | ------------------------------------------- | ---------------------------- | ------------- | ------ | - | --------- | - | ------ | ----- | --------- | - | ------ | ----- | 
|                                                    |                       |                                             |                              | June 30, 2006 |       
|                                                    |                       |                                             |                              |               |       
|Private Finance                                     |                       |                                             |                              |              
|Portfolio Company                                   |                       |                                             |                              | (unaudited)   |       
|(in thousands, except number of shares)             |                       | Investment(1)(2)                            |                              | Principal     |        |   | Cost      |   |        | Value |          
|                                                    |                       |                                             |                              |               |        |   |           |   |        |       |          
|The Step2 Company, LLC                              |                       | Unitranche Debt (10.5%, Due 4/12)           |                              | $             | 68,000 |   |           | $ | 67,517 |       |           | $ | 67,517 |      
|                                                    | (Consumer Products)   |                                             | Equity Interests             |               |        |   |           |   |        | 2,000 |           |   |        | 2,000 | 
|                                                   
|Tradesmen International, Inc.                       |                       | Subordinated Debt (12.0%, Due 12/09)        |                              |               | 15,000 |   |           |   | 14,393 |       |           |   | 14,393 |      
|                                                    | (Business Services)   |                                             | Warrants                     |               |        |   |           |   |        | 710   |           |   |        | 2,900 | 
|                                                   
|TransAmerican Auto Parts, LLC                       |                       | Subordinated Debt (14.0%, Due 11/12)        |                              |               | 12,818 |   |           |   | 12,760 |       |           |   | 12,760 |      
|                                                    | (Consumer Products)   |                                             | Equity Interests             |               |        |   |           |   |        | 1,190 |           |   |        | 1,039 | 
|                                                   
|TransTechnology
    Corporation(3)                  |                       | Senior Loan (9.9%, Due 4/11)                |                              |               | 10,000 |   |           |   | 10,000 |       |           |   | 10,000 |      
|                                                    | (Industrial Products) |                                             |                              |               |        |   |           |   |        |       |           |   |        |       | 
|                                                   
|Universal Air Filter Company                        |                       | Unitranche Debt (11.0%, Due 11/11)          |                              |               | 19,617 |   |           |   | 19,518 |       |           |   | 19,518 |      
|                                                    | (Industrial Products) |                                             |                              |               |        |   |           |   |        |       |           |   |        |       | 
|                                                   
|Universal Tax Systems, Inc.                         |                       | Subordinated Debt (14.5%, Due 10/13)        |                              |               | 19,310 |   |           |   | 19,243 |       |           |   | 19,243 |      
|                                                    | (Business Services)   |                                             |                              |               |        |   |           |   |        |       |           |   |        |       | 
|                                                   
|Updata Venture Partners II,
    L.P.(5)             |                       | Limited Partnership Interest                |                              |               |        |   |           |   | 5,077  |       |           |   | 4,898  |      
|                                                    | (Private Equity Fund) |                                             |                              |               |        |   |           |   |        |       |           |   |        |       | 
|                                                   
|Venturehouse-Cibernet Investors, LLC                |                       | Equity Interest                             |                              |               |        |   |           |   | 42     |       |           |   | 42     |      
|                                                    | (Business Services)   |                                             |                              |               |        |   |           |   |        |       |           |   |        |       | 
|                                                   
|Venturehouse Group,
    LLC(5)                      |                       | Equity Interest                             |                              |               |        |   |           |   | 598    |       |           |   | 407    |      
|                                                    | (Private Equity Fund) |                                             |                              |               |        |   |           |   |        |       |           |   |        |       | 
|                                                   
|VICORP Restaurants,
    Inc.(3)                     |                       | Warrants                                    |                              |               |        |   |           |   | 33     |       |           |   | 33     |      
|                                                    | (Retail)              |                                             |                              |               |        |   |           |   |        |       |           |   |        |       | 
|                                                   
|Walker Investment Fund II,
    LLLP(5)              |                       | Limited Partnership Interest                |                              |               |        |   |           |   | 1,330  |       |           |   | 521    |      
|                                                    | (Private Equity Fund) |                                             |                              |               |        |   |           |   |        |       |           |   |        |       | 
|                                                   
|Wear Me Apparel Corporation                         |                       | Subordinated Debt (15.0%, Due 12/10)        |                              |               | 40,000 |   |           |   | 39,190 |       |           |   | 39,190 |      
|                                                    | (Consumer Products)   |                                             | Warrants                     |               |        |   |           |   |        | 1,219 |           |   |        | 2,900 | 
|                                                   
|Wilton Industries, Inc.                             |                       | Subordinated Debt (16.0%, Due 6/08)         |                              |               | 4,800  |   |           |   | 4,800  |       |           |   | 4,800  |      
|                                                    | (Consumer Products)   |                                             |                              |               |        |   |           |   |        |       |           |   |        |       | 
|                                                   
|Woodstream Corporation                              |                       | Subordinated Debt (13.4%, Due 11/12  5/13) |                              |               | 52,753 |   |           |   | 52,617 |       |           |   | 52,617 |      
|                                                    | (Consumer Products)   |                                             | Common Stock (180 shares)    |               |        |   |           |   |        | 673   |           |   |        | 3,352 | 
|                                                    |                       |                                             | Warrants                     |               |        |   |           |   |        |      |           |   |        | 2,348 | 
|                                                   
|York Insurance Services Group, Inc.                 |                       | Subordinated Debt (14.5%, Due 10/13)        |                              |               | 19,000 |   |           |   | 18,907 |       |           |   | 18,907 |      
|                                                    | (Business Services)   |                                             | Common Stock (10,000 shares) |               |        |   |           |   |        | 1,000 |           |   |        | 1,000 | 
|                                                   
|Other companies                                     |                       | Other debt
    investments(6)               |                              |               | 453    |   |           |   | 453    |       |           |   | 334    |      
|                                                    |                       | Other equity investments                    |                              |               |        |   |           |   | 8      |       |           |   |       |      
|                                                    |                       | Guaranty ($159)                             |                              |               |        |   |           |   |        |       |           |   |        |      
|                                                   
|Total
    companies less than 5% owned              |                       |                                             |                              |               |        | $ | 1,933,932 |   |        | $     | 1,901,139 |  
|                                                   
|Total
    private finance (131 portfolio companies) |                       |                                             |                              |               |        | $ | 3,588,250 |   |        | $     | 3,460,426 |  
|                                                   

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





13



---



##### 



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

|                                                                                      |                                         |                  |               |  |           |               |        |             |       |   |           |         |       |   |           |         | 
|------------------------------------------------------------------------------------- | --------------------------------------- | ---------------- | ------------- |  | --------- | ------------- | ------ | ----------- | ----- | - | --------- | ------- | ----- | - | --------- | ------- | 
|                                                                                      |                                         |                  |               |  |           | June 30, 2006 |       
|                                                                                      |                                         |                  |               |  |           |               |       
|                                                                                      |                                         | Interest         |               |  | Number of |               |        | (unaudited) |      
|                                                                                      |                                         | Rate Ranges      |               |  | Loans     |               |        | Cost        |       |   | Value     |        
|                                                                                      |                                         |                  |               |  |           |               |        |             |       |   |           |        
|Commercial Mortgage Loans                                                             |                                         |                  |               |  |           |               |        |             |       |   |           |         |       |   |           |        
|                                                                                      |                                         |                  | Up to 6.99%   |  |           |               | 3      |             |       | $ | 20,314    |         |       | $ | 19,481    |        
|                                                                                      |                                         |                  | 7.00%8.99%   |  |           |               | 25     |             |       |   | 48,798    |         |       |   | 49,024    |        
|                                                                                      |                                         |                  | 9.00%10.99%  |  |           |               | 3      |             |       |   | 21,781    |         |       |   | 21,781    |        
|                                                                                      |                                         |                  | 11.00%14.99% |  |           |               | 1      |             |       |   | 2,291     |         |       |   | 2,291     |        
|                                                                                      |                                         | 15.00% and above |               |  | 2         |               |        |             | 3,970 |   |           |         | 3,970 |  
|                                                                                     
|                                                                                      | Total commercial mortgage
    loans(12) |                  |               |  |           |               |        | 34          |       |   | $         | 97,154  |       |   | $         | 96,547  | 
|                                                                                     
|Real Estate Owned                                                                     |                                         |                  |               |  |           |               |        |             |       | $ | 13,090    |         |       | $ | 14,553    |        
|                                                                                     
|Equity
    Interests(2) 
    Companies more than 25% owned
    (Guarantees  $6,871) |                                         |                  |               |  |           | $             | 17,504 |             |       | $ | 21,951    |        
|                                                                                     
|                                                                                      | Total commercial real estate finance    |                  |               |  |           |               |        |             |       |   | $         | 127,748 |       |   | $         | 133,051 | 
|                                                                                     
|Total portfolio                                                                       |                                         |                  |               |  |           |               |        |             |       | $ | 3,715,998 |         |       | $ | 3,593,477 |        
|                                                                                     

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

|                                                     |                                                     |                           |  |      |      |  |   |         |         |  |   |         |         | 
|---------------------------------------------------- | --------------------------------------------------- | ------------------------- |  | ---- | ---- |  | - | ------- | ------- |  | - | ------- | ------- | 
|                                                     |                                                     | Yield                     |  |      | Cost |  |   | Value   |        
|                                                     |                                                     |                           |  |      |      |  |   |         |        
|Liquidity Portfolio                                  |                                                     |                           |  |      |      |  |   |         |         |  |   |        
|                                                     | U.S. Treasury bills (Due October 2006)              |                           |  | 4.9% |      |  | $ | 24,996  |         |  | $ | 25,067  |        
|                                                     | U.S. Treasury bills (Due December 2006)             |                           |  | 4.9% |      |  |   | 100,004 |         |  |   | 100,873 |        
|                                                     | SEI Daily Income Tr Prime Obligation
    Fund(13)   |                           |  | 5.0% |      |  |   | 55,292  |         |  |   | 55,292  |        
|                                                     | Certificate of Deposit (Due September
    2006)(13) |                           |  | 5.6% |      |  |   | 20,000  |         |  |   | 20,000  |        
|                                                    
|                                                     |                                                     | Total liquidity portfolio |  |      |      |  |   | $       | 200,292 |  |   | $       | 201,232 | 
|                                                    
|Other Investments in Money Market
    Securities(13) |                                                     |                           |  |      |      |  |   |         |         |  |   |        
|                                                     | Columbia Treasury Reserves Money Market Fund        |                           |  | 5.2% |      |  | $ | 19,280  |         |  | $ | 19,280  |        
|                                                     | PNC Bank Corporate Money Market Deposit Account     |                           |  | 4.8% |      |  | $ | 524     |         |  | $ | 524     |        
|                                                     | Columbia Money Market Reserves                      |                           |  | 5.0% |      |  | $ | 2,714   |         |  | $ | 2,714   |        
|                                                    

|                                                                                                                                                                                                                                                                                                 |  |  |  |  |  |  |  |  |  |  |  | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  |  |  |  |  |  |  |  |  |  |  | 
|(1)       Interest
    rates represent the weighted average annual stated interest rate
    on loans and debt securities, which are presented by nature of
    indebtedness
    for            a
    single issuer. The maturity dates represent the earliest and the
    latest maturity dates.
|(2)       Common
    stock, preferred stock, warrants, options, and equity interests
    are generally non-income producing and restricted.                                                                                                                                                     
|(3)       Public
    company.                                                                                                                                                                                                                                                                   
|(4)       Non-U.S. company
    or principal place of business outside the U.S.                                                                                                                                                                                                                  
|(5)       Non-registered
    investment company.                                                                                                                                                                                                                                                
|(12)       Commercial
    mortgage loans totaling $15.7 million at value were on
    non-accrual status and therefore were considered non-income
    producing.                                                                                                                                 
|(13)       Included
    in investments in money market and other securities on the
    accompanying Consolidated Balance Sheet.                                                                                                                                                                 





14



---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


CONSOLIDATED STATEMENT OF INVESTMENTS


|                                                   |                       |                                                       |                                            |                   |        |         |      |   |         |         |  |   |         |         | 
|-------------------------------------------------- | --------------------- | ----------------------------------------------------- | ------------------------------------------ | ----------------- | ------ | ------- | ---- | - | ------- | ------- |  | - | ------- | ------- | 
|                                                   |                       |                                                       |                                            | December 31, 2005 |       
|Private Finance                                    |                       |                                                       |                                            |                   |       
|Portfolio Company                                  |                       |                                                       |                                            |                  
|(in thousands, except number of shares)            |                       | Investment(1)(2)                                      |                                            | Principal         |        |         | Cost |   |         | Value   | 
|                                                   |                       |                                                       |                                            |                   |        |         |      |   |         |         | 
|Companies More Than 25% Owned                      |                       |                                                       |                                            |                   |        |         |      |   |         |         |  |  
|                                                  
|Acme Paging,
    L.P.(4)                           |                       | Senior Loan (6.0%, Due
    12/07)(6)                  |                                            | $                 | 3,750  |         |      | $ | 3,750   |         |  | $ |        |        
|                                                   | (Telecommunications)  |                                                       | Subordinated Debt (10.0%, Due
    1/08)(6) |                   |        | 881     |      |   |         | 881     |  |   |         |        | 
|                                                   |                       |                                                       | Common Stock (23,513 shares)               |                   |        |         |      |   |         | 27      |  |   |         |        | 
|                                                  
|Advantage Sales & Marketing, Inc.                  |                       | Subordinated Debt (10.5%, Due 9/09)                   |                                            |                   | 60,000 |         |      |   | 59,787  |         |  |   | 59,787  |        
|                                                   | (Business Services)   |                                                       | Subordinated Debt (18.5%, Due 12/09)       |                   |        | 124,000 |      |   |         | 124,000 |  |   |         | 124,000 | 
|                                                   |                       | Common Stock (18,924,976 shares)                      |                                            |                   |        |         |      |   | 73,932  |         |  |   | 476,578 |        
|                                                  
|Alaris Consulting, LLC                             |                       | Senior Loan (15.8%, Due 12/05  12/07)
    (6)        |                                            |                   | 27,055 |         |      |   | 27,050  |         |  |   |        |        
|                                                   | (Business Services)   |                                                       | Equity Interests                           |                   |        |         |      |   |         | 5,305   |  |   |         |        | 
|                                                   |                       | Guaranty ($1,100)                                     |                                            |                   |        |         |      |   |         |         |  |   |         |        
|                                                  
|American Healthcare Services, Inc.                 |                       | Senior Loan (0.7%, Due 12/04  12/05)
    (6)         |                                            |                   | 4,999  |         |      |   | 4,600   |         |  |   | 4,097   |        
|                                                   | and Affiliates        |                                                       |                                            |                   |        |         |      |   |         |         |  |   |         |         | 
|                                                   | (Healthcare Services) |                                                       |                                            |                   |        |         |      |   |         |         |  |   |         |         | 
|                                                  
|Avborne,
    Inc.(7)                               |                       | Preferred Stock (12,500 shares)                       |                                            |                   |        |         |      |   | 658     |         |  |   | 892     |        
|                                                   | (Business Services)   |                                                       | Common Stock (27,500 shares)               |                   |        |         |      |   |         |        |  |   |         |        | 
|                                                  
|Avborne Heavy Maintenance,
    Inc.(7)             |                       | Preferred Stock (1,568 shares)                        |                                            |                   |        |         |      |   | 2,401   |         |  |   |        |        
|                                                   | (Business Services)   |                                                       | Common Stock (2,750 shares)                |                   |        |         |      |   |         |        |  |   |         |        | 
|                                                   |                       | Guaranty ($2,401)                                     |                                            |                   |        |         |      |   |         |         |  |   |         |        
|                                                  
|Business Loan Express, LLC                         |                       | Subordinated Debt (6.9%, Due 4/06)                    |                                            |                   | 10,000 |         |      |   | 10,000  |         |  |   | 10,000  |        
|                                                   | (Financial Services)  |                                                       | Class A Equity Interests                   |                   |        | 60,693  |      |   |         | 60,693  |  |   |         | 60,693  | 
|                                                   |                       |                                                       | Class B Equity Interests                   |                   |        |         |      |   |         | 119,436 |  |   |         | 146,910 | 
|                                                   |                       | Class C Equity Interests                              |                                            |                   |        |         |      |   | 109,301 |         |  |   | 139,521 |        
|                                                   |                       | Guaranty ($135,437  See Note 3)                      |                                            |                   |        |         |      |   |         |         |  |   |         |        
|                                                   |                       | Standby Letters of Credit
    ($34,050   See Note 3) |                                            |                   |        |         |      |   |         |         |  |   |         |        
|                                                  
|Callidus Capital Corporation                       |                       | Senior Loan (12.0%, Due 12/06)                        |                                            |                   | 600    |         |      |   | 600     |         |  |   | 600     |        
|                                                   | (Financial Services)  |                                                       | Subordinated Debt (18.0%, Due 10/08)       |                   |        | 4,832   |      |   |         | 4,832   |  |   |         | 4,832   | 
|                                                   |                       | Common Stock (10 shares)                              |                                            |                   |        |         |      |   | 2,049   |         |  |   | 7,968   |        
|                                                  
|Diversified Group Administrators, Inc.             |                       | Preferred Stock (1,000,000 shares)                    |                                            |                   |        |         |      |   | 700     |         |  |   | 728     |        
|                                                   | (Business Services)   |                                                       | Preferred Stock (1,451,380 shares)         |                   |        |         |      |   |         | 841     |  |   |         | 841     | 
|                                                   |                       |                                                       | Common Stock (1,451,380 shares)            |                   |        |         |      |   |         |        |  |   |         | 502     | 
|                                                  
|Financial Pacific Company
    (Financial Services) |                       | Subordinated Debt (17.4%, Due 2/12  8/12)            |                                            |                   | 70,175 |         |      |   | 69,904  |         |  |   | 69,904  |        
|                                                   |                       |                                                       | Preferred Stock (10,964 shares)            |                   |        |         |      |   |         | 10,276  |  |   |         | 13,116  | 
|                                                   |                       |                                                       | Common Stock (14,735 shares)               |                   |        |         |      |   |         | 14,819  |  |   |         | 44,180  | 
|                                                  
|ForeSite Towers, LLC                               |                       | Equity Interests                                      |                                            |                   |        |         |      |   | 7,620   |         |  |   | 9,750   |        
|                                                   | (Tower Leasing)       |                                                       |                                            |                   |        |         |      |   |         |         |  |   |         |         | 
|                                                  

|    |  |                                                                                                                                                                                                                                                                
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) |  | Interest rates represent the weighted average annual stated
    interest rate on loans and debt securities, which are presented
    by nature of indebtedness for a single issuer. The maturity
    dates represent the earliest and the latest maturity dates.
|(2) |  | Common stock, preferred stock, warrants, options, and equity
    interests are generally non-income producing and restricted.                                                                                                                                  
|(3) |  | Public company.                                                                                                                                                                                                                                                
|(4) |  | Non-U.S. company or principal place of business outside the
    U.S.                                                                                                                                                                                           
|(5) |  | Non-registered investment company.                                                                                                                                                                                                                             
|(6) |  | Loan or debt security is on non-accrual status and therefore is
    considered non-income producing.                                                                                                                                                           
|(7) |  | Avborne, Inc. and Avborne Heavy Maintenance, Inc. are affiliated
    companies.                                                                                                                                                                                





15



---



##### 



|                                                      |                       |                                               |                                                    |                   |        |        |      |   |        |        |  |   |        |        | 
|----------------------------------------------------- | --------------------- | --------------------------------------------- | -------------------------------------------------- | ----------------- | ------ | ------ | ---- | - | ------ | ------ |  | - | ------ | ------ | 
|                                                      |                       |                                               |                                                    | December 31, 2005 |       
|Private Finance                                       |                       |                                               |                                                    |                   |       
|Portfolio Company                                     |                       |                                               |                                                    |                  
|(in thousands, except number of shares)               |                       | Investment(1)(2)                              |                                                    | Principal         |        |        | Cost |   |        | Value  | 
|                                                      |                       |                                               |                                                    |                   |        |        |      |   |        |        | 
|Global Communications, LLC                            |                       | Senior Loan (10.7%, Due 9/02  11/07)
    (6) |                                                    | $                 | 15,957 |        |      | $ | 15,957 |        |  | $ | 15,957 |       
|                                                      | (Business Services)   |                                               | Subordinated Debt (17.0%, Due
    12/03  9/05)(6) |                   |        | 11,201 |      |   |        | 11,198 |  |   |        | 11,198 | 
|                                                      |                       | Preferred Equity Interest                     |                                                    |                   |        |        |      |   | 14,067 |        |  |   | 4,303  |       
|                                                      |                       | Options                                       |                                                    |                   |        |        |      |   | 1,639  |        |  |   |       |       
|                                                     
|Gordian Group, Inc.                                   |                       | Senior Loan (10.0%, Due 6/06  12/08)
    (6) |                                                    |                   | 11,392 |        |      |   | 11,421 |        |  |   | 4,161  |       
|                                                      | (Business Services)   |                                               | Common Stock (1,000 shares)                        |                   |        |        |      |   |        | 6,542  |  |   |        |       | 
|                                                     
|Healthy Pet Corp.                                     |                       | Senior Loan (10.1%, Due 8/10)                 |                                                    |                   | 4,086  |        |      |   | 4,086  |        |  |   | 4,086  |       
|                                                      | (Consumer Services)   |                                               | Subordinated Debt (15.0%, Due 8/10)                |                   |        | 38,716 |      |   |        | 38,535 |  |   |        | 38,535 | 
|                                                      |                       |                                               | Common Stock (25,766 shares)                       |                   |        |        |      |   |        | 25,766 |  |   |        | 25,766 | 
|                                                     
|HMT, Inc.                                             |                       | Preferred Stock (554,052 shares)              |                                                    |                   |        |        |      |   | 2,637  |        |  |   | 2,637  |       
|                                                      | (Energy Services)     |                                               | Common Stock (300,000 shares)                      |                   |        |        |      |   |        | 3,000  |  |   |        | 5,343  | 
|                                                      |                       | Warrants                                      |                                                    |                   |        |        |      |   | 1,155  |        |  |   | 2,057  |       
|                                                     
|Impact Innovations Group, LLC
    (Business Services) |                       | Equity Interests in Affiliate                 |                                                    |                   |        |        |      |   |       |        |  |   | 742    |       
|                                                     
|Insight Pharmaceuticals Corporation                   |                       | Subordinated Debt (16.1%, Due 9/12)           |                                                    |                   | 58,534 |        |      |   | 58,298 |        |  |   | 58,298 |       
|                                                      | (Consumer Products)   |                                               | Preferred Stock (25,000 shares)                    |                   |        |        |      |   |        | 25,000 |  |   |        | 26,791 | 
|                                                      |                       | Common Stock (6,200 shares)                   |                                                    |                   |        |        |      |   | 6,325  |        |  |   | 236    |       
|                                                     
|Jakel, Inc.                                           |                       | Subordinated Debt (15.5%, Due
    3/08)(6)    |                                                    |                   | 13,742 |        |      |   | 13,742 |        |  |   |       |       
|                                                      | (Industrial Products) |                                               | Preferred Stock (6,460 shares)                     |                   |        |        |      |   |        | 6,460  |  |   |        |       | 
|                                                      |                       |                                               | Common Stock (158,061 shares)                      |                   |        |        |      |   |        | 9,347  |  |   |        |       | 
|                                                     
|Legacy Partners Group, LLC                            |                       | Senior Loan (14.0%, Due
    5/09)(6)          |                                                    |                   | 7,646  |        |      |   | 7,646  |        |  |   | 5,029  |       
|                                                      | (Financial Services)  |                                               | Subordinated Debt (18.0%, Due
    5/09)(6)         |                   |        | 2,952  |      |   |        | 2,952  |  |   |        |       | 
|                                                      |                       | Equity Interests                              |                                                    |                   |        |        |      |   | 4,229  |        |  |   |       |       
|                                                     
|Litterer
    Beteiligungs-GmbH(4)                     |                       | Subordinated Debt (8.0%, Due 3/07)            |                                                    |                   | 621    |        |      |   | 621    |        |  |   | 621    |       
|                                                      | (Business Services)   |                                               | Equity Interest                                    |                   |        |        |      |   |        | 1,810  |  |   |        | 2,226  | 
|                                                     
|Mercury Air Centers, Inc.                             |                       | Senior Loan (10.0%, Due 4/09)                 |                                                    |                   | 31,720 |        |      |   | 31,720 |        |  |   | 31,720 |       
|                                                      | (Business Services)   |                                               | Subordinated Debt (16.0%, Due 4/09)                |                   |        | 46,703 |      |   |        | 46,519 |  |   |        | 46,519 | 
|                                                      |                       |                                               | Common Stock (57,970 shares)                       |                   |        |        |      |   |        | 35,053 |  |   |        | 88,898 | 
|                                                      |                       |                                               | Standby Letters of Credit ($1,397)                 |                   |        |        |      |   |        |        |  |   |        |        | 
|                                                     
|MVL Group, Inc.                                       |                       | Senior Loan (12.1%, Due 7/09)                 |                                                    |                   | 27,519 |        |      |   | 27,218 |        |  |   | 27,218 |       
|                                                      | (Business Services)   |                                               | Subordinated Debt (14.4%, Due 7/09)                |                   |        | 32,905 |      |   |        | 32,417 |  |   |        | 32,417 | 
|                                                      |                       | Common Stock (648,661 shares)                 |                                                    |                   |        |        |      |   | 643    |        |  |   | 3,211  |       
|                                                     
|Pennsylvania Avenue Investors, L.P.
    (5)           |                       | Equity Interests                              |                                                    |                   |        |        |      |   | 2,576  |        |  |   | 1,864  |       
|                                                      | (Private Equity Fund) |                                               |                                                    |                   |        |        |      |   |        |        |  |   |        |        | 
|                                                     
|Powell Plant Farms, Inc.                              |                       | Senior Loan (15.0%, Due 12/05 - 12/06)        |                                                    |                   | 32,640 |        |      |   | 23,792 |        |  |   | 23,792 |       
|                                                      | (Consumer Products)   |                                               | Subordinated Debt (20.0%, Due
    6/03)(6)         |                   |        | 19,291 |      |   |        | 19,224 |  |   |        | 7,364  | 
|                                                      |                       | Preferred Stock (1,483 shares)                |                                                    |                   |        |        |      |   |       |        |  |   |       |       
|                                                      |                       | Warrants                                      |                                                    |                   |        |        |      |   |       |        |  |   |       |       
|                                                     

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





16



---



##### 



|                                        |                        |                                            |                                      |                   |        |        |           |   |        |        |           |   |        |        | 
|--------------------------------------- | ---------------------- | ------------------------------------------ | ------------------------------------ | ----------------- | ------ | ------ | --------- | - | ------ | ------ | --------- | - | ------ | ------ | 
|                                        |                        |                                            |                                      | December 31, 2005 |       
|Private Finance                         |                        |                                            |                                      |                   |       
|Portfolio Company                       |                        |                                            |                                      |                  
|(in thousands, except number of shares) |                        | Investment(1)(2)                           |                                      | Principal         |        |        | Cost      |   |        | Value  |          
|                                        |                        |                                            |                                      |                   |        |        |           |   |        |        |          
|Redox Brands, Inc.                      |                        | Preferred Stock (2,726,444 shares)         |                                      |                   |        |        |           | $ | 7,903  |        |           | $ | 12,097 |       
|                                        | (Consumer Products)    |                                            | Warrants                             |                   |        |        |           |   |        | 584    |           |   |        | 500    | 
|                                       
|Service Champ, Inc.                     |                        | Subordinated Debt (15.5%, Due 4/12)        |                                      | $                 | 27,041 |        |           |   | 26,906 |        |           |   | 26,906 |       
|                                        | (Business Services)    |                                            | Common Stock (63,888 shares)         |                   |        |        |           |   |        | 13,662 |           |   |        | 13,319 | 
|                                       
|Staffing Partners Holding               |                        | Subordinated Debt (13.5%,
    Due 1/07)(6) |                                      |                   | 6,343  |        |           |   | 6,343  |        |           |   | 6,343  |       
|                                        | Company, Inc.          |                                            | Preferred Stock (439,600 shares)     |                   |        |        |           |   |        | 4,968  |           |   |        | 1,812  | 
|                                        | (Business Services)    |                                            | Common Stock (69,773 shares)         |                   |        |        |           |   |        | 50     |           |   |        |       | 
|                                        |                        | Warrants                                   |                                      |                   |        |        |           |   | 10     |        |           |   |       |       
|                                       
|Startec Global Communications           |                        | Senior Loan (10.0%, Due 5/07  5/09)       |                                      |                   | 25,226 |        |           |   | 25,226 |        |           |   | 21,685 |       
|                                        | Corporation            |                                            | Common Stock (19,180,000 shares)     |                   |        |        |           |   |        | 37,255 |           |   |        |       | 
|                                        | (Telecommunications)   |                                            |                                      |                   |        |        |           |   |        |        |           |   |        |        | 
|                                       
|STS Operating, Inc.                     |                        | Subordinated Debt (15.3%, Due 3/12)        |                                      |                   | 6,593  |        |           |   | 6,593  |        |           |   | 6,593  |       
|                                        | (Industrial Products)  |                                            | Common Stock (3,000,000 shares)      |                   |        |        |           |   |        | 3,522  |           |   |        | 64,963 | 
|                                        |                        |                                            | Options                              |                   |        |        |           |   |        |       |           |   |        | 560    | 
|                                       
|Triview Investments,
    Inc.(8)        |                        | Senior Loan (8.6%, Due 12/06)              |                                      |                   | 7,449  |        |           |   | 7,449  |        |           |   | 7,449  |       
|                                        | (Broadcasting & Cable/ |                                            | Subordinated Debt (15.0%, Due 7/12)  |                   |        | 31,000 |           |   |        | 30,845 |           |   |        | 30,845 | 
|                                        | Consumer Products)     |                                            | Subordinated Debt (16.8%, Due 7/08  |                   |        |        |           |   |        |        |           |   |        |        | 
|                                        |                        |                                            | 7/12)(6)                             |                   |        | 19,600 |           |   |        | 19,520 |           |   |        | 19,520 | 
|                                        |                        |                                            | Common Stock (202 shares)            |                   |        |        |           |   |        | 93,889 |           |   |        | 29,171 | 
|                                        |                        | Guaranty ($800)                            |                                      |                   |        |        |           |   |        |        |           |   |        |       
|                                        |                        | Standby Letter of Credit ($200)            |                                      |                   |        |        |           |   |        |        |           |   |        |       
|                                       
|Total
    companies more than 25% owned |                        |                                            |                                      |                   |        | $      | 1,489,782 |   |        | $      | 1,887,651 |  
|                                       
|Companies 5% to 25% Owned               |                        |                                            |                                      |                  
|                                       
|Air Evac Lifeteam                       |                        | Subordinated Debt (13.8%, Due 7/10)        |                                      | $                 | 42,414 |        |           | $ | 42,267 |        |           | $ | 42,267 |       
|                                        | (Healthcare Services)  |                                            | Equity Interests                     |                   |        |        |           |   |        | 3,941  |           |   |        | 4,025  | 
|                                        |                        |                                            |                                      |                   |        |        |           |   |        |        |           |   |        |        | 
|                                       
|Aspen Pet Products, Inc.                |                        | Subordinated Debt (19.0%, Due 6/08)        |                                      |                   | 20,051 |        |           |   | 19,959 |        |           |   | 19,959 |       
|                                        | (Consumer Products)    |                                            | Preferred Stock (2,935 shares)       |                   |        |        |           |   |        | 2,154  |           |   |        | 1,638  | 
|                                        |                        | Common Stock (1,400 shares)                |                                      |                   |        |        |           |   | 140    |        |           |   | 17     |       
|                                        |                        | Warrants                                   |                                      |                   |        |        |           |   |       |        |           |   |       |       
|                                       
|Becker Underwood, Inc.                  |                        | Subordinated Debt (14.5%, Due 8/12)        |                                      |                   | 23,639 |        |           |   | 23,543 |        |           |   | 23,543 |       
|                                        | (Industrial Products)  |                                            | Common Stock (5,073 shares)          |                   |        |        |           |   |        | 5,813  |           |   |        | 2,200  | 
|                                       
|The Debt Exchange Inc.                  |                        | Preferred Stock (921,875 shares)           |                                      |                   |        |        |           |   | 1,250  |        |           |   | 3,219  |       
|                                        | (Business Services)    |                                            |                                      |                   |        |        |           |   |        |        |           |   |        |        | 
|                                       

|    |  |                                                                                                                                                                                                                                                                                                                                                                                                         
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) |  | Interest rates represent the weighted average annual stated
    interest rate on loans and debt securities, which are presented
    by nature of indebtedness for a single issuer. The maturity
    dates represent the earliest and the latest maturity dates.                                                                                                                                         
|(2) |  | Common stock, preferred stock, warrants, options, and equity
    interests are generally non-income producing and restricted.                                                                                                                                                                                                                                                                           
|(3) |  | Public company.                                                                                                                                                                                                                                                                                                                                                                                         
|(4) |  | Non-U.S. company or principal place of business outside the
    U.S.                                                                                                                                                                                                                                                                                                                                    
|(5) |  | Non-registered investment company.                                                                                                                                                                                                                                                                                                                                                                      
|(6) |  | Loan or debt security is on non-accrual status and therefore is
    considered non-income producing.                                                                                                                                                                                                                                                                                                    
|(8) |  | Triview Investments, Inc. (formerly GAC Investments, Inc.) holds
    investments in Longview Cable & Data, LLC (Broadcasting
    & Cable) with a cost of $66.5 million and value of
    $16.0 million and Triax Holdings, LLC (Consumer Products)
    with a cost of $85.2 million and a value of
    $71.0 million. The guaranty and standby letter of credit
    relate to Longview Cable & Data, LLC.





17



---



##### 



|                                           |                       |                                                           |                                            |                   |        |       |         |   |        |       |         |   |        |       | 
|------------------------------------------ | --------------------- | --------------------------------------------------------- | ------------------------------------------ | ----------------- | ------ | ----- | ------- | - | ------ | ----- | ------- | - | ------ | ----- | 
|                                           |                       |                                                           |                                            | December 31, 2005 |       
|Private Finance                            |                       |                                                           |                                            |                   |       
|Portfolio Company                          |                       |                                                           |                                            |                  
|(in thousands, except number of shares)    |                       | Investment(1)(2)                                          |                                            | Principal         |        |       | Cost    |   |        | Value |        
|                                           |                       |                                                           |                                            |                   |        |       |         |   |        |       |        
|MedBridge Healthcare, LLC                  |                       | Senior Loan (4.0%, Due 8/09)                              |                                            | $                 | 7,093  |       |         | $ | 7,093  |       |         | $ | 7,093  |      
|                                           | (Healthcare Services) |                                                           | Subordinated Debt (10.0%, Due
    8/14)(6) |                   |        | 4,809 |         |   |        | 4,809 |         |   |        | 534   | 
|                                           |                       | Convertible Subordinated Debt (2.0%,
    Due
    8/14)(6) |                                            |                   | 2,970  |       |         |   | 984    |       |         |   |       |      
|                                           |                       | Equity Interests                                          |                                            |                   |        |       |         |   | 800    |       |         |   |       |      
|                                          
|Nexcel Synthetics, LLC                     |                       | Subordinated Debt (14.5%, Due 6/09)                       |                                            |                   | 10,617 |       |         |   | 10,588 |       |         |   | 10,588 |      
|                                           | (Consumer Products)   |                                                           | Equity Interests                           |                   |        |       |         |   |        | 1,708 |         |   |        | 1,367 | 
|                                          
|Pres Air Trol LLC                          |                       | Unitranche Debt (12.0%, Due 4/10)                         |                                            |                   | 6,138  |       |         |   | 5,820  |       |         |   | 5,820  |      
|                                           | (Industrial Products) |                                                           | Equity Interests                           |                   |        |       |         |   |        | 1,356 |         |   |        | 318   | 
|                                          
|Progressive International                  |                       | Subordinated Debt (16.0%, Due 12/09)                      |                                            |                   | 7,401  |       |         |   | 7,376  |       |         |   | 7,376  |      
|                                           | Corporation           |                                                           | Preferred Stock (500 shares)               |                   |        |       |         |   |        | 500   |         |   |        | 884   | 
|                                           | (Consumer Products)   |                                                           | Common Stock (197 shares)                  |                   |        |       |         |   |        | 13    |         |   |        | 13    | 
|                                           |                       | Warrants                                                  |                                            |                   |        |       |         |   |       |       |         |   |       |      
|                                          
|Soteria Imaging Services, LLC              |                       | Subordinated Debt (11.8%, Due 11/10)                      |                                            |                   | 14,500 |       |         |   | 13,447 |       |         |   | 13,447 |      
|                                           | (Healthcare Services) |                                                           | Equity Interests                           |                   |        |       |         |   |        | 2,153 |         |   |        | 2,308 | 
|                                          
|Universal Environmental Services, LLC      |                       | Unitranche Debt (15.5%, Due 2/09)                         |                                            |                   | 10,900 |       |         |   | 10,862 |       |         |   | 10,862 |      
|                                           | (Business Services)   |                                                           | Equity Interests                           |                   |        |       |         |   |        | 1,797 |         |   |        | 1,328 | 
|                                          
|Total
    companies 5% to 25% owned        |                       |                                                           |                                            |                   |        | $     | 168,373 |   |        | $     | 158,806 |  
|                                          
|Companies Less Than 5% Owned               |                       |                                                           |                                            |                  
|                                          
|Advanced Circuits, Inc.                    |                       | Senior Loans (10.1%, Due 9/11  3/12)                     |                                            | $                 | 18,732 |       |         | $ | 18,642 |       |         | $ | 18,642 |      
|                                           | (Industrial Products) |                                                           | Common Stock (40,000 shares)               |                   |        |       |         |   |        | 1,000 |         |   |        | 1,000 | 
|                                          
|Anthony, Inc.
    (Industrial Products)    |                       | Subordinated Debt (12.9%, Due 9/11  9/12)                |                                            |                   | 14,670 |       |         |   | 14,610 |       |         |   | 14,610 |      
|                                          
|Benchmark Medical, Inc.                    |                       | Warrants                                                  |                                            |                   |        |       |         |   | 18     |       |         |   | 190    |      
|                                           | (Healthcare Services) |                                                           |                                            |                   |        |       |         |   |        |       |         |   |        |       | 
|                                          
|BI Incorporated                            |                       | Subordinated Debt (14.0%, Due 2/12)                       |                                            |                   | 16,203 |       |         |   | 16,133 |       |         |   | 16,133 |      
|                                           | (Business Services)   |                                                           |                                            |                   |        |       |         |   |        |       |         |   |        |       | 
|                                          
|Border Foods, Inc.
    (Consumer Products) |                       | Subordinated Debt (13.0%, Due
    12/10)(6)               |                                            |                   | 13,428 |       |         |   | 12,721 |       |         |   |       |      
|                                           |                       | Preferred Stock (140,214 shares)                          |                                            |                   |        |       |         |   | 2,893  |       |         |   |       |      
|                                           |                       | Common Stock (1,810 shares)                               |                                            |                   |        |       |         |   | 45     |       |         |   |       |      
|                                           |                       | Warrants                                                  |                                            |                   |        |       |         |   | 910    |       |         |   |       |      
|                                          

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





18



---



##### 



|                                                     |                               |                                      |                                  |                   |        |       |      |   |        |        |  |   |        |        | 
|---------------------------------------------------- | ----------------------------- | ------------------------------------ | -------------------------------- | ----------------- | ------ | ----- | ---- | - | ------ | ------ |  | - | ------ | ------ | 
|                                                     |                               |                                      |                                  | December 31, 2005 |       
|Private Finance                                      |                               |                                      |                                  |                   |       
|Portfolio Company                                    |                               |                                      |                                  |                  
|(in thousands, except number of shares)              |                               | Investment(1)(2)                     |                                  | Principal         |        |       | Cost |   |        | Value  | 
|                                                     |                               |                                      |                                  |                   |        |       |      |   |        |        | 
|C&K Market, Inc.                                     |                               | Subordinated Debt (13.0%, Due 12/08) |                                  | $                 | 14,694 |       |      | $ | 14,638 |        |  | $ | 14,638 |       
|                                                     | (Retail)                      |                                      |                                  |                   |        |       |      |   |        |        |  |   |        |        | 
|                                                    
|Callidus Debt Partners                               |                               | Class C Notes (12.9%, Due 12/13)     |                                  |                   | 18,800 |       |      |   | 18,973 |        |  |   | 18,973 |       
|                                                     | CDO Fund I,
    Ltd.(4)(9)    |                                      | Class D Notes (17.0%, Due 12/13) |                   |        | 9,400 |      |   |        | 9,487  |  |   |        | 9,487  | 
|                                                     | (Senior Debt Fund)            |                                      |                                  |                   |        |       |      |   |        |        |  |   |        |        | 
|                                                    
|Callidus Debt Partners                               |                               | Preferred Shares (23,600,000 shares) |                                  |                   |        |       |      |   | 24,233 |        |  |   | 24,233 |       
|                                                     | CLO Fund III, Ltd.
    (4)(9) |                                      |                                  |                   |        |       |      |   |        |        |  |   |        |        | 
|                                                     | (Senior Debt Fund)            |                                      |                                  |                   |        |       |      |   |        |        |  |   |        |        | 
|                                                    
|Callidus MAPS CLO Fund I
    LLC(9)                  |                               | Class E Notes (9.7%, Due 12/17)      |                                  |                   | 17,000 |       |      |   | 17,000 |        |  |   | 17,000 |       
|                                                     | (Senior Debt Fund)            |                                      | Income Notes                     |                   |        |       |      |   |        | 48,108 |  |   |        | 48,108 | 
|                                                    
|Camden Partners Strategic Fund II,
    L.P.(5)       |                               | Limited Partnership Interest         |                                  |                   |        |       |      |   | 2,142  |        |  |   | 2,726  |       
|                                                     | (Private Equity Fund)         |                                      |                                  |                   |        |       |      |   |        |        |  |   |        |        | 
|                                                    
|Catterton Partners V,
    L.P.(5)                    |                               | Limited Partnership Interest         |                                  |                   |        |       |      |   | 2,650  |        |  |   | 2,691  |       
|                                                     | (Private Equity Fund)         |                                      |                                  |                   |        |       |      |   |        |        |  |   |        |        | 
|                                                    
|CBS Personnel Holdings, Inc.
    (Business Services) |                               | Subordinated Debt (14.5%, Due 12/09) |                                  |                   | 20,617 |       |      |   | 20,541 |        |  |   | 20,541 |       
|                                                    
|Community Education
    Centers, Inc.                |                               | Subordinated Debt (16.0%, Due 12/10) |                                  |                   | 32,852 |       |      |   | 32,738 |        |  |   | 32,738 |       
|                                                     | (Education Services)          |                                      |                                  |                   |        |       |      |   |        |        |  |   |        |        | 
|                                                    
|Component Hardware Group, Inc.                       |                               | Preferred Stock (18,000 shares)      |                                  |                   |        |       |      |   | 2,605  |        |  |   | 2,783  |       
|                                                     | (Industrial Products)         |                                      | Common Stock (2,000 shares)      |                   |        |       |      |   |        | 200    |  |   |        | 700    | 
|                                                    
|Cooper Natural Resources, Inc.                       |                               | Subordinated Debt (0%, Due 11/07)    |                                  |                   | 840    |       |      |   | 840    |        |  |   | 840    |       
|                                                     | (Industrial Products)         |                                      | Preferred Stock (6,316 shares)   |                   |        |       |      |   |        | 1,424  |  |   |        | 20     | 
|                                                     |                               | Warrants                             |                                  |                   |        |       |      |   | 830    |        |  |   |       |       
|                                                    
|Coverall North America, Inc.                         |                               | Subordinated Debt (14.6%, Due 2/11)  |                                  |                   | 27,309 |       |      |   | 27,261 |        |  |   | 27,261 |       
|                                                     | (Business Services)           |                                      | Preferred Stock (6,500 shares)   |                   |        |       |      |   |        | 6,500  |  |   |        | 6,866  | 
|                                                     |                               | Warrants                             |                                  |                   |        |       |      |   | 2,950  |        |  |   | 3,100  |       
|                                                    

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





19



---



##### 



|                                              |                        |                                            |                                            |                   |        |        |      |   |        |        |  |   |        |        | 
|--------------------------------------------- | ---------------------- | ------------------------------------------ | ------------------------------------------ | ----------------- | ------ | ------ | ---- | - | ------ | ------ |  | - | ------ | ------ | 
|                                              |                        |                                            |                                            | December 31, 2005 |       
|Private Finance                               |                        |                                            |                                            |                   |       
|Portfolio Company                             |                        |                                            |                                            |                  
|(in thousands, except number of shares)       |                        | Investment(1)(2)                           |                                            | Principal         |        |        | Cost |   |        | Value  | 
|                                              |                        |                                            |                                            |                   |        |        |      |   |        |        | 
|Drilltec Patents & Technologies Company, Inc. |                        | Subordinated Debt (17.0%, Due
    8/06)(6) |                                            | $                 | 1,500  |        |      | $ | 1,500  |        |  | $ | 1,500  |       
|                                              | (Energy Services)      |                                            | Subordinated Debt (10.0%, Due
    8/06)(6) |                   |        | 10,994 |      |   |        | 10,918 |  |   |        | 9,792  | 
|                                             
|eCentury Capital Partners,
    L.P.(5)        |                        | Limited Partnership Interest               |                                            |                   |        |        |      |   | 5,649  |        |  |   | 83     |       
|                                              | (Private Equity Fund)  |                                            |                                            |                   |        |        |      |   |        |        |  |   |        |        | 
|                                             
|Elexis Beta
    GmbH(4)                       |                        | Options                                    |                                            |                   |        |        |      |   | 426    |        |  |   | 50     |       
|                                              | (Industrial Products)  |                                            |                                            |                   |        |        |      |   |        |        |  |   |        |        | 
|                                             
|Event Rentals, Inc.                           |                        | Senior Loans (9.9%, Due 11/11)             |                                            |                   | 18,341 |        |      |   | 18,244 |        |  |   | 18,244 |       
|                                              | (Consumer Services)    |                                            |                                            |                   |        |        |      |   |        |        |  |   |        |        | 
|                                             
|Frozen Specialties, Inc.                      |                        | Warrants                                   |                                            |                   |        |        |      |   | 435    |        |  |   | 470    |       
|                                              | (Consumer Products)    |                                            |                                            |                   |        |        |      |   |        |        |  |   |        |        | 
|                                             
|Garden Ridge Corporation
    (Retail)         |                        | Subordinated Debt (7.0%, Due
    5/12)(6)  |                                            |                   | 22,500 |        |      |   | 22,500 |        |  |   | 22,500 |       
|                                             
|Geotrace Technologies, Inc.                   |                        | Subordinated Debt (10.0%, Due 6/09)        |                                            |                   | 25,618 |        |      |   | 23,875 |        |  |   | 23,875 |       
|(Energy Services)                             |                        | Warrants                                   |                                            |                   |        |        |      |   | 2,350  |        |  |   | 2,500  |       
|                                             
|Ginsey Industries, Inc.                       |                        | Subordinated Debt (12.5%, Due 3/07)        |                                            |                   | 3,680  |        |      |   | 3,680  |        |  |   | 3,680  |       
|                                              | (Consumer Products)    |                                            |                                            |                   |        |        |      |   |        |        |  |   |        |        | 
|                                             
|Grant Broadcasting Systems II                 |                        | Subordinated Debt (5.0%, Due 6/09)         |                                            |                   | 2,756  |        |      |   | 2,756  |        |  |   | 2,756  |       
|                                              | (Broadcasting & Cable) |                                            |                                            |                   |        |        |      |   |        |        |  |   |        |        | 
|                                             
|Grotech Partners, VI,
    L.P.(5)             |                        | Limited Partnership Interest               |                                            |                   |        |        |      |   | 6,914  |        |  |   | 4,161  |       
|                                              | (Private Equity Fund)  |                                            |                                            |                   |        |        |      |   |        |        |  |   |        |        | 
|                                             
|Havco Wood Products LLC                       |                        | Unitranche Debt (10.4%, Due 8/11)          |                                            |                   | 33,000 |        |      |   | 31,794 |        |  |   | 31,794 |       
|                                              | (Industrial Products)  |                                            | Equity Interests                           |                   |        |        |      |   |        | 1,048  |  |   |        | 1,048  | 
|                                             
|Haven Eldercare of New England,
    LLC(10)   |                        | Subordinated Debt (12.0%, Due
    8/09)(6) |                                            |                   | 4,320  |        |      |   | 4,320  |        |  |   | 4,320  |       
|                                              | (Healthcare Services)  |                                            |                                            |                   |        |        |      |   |        |        |  |   |        |        | 
|                                             
|Haven Healthcare Management,
    LLC(10)      |                        | Subordinated Debt (18.0% Due
    4/07)(6)  |                                            |                   | 1,319  |        |      |   | 1,319  |        |  |   | 485    |       
|                                              | (Healthcare Services)  |                                            |                                            |                   |        |        |      |   |        |        |  |   |        |        | 
|                                             
|HealthASPex Services Inc.                     |                        | Senior Loans (4.0%, Due 7/08)              |                                            |                   | 500    |        |      |   | 500    |        |  |   | 500    |       
|                                              | (Business Services)    |                                            |                                            |                   |        |        |      |   |        |        |  |   |        |        | 
|                                             
|The Hillman Companies,
    Inc.(3)            |                        | Subordinated Debt (13.5%, Due 9/11)        |                                            |                   | 44,000 |        |      |   | 43,815 |        |  |   | 43,815 |       
|                                              | (Consumer Products)    |                                            |                                            |                   |        |        |      |   |        |        |  |   |        |        | 
|                                             
|Homax Holdings, Inc.                          |                        | Subordinated Debt (12.0%, Due 8/11)        |                                            |                   | 14,000 |        |      |   | 13,039 |        |  |   | 13,039 |       
|                                              | (Consumer Products)    |                                            | Preferred Stock (89 shares)                |                   |        |        |      |   |        | 89     |  |   |        | 92     | 
|                                              |                        |                                            | Common Stock (28 shares)                   |                   |        |        |      |   |        | 6      |  |   |        | 6      | 
|                                              |                        |                                            | Warrants                                   |                   |        |        |      |   |        | 1,106  |  |   |        | 1,492  | 
|                                             
|Icon International, Inc.                      |                        | Common Stock (25,707 shares)               |                                            |                   |        |        |      |   | 76     |        |  |   | 16     |       
|                                              | (Business Services)    |                                            |                                            |                   |        |        |      |   |        |        |  |   |        |        | 
|                                             
|International Fiber Corporation               |                        | Subordinated Debt (14.0%, Due 6/12)        |                                            |                   | 21,546 |        |      |   | 21,460 |        |  |   | 21,460 |       
|                                              | (Industrial Products)  |                                            | Preferred Stock (25,000 shares)            |                   |        |        |      |   |        | 2,500  |  |   |        | 1,900  | 
|                                             
|Line-X, Inc.                                  |                        | Senior Loan (8.1%, Due 8/11)               |                                            |                   | 4,134  |        |      |   | 4,111  |        |  |   | 4,111  |       
|                                              | (Consumer Products)    |                                            | Unitranche Debt (10.0% Due 8/11)           |                   |        | 51,475 |      |   |        | 51,229 |  |   |        | 51,229 | 
|                                              |                        |                                            | Standby Letter of Credit ($1,500)          |                   |        |        |      |   |        |        |  |   |        |        | 
|                                             

| |      |  |  |                                                                                                                                                                                                                                                                
| | ---- |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (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.                                                                                                                                  
| | (3)  |  |  | Public company.                                                                                                                                                                                                                                                
| | (4)  |  |  | Non-U.S. company or principal place of business outside the
    U.S.                                                                                                                                                                                           
| | (5)  |  |  | Non-registered investment company.                                                                                                                                                                                                                             
| | (6)  |  |  | Loan or debt security is on non-accrual status and therefore is
    considered non-income producing.                                                                                                                                                           
| | (10) |  |  | Haven Eldercare of New England, LLC and Haven Healthcare
    Management, LLC are affiliated companies.                                                                                                                                                         





20



---



##### 



|                                               |                       |                                            |                                                 |                   |        |        |      |   |        |        |  |   |        |        | 
|---------------------------------------------- | --------------------- | ------------------------------------------ | ----------------------------------------------- | ----------------- | ------ | ------ | ---- | - | ------ | ------ |  | - | ------ | ------ | 
|                                               |                       |                                            |                                                 | December 31, 2005 |       
|Private Finance                                |                       |                                            |                                                 |                   |       
|Portfolio Company                              |                       |                                            |                                                 |                  
|(in thousands, except number of shares)        |                       | Investment(1)(2)                           |                                                 | Principal         |        |        | Cost |   |        | Value  | 
|                                               |                       |                                            |                                                 |                   |        |        |      |   |        |        | 
|MedAssets, Inc.                                |                       | Preferred Stock (227,865 shares)           |                                                 |                   |        |        |      | $ | 2,049  |        |  | $ | 2,893  |       
|                                               | (Business Services)   |                                            | Warrants                                        |                   |        |        |      |   |        | 136    |  |   |        | 180    | 
|                                              
|Meineke Car Care Centers, Inc.                 |                       | Senior Loan (8.0%, Due 6/11)               |                                                 | $                 | 28,000 |        |      |   | 27,865 |        |  |   | 27,865 |       
|                                               | (Consumer Services)   |                                            | Subordinated Debt (11.9%, Due 6/12  6/13)      |                   |        | 72,000 |      |   |        | 71,675 |  |   |        | 71,675 | 
|                                               |                       |                                            | Common Stock (10,696,308
    shares)(11)        |                   |        |        |      |   |        | 26,985 |  |   |        | 26,629 | 
|                                               |                       |                                            | Warrants                                        |                   |        |        |      |   |        |       |  |   |        |       | 
|                                              
|MHF Logistical Solutions, Inc.                 |                       | Unitranche Debt (10.0%, Due 5/11)          |                                                 |                   | 22,281 |        |      |   | 22,177 |        |  |   | 22,177 |       
|                                               | (Business Services)   |                                            | Preferred Stock (431 shares)                    |                   |        |        |      |   |        | 431    |  |   |        | 455    | 
|                                               |                       |                                            | Common Stock (1,438 shares)                     |                   |        |        |      |   |        | 144    |  |   |        | 211    | 
|                                              
|Mid-Atlantic Venture Fund IV, L.P.
    (5)     |                       | Limited Partnership Interest               |                                                 |                   |        |        |      |   | 6,600  |        |  |   | 3,339  |       
|                                               | (Private Equity Fund) |                                            |                                                 |                   |        |        |      |   |        |        |  |   |        |        | 
|                                              
|Mogas Energy, LLC                              |                       | Subordinated Debt (9.5%, Due 3/12  4/12)  |                                                 |                   | 16,855 |        |      |   | 15,472 |        |  |   | 15,472 |       
|                                               | (Energy Services)     |                                            | Warrants                                        |                   |        |        |      |   |        | 1,774  |  |   |        | 3,550  | 
|                                              
|Network Hardware Resale, Inc.                  |                       | Unitranche Debt (10.5%, Due 12/11)         |                                                 |                   | 38,500 |        |      |   | 38,743 |        |  |   | 38,743 |       
|                                               | (Business Services)   |                                            | Convertible Subordinated Debt (9.8%, Due 12/15) |                   |        | 12,000 |      |   |        | 12,076 |  |   |        | 12,076 | 
|                                              
|N.E.W. Customer Service Companies, Inc.        |                       | Subordinated Debt (11.0%, Due 7/12)        |                                                 |                   | 40,000 |        |      |   | 40,016 |        |  |   | 40,016 |       
|                                               | (Business Services)   |                                            |                                                 |                   |        |        |      |   |        |        |  |   |        |        | 
|                                              
|Nobel Learning Communities,                    |                       | Preferred Stock (1,214,356 shares)         |                                                 |                   |        |        |      |   | 2,764  |        |  |   | 2,343  |       
|                                               | Inc.(3)               |                                            | Warrants                                        |                   |        |        |      |   |        | 575    |  |   |        | 1,296  | 
|                                               | (Education)           |                                            |                                                 |                   |        |        |      |   |        |        |  |   |        |        | 
|                                              
|Norwesco, Inc.
    (Industrial Products)       |                       | Subordinated Debt (12.6%, Due 1/12  7/12) |                                                 |                   | 82,061 |        |      |   | 81,683 |        |  |   | 81,683 |       
|                                               |                       |                                            | Common Stock (559,603
    shares)(11)           |                   |        |        |      |   |        | 38,313 |  |   |        | 38,313 | 
|                                               |                       | Warrants                                   |                                                 |                   |        |        |      |   |       |        |  |   |       |       
|                                              
|Novak Biddle Venture Partners III,
    L.P.(5) |                       | Limited Partnership Interest               |                                                 |                   |        |        |      |   | 1,669  |        |  |   | 1,809  |       
|                                               | (Private Equity Fund) |                                            |                                                 |                   |        |        |      |   |        |        |  |   |        |        | 
|                                              
|Oahu Waste Services, Inc.                      |                       | Stock Appreciation Rights                  |                                                 |                   |        |        |      |   | 239    |        |  |   | 1,000  |       
|                                               | (Business Services)   |                                            |                                                 |                   |        |        |      |   |        |        |  |   |        |        | 
|                                              
|Opinion Research
    Corporation(3)            |                       | Warrants                                   |                                                 |                   |        |        |      |   | 996    |        |  |   | 45     |       
|                                               | (Business Services)   |                                            |                                                 |                   |        |        |      |   |        |        |  |   |        |        | 
|                                              
|Oriental Trading Company, Inc.                 |                       | Common Stock (13,820 shares)               |                                                 |                   |        |        |      |   |       |        |  |   | 5,200  |       
|                                               | (Consumer Products)   |                                            |                                                 |                   |        |        |      |   |        |        |  |   |        |        | 
|                                              
|Palm Coast Data, LLC                           |                       | Senior Loan (7.6%, Due 8/10)               |                                                 |                   | 16,100 |        |      |   | 16,024 |        |  |   | 16,024 |       
|                                               | (Business Services)   |                                            | Subordinated Debt (15.5%, Due 8/12  8/15)      |                   |        | 29,600 |      |   |        | 29,461 |  |   |        | 29,461 | 
|                                               |                       |                                            | Common Stock (21,743
    shares)(11)            |                   |        |        |      |   |        | 21,743 |  |   |        | 21,743 | 
|                                               |                       |                                            | Warrants                                        |                   |        |        |      |   |        |       |  |   |        |       | 
|                                              
|Performant Financial Corporation               |                       | Common Stock (478,816 shares)              |                                                 |                   |        |        |      |   | 734    |        |  |   | 2,500  |       
|                                               | (Business Services)   |                                            |                                                 |                   |        |        |      |   |        |        |  |   |        |        | 
|                                              
|Pro Mach, Inc.                                 |                       | Subordinated Debt (13.8%, Due 6/12)        |                                                 |                   | 19,275 |        |      |   | 19,193 |        |  |   | 19,193 |       
|                                               | (Industrial Products) |                                            | Equity Interests                                |                   |        |        |      |   |        | 1,500  |  |   |        | 1,200  | 
|                                              

| |      |  |  |                                                                                                                                                                                                                                                                
| | ---- |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1)  |  |  | Interest rates represent the weighted average annual stated
    interest rate on loans and debt securities, which are presented
    by nature of indebtedness for a single issuer. The maturity
    dates represent the earliest and the latest maturity dates.
| | (2)  |  |  | Common stock, preferred stock, warrants, options, and equity
    interests are generally non-income producing and restricted.                                                                                                                                  
| | (3)  |  |  | Public company.                                                                                                                                                                                                                                                
| | (4)  |  |  | Non-U.S. company or principal place of business outside the
    U.S.                                                                                                                                                                                           
| | (5)  |  |  | Non-registered investment company.                                                                                                                                                                                                                             
| | (6)  |  |  | Loan or debt security is on non-accrual status and therefore is
    considered non-income producing.                                                                                                                                                           
| | (11) |  |  | Common stock is non-voting. In addition to non-voting stock
    ownership, the Company has an option to acquire a majority of
    the voting securities of the portfolio company at fair market
    value.                                                     





21



---



##### 



|                                        |                        |                                              |                                    |                   |        |        |      |   |        |        |  |   |        |        | 
|--------------------------------------- | ---------------------- | -------------------------------------------- | ---------------------------------- | ----------------- | ------ | ------ | ---- | - | ------ | ------ |  | - | ------ | ------ | 
|                                        |                        |                                              |                                    | December 31, 2005 |       
|Private Finance                         |                        |                                              |                                    |                   |       
|Portfolio Company                       |                        |                                              |                                    |                  
|(in thousands, except number of shares) |                        | Investment(1)(2)                             |                                    | Principal         |        |        | Cost |   |        | Value  | 
|                                        |                        |                                              |                                    |                   |        |        |      |   |        |        | 
|Promo Works, LLC                        |                        | Senior Loan (8.5%, Due 12/11)                |                                    | $                 | 900    |        |      | $ | 851    |        |  | $ | 851    |       
|                                        | (Business Services)    |                                              | Unitranche Debt (10.3%, Due 12/11) |                   |        | 31,000 |      |   |        | 30,728 |  |   |        | 30,728 | 
|                                        |                        |                                              | Guaranty ($1,650)                  |                   |        |        |      |   |        |        |  |   |        |        | 
|                                       
|RadioVisa Corporation                   |                        | Unitranche Debt (15.5%, Due 12/08)           |                                    |                   | 27,093 |        |      |   | 26,993 |        |  |   | 26,993 |       
|                                        | (Broadcasting & Cable) |                                              |                                    |                   |        |        |      |   |        |        |  |   |        |        | 
|                                       
|Red Hawk Industries, LLC                |                        | Unitranche Debt (11.0%, Due 4/11)            |                                    |                   | 56,343 |        |      |   | 56,063 |        |  |   | 56,063 |       
|                                        | (Business Services)    |                                              |                                    |                   |        |        |      |   |        |        |  |   |        |        | 
|                                       
|S.B. Restaurant Company
    (Retail)    |                        | Subordinated Debt (14.6%, Due 11/08  12/09) |                                    |                   | 29,085 |        |      |   | 28,615 |        |  |   | 28,615 |       
|                                        |                        |                                              | Preferred Stock (54,125 shares)    |                   |        |        |      |   |        | 135    |  |   |        | 135    | 
|                                        |                        | Warrants                                     |                                    |                   |        |        |      |   | 619    |        |  |   | 700    |       
|                                       
|SBBUT, LLC                              |                        | Equity Interests                             |                                    |                   |        |        |      |   |       |        |  |   |       |       
|                                        | (Consumer Products)    |                                              |                                    |                   |        |        |      |   |        |        |  |   |        |        | 
|                                       
|Soff-Cut Holdings, Inc.                 |                        | Preferred Stock (300 shares)                 |                                    |                   |        |        |      |   | 300    |        |  |   | 300    |       
|                                        | (Industrial Products)  |                                              | Common Stock (2,000 shares)        |                   |        |        |      |   |        | 200    |  |   |        | 37     | 
|                                       
|SPP Mezzanine Fund,
    L.P.(5)         |                        | Limited Partnership Interest                 |                                    |                   |        |        |      |   | 3,007  |        |  |   | 2,969  |       
|                                        | (Private Equity Fund)  |                                              |                                    |                   |        |        |      |   |        |        |  |   |        |        | 
|                                       
|Tradesmen International, Inc.           |                        | Subordinated Debt (12.0%, Due 12/09)         |                                    |                   | 15,000 |        |      |   | 14,323 |        |  |   | 14,323 |       
|                                        | (Business Services)    |                                              | Warrants                           |                   |        |        |      |   |        | 710    |  |   |        | 1,700  | 
|                                       
|TransAmerican Auto Parts, LLC           |                        | Subordinated Debt (14.0%, Due 11/12)         |                                    |                   | 10,000 |        |      |   | 9,951  |        |  |   | 9,951  |       
|                                        | (Consumer Products)    |                                              | Equity Interests                   |                   |        |        |      |   |        | 889    |  |   |        | 889    | 
|                                       
|United Site Services, Inc.              |                        | Subordinated Debt (12.4%, Due 8/11)          |                                    |                   | 49,712 |        |      |   | 49,503 |        |  |   | 49,503 |       
|                                        | (Business Services)    |                                              | Common Stock (160,588 shares)      |                   |        |        |      |   |        | 1,000  |  |   |        | 1,200  | 
|                                       
|Universal Air Filter Company            |                        | Senior Loans (7.9%, Due 11/11)               |                                    |                   | 400    |        |      |   | 390    |        |  |   | 390    |       
|                                        | (Industrial Products)  |                                              | Unitranche Debt (11.0%, Due 11/11) |                   |        | 19,867 |      |   |        | 19,768 |  |   |        | 19,768 | 
|                                       
|Universal Tax Systems, Inc.             |                        | Subordinated Debt (14.5%, Due 7/11)          |                                    |                   | 19,068 |        |      |   | 18,995 |        |  |   | 18,995 |       
|                                        | (Business Services)    |                                              |                                    |                   |        |        |      |   |        |        |  |   |        |        | 
|                                       
|Updata Venture Partners II,
    L.P.(5) |                        | Limited Partnership Interest                 |                                    |                   |        |        |      |   | 4,977  |        |  |   | 4,686  |       
|                                        | (Private Equity Fund)  |                                              |                                    |                   |        |        |      |   |        |        |  |   |        |        | 
|                                       
|Venturehouse-Cibernet Investors, LLC    |                        | Equity Interest                              |                                    |                   |        |        |      |   | 42     |        |  |   | 42     |       
|                                        | (Business Services)    |                                              |                                    |                   |        |        |      |   |        |        |  |   |        |        | 
|                                       
|Venturehouse Group,
    LLC(5)          |                        | Equity Interest                              |                                    |                   |        |        |      |   | 598    |        |  |   | 397    |       
|                                        | (Private Equity Fund)  |                                              |                                    |                   |        |        |      |   |        |        |  |   |        |        | 
|                                       
|VICORP Restaurants,
    Inc.(3)         |                        | Warrants                                     |                                    |                   |        |        |      |   | 33     |        |  |   | 691    |       
|                                        | (Retail)               |                                              |                                    |                   |        |        |      |   |        |        |  |   |        |        | 
|                                       
|Walker Investment Fund II,
    LLLP(5)  |                        | Limited Partnership Interest                 |                                    |                   |        |        |      |   | 1,330  |        |  |   | 676    |       
|                                        | (Private Equity Fund)  |                                              |                                    |                   |        |        |      |   |        |        |  |   |        |        | 
|                                       

| |      |  |  |                                                                                                                                                                                                                                                                
| | ---- |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1)  |  |  | Interest rates represent the weighted average annual stated
    interest rate on loans and debt securities, which are presented
    by nature of indebtedness for a single issuer. The maturity
    dates represent the earliest and the latest maturity dates.
| | (2)  |  |  | Common stock, preferred stock, warrants, options, and equity
    interests are generally non-income producing and restricted.                                                                                                                                  
| | (3)  |  |  | Public company.                                                                                                                                                                                                                                                
| | (4)  |  |  | Non-U.S. company or principal place of business outside the
    U.S.                                                                                                                                                                                           
| | (5)  |  |  | Non-registered investment company.                                                                                                                                                                                                                             
| | (6)  |  |  | Loan or debt security is on non-accrual status and therefore is
    considered non-income producing.                                                                                                                                                           
| | (11) |  |  | Common stock is non-voting. In addition to non-voting stock
    ownership, the Company has an option to acquire a majority of
    the voting securities of the portfolio company at fair market
    value.                                                     





22



---



##### 



|                                                    |                     |                                             |                           |                   |        |   |           |   |        |       |           |   |        |       | 
|--------------------------------------------------- | ------------------- | ------------------------------------------- | ------------------------- | ----------------- | ------ | - | --------- | - | ------ | ----- | --------- | - | ------ | ----- | 
|                                                    |                     |                                             |                           | December 31, 2005 |       
|Private Finance                                     |                     |                                             |                           |                   |       
|Portfolio Company                                   |                     |                                             |                           |                  
|(in thousands, except number of shares)             |                     | Investment(1)(2)                            |                           | Principal         |        |   | Cost      |   |        | Value |          
|                                                    |                     |                                             |                           |                   |        |   |           |   |        |       |          
|Wear Me Apparel Corporation                         |                     | Subordinated Debt (15.0%, Due 12/10)        |                           | $                 | 40,000 |   |           | $ | 38,992 |       |           | $ | 38,992 |      
|                                                    | (Consumer Products) |                                             | Warrants                  |                   |        |   |           |   |        | 1,219 |           |   |        | 2,000 | 
|                                                   
|Wilshire Restaurant Group, Inc.
    (Retail)        |                     | Subordinated Debt (20.0%, Due
    6/07)(6)  |                           |                   | 22,471 |   |           |   | 21,930 |       |           |   | 21,930 |      
|                                                    |                     |                                             | Warrants                  |                   |        |   |           |   |        | 735   |           |   |        | 538   | 
|                                                   
|Wilton Industries, Inc.                             |                     | Subordinated Debt (19.3%, Due 6/08)         |                           |                   | 4,800  |   |           |   | 4,800  |       |           |   | 4,800  |      
|                                                    | (Consumer Products) |                                             |                           |                   |        |   |           |   |        |       |           |   |        |       | 
|                                                   
|Woodstream Corporation
    (Consumer Products)      |                     | Subordinated Debt (13.2%, Due 11/12  5/13) |                           |                   | 52,397 |   |           |   | 52,251 |       |           |   | 52,251 |      
|                                                    |                     |                                             | Common Stock (180 shares) |                   |        |   |           |   |        | 673   |           |   |        | 3,336 | 
|                                                    |                     |                                             | Warrants                  |                   |        |   |           |   |        |      |           |   |        | 2,365 | 
|                                                   
|Other companies                                     |                     | Other debt investments                      |                           |                   | 382    |   |           |   | 382    |       |           |   | 382    |      
|                                                    |                     | Other debt
    investments(6)               |                           |                   | 470    |   |           |   | 470    |       |           |   | 348    |      
|                                                    |                     | Other equity investments                    |                           |                   |        |   |           |   | 8      |       |           |   |       |      
|                                                    |                     | Guaranty ($135)                             |                           |                   |        |   |           |   |        |       |           |   |        |      
|                                                   
|Total
    companies less than 5% owned              |                     |                                             |                           |                   |        | $ | 1,448,268 |   |        | $     | 1,432,833 |  
|                                                   
|Total
    private finance (118 portfolio companies) |                     |                                             |                           |                   |        | $ | 3,106,423 |   |        | $     | 3,479,290 |  
|                                                   

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





23



---



##### 



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

|                                                                                      |                                         |                  |               |  |           |                   |        |      |       |   |           |         |       |   |           |         | 
|------------------------------------------------------------------------------------- | --------------------------------------- | ---------------- | ------------- |  | --------- | ----------------- | ------ | ---- | ----- | - | --------- | ------- | ----- | - | --------- | ------- | 
|                                                                                      |                                         |                  |               |  |           | December 31, 2005 |       
|                                                                                      |                                         | Interest         |               |  | Number of |                   |        |      |      
|                                                                                      |                                         | Rate Ranges      |               |  | Loans     |                   |        | Cost |       |   | Value     |        
|                                                                                      |                                         |                  |               |  |           |                   |        |      |       |   |           |        
|Commercial Mortgage Loans                                                             |                                         |                  |               |  |           |                   |        |      |       |   |           |         |       |   |           |        
|                                                                                      |                                         |                  | Up to 6.99%   |  |           |                   | 5      |      |       | $ | 23,121    |         |       | $ | 21,844    |        
|                                                                                      |                                         |                  | 7.00%8.99%   |  |           |                   | 24     |      |       |   | 48,156    |         |       |   | 48,156    |        
|                                                                                      |                                         |                  | 9.00%10.99%  |  |           |                   | 5      |      |       |   | 25,999    |         |       |   | 25,967    |        
|                                                                                      |                                         |                  | 11.00%12.99% |  |           |                   | 1      |      |       |   | 338       |         |       |   | 338       |        
|                                                                                      |                                         |                  | 13.00%14.99% |  |           |                   | 1      |      |       |   | 2,294     |         |       |   | 2,294     |        
|                                                                                      |                                         | 15.00% and above |               |  | 2         |                   |        |      | 3,970 |   |           |         | 3,970 |  
|                                                                                     
|                                                                                      | Total commercial mortgage
    loans(12) |                  |               |  |           |                   |        | 38   |       |   | $         | 103,878 |       |   | $         | 102,569 | 
|                                                                                     
|Real Estate Owned                                                                     |                                         |                  |               |  |           |                   |        |      |       | $ | 14,240    |         |       | $ | 13,932    |        
|                                                                                     
|Equity
    Interests(2) 
    Companies more than 25% owned
    (Guarantees  $7,054) |                                         |                  |               |  |           | $                 | 13,577 |      |       | $ | 10,564    |        
|                                                                                     
|                                                                                      | Total commercial real estate finance    |                  |               |  |           |                   |        |      |       |   | $         | 131,695 |       |   | $         | 127,065 | 
|                                                                                     
|Total portfolio                                                                       |                                         |                  |               |  |           |                   |        |      |       | $ | 3,238,118 |         |       | $ | 3,606,355 |        
|                                                                                     

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

|                                                     |                                                   |                           |  |       |      |  |   |         |         |  |   |         |         | 
|---------------------------------------------------- | ------------------------------------------------- | ------------------------- |  | ----- | ---- |  | - | ------- | ------- |  | - | ------- | ------- | 
|                                                     |                                                   | Yield                     |  |       | Cost |  |   | Value   |        
|                                                     |                                                   |                           |  |       |      |  |   |         |        
|Liquidity Portfolio                                  |                                                   |                           |  |       |      |  |   |         |         |  |   |        
|                                                     | U.S. Treasury bills (Due June 2006)               |                           |  | 4.25% |      |  | $ | 100,000 |         |  | $ | 100,305 |        
|                                                     | SEI Daily Income Tr Prime Obligation
    Fund(13) |                           |  | 4.11% |      |  |   | 100,000 |         |  |   | 100,000 |        
|                                                    
|                                                     |                                                   | Total liquidity portfolio |  |       |      |  |   | $       | 200,000 |  |   | $       | 200,305 | 
|                                                    
|Other Investments in Money Market
    Securities(13) |                                                   |                           |  |       |      |  |   |         |         |  |   |        
|                                                     | PNC Bank Corporate Money Market Deposit Account   |                           |  | 4.15% |      |  | $ | 21,967  |         |  | $ | 21,967  |        
|                                                    

|                                                                                                                                                                                                                                                                                                 |  |  |  |  |  |  |  |  |  |  |  | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  |  |  |  |  |  |  |  |  |  |  | 
|(1)       Interest
    rates represent the weighted average annual stated interest rate
    on loans and debt securities, which are presented by nature of
    indebtedness
    for            a
    single issuer. The maturity dates represent the earliest and the
    latest maturity dates.
|(2)       Common
    stock, preferred stock, warrants, options, and equity interests
    are generally non-income producing and restricted.                                                                                                                                                     
|(3)       Public
    company.                                                                                                                                                                                                                                                                   
|(4)       Non-U.S. company
    or principal place of business outside the U.S.                                                                                                                                                                                                                  
|(5)       Non-registered
    investment company.                                                                                                                                                                                                                                                
|(12)       Commercial
    mortgage loans totaling $20.8 million at value were on
    non-accrual status and therefore were considered non-income
    producing.                                                                                                                                 
|(13)       Included
    in investments in money market securities on the accompanying
    Consolidated Balance Sheet.                                                                                                                                                                           





24



---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(Information at and for the three and six months ended
June 30, 2006 and 2005 is unaudited)


Note 1. Organization








Note 2. Summary of Significant Accounting Policies


Basis of Presentation








25



---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




Note 2. Summary of Significant Accounting Policies,
continued








| |                                   
| | ----------------------------------
| | Valuation Of Portfolio Investments





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



26



---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




Note 2. Summary of Significant Accounting Policies,
continued










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







27



---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




Note 2. Summary of Significant Accounting Policies,
continued






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







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





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



28



---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




Note 2. Summary of Significant Accounting Policies,
continued




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

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




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





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





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

Share-Based Payment


|                                          |                                                            |                            |   |     |              |  |   |     |      | 
|----------------------------------------- | ---------------------------------------------------------- | -------------------------- | - | --- | ------------ |  | - | --- | ---- | 
|                                          |                                                            | For the Three              |   |     | For the Six  | 
|                                          |                                                            | Months Ended               |   |     | Months Ended | 
|                                          |                                                            | June 30,                   |   |     | June 30,     | 
|                                          |                                                            |                            |   |     |              | 
|                                          |                                                            | 2006                       |   |     | 2006         | 
|($ in millions, except per share amounts) |                                                            |                            |   |     |              | 
|Employee Stock Option Expense:            |                                                            |                            |   |     |              |  |   |    
|                                          | Previously awarded, unvested options as of January 1, 2006 |                            | $ | 3.3 |              |  | $ | 6.7 |     
|                                          | Options granted on or after January 1, 2006                |                            |   | 1.3 |              |  |   | 1.5 |     
|                                          |                                                            |                            |   |     |              | 
|                                          |                                                            | Total stock option expense |   | $   | 4.6          |  |   | $   | 8.2  | 
|                                          |                                                            |                            |   |     |              | 
|                                          |                                                            | Per basic share            |   | $   | 0.03         |  |   | $   | 0.06 | 
|                                          |                                                            | Per diluted share          |   | $   | 0.03         |  |   | $   | 0.06 | 



29



---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




Note 2. Summary of Significant Accounting Policies,
continued


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


|                                                                                                                                        |             |               |       |      |              |   |       |      | 
|--------------------------------------------------------------------------------------------------------------------------------------- | ----------- | ------------- | ----- | ---- | ------------ | - | ----- | ---- | 
|                                                                                                                                        |             | For the Three |       |      | For the Six  |  
|                                                                                                                                        |             | Months Ended  |       |      | Months Ended |  
|                                                                                                                                        |             | June 30,      |       |      | June 30,     |  
|                                                                                                                                        |             |               |       |      |              |  
|                                                                                                                                        |             | 2005          |       |      | 2005         |  
|($ in millions, except per share amounts)                                                                                               |             |               |       |      |              |  
|Net increase in net assets resulting from operations as reported                                                                        |             | $             | 311.9 |      |              | $ | 431.5 |     
|Less total stock-based compensation expense determined under
    fair value based method for all awards, net of related tax
    effects |             |               | (4.1  | )    |              |   | (7.0  | )   
|                                                                                                                                        |             |               |       |      |              |  
|Pro forma net increase in net assets resulting from operations
    available to common shareholders                                     |             | $             | 307.8 |      |              | $ | 424.5 |     
|                                                                                                                                        |             |               |       |      |              |  
|Basic earnings per common share:                                                                                                        |             |               |       |      |              |   |       |     
|                                                                                                                                        | As reported |               | $     | 2.33 |              |   | $     | 3.23 | 
|                                                                                                                                        | Pro forma   |               | $     | 2.30 |              |   | $     | 3.18 | 
|Diluted earnings per common share:                                                                                                      |             |               |       |      |              |   |       |     
|                                                                                                                                        | As reported |               | $     | 2.29 |              |   | $     | 3.17 | 
|                                                                                                                                        | Pro forma   |               | $     | 2.26 |              |   | $     | 3.12 | 



|                                       |  |               |      |   |              |   |      |      |  |   |      |   |  |   |      |  
|-------------------------------------- |  | ------------- | ---- | - | ------------ | - | ---- | ---- |  | - | ---- | - |  | - | ---- | -
|                                       |  | For the Three |      |   | For the Six  |  
|                                       |  | Months Ended  |      |   | Months Ended |  
|                                       |  | June 30,      |      |   | June 30,     |  
|                                       |  |               |      |   |              |  
|                                       |  | 2006          |      |   | 2005         |   |      | 2006 |  |   | 2005 |  
|                                       |  |               |      |   |              |   |      |      |  |   |      |  
|Risk-free interest rate                |  |               | 5.0  | % |              |   | 4.1  | %    |  |   | 4.8  | % |  |   | 4.1  | %
|Expected life (in years)               |  |               | 5.0  |   |              |   | 5.0  |      |  |   | 5.0  |   |  |   | 5.0  |  
|Expected volatility                    |  |               | 29.6 | % |              |   | 35.5 | %    |  |   | 29.6 | % |  |   | 35.5 | %
|Dividend yield                         |  |               | 9.0  | % |              |   | 9.0  | %    |  |   | 9.0  | % |  |   | 9.0  | %
|Weighted average fair value per option |  | $             | 3.65 |   |              | $ | 3.87 |      |  | $ | 3.54 |   |  | $ | 3.87 |  



30



---



##### 



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



31



---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




Note 2. Summary of Significant Accounting Policies,
continued




| |                                                                
| | ---------------------------------------------------------------
| | Use of Estimates in the Preparation of Financial
    Statements





Note 3. Portfolio




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



|                           |                        |                                        |         |           |           |  |         |           |           |  |      |      |      |       |         |           |           |  |           |           |           |  |  |      |      |  
|-------------------------- | ---------------------- | -------------------------------------- | ------- | --------- | --------- |  | ------- | --------- | --------- |  | ---- | ---- | ---- | ----- | ------- | --------- | --------- |  | --------- | --------- | --------- |  |  | ---- | ---- | -
|                           |                        | 2006                                   |         |           | 2005      | 
|                           |                        |                                        |         |           |           | 
|                           |                        | Cost                                   |         |           | Value     |  |         | Yield(1)  |           |  | Cost |      |      | Value |         |           | Yield(1)  | 
|($ in thousands)           |                        |                                        |         |           |           |  |         |           |           |  |      |      |      |       |         |           |           | 
|Loans and debt securities: |                        |                                        |         |           |           |  |         |           |           |  |      |      |      |       |         |           |           |  |           |           |           |  |  |     
|                           | Senior loans           |                                        | $       | 322,041   |           |  | $       | 275,874   |           |  |      | 9.5  | %    |       | $       | 284,680   |           |  | $         | 239,838   |           |  |  | 9.5  | %   
|                           | Unitranche
    debt(2) |                                        |         | 517,287   |           |  |         | 515,006   |           |  |      | 10.7 | %    |       |         | 294,201   |           |  |           | 294,201   |           |  |  | 11.4 | %   
|                           | Subordinated debt      |                                        |         | 1,769,369 |           |  |         | 1,700,324 |           |  |      | 13.9 | %    |       |         | 1,610,228 |           |  |           | 1,560,851 |           |  |  | 13.8 | %   
|                           |                        |                                        |         |           |           |  |         |           |           |  |      |      |      |       |         |           |           | 
|                           |                        | Total loans and debt
    securities(3) |         |           | 2,608,697 |  |         |           | 2,491,204 |  |      |      | 12.7 | %     |         |           | 2,189,109 |  |           |           | 2,094,890 |  |  |      | 13.0 | %
|Equity securities          |                        |                                        | 979,553 |           |           |  | 969,222 |           |           |  |      |      |      |       | 917,314 |           |           |  | 1,384,400 |           |           |  |  |     
|                           |                        |                                        |         |           |           |  |         |           |           |  |      |      |      |       |         |           |           | 
|                           |                        | Total                                  |         | $         | 3,588,250 |  |         | $         | 3,460,426 |  |      |      |      |       |         | $         | 3,106,423 |  |           | $         | 3,479,290 |  |  |      |      |  
|                           |                        |                                        |         |           |           |  |         |           |           |  |      |      |      |       |         |           |           | 




|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The weighted average yield on loans and debt securities is
    computed as the (a) annual stated interest plus the annual
    amortization of loan origination fees, original issue discount,
    and market discount on accruing loans and debt securities less
    the annual amortization of loan origination costs, divided by
    (b) total loans and debt securities at value. At June 30,
    2006, and December 31, 2005, the cost and value of
    subordinated debt include the Class A equity interests in
    BLX and the guaranteed dividend yield on these equity interests
    is included in interest income. The weighted average yield is
    computed as of the balance sheet date.
|   
|(2) | Unitranche debt is a single debt investment that is a blend of
    senior and subordinated debt terms.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   
|(3) | The total principal balance outstanding on loans and debt
    securities was $2,637.0 million and $2,216.3 million
    at June 30, 2006, and December 31, 2005, respectively. The
    difference between principal and cost is represented by
    unamortized loan origination fees and costs, original issue
    discounts, and market discounts totaling $28.3 million and
    $27.2 million at June 30, 2006, and December 31, 2005,
    respectively.                                                                                                                                                                                                                                             



32



---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




Note 3. Portfolio, continued












33



---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




Note 3. Portfolio, continued


Business Loan Express, LLC.




|                                                                      |                                             |               |     |     |              |   |     |      |  |   |      |      |  |   |     |      | 
|--------------------------------------------------------------------- | ------------------------------------------- | ------------- | --- | --- | ------------ | - | --- | ---- |  | - | ---- | ---- |  | - | --- | ---- | 
|                                                                      |                                             | For the Three |     |     | For the Six  |  
|                                                                      |                                             | Months Ended  |     |     | Months Ended |  
|                                                                      |                                             | June 30,      |     |     | June 30,     |  
|                                                                      |                                             |               |     |     |              |  
|                                                                      |                                             | 2006          |     |     | 2005         |   |     | 2006 |  |   | 2005 |     
|($ in millions)                                                       |                                             |               |     |     |              |   |     |      |  |   |      |     
|Interest income on subordinated debt and Class A equity
    interests |                                             | $             | 4.0 |     |              | $ | 3.5 |      |  | $ | 7.8  |      |  | $ | 6.9 |     
|Dividend income on Class B equity interests                           |                                             |               |    |     |              |   | 3.0 |      |  |   |     |      |  |   | 5.0 |     
|Fees and other income                                                 |                                             |               | 2.0 |     |              |   | 2.3 |      |  |   | 4.3  |      |  |   | 4.7 |     
|                                                                      |                                             |               |     |     |              |   |     |      |  |   |      |     
|                                                                      | Total interest and related portfolio income |               | $   | 6.0 |              |   | $   | 8.8  |  |   | $    | 12.1 |  |   | $   | 16.6 | 
|                                                                      |                                             |               |     |     |              |   |     |      |  |   |      |     









34



---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




Note 3. Portfolio, continued


built-in 10-year


built-in








35



---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




Note 3. Portfolio, continued


Advantage Sales and Marketing, Inc.




post-closing








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


36



---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




Note 3. Portfolio, continued




|                                          |       |      |      |       |       |   |      |       |  |   |       |       |  |   |      |       | 
|----------------------------------------- | ----- | ---- | ---- | ----- | ----- | - | ---- | ----- |  | - | ----- | ----- |  | - | ---- | ----- | 
|                                          |       | 2006 |      |       | 2005  |  
|                                          |       |      |      |       |       |  
|                                          |       | Cost |      |       | Value |   |      | Cost  |  |   | Value |      
|($ in millions)                           |       |      |      |       |       |   |      |       |  |   |       |      
|Callidus Debt Partners CDO Fund I, Ltd.   |       | $    | 28.4 |       |       | $ | 28.4 |       |  | $ | 28.5  |       |  | $ | 28.5 |      
|Callidus Debt Partners CLO Fund III, Ltd. |       |      | 23.8 |       |       |   | 23.8 |       |  |   | 24.2  |       |  |   | 24.2 |      
|Callidus Debt Partners CLO Fund IV, Ltd.  |       |      | 12.9 |       |       |   | 12.9 |       |  |   |      |       |  |   |     |      
|Callidus MAPS CLO Fund I LLC              |       |      | 67.6 |       |       |   | 67.6 |       |  |   | 65.1  |       |  |   | 65.1 |      
|                                          |       |      |      |       |       |   |      |       |  |   |       |      
|                                          | Total |      | $    | 132.7 |       |   | $    | 132.7 |  |   | $     | 117.8 |  |   | $    | 117.8 | 
|                                          |       |      |      |       |       |   |      |       |  |   |       |      









|                 |                                    |      |         |         |      |   |       |         | 
|---------------- | ---------------------------------- | ---- | ------- | ------- | ---- | - | ----- | ------- | 
|                 |                                    | 2006 |         |         | 2005 |  
|($ in millions)  |                                    |      |         |         |      |  
|Bonds            |                                    | $    | 242.8   |         |      | $ | 230.7 |        
|Syndicated Loans |                                    |      | 1,304.9 |         |      |   | 704.0 |        
|Cash(1)          |                                    |      | 126.0   |         |      |   | 238.4 |        
|                 |                                    |      |         |         |      |  
|                 | Total underlying collateral assets |      | $       | 1,673.7 |      |   | $     | 1,173.1 | 
|                 |                                    |      |         |         |      |  




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





37



---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




Note 3. Portfolio, continued




Loans and Debt Securities on Non-Accrual Status.


|                                                                             |                               |       |   |        |        |  |   |        |         | 
|---------------------------------------------------------------------------- | ----------------------------- | ----- | - | ------ | ------ |  | - | ------ | ------- | 
|                                                                             |                               | 2006  |   |        | 2005   | 
|($ in thousands)                                                             |                               |       |   |        |        | 
|Loans and debt securities in workout status (classified as
    Grade 4 or 5) |                               |       |   |        |        |  |   |       
|                                                                             | Companies more than 25% owned |       | $ | 17,670 |        |  | $ | 15,622 |        
|                                                                             | Companies 5% to 25% owned     |       |   | 3,312  |        |  |   |       |        
|                                                                             | Companies less than 5% owned  |       |   | 24,598 |        |  |   | 11,417 |        
|Loans and debt securities not in workout status                              |                               |       |   |        |        |  |   |       
|                                                                             | Companies more than 25% owned |       |   | 40,775 |        |  |   | 58,047 |        
|                                                                             | Companies 5% to 25% owned     |       |   | 6,595  |        |  |   | 534    |        
|                                                                             | Companies less than 5% owned  |       |   | 3,922  |        |  |   | 49,458 |        
|                                                                             |                               |       |   |        |        | 
|                                                                             |                               | Total |   | $      | 96,872 |  |   | $      | 135,078 | 
|                                                                             |                               |       |   |        |        | 

Industry and Geographic Compositions.


|                    |       |      |    |     |      |  |    |     |  
|------------------- | ----- | ---- | -- | --- | ---- |  | -- | --- | -
|                    |       | 2006 |    |     | 2005 | 
|                    |       |      |    |     |      | 
|Industry            |       |      |    |     |      |  |    |    
|Business services   |       |      | 31 | %   |      |  | 42 | %  
|Consumer products   |       |      | 24 |     |      |  | 14 |    
|Financial services  |       |      | 14 |     |      |  | 14 |    
|Industrial products |       |      | 9  |     |      |  | 10 |    
|Consumer services   |       |      | 7  |     |      |  | 6  |    
|Healthcare services |       |      | 3  |     |      |  | 2  |    
|Retail              |       |      | 2  |     |      |  | 3  |    
|Energy services     |       |      | 2  |     |      |  | 2  |    
|Other(1)            |       |      | 8  |     |      |  | 7  |    
|                    |       |      |    |     |      | 
|                    | Total |      |    | 100 | %    |  |    | 100 | %




|    |                                                                                                                                   
|--- | ----------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes investments in senior debt CDO and CLO funds. These
    funds invest in senior debt representing a variety of industries.

38



---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




Note 3. Portfolio, continued


|                     |       |  |    |     |   |  |    |     |  
|-------------------- | ----- |  | -- | --- | - |  | -- | --- | -
|Geographic Region(1) |       |  |    |    
|Mid-Atlantic         |       |  | 34 | %   |   |  | 29 | %  
|Midwest              |       |  | 26 |     |   |  | 21 |    
|West                 |       |  | 20 |     |   |  | 34 |    
|Southeast            |       |  | 16 |     |   |  | 12 |    
|Northeast            |       |  | 4  |     |   |  | 4  |    
|                     |       |  |    |     |   | 
|                     | Total |  |    | 100 | % |  |    | 100 | %
|                     |       |  |    |     |   | 




|    |                                                                                                                                                                                                                                              
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The geographic region for the private finance portfolio depicts
    the location of the headquarters for the Companys
    portfolio companies. The portfolio companies may have a number
    of other locations in other geographic regions.



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



|                          |       |      |        |         |       |   |        |          |  |  |      |  |  |       |         |         |          |   |         |         |  |  |      |  | 
|------------------------- | ----- | ---- | ------ | ------- | ----- | - | ------ | -------- |  |  | ---- |  |  | ----- | ------- | ------- | -------- | - | ------- | ------- |  |  | ---- |  | 
|                          |       | 2006 |        |         | 2005  |  
|                          |       |      |        |         |       |  
|                          |       | Cost |        |         | Value |   |        | Yield(1) |  |  | Cost |  |  | Value |         |         | Yield(1) |  
|($ in thousands)          |       |      |        |         |       |   |        |          |  |  |      |  |  |       |         |         |          |  
|Commercial mortgage loans |       | $    | 97,154 |         |       | $ | 96,547 |          |  |  | 8.1% |  |  | $     | 103,878 |         |          | $ | 102,569 |         |  |  | 7.6% | 
|Real estate owned         |       |      | 13,090 |         |       |   | 14,553 |          |  |  |      |  |  |       | 14,240  |         |          |   | 13,932  |         |  |  |      | 
|Equity interests          |       |      | 17,504 |         |       |   | 21,951 |          |  |  |      |  |  |       | 13,577  |         |          |   | 10,564  |         |  |  |      | 
|                          |       |      |        |         |       |   |        |          |  |  |      |  |  |       |         |         |          |  
|                          | Total |      | $      | 127,748 |       |   | $      | 133,051  |  |  |      |  |  |       | $       | 131,695 |          |   | $       | 127,065 |  |  |      |  | 
|                          |       |      |        |         |       |   |        |          |  |  |      |  |  |       |         |         |          |  




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

Commercial Mortgage Loans and Equity Interests.




39



---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




Note 3. Portfolio, continued




|                  |       |      |    |     |      |  |    |     |  
|----------------- | ----- | ---- | -- | --- | ---- |  | -- | --- | -
|                  |       | 2006 |    |     | 2005 | 
|                  |       |      |    |     |      | 
|Property Type     |       |      |    |     |      |  |    |    
|Hospitality       |       |      | 36 | %   |      |  | 37 | %  
|Housing           |       |      | 27 |     |      |  | 30 |    
|Office            |       |      | 18 |     |      |  | 11 |    
|Retail            |       |      | 15 |     |      |  | 16 |    
|Other             |       |      | 4  |     |      |  | 6  |    
|                  |       |      |    |     |      | 
|                  | Total |      |    | 100 | %    |  |    | 100 | %
|                  |       |      |    |     |      | 
|Geographic Region |       |      |    |     |      |  |    |    
|Mid-Atlantic      |       |      | 33 | %   |      |  | 31 | %  
|Southeast         |       |      | 30 |     |      |  | 25 |    
|West              |       |      | 16 |     |      |  | 18 |    
|Midwest           |       |      | 15 |     |      |  | 21 |    
|Northeast         |       |      | 6  |     |      |  | 5  |    
|                  |       |      |    |     |      | 
|                  | Total |      |    | 100 | %    |  |    | 100 | %
|                  |       |      |    |     |      | 

Note 4. Debt




|                              |                         |                                    |         |           |           |  |       |           |           |  |          |      |      |        |         |           |           |  |        |           |           |  |     |      |      |  
|----------------------------- | ----------------------- | ---------------------------------- | ------- | --------- | --------- |  | ----- | --------- | --------- |  | -------- | ---- | ---- | ------ | ------- | --------- | --------- |  | ------ | --------- | --------- |  | --- | ---- | ---- | -
|                              |                         | 2006                               |         |           | 2005      | 
|                              |                         |                                    |         |           |           | 
|                              |                         |                                    |         | Annual    |           |  |       |           | Annual    | 
|                              |                         | Facility                           |         |           | Amount    |  |       | Interest  |           |  | Facility |      |      | Amount |         |           | Interest  | 
|                              |                         | Amount                             |         |           | Drawn     |  |       | Cost(1)   |           |  | Amount   |      |      | Drawn  |         |           | Cost(1)   | 
|($ in thousands)              |                         |                                    |         |           |           |  |       |           |           |  |          |      |      |        |         |           |           | 
|Notes payable and debentures: |                         |                                    |         |           |           |  |       |           |           |  |          |      |      |        |         |           |           |  |        |           |           |  |     |     
|                              | Unsecured notes payable |                                    | $       | 1,190,637 |           |  | $     | 1,190,637 |           |  |          | 6.2  | %    |        | $       | 1,164,540 |           |  | $      | 1,164,540 |           |  |     | 6.2  | %   
|                              | SBA debentures          |                                    |         | 16,500    |           |  |       | 16,500    |           |  |          | 7.4  | %    |        |         | 28,500    |           |  |        | 28,500    |           |  |     | 7.5  | %   
|                              |                         |                                    |         |           |           |  |       |           |           |  |          |      |      |        |         |           |           | 
|                              |                         | Total notes payable and debentures |         |           | 1,207,137 |  |       |           | 1,207,137 |  |          |      | 6.2  | %      |         |           | 1,193,040 |  |        |           | 1,193,040 |  |     |      | 6.3  | %
|Revolving line of credit      |                         |                                    | 922,500 |           |           |  | 1,750 |           |           |  | 6.4      | %(2) |      |        | 772,500 |           |           |  | 91,750 |           |           |  | 5.6 | %(2)
|                              |                         |                                    |         |           |           |  |       |           |           |  |          |      |      |        |         |           |           | 
|                              | Total debt              |                                    | $       | 2,129,637 |           |  | $     | 1,208,887 |           |  |          | 6.6  | %(3) |        | $       | 1,965,540 |           |  | $      | 1,284,790 |           |  |     | 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 addition to
    the current interest rate payable, there were annual costs of
    commitment fees, other facility fees and amortization of debt
    financing costs of $3.8 million and $3.3 million at
    June 30, 2006, and December 31, 2005, respectively.             
|   
|(3) | The annual interest cost for total debt includes the annual cost
    of commitment fees, other facility fees and amortization of debt
    financing costs on the revolving line of credit regardless of
    the amount outstanding on the facility as of the balance sheet
    date.                                                                                                              

40



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##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




Note 4. Debt, continued


Notes Payable and Debentures


Unsecured Notes Payable.






SBA Debentures.


Scheduled Maturities.


|           |       |                  |         |           | 
|---------- | ----- | ---------------- | ------- | --------- | 
|Year       |       | Amount Maturing  |        
|           |       |                  |        
|           |       | ($ in thousands) |        
|2006       |       | $                | 150,000 |          
|2007       |       |                  |        |          
|2008       |       |                  | 153,000 |          
|2009       |       |                  | 268,137 |          
|2010       |       |                  | 408,000 |          
|Thereafter |       |                  | 228,000 |          
|           |       |                  |        
|          
|           | Total |                  | $       | 1,207,137 | 
|           |       |                  |        



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



41



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##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




Note 4. Debt, continued












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



Note 5. Guarantees and Commitments




42



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##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


Note 5. Guarantees, continued






|                                 |       |       |       |       |      |   |     |      |  |   |      |     |  |      |      |      |      |   |            |       |  |   |   |   |  |   |     |     | 
|-------------------------------- | ----- | ----- | ----- | ----- | ---- | - | --- | ---- |  | - | ---- | --- |  | ---- | ---- | ---- | ---- | - | ---------- | ----- |  | - | - | - |  | - | --- | --- | 
|                                 |       | Total |       |       | 2006 |   |     | 2007 |  |   | 2008 |     |  | 2009 |      |      | 2010 |   | After 2010 |      
|(in millions)                    |       |       |       |       |      |   |     |      |  |   |      |     |  |      |      |      |      |   |            |      
|Guarantees                       |       | $     | 163.3 |       |      | $ | 2.5 |      |  | $ | 0.7  |     |  | $    | 3.0  |      |      | $ | 151.6      |       |  | $ |  |   |  | $ | 5.5 |    
|Standby letters of
    credit(1) |       |       | 38.3  |       |      |   | 0.1 |      |  |   |     |     |  |      | 38.2 |      |      |   |           |       |  |   |  |   |  |   |    |    
|                                 |       |       |       |       |      |   |     |      |  |   |      |     |  |      |      |      |      |   |            |       | 
|                                 | Total |       | $     | 201.6 |      |   | $   | 2.6  |  |   | $    | 0.7 |  |      | $    | 41.2 |      |   | $          | 151.6 |  |   | $ |  |  |   | $   | 5.5 | 
|                                 |       |       |       |       |      |   |     |      |  |   |      |     |  |      |      |      |      |   |            |       | 




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





Note 6. Shareholders Equity




|                                        |              |      |        |        |         |   |   |   | 
|--------------------------------------- | ------------ | ---- | ------ | ------ | ------- | - | - | - | 
|                                        |              | 2006 |        |        | 2005(1)
|(in thousands)                          |              |      |        |        |        
|Number of common shares                 |              |      | 3,000  |        |         |   |  |  
|                                        |              |      |        |        |         |  
|Gross proceeds                          |              | $    | 87,750 |        |         | $ |  |  
|Less costs, including underwriting fees |              |      | 4,780  |        |         |   |  |  
|                                        |              |      |        |        |         |  
|                                        | Net proceeds |      | $      | 82,970 |         |   | $ |  | 
|                                        |              |      |        |        |         |  




|    |                                                                                         
|--- | ----------------------------------------------------------------------------------------
|(1) | The Company did not sell any common stock during the six months
    ended June 30, 2005.





43



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##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




Note 6. Shareholders Equity, continued








|                                         |  |                    |       |  |      |   |       | 
|---------------------------------------- |  | ------------------ | ----- |  | ---- | - | ----- | 
|                                         |  | For the Six Months |      
|                                         |  | Ended June 30,     |      
|                                         |  |                    |      
|                                         |  | 2006               |       |  | 2005 |  
|(in thousands, except per share amounts) |  |                    |       |  |      |  
|Shares issued                            |  |                    | 243   |  |      |   | 151   | 
|Average price per share                  |  | $                  | 29.63 |  |      | $ | 27.58 | 

Note 7. Earnings Per Common Share




|                                                                                          |  |                      |         |  |                    |   |         |      |  |   |         |  |  |   |         | 
|----------------------------------------------------------------------------------------- |  | -------------------- | ------- |  | ------------------ | - | ------- | ---- |  | - | ------- |  |  | - | ------- | 
|                                                                                          |  | For the Three Months |         |  | For the Six Months |  
|                                                                                          |  | Ended June 30,       |         |  | Ended June 30,     |  
|                                                                                          |  |                      |         |  |                    |  
|                                                                                          |  | 2006                 |         |  | 2005               |   |         | 2006 |  |   | 2005    | 
|(in thousands, except per share amounts)                                                  |  |                      |         |  |                    |   |         |      |  |   |         | 
|Net increase in net assets resulting from operations available
    to common shareholders |  | $                    | 33,729  |  |                    | $ | 311,885 |      |  | $ | 133,316 |  |  | $ | 431,506 | 
|                                                                                          |  |                      |         |  |                    |   |         |      |  |   |         | 
|Weighted average common shares outstanding  basic                                        |  |                      | 140,024 |  |                    |   | 133,701 |      |  |   | 139,395 |  |  |   | 133,493 | 
|Dilutive options outstanding                                                              |  |                      | 3,189   |  |                    |   | 2,680   |      |  |   | 3,071   |  |  |   | 2,489   | 
|                                                                                          |  |                      |         |  |                    |   |         |      |  |   |         | 
|Weighted average common shares
    outstanding  diluted                                  |  |                      | 143,213 |  |                    |   | 136,381 |      |  |   | 142,466 |  |  |   | 135,982 | 
|                                                                                          |  |                      |         |  |                    |   |         |      |  |   |         | 
|Basic earnings per common share                                                           |  | $                    | 0.24    |  |                    | $ | 2.33    |      |  | $ | 0.96    |  |  | $ | 3.23    | 
|                                                                                          |  |                      |         |  |                    |   |         |      |  |   |         | 
|Diluted earnings per common share                                                         |  | $                    | 0.24    |  |                    | $ | 2.29    |      |  | $ | 0.94    |  |  | $ | 3.17    | 
|                                                                                          |  |                      |         |  |                    |   |         |      |  |   |         | 

Note 8. Employee Compensation Plans




44



---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




Note 8. Employee Compensation Plans, continued














45



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##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




Note 8. Employee Compensation Plans, continued






|                                     |                   |               |      |     |              |   |     |      |  |   |      |     |  |   |     |     | 
|------------------------------------ | ----------------- | ------------- | ---- | --- | ------------ | - | --- | ---- |  | - | ---- | --- |  | - | --- | --- | 
|                                     |                   | For the Three |      |     | For the Six  |  
|                                     |                   | Months Ended  |      |     | Months Ended |  
|                                     |                   | June 30,      |      |     | June 30,     |  
|                                     |                   |               |      |     |              |  
|                                     |                   | 2006          |      |     | 2005         |   |     | 2006 |  |   | 2005 |    
|($ in millions)                      |                   |               |      |     |              |   |     |      |  |   |      |    
|IPA contributions                    |                   | $             | 2.1  |     |              | $ | 1.9 |      |  | $ | 3.8  |     |  | $ | 3.8 |    
|IPA mark to market expense (benefit) |                   |               | (1.5 | )   |              |   | 1.8 |      |  |   | (0.6 | )   |  |   | 1.9 |    
|                                     |                   |               |      |     |              |   |     |      |  |   |      |    
|                                     | Total IPA expense |               | $    | 0.6 |              |   | $   | 3.7  |  |   | $    | 3.2 |  |   | $   | 5.7 | 
|                                     |                   |               |      |     |              |   |     |      |  |   |      |    

bi-weekly


Note 9. Stock Option Plan


non-officer






46



---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




Note 9. Stock Option Plan, continued




|                                                                   |  |        |        |           |  |              |       |                 |  |  |      |  |  |   |        | 
|------------------------------------------------------------------ |  | ------ | ------ | --------- |  | ------------ | ----- | --------------- |  |  | ---- |  |  | - | ------ | 
|                                                                   |  |        |        | Weighted  |  | Weighted     |       |                
|                                                                   |  |        |        | Average   |  | Average      |       | Aggregate      
|                                                                   |  |        |        | Exercise  |  | Contractual  |       | Intrinsic Value
|                                                                   |  |        |        | Price Per |  | Remaining    |       | at June 30,    
|                                                                   |  | Shares |        | Share     |  | Term (Years) |       | 2006(1)        
|(in thousands, except per share amounts)                           |  |        |        |           |  |              |       |                
|Options outstanding at January 1, 2006                             |  |        | 22,259 |           |  | $            | 24.52 |                 |  |  |      |  |  |   |        | 
|Granted                                                            |  |        | 1,505  |           |  | $            | 29.75 |                 |  |  |      |  |  |   |        | 
|Exercised                                                          |  |        | (373   | )         |  | $            | 22.09 |                 |  |  |      |  |  |   |        | 
|Forfeited                                                          |  |        | (277   | )         |  | $            | 27.68 |                 |  |  |      |  |  |   |        | 
|                                                                   |  |        |        |           |  |              |       |                 |  |  |      |  |  |   |        | 
|Outstanding at June 30, 2006                                       |  |        | 23,114 |           |  | $            | 24.86 |                 |  |  | 6.78 |  |  | $ | 92,792 | 
|                                                                   |  |        |        |           |  |              |       |                 |  |  |      |  |  |   |        | 
|Exercisable at June 30, 2006                                       |  |        | 16,848 |           |  | $            | 23.71 |                 |  |  | 6.11 |  |  | $ | 86,399 | 
|                                                                   |  |        |        |           |  |              |       |                 |  |  |      |  |  |   |        | 
|Exercisable and expected to be exercisable at June 30,
    2006(2) |  |        | 22,442 |           |  | $            | 24.77 |                 |  |  | 6.73 |  |  | $ | 92,101 | 
|                                                                   |  |        |        |           |  |              |       |                 |  |  |      |  |  |   |        | 




|    |                                                                                                                                                         
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Represents the difference between the market value of the
    options at June 30, 2006, and the cost for the option
    holders to exercise the options.
|   
|(2) | The amount of options expected to be exercisable at
    June 30, 2006, is calculated based on an estimate of
    expected forfeitures.                  



Note 10. Dividends and Distributions and Taxes








47



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##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


Note 11. Supplemental Disclosure of Cash Flow
Information










| |   |                                                                                                                                                                 
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | a note received as consideration from the sale of the
    Companys equity investment in Advantage of
    $150.0 million;                                       
|
| |  | a note received as consideration from the sale of the
    Companys equity investment in STS Operating, Inc. of
    $30.0 million;                              
|
| |  | the exchange of existing debt securities and accrued interest of
    S.B. Restaurant Company with a cost basis of $29.2 million
    for new debt securities; and
|
| |  | the exchange of existing preferred stock and common stock of
    Redox Brands, Inc. with a cost basis of $10.2 million for
    common stock in CR Brands, Inc.  





| |   |                                                                                                                                                                                                                                                                                                                                                             
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the exchange of existing subordinated debt securities and
    accrued interest of BLX with a cost basis of $44.8 million
    for additional Class B equity interests;                                                                                                                                                                                       
|
| |  | the exchange of debt securities and accrued interest of Coverall
    North America, Inc. with a cost basis of $24.2 million for
    new debt securities and warrants with a total cost basis of
    $26.8 million;                                                                                                                                          
|
| |  | the exchange of debt securities of Garden Ridge Corporation with
    a cost basis of $25.0 million for a new loan with a cost
    basis of $22.5 million; and                                                                                                                                                                                               
|
| |  | the contribution to capital of existing debt securities of GAC
    Investments, Inc. (GAC) with a cost basis of $11.0 million,
    resulting in a decrease in the Companys debt cost basis
    and an increase in the Companys common stock cost basis in
    GAC. During the third quarter of 2005, GAC changed its name to
    Triview Investments, Inc.



Note 12. Hedging Activities




48



---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




Note 12. Hedging Activities, continued




|                                           |  |      |        |  |      |   |        | 
|------------------------------------------ |  | ---- | ------ |  | ---- | - | ------ | 
|($ in thousands)                           |  |      |        | 
|Description of Issue                       |  | 2006 |        |  | 2005 |  
|                                           |  |      |        |  |      |  
|5-year Treasury securities, due April 2010 |  | $    | 17,156 |  |      | $ | 17,666 | 







49



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##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


Note 13. Financial Highlights


|                                                                                  |                                                                  |                  |           |       |                |   |           |      |  |   |           |      | 
|--------------------------------------------------------------------------------- | ---------------------------------------------------------------- | ---------------- | --------- | ----- | -------------- | - | --------- | ---- |  | - | --------- | ---- | 
|                                                                                  |                                                                  | At and for the   |           |       |               
|                                                                                  |                                                                  | Six Months Ended |           |       | At and for the |  
|                                                                                  |                                                                  | June 30,         |           |       | Year Ended     |  
|                                                                                  |                                                                  |                  |           |       | December 31,   |  
|                                                                                  |                                                                  | 2006(1)          |           |       | 2005           |   |           | 2005 | 
|                                                                                  |                                                                  |                  |           |       |                |   |           |      | 
|Per Common Share Data                                                             |                                                                  |                  |           |       |                |   |           |      |  |   |           |     
|Net asset value, beginning of period                                              |                                                                  | $                | 19.17     |       |                | $ | 14.87     |      |  | $ | 14.87     |     
|                                                                                  |                                                                  |                  |           |       |                |   |           |      | 
|                                                                                  | Net investment
    income(2)                                     |                  |           | 0.64  |                |   |           | 0.40 |  |   |           | 1.00 | 
|                                                                                  | Net realized
    gains(2)(3)                                     |                  |           | 3.74  |                |   |           | 1.60 |  |   |           | 1.99 | 
|                                                                                  |                                                                  |                  |           |       |                |   |           |      | 
|                                                                                  | Net investment income plus net realized
    gains(2)             |                  |           | 4.38  |                |   |           | 2.00 |  |   |           | 2.99 | 
|                                                                                  | Net change in unrealized appreciation or depreciation
    (2)(3) |                  |           | (3.44 | )              |   |           | 1.17 |  |   |           | 3.37 | 
|                                                                                  |                                                                  |                  |           |       |                |   |           |      | 
|Net increase in net assets resulting from operations
    (2)                      |                                                                  |                  | 0.94      |       |                |   | 3.17      |      |  |   | 6.36      |     
|                                                                                  |                                                                  |                  |           |       |                |   |           |      | 
|Net decrease in net assets from shareholder distributions                         |                                                                  |                  | (1.19     | )     |                |   | (1.14     | )    |  |   | (2.33     | )   
|Net increase in net assets from capital share
    transactions(2)                 |                                                                  |                  | 0.25      |       |                |   | 0.11      |      |  |   | 0.27      |     
|                                                                                  |                                                                  |                  |           |       |                |   |           |      | 
|Net asset value, end of period                                                    |                                                                  | $                | 19.17     |       |                | $ | 17.01     |      |  | $ | 19.17     |     
|                                                                                  |                                                                  |                  |           |       |                |   |           |      | 
|Market value, end of period                                                       |                                                                  | $                | 28.77     |       |                | $ | 29.11     |      |  | $ | 29.37     |     
|Total
    return(4)                                                               |                                                                  |                  | 1.9       | %     |                |   | 17.4      | %    |  |   | 23.5      | %   
|Ratios and Supplemental Data($ and shares in thousands, except per share amounts) |                                                                  |                  |           |       |                |   |           |      |  |   |           |     
|Ending net assets                                                                 |                                                                  | $                | 2,690,019 |       |                | $ | 2,281,287 |      |  | $ | 2,620,546 |     
|Common shares outstanding at end of period                                        |                                                                  |                  | 140,312   |       |                |   | 134,131   |      |  |   | 136,697   |     
|Diluted weighted average common shares outstanding                                |                                                                  |                  | 142,466   |       |                |   | 135,982   |      |  |   | 137,274   |     
|Employee, stock option and administrative expenses/average net
    assets         |                                                                  |                  | 2.66      | %     |                |   | 3.91      | %    |  |   | 6.58      | %   
|Total operating expenses/average net assets                                       |                                                                  |                  | 4.38      | %     |                |   | 5.79      | %    |  |   | 9.99      | %   
|Net investment income/average net assets                                          |                                                                  |                  | 3.41      | %     |                |   | 2.57      | %    |  |   | 6.08      | %   
|Net increase in net assets resulting from operations/ average
    net assets      |                                                                  |                  | 4.97      | %     |                |   | 20.57     | %    |  |   | 38.68     | %   
|Portfolio turnover rate                                                           |                                                                  |                  | 21.20     | %     |                |   | 21.76     | %    |  |   | 47.72     | %   
|Average debt outstanding                                                          |                                                                  | $                | 1,395,791 |       |                | $ | 1,097,851 |      |  | $ | 1,087,118 |     
|Average debt per
    share(2)                                                     |                                                                  | $                | 9.80      |       |                | $ | 8.07      |      |  | $ | 7.92      |     




|    |                                                                                                                                                                                                  
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The results for the six months ended June 30, 2006, are not
    necessarily indicative of the operating results to be expected
    for the full year.                                            
|   
|(2) | Based on diluted weighted average number of common shares
    outstanding for the period.                                                                                                        
|   
|(3) | Net realized gains and net change in unrealized appreciation or
    depreciation can fluctuate significantly from period to period.
    As a result, quarterly comparisons may not be meaningful.
|   
|(4) | Total return assumes the reinvestment of all dividends paid for
    the periods presented.                                                                                                       

Note 14. Litigation




50



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##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




Note 14. Litigation, continued








51



---



##### 



Report of Independent Registered Public Accounting Firm





















52



---



##### 



Schedule 12-14


ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


SCHEDULE OF INVESTMENTS IN AND ADVANCES TO AFFILIATES


|                                                   |                       |                          |                      |                       |       |       |          |   |                   |       |  |       |              |         |       |               |        |               |       |   |         |          |   |   |         |        | 
|-------------------------------------------------- | --------------------- | ------------------------ | -------------------- | --------------------- | ----- | ----- | -------- | - | ----------------- | ----- |  | ----- | ------------ | ------- | ----- | ------------- | ------ | ------------- | ----- | - | ------- | -------- | - | - | ------- | ------ | 
|                                                   |                       |                          |                      | Amount of Interest or |       |       |          |   |                   |       |  |       |             
|                                                   |                       |                          |                      | Dividends             |       |       |          |   |                   |       |  |       |             
|PRIVATE FINANCE                                    |                       |                          |                      |                       |       |       |          |   |                   |       |  |       |             
|Portfolio Company                                  |                       |                          |                      | Credited              |       |       |          |   | December 31, 2005 |       |  | Gross |              |         | Gross |               |        | June 30, 2006 |      
|(in thousands)                                     |                       | Investment(1)            |                      | to Income(6)          |       |       | Other(2) |   |                   | Value |  |       | Additions(3) |         |       | Reductions(4) |        |               | Value |  
|                                                   |                      
|Companies More Than 25% Owned                     
|                                                  
|Acme Paging, L.P.                                  |                       | Senior Loan(5)           |                      |                       |       |       |          |   |                   |       |  | $     |             |         |       | $             |       |               |       | $ |        |          |   | $ |        |       
|                                                   | (Telecommunications)  |                          | Subordinated Debt(5) |                       |       |       |          |   |                   |       |  |       |              |        |       |               |        |              |       |   |         |         |   |   |         |       | 
|                                                   |                       | Common Stock             |                      |                       |       |       |          |   |                   |       |  |       |             |         |       |               |       |               |       |   |        |          |   |   |        |       
|                                                  
|Advantage Sales &                                  |                       | Subordinated Debt        |                      | $                     | 1,712 |       |          |   |                   |       |  |       | 59,787       |         |       |               | 213    |               |       |   | (60,000 | )        |   |   |        |       
|                                                   | Marketing, Inc.(7)    |                          | Subordinated Debt    |                       |       | 5,555 |          |   |                   |       |  |       |              | 124,000 |       |               |        | 374           |       |   |         | (124,374 | ) |   |         |       | 
|                                                   | (Business Services)   |                          | Common Stock         |                       |       |       |          |   |                   |       |  |       |              | 476,578 |       |               |        |              |       |   |         | (476,578 | ) |   |         |       | 
|                                                  
|Alaris Consulting, LLC                             |                       | Senior Loan(5)           |                      |                       | (32   | )     |          |   |                   |       |  |       |             |         |       |               | 32     |               |       |   | (32     | )        |   |   |        |       
|                                                   | (Business Services)   |                          | Equity Interests     |                       |       |       |          |   |                   |       |  |       |              |        |       |               |        |              |       |   |         |         |   |   |         |       | 
|                                                  
|American Healthcare Services,  Inc. and Affiliates |                       | Senior Loan(5)           |                      |                       |       |       |          | $ | 1                 |       |  |       | 4,097        |         |       |               | 328    |               |       |   | (96     | )        |   |   | 4,329   |       
|                                                   | (Healthcare Services) |                          |                      |                       |       |       |          |   |                   |       |  |       |              |         |       |               |        |               |       |   |         |          |   |   |         |        | 
|                                                  
|Avborne, Inc.                                      |                       | Preferred Stock          |                      |                       |       |       |          |   |                   |       |  |       | 892          |         |       |               |       |               |       |   | (119    | )        |   |   | 773     |       
|                                                   | (Business Services)   |                          | Common Stock         |                       |       |       |          |   |                   |       |  |       |              |        |       |               |        |              |       |   |         |         |   |   |         |       | 
|                                                  
|Avborne Heavy Maintenance,  Inc.                   |                       | Preferred Stock          |                      |                       |       |       |          |   |                   |       |  |       |             |         |       |               |       |               |       |   |        |          |   |   |        |       
|                                                   | (Business Services)   |                          | Common Stock         |                       |       |       |          |   |                   |       |  |       |              |        |       |               |        |              |       |   |         |         |   |   |         |       | 
|                                                  
|Business Loan Express, LLC                         |                       | Subordinated Debt        |                      |                       | 38    |       |          |   |                   |       |  |       | 10,000       |         |       |               | 15,000 |               |       |   | (25,000 | )        |   |   |        |       
|                                                   | (Financial Services)  |                          | Class A Equity       |                       |       |       |          |   |                   |       |  |       |              |         |       |               |        |               |       |   |         |          |   |   |         |        | 
|                                                   |                       | Interests                |                      |                       | 7,807 |       |          |   |                   |       |  |       | 60,693       |         |       |               | 3,734  |               |       |   |        |          |   |   | 64,427  |       
|                                                   |                       | Class B Equity Interests |                      |                       |       |       |          |   |                   |       |  |       | 146,910      |         |       |               |       |               |       |   | (16,020 | )        |   |   | 130,890 |       
|                                                   |                       | Class C Equity Interests |                      |                       |       |       |          |   |                   |       |  |       | 139,521      |         |       |               |       |               |       |   | (17,621 | )        |   |   | 121,900 |       
|                                                  
|Callidus Capital Corporation                       |                       | Senior Loan              |                      |                       | 399   |       |          |   |                   |       |  |       | 600          |         |       |               | 8,705  |               |       |   | (7,655  | )        |   |   | 1,650   |       
|                                                   | (Financial Services)  |                          | Subordinated Debt    |                       |       | 464   |          |   |                   |       |  |       |              | 4,832   |       |               |        | 444           |       |   |         |         |   |   |         | 5,276  | 
|                                                   |                       | Common Stock             |                      |                       |       |       |          |   |                   |       |  |       | 7,968        |         |       |               | 4,125  |               |       |   |        |          |   |   | 12,093  |       
|                                                  
|Cambridge Capital Partners                         |                       | Senior Debt(5)           |                      |                       |       |       |          |   |                   |       |  |       |             |         |       |               | 250    |               |       |   |        |          |   |   | 250     |       
|                                                   | (Financial Services)  |                          | Equity Interests     |                       |       |       |          |   |                   |       |  |       |              |        |       |               |        | 1,751         |       |   |         |         |   |   |         | 1,751  | 
|                                                  
|CR Brands, Inc.                                    |                       | Senior Loan              |                      |                       | 1,109 |       |          |   |                   |       |  |       |             |         |       |               | 37,219 |               |       |   | (37,219 | )        |   |   |        |       
|                                                   | (Consumer Products)   |                          | Subordinated Debt    |                       |       | 2,344 |          |   |                   |       |  |       |              |        |       |               |        | 38,712        |       |   |         |         |   |   |         | 38,712 | 
|                                                   |                       | Common Stock             |                      |                       |       |       |          |   |                   |       |  |       |             |         |       |               | 37,431 |               |       |   |        |          |   |   | 37,431  |       
|                                                  
|Diversified Group                                  |                       | Preferred Stock          |                      |                       | 33    |       |          |   |                   |       |  |       | 728          |         |       |               | 14     |               |       |   | (14     | )        |   |   | 728     |       
|                                                   | Administrators, Inc.  |                          | Preferred Stock      |                       |       |       |          |   |                   |       |  |       |              | 841     |       |               |        |              |       |   |         |         |   |   |         | 841    | 
|                                                   | (Business Services)   |                          | Common Stock         |                       |       | 68    |          |   |                   |       |  |       |              | 502     |       |               |        | 69            |       |   |         | (249     | ) |   |         | 322    | 
|                                                  
|Financial Pacific Company                          |                       | Subordinated Debt        |                      |                       | 6,176 |       |          |   |                   |       |  |       | 69,904       |         |       |               | 726    |               |       |   |        |          |   |   | 70,630  |       
|                                                   | (Financial Services)  |                          | Preferred Stock      |                       |       |       |          |   |                   |       |  |       |              | 13,116  |       |               |        | 1,344         |       |   |         |         |   |   |         | 14,460 | 
|                                                   |                       | Common Stock             |                      |                       |       |       |          |   |                   |       |  |       | 44,180       |         |       |               | 749    |               |       |   | (511    | )        |   |   | 44,418  |       
|                                                  
|ForeSite Towers, LLC                               |                       | Equity Interests         |                      |                       | 161   |       |          |   |                   |       |  |       | 9,750        |         |       |               | 3,068  |               |       |   |        |          |   |   | 12,818  |       
|                                                   | (Tower Leasing)       |                          |                      |                       |       |       |          |   |                   |       |  |       |              |         |       |               |        |               |       |   |         |          |   |   |         |        | 
|                                                  
|Global Communications, LLC                         |                       | Senior Loan(5)           |                      |                       |       |       |          |   |                   |       |  |       | 15,957       |         |       |               |       |               |       |   |        |          |   |   | 15,957  |       
|                                                   | (Business Services)   |                          | Subordinated Debt(5) |                       |       |       |          |   |                   |       |  |       |              | 11,198  |       |               |        | 138           |       |   |         | (1,688   | ) |   |         | 9,648  | 
|                                                   |                       | Preferred Equity         |                      |                       |       |       |          |   |                   |       |  |       |              |         |       |               |        |               |       |   |         |          |   |   |         |       
|                                                   |                       | Interest                 |                      |                       |       |       |          |   |                   |       |  |       | 4,303        |         |       |               |       |               |       |   | (4,303  | )        |   |   |        |       
|                                                   |                       | Options                  |                      |                       |       |       |          |   |                   |       |  |       |             |         |       |               |       |               |       |   |        |          |   |   |        |       
|                                                  
|Gordian Group, Inc.                                |                       | Senior Loan(5)           |                      |                       | (10   | )     |          |   |                   |       |  |       | 4,161        |         |       |               | 400    |               |       |   | (4,561  | )        |   |   |        |       
|                                                   | (Business Services)   |                          | Common Stock         |                       |       |       |          |   |                   |       |  |       |              |        |       |               |        | 220           |       |   |         | (220     | ) |   |         |       | 
|                                                  
|Healthy Pet Corp.                                  |                       | Senior Loan              |                      |                       | 772   |       |          |   |                   |       |  |       | 4,086        |         |       |               | 12,652 |               |       |   | (800    | )        |   |   | 15,938  |       
|                                                   | (Consumer Services)   |                          | Subordinated Debt    |                       |       | 3,258 |          |   |                   |       |  |       |              | 38,535  |       |               |        | 4,776         |       |   |         | (186     | ) |   |         | 43,125 | 
|                                                   |                       | Common Stock             |                      |                       |       |       |          |   |                   |       |  |       | 25,766       |         |       |               | 5,174  |               |       |   | (2,788  | )        |   |   | 28,152  |       
|                                                  
|HMT, Inc.                                          |                       | Preferred Stock          |                      |                       |       |       |          |   |                   |       |  |       | 2,637        |         |       |               |       |               |       |   |        |          |   |   | 2,637   |       
|                                                   | (Energy Services)     |                          | Common Stock         |                       |       |       |          |   |                   |       |  |       |              | 5,343   |       |               |        | 2,599         |       |   |         |         |   |   |         | 7,942  | 
|                                                   |                       | Warrants                 |                      |                       |       |       |          |   |                   |       |  |       | 2,057        |         |       |               | 1,001  |               |       |   |        |          |   |   | 3,058   |       
|                                                  
|Impact Innovations Group, LLC                      |                       | Equity Interests in      |                      |                       |       |       |          |   |                   |       |  |       |              |         |       |               |        |               |       |   |         |          |   |   |         |       
|                                                   | (Business Services)   |                          | Affiliate            |                       |       |       |          |   |                   |       |  |       |              | 742     |       |               |        | 128           |       |   |         |         |   |   |         | 870    | 
|                                                  





53



---



##### 



|                                    |                        |                      |                      |                       |       |       |          |   |                   |       |           |       |              |        |       |               |         |               |       |   |         |         |           |   |         |        | 
|----------------------------------- | ---------------------- | -------------------- | -------------------- | --------------------- | ----- | ----- | -------- | - | ----------------- | ----- | --------- | ----- | ------------ | ------ | ----- | ------------- | ------- | ------------- | ----- | - | ------- | ------- | --------- | - | ------- | ------ | 
|                                    |                        |                      |                      | Amount of Interest or |       |       |          |   |                   |       |           |       |             
|                                    |                        |                      |                      | Dividends             |       |       |          |   |                   |       |           |       |             
|PRIVATE FINANCE                     |                        |                      |                      |                       |       |       |          |   |                   |       |           |       |             
|Portfolio Company                   |                        |                      |                      | Credited              |       |       |          |   | December 31, 2005 |       |           | Gross |              |        | Gross |               |         | June 30, 2006 |      
|(in thousands)                      |                        | Investment(1)        |                      | to Income(6)          |       |       | Other(2) |   |                   | Value |           |       | Additions(3) |        |       | Reductions(4) |         |               | Value |  
|                                    |                       
|Insight Pharmaceuticals             |                        | Subordinated Debt    |                      | $                     | 4,790 |       |          |   |                   |       |           | $     | 58,298       |        |       | $             | 769     |               |       | $ |        |         |           | $ | 59,067  |       
|                                    | Corporation            |                      | Preferred Stock      |                       |       |       |          |   |                   |       |           |       |              | 26,791 |       |               |         | 1,473         |       |   |         | (2,015  | )         |   |         | 26,249 | 
|                                    | (Consumer Products)    |                      | Common Stock         |                       |       |       |          |   |                   |       |           |       |              | 236    |       |               |         | 218           |       |   |         | (236    | )         |   |         | 218    | 
|                                   
|Jakel, Inc.                         |                        | Subordinated Debt(5) |                      |                       |       |       |          |   |                   |       |           |       |             |        |       |               | 2,533   |               |       |   |        |         |           |   | 2,533   |       
|                                    | (Industrial Products)  |                      | Preferred Stock      |                       |       |       |          |   |                   |       |           |       |              |       |       |               |         |              |       |   |         |        |           |   |         |       | 
|                                    |                        | Common Stock         |                      |                       |       |       |          |   |                   |       |           |       |             |        |       |               |        |               |       |   |        |         |           |   |        |       
|                                   
|Legacy Partners Group, LLC          |                        | Senior Loan (5)      |                      |                       |       |       |          |   |                   |       |           |       | 5,029        |        |       |               | 93      |               |       |   | (74     | )       |           |   | 5,048   |       
|                                    | (Financial Services)   |                      | Subordinated Debt(5) |                       |       |       |          |   |                   |       |           |       |              |       |       |               |         |              |       |   |         |        |           |   |         |       | 
|                                    |                        | Equity Interests     |                      |                       |       |       |          |   |                   |       |           |       |             |        |       |               | 18      |               |       |   | (18     | )       |           |   |        |       
|                                   
|Litterer Beteiligungs-GmbH          |                        | Subordinated Debt    |                      |                       | 21    |       |          |   |                   |       |           |       | 621          |        |       |               | 37      |               |       |   |        |         |           |   | 658     |       
|                                    | (Business Services)    |                      | Equity Interest      |                       |       |       |          |   |                   |       |           |       |              | 2,226  |       |               |         | 763           |       |   |         | (1,374  | )         |   |         | 1,615  | 
|                                   
|Mercury Air Centers, Inc.           |                        | Senior Loan          |                      |                       | 1,231 |       |          |   |                   |       |           |       | 31,720       |        |       |               | 4,000   |               |       |   | (35,720 | )       |           |   |        |       
|                                    | (Business Services)    |                      | Subordinated Debt    |                       |       | 4,028 |          |   |                   |       |           |       |              | 46,519 |       |               |         | 4,679         |       |   |         | (3,000  | )         |   |         | 48,198 | 
|                                    |                        | Common Stock         |                      |                       |       |       |          |   |                   |       |           |       | 88,898       |        |       |               | 4,702   |               |       |   | (412    | )       |           |   | 93,188  |       
|                                   
|MVL Group, Inc.                     |                        | Senior Loan          |                      |                       | 1,742 |       |          |   |                   |       |           |       | 27,218       |        |       |               | 79      |               |       |   | (973    | )       |           |   | 26,324  |       
|                                    | (Business Services)    |                      | Subordinated Debt    |                       |       | 2,506 |          |   |                   |       |           |       |              | 32,417 |       |               |         | 1,504         |       |   |         |        |           |   |         | 33,921 | 
|                                    |                        | Common Stock         |                      |                       |       |       |          |   |                   |       |           |       | 3,211        |        |       |               |        |               |       |   | (1,949  | )       |           |   | 1,262   |       
|                                   
|Pennsylvania Avenue                 |                        | Equity Interests     |                      |                       |       |       |          |   |                   |       |           |       | 1,864        |        |       |               | 1,193   |               |       |   | (3,057  | )       |           |   |        |       
|                                    | Investors, L.P.        |                      |                      |                       |       |       |          |   |                   |       |           |       |              |        |       |               |         |               |       |   |         |         |           |   |         |        | 
|                                    | (Private Equity Fund)  |                      |                      |                       |       |       |          |   |                   |       |           |       |              |        |       |               |         |               |       |   |         |         |           |   |         |        | 
|                                   
|Powell Plant Farms, Inc.            |                        | Senior Loan          |                      |                       | 2,390 |       |          |   |                   |       |           |       | 23,792       |        |       |               | 6,075   |               |       |   | (8,225  | )       |           |   | 21,642  |       
|                                    | (Consumer Products)    |                      | Subordinated Debt(5) |                       |       |       |          |   |                   |       |           |       |              | 7,364  |       |               |         | 1,093         |       |   |         | (8,457  | )         |   |         |       | 
|                                    |                        | Preferred Stock      |                      |                       |       |       |          |   |                   |       |           |       |             |        |       |               |        |               |       |   |        |         |           |   |        |       
|                                    |                        | Warrants             |                      |                       |       |       |          |   |                   |       |           |       |             |        |       |               |        |               |       |   |        |         |           |   |        |       
|                                   
|Redox Brands, Inc.                  |                        | Preferred Stock      |                      |                       | 363   |       |          |   |                   |       |           |       | 12,097       |        |       |               | 1,708   |               |       |   | (13,805 | )       |           |   |        |       
|                                    | (Consumer Products)    |                      | Warrants             |                       |       |       |          |   |                   |       |           |       |              | 500    |       |               |         | 84            |       |   |         | (584    | )         |   |         |       | 
|                                   
|Service Champ, Inc.                 |                        | Subordinated Debt    |                      |                       | 2,138 |       |          |   |                   |       |           |       | 26,906       |        |       |               | 354     |               |       |   |        |         |           |   | 27,260  |       
|                                    | (Business Services)    |                      | Common Stock         |                       |       |       |          |   |                   |       |           |       |              | 13,319 |       |               |         | 3,003         |       |   |         |        |           |   |         | 16,322 | 
|                                   
|Staffing Partners Holding           |                        | Subordinated Debt(5) |                      |                       |       |       |          | $ | 355               |       |           |       | 6,343        |        |       |               |        |               |       |   | (5,183  | )       |           |   | 1,160   |       
|                                    | Company, Inc.          |                      | Preferred Stock      |                       |       |       |          |   |                   |       |           |       |              | 1,812  |       |               |         |              |       |   |         | (1,812  | )         |   |         |       | 
|                                    | (Business Services)    |                      | Common Stock         |                       |       |       |          |   |                   |       |           |       |              |       |       |               |         |              |       |   |         |        |           |   |         |       | 
|                                    |                        | Warrants             |                      |                       |       |       |          |   |                   |       |           |       |             |        |       |               |        |               |       |   |        |         |           |   |        |       
|                                   
|Startec Global Communications       |                        |                      |                      |                       |       |       |          |   |                   |       |           |       |              |        |       |               |         |               |       |   |         |         |           |   |         |       
|                                    | Corporation            |                      | Senior Loan          |                       |       | 1,197 |          |   |                   |       |           |       |              | 21,685 |       |               |         | 3,540         |       |   |         | (3,299  | )         |   |         | 21,926 | 
|                                    | (Telecommunications)   |                      | Common Stock         |                       |       |       |          |   |                   |       |           |       |              |       |       |               |         | 6,480         |       |   |         |        |           |   |         | 6,480  | 
|                                   
|STS Operating, Inc.                 |                        | Subordinated Debt    |                      |                       | 328   |       |          |   |                   |       |           |       | 6,593        |        |       |               | 123     |               |       |   | (6,716  | )       |           |   |        |       
|                                    | (Industrial Products)  |                      | Common Stock         |                       |       |       |          |   |                   |       |           |       |              | 64,963 |       |               |         | 32,039        |       |   |         | (97,002 | )         |   |         |       | 
|                                    |                        | Options              |                      |                       |       |       |          |   |                   |       |           |       | 560          |        |       |               | 292     |               |       |   | (852    | )       |           |   |        |       
|                                   
|Triview Investments, Inc.           |                        | Senior Loan          |                      |                       | 587   |       |          |   |                   |       |           |       | 7,449        |        |       |               | 6,852   |               |       |   |        |         |           |   | 14,301  |       
|                                    | (Broadcasting & Cable/ |                      | Subordinated Debt    |                       |       | 2,390 |          |   |                   |       |           |       |              | 30,845 |       |               |         | 6,842         |       |   |         |        |           |   |         | 37,687 | 
|                                    | Consumer Products)     |                      | Subordinated Debt(5) |                       |       |       |          |   |                   |       |           |       |              | 19,520 |       |               |         |              |       |   |         |        |           |   |         | 19,520 | 
|                                    |                        |                      | Common Stock         |                       |       |       |          |   |                   |       |           |       |              | 29,171 |       |               |         | 5,011         |       |   |         | (1,656  | )         |   |         | 32,526 | 
|                                   
|Total companies more than 25% owned |                        | $                    | 53,565               |                       |       |       |          |   |                   | $     | 1,887,651 |       |              |        |       |               |         |               |       |   |         | $       | 1,188,131 |  
|                                   
|Companies 5% to 25% Owned           |                        |                      |                      |                       |       |       |          |   |                   |       |           |       |              |        |       |               |         |               |       |   |         |         |           |   |         |       
|                                   
|Advantage Sales &                   |                        | Subordinated Debt    |                      | $                     | 4,732 |       |          |   |                   |       |           |       |             |        |       | $             | 150,056 |               |       | $ |        |         |           | $ | 150,056 |       
|                                    | Marketing, Inc.(7)     |                      | Equity Interests     |                       |       |       |          |   |                   |       |           |       |              |       |       |               |         | 15,000        |       |   |         |        |           |   |         | 15,000 | 
|                                    | (Business Services)    |                      |                      |                       |       |       |          |   |                   |       |           |       |              |        |       |               |         |               |       |   |         |         |           |   |         |        | 
|                                   
|Air Medical Group Holdings LLC      |                        | Senior Loan          |                      |                       | 714   |       |          |   |                   |       |           |       |             |        |       |               | 1,512   |               |       |   |        |         |           |   | 1,512   |       
|                                    | (Healthcare Services)  |                      | Subordinated Debt    |                       |       | 2,145 |          |   |                   |       |           |       |              | 42,267 |       |               |         | 34,950        |       |   |         | (42,627 | )         |   |         | 34,590 | 
|                                    |                        |                      | Equity Interests     |                       |       | 1,694 |          |   |                   |       |           |       |              | 4,025  |       |               |         | 2,372         |       |   |         | (2,197  | )         |   |         | 4,200  | 
|                                   
|Amerex Group, LLC                   |                        | Subordinated Debt    |                      |                       | 154   |       |          |   |                   |       |           |       |             |        |       |               | 8,400   |               |       |   |        |         |           |   | 8,400   |       
|                                    | (Consumer Products)    |                      | Equity Interests     |                       |       |       |          |   |                   |       |           |       |              |       |       |               |         | 3,583         |       |   |         |        |           |   |         | 3,583  | 
|                                   
|Aspen Pet Products, Inc.            |                        | Subordinated Debt    |                      |                       | 1,130 |       |          |   |                   |       |           |       | 19,959       |        |       |               | 399     |               |       |   | (20,358 | )       |           |   |        |       
|                                    | (Consumer Products)    |                      | Preferred Stock      |                       |       | 29    |          |   |                   |       |           |       |              | 1,638  |       |               |         | 516           |       |   |         | (2,154  | )         |   |         |       | 
|                                    |                        |                      | Common Stock         |                       |       |       |          |   |                   |       |           |       |              | 17     |       |               |         | 123           |       |   |         | (140    | )         |   |         |       | 
|                                    |                        |                      | Warrants             |                       |       |       |          |   |                   |       |           |       |              |       |       |               |         |              |       |   |         |        |           |   |         |       | 
|                                   
|BB&T Capital                        |                        | Equity Interests     |                      |                       |       |       |          |   |                   |       |           |       |             |        |       |               | 5,867   |               |       |   |        |         |           |   | 5,867   |       
|                                    | Partners/Windsor       |                      |                      |                       |       |       |          |   |                   |       |           |       |              |        |       |               |         |               |       |   |         |         |           |   |         |        | 
|                                    | Mezzanine Fund, LLC    |                      |                      |                       |       |       |          |   |                   |       |           |       |              |        |       |               |         |               |       |   |         |         |           |   |         |        | 
|                                    | (Private Equity Fund)  |                      |                      |                       |       |       |          |   |                   |       |           |       |              |        |       |               |         |               |       |   |         |         |           |   |         |        | 
|                                   
|Becker Underwood, Inc.              |                        | Subordinated Debt    |                      |                       | 1,747 |       |          |   |                   |       |           |       | 23,543       |        |       |               | 307     |               |       |   |        |         |           |   | 23,850  |       
|                                    | (Industrial Products)  |                      | Common Stock         |                       |       |       |          |   |                   |       |           |       |              | 2,200  |       |               |         | 900           |       |   |         | (700    | )         |   |         | 2,400  | 
|                                   





54



---



##### 



|                                |                       |                      |                      |                       |     |       |          |   |                   |       |         |       |              |        |       |               |        |               |       |   |         |        |         |   |        |        | 
|------------------------------- | --------------------- | -------------------- | -------------------- | --------------------- | --- | ----- | -------- | - | ----------------- | ----- | ------- | ----- | ------------ | ------ | ----- | ------------- | ------ | ------------- | ----- | - | ------- | ------ | ------- | - | ------ | ------ | 
|                                |                       |                      |                      | Amount of Interest or |     |       |          |   |                   |       |         |       |             
|                                |                       |                      |                      | Dividends             |     |       |          |   |                   |       |         |       |             
|PRIVATE FINANCE                 |                       |                      |                      |                       |     |       |          |   |                   |       |         |       |             
|Portfolio Company               |                       |                      |                      | Credited              |     |       |          |   | December 31, 2005 |       |         | Gross |              |        | Gross |               |        | June 30, 2006 |      
|(in thousands)                  |                       | Investment(1)        |                      | to Income(6)          |     |       | Other(2) |   |                   | Value |         |       | Additions(3) |        |       | Reductions(4) |        |               | Value |  
|                                |                      
|wBI Incorporated                |                       | Senior Loan          |                      | $                     | 125 |       |          |   |                   |       |         | $     |             |        |       | $             | 15,000 |               |       | $ | (15,000 | )      |         | $ |       |       
|                                | (Business Services)   |                      | Subordinated Debt    |                       |     | 1,390 |          |   |                   |       |         |       |              |       |       |               |        | 29,856        |       |   |         |       |         |   |        | 29,856 | 
|                                |                       |                      | Common Stock         |                       |     |       |          |   |                   |       |         |       |              |       |       |               |        | 4,000         |       |   |         |       |         |   |        | 4,000  | 
|                               
|The Debt Exchange Inc.          |                       | Preferred Stock      |                      |                       |     |       |          |   |                   |       |         |       | 3,219        |        |       |               |       |               |       |   | (3,219  | )      |         |   |       |       
|                                | (Business Services)   |                      |                      |                       |     |       |          |   |                   |       |         |       |              |        |       |               |        |               |       |   |         |        |         |   |        |        | 
|                               
|MedBridge Healthcare, LLC       |                       | Senior Loan(5)       |                      |                       |     |       |          |   |                   |       |         |       | 7,093        |        |       |               | 1,512  |               |       |   | (2,010  | )      |         |   | 6,595  |       
|                                | (Healthcare Services) |                      | Subordinated Debt(5) |                       |     |       |          |   |                   |       |         |       |              | 534    |       |               |        | 1,364         |       |   |         | (1,898 | )       |   |        |       | 
|                                |                       | Convertible          |                      |                       |     |       |          |   |                   |       |         |       |              |        |       |               |        |               |       |   |         |        |         |   |        |       
|                                |                       | Subordinated Debt(5) |                      |                       |     |       |          |   |                   |       |         |       |             |        |       |               |       |               |       |   |        |        |         |   |       |       
|                                |                       | Equity Interests     |                      |                       |     |       |          |   |                   |       |         |       |             |        |       |               | 501    |               |       |   | (501    | )      |         |   |       |       
|                               
|Nexcel Synthetics, LLC          |                       | Subordinated Debt    |                      |                       | 788 |       |          |   |                   |       |         |       | 10,588       |        |       |               | 193    |               |       |   |        |        |         |   | 10,781 |       
|                                | (Consumer Products)   |                      | Equity Interests     |                       |     |       |          |   |                   |       |         |       |              | 1,367  |       |               |        | 363           |       |   |         |       |         |   |        | 1,730  | 
|                               
|Pres Air Trol LLC               |                       | Unitranche Debt(5)   |                      |                       |     |       |          | $ | 184               |       |         |       | 5,820        |        |       |               | 10     |               |       |   | (2,518  | )      |         |   | 3,312  |       
|                                | (Industrial Products) |                      | Equity Interests     |                       |     |       |          |   |                   |       |         |       |              | 318    |       |               |        | 11            |       |   |         | (329   | )       |   |        |       | 
|                               
|Progressive International       |                       |                      |                      |                       |     |       |          |   |                   |       |         |       |              |        |       |               |        |               |       |   |         |        |         |   |        |       
|                                | Corporation           |                      | Subordinated Debt    |                       |     | 603   |          |   |                   |       |         |       |              | 7,376  |       |               |        | 78            |       |   |         |       |         |   |        | 7,454  | 
|                                | (Consumer Products)   |                      | Preferred Stock      |                       |     |       |          |   |                   |       |         |       |              | 884    |       |               |        | 36            |       |   |         |       |         |   |        | 920    | 
|                                |                       | Common Stock         |                      |                       |     |       |          |   |                   |       |         |       | 13           |        |       |               | 487    |               |       |   |        |        |         |   | 500    |       
|                                |                       | Warrants             |                      |                       |     |       |          |   |                   |       |         |       |             |        |       |               |       |               |       |   |        |        |         |   |       |       
|                               
|Regency Healthcare Group, LLC   |                       | Senior Loan          |                      |                       |     |       |          |   |                   |       |         |       |             |        |       |               | 980    |               |       |   |        |        |         |   | 980    |       
|                                | (Healthcare Services) |                      | Unitranche Debt      |                       |     |       |          |   |                   |       |         |       |              |       |       |               |        | 19,900        |       |   |         |       |         |   |        | 19,900 | 
|                                |                       |                      | Equity Interests     |                       |     |       |          |   |                   |       |         |       |              |       |       |               |        | 1,500         |       |   |         |       |         |   |        | 1,500  | 
|                               
|SGT India Private Limited       |                       | Common Stock         |                      |                       |     |       |          |   |                   |       |         |       |             |        |       |               | 3,608  |               |       |   |        |        |         |   | 3,608  |       
|                                | (Business Services)   |                      |                      |                       |     |       |          |   |                   |       |         |       |              |        |       |               |        |               |       |   |         |        |         |   |        |        | 
|                               
|wSoteria Imaging Services, LLC  |                       | Subordinated Debt    |                      |                       | 959 |       |          |   |                   |       |         |       | 13,447       |        |       |               | 2,058  |               |       |   |        |        |         |   | 15,505 |       
|                                | (Healthcare Services) |                      | Equity Interests     |                       |     |       |          |   |                   |       |         |       |              | 2,308  |       |               |        | 92            |       |   |         |       |         |   |        | 2,400  | 
|                               
|Universal Environmental         |                       |                      |                      |                       |     |       |          |   |                   |       |         |       |              |        |       |               |        |               |       |   |         |        |         |   |        |       
|                                | Services, LLC         |                      | Unitranche Debt      |                       |     | 859   |          |   |                   |       |         |       |              | 10,862 |       |               |        | 94            |       |   |         |       |         |   |        | 10,956 | 
|                                | (Business Services)   |                      | Equity Interests     |                       |     |       |          |   |                   |       |         |       |              | 1,328  |       |               |        | 651           |       |   |         | (278   | )       |   |        | 1,701  | 
|                               
|Total companies 5% to 25% owned |                       | $                    | 17,069               |                       |     |       |          |   |                   | $     | 158,806 |       |              |        |       |               |        |               |       |   |         | $      | 371,156 |  
|                               





|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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 June 30, 2006.                                                                                                                                                                                              
|   
|(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 June 30,
    2006, 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) | Included in the companies more than 25% owned category while the
    Company held a majority equity interest. On March 29, 2006,
    the Company sold its majority equity interest in Advantage. The
    Companys investment in Advantage after the sale
    transaction is included in the companies 5% to 25% owned
    category. See Note 3 to the consolidated financial
    statements for further information.                                                                                                             

55



---



##### 





|         |                                                                                          
|-------- | -----------------------------------------------------------------------------------------
|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, 2005. In addition, this quarterly
report on Form 10-Q contains certain forward-looking statements.
These statements include the plans and objectives of management
for future operations and financial objectives and can be
identified by the use of forward-looking terminology such as
may, will, expect,
intend, anticipate,
estimate, or continue or the negative
thereof or other variations thereon or comparable terminology.
These forward-looking statements are subject to the inherent
uncertainties in predicting future results and conditions.
Certain factors that could cause actual results and conditions
to differ materially from those projected in these
forward-looking statements are set forth below in the Risk
Factors section. Other factors that could cause actual results
to differ materially include:




| |   |                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------
| |  | changes in the economy and general economic conditions;                                                            
|
| |  | risks associated with possible disruption in our operations
    due to terrorism;                                  
|
| |  | future changes in laws or regulations and conditions in our
    operating areas; and                               
|
| |  | other risks and uncertainties as may be detailed from time to
    time in our public announcements and SEC filings.

Financial or other information presented for private finance
portfolio companies has been obtained from the portfolio
companies, and the financial information presented may represent
unaudited, projected or pro forma financial information, and
therefore may not be indicative of actual results. In addition,
the private equity industry uses financial measures such as
EBITDA or EBITDAM (Earnings Before Interest, Taxes,
Depreciation, Amortization and, in some instances, Management
fees) in order to assess a portfolio companys financial
performance and to value a portfolio company. EBITDA and EBITDAM
are not intended to represent cash flow from operations as
defined by U.S. generally accepted accounting principles and
such information should not be considered as an alternative to
net income, cash flow from operations or any other measure of
performance prescribed by U.S. generally accepted accounting
principles.


OVERVIEW






56



---



##### 





|                               |  |          |    |   |              |  |    |      |  |  |    |  
|------------------------------ |  | -------- | -- | - | ------------ |  | -- | ---- |  |  | -- | -
|                               |  | June 30, |    |   |             
|                               |  |          |    |   | December 31, | 
|                               |  | 2006     |    |   | 2005         |  |    | 2005 | 
|                               |  |          |    |   |              |  |    |      | 
|Private finance                |  |          | 96 | % |              |  | 95 | %    |  |  | 96 | %
|Commercial real estate finance |  |          | 4  | % |              |  | 5  | %    |  |  | 4  | %





PORTFOLIO AND INVESTMENT ACTIVITY




|                                                                |  |                    |         |   |                  |   |         |                |  |   |         |   |  |      |         |   |  |   |         |  
|--------------------------------------------------------------- |  | ------------------ | ------- | - | ---------------- | - | ------- | -------------- |  | - | ------- | - |  | ---- | ------- | - |  | - | ------- | -
|                                                                |  | At and for the     |         |   | At and for the   |   |         | At and for the | 
|                                                                |  | Three Months Ended |         |   | Six Months Ended |   |         | Year Ended     | 
|                                                                |  | June 30,           |         |   | June 30,         |   |         | December 31,   | 
|                                                                |  |                    |         |   |                  |   |         |                | 
|                                                                |  | 2006               |         |   | 2005             |   |         | 2006           |  |   | 2005    |   |  | 2005 |        
|($ in millions)                                                 |  |                    |         |   |                  |   |         |                |  |   |         |   |  |      |        
|Portfolio at value                                              |  | $                  | 3,593.5 |   |                  | $ | 2,714.3 |                |  | $ | 3,593.5 |   |  | $    | 2,714.3 |   |  | $ | 3,606.4 |  
|Investments
    funded(1)                                       |  | $                  | 453.4   |   |                  | $ | 389.3   |                |  | $ | 1,251.2 |   |  | $    | 654.9   |   |  | $ | 1,675.8 |  
|Change in accrued or reinvested interest and
    dividends(2)   |  | $                  | (7.0    | ) |                  | $ | (14.1   | )              |  | $ | (9.1    | ) |  | $    | (3.6    | ) |  | $ | 6.6     |  
|Principal collections related to investment repayments or sales |  | $                  | 429.2   |   |                  | $ | 932.6   |                |  | $ | 769.6   |   |  | $    | 1,090.8 |   |  | $ | 1,503.4 |  
|Yield on interest-bearing
    investments(3)                    |  |                    | 12.6    | % |                  |   | 13.2    | %              |  |   | 12.6    | % |  |      | 13.2    | % |  |   | 12.8    | %




|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Investments funded for the six months ended June 30, 2006,
    included a $150 million subordinated debt investment in
    Advantage Sales & Marketing, Inc. received in
    conjunction with the sale of Advantage and a $30 million
    subordinated debt investment in STS Operating, Inc.
    received in conjunction with the sale of STS. See discussion
    below.                                                                                             
|   
|(2) | Includes changes in accrued or reinvested interest of
    $0.6 million and $1.7 million for the three and six
    months ended June 30, 2006, respectively, related to our
    investments in money market securities.                                                                                                                                                                                                                                                
|   
|(3) | The weighted average yield on interest-bearing investments is
    computed as the (a) annual stated interest plus the annual
    amortization of loan origination fees, original issue discount,
    and market discount on accruing interest-bearing investments
    less the annual amortization of loan origination costs, divided
    by (b) total interest-bearing investments at value. The
    weighted average yield is computed as of the balance sheet date.

57



---



##### 



Private Finance




|                                                                |                            |                    |                                 |       |                  |         |  |                |      |      |          |       |         |         |  |  |          |      |         |       |         |         |          |  |      |       |         |       |          |         |  |  |      |      |         |         |         |         |  |  |      |      |  
|--------------------------------------------------------------- | -------------------------- | ------------------ | ------------------------------- | ----- | ---------------- | ------- |  | -------------- | ---- | ---- | -------- | ----- | ------- | ------- |  |  | -------- | ---- | ------- | ----- | ------- | ------- | -------- |  | ---- | ----- | ------- | ----- | -------- | ------- |  |  | ---- | ---- | ------- | ------- | ------- | ------- |  |  | ---- | ---- | -
|                                                                |                            | At and for the     |                                 |       | At and for the   |         |  | At and for the |     
|                                                                |                            | Three Months Ended |                                 |       | Six Months Ended |         |  | Year Ended     |     
|                                                                |                            | June 30,           |                                 |       | June 30,         |         |  | December 31,   |     
|                                                                |                            |                    |                                 |       |                  |         |  |                |     
|                                                                |                            | 2006               |                                 |       | 2005             |         |  | 2006           |      |      | 2005     |       |         | 2005    | 
|                                                                |                            |                    |                                 |       |                  |         |  |                |      |      |          |       |         |         | 
|                                                                |                            | Value              |                                 |       | Yield(2)         |         |  | Value          |      |      | Yield(2) |       |         | Value   |  |  | Yield(2) |      |         | Value |         |         | Yield(2) |  |      | Value |         |       | Yield(2) |        
|($ in millions)                                                 |                            |                    |                                 |       |                  |         |  |                |      |      |          |       |         |         |  |  |          |      |         |       |         |         |          |  |      |       |         |       |          |        
|Portfolio at value:                                             |                            |                    |                                 |       |                  |         |  |                |      |      |          |       |         |         |  |  |          |      |         |       |         |         |          |  |      |       |         |       |          |         |  |  |      |      |         |         |         |         |  | 
|                                                                | Loans and debt securities: |                    |                                 |       |                  |         |  |                |      |      |          |       |         |         |  |  |          |      |         |       |         |         |          |  |      |       |         |       |          |         |  |  |      |      |         |         |         |         |  |  |     
|                                                                |                            | Senior loans       |                                 | $     | 275.9            |         |  |                | 9.5  | %    |          | $     | 203.3   |         |  |  | 10.0     | %    |         | $     | 275.9   |         |          |  | 9.5  | %     |         | $     | 203.3    |         |  |  | 10.0 | %    |         | $       | 239.8   |         |  |  | 9.5  | %   
|                                                                |                            | Unitranche debt    |                                 |       | 515.0            |         |  |                | 10.7 | %    |          |       | 67.3    |         |  |  | 13.3     | %    |         |       | 515.0   |         |          |  | 10.7 | %     |         |       | 67.3     |         |  |  | 13.3 | %    |         |         | 294.2   |         |  |  | 11.4 | %   
|                                                                |                            | Subordinated debt  |                                 |       | 1,700.3          |         |  |                | 13.9 | %    |          |       | 1,362.4 |         |  |  | 14.2     | %    |         |       | 1,700.3 |         |          |  | 13.9 | %     |         |       | 1,362.4  |         |  |  | 14.2 | %    |         |         | 1,560.9 |         |  |  | 13.8 | %   
|                                                                |                            |                    |                                 |       |                  |         |  |                |      |      |          |       |         |         |  |  |          |      |         |       |         |         |          |  |      |       |         |       |          |        
|                                                                |                            |                    | Total loans and debt securities |       | $                | 2,491.2 |  |                |      | 12.7 | %        |       | $       | 1,633.0 |  |  |          | 13.7 | %       |       | $       | 2,491.2 |          |  |      | 12.7  | %       |       | $        | 1,633.0 |  |  |      | 13.7 | %       |         | $       | 2,094.9 |  |  |      | 13.0 | %
|                                                                | Equity securities          |                    |                                 | 969.2 |                  |         |  |                |      |      |          | 937.5 |         |         |  |  |          |      |         | 969.2 |         |         |          |  |      |       |         | 937.5 |          |         |  |  |      |      |         | 1,384.4 |         |         |  |  |     
|                                                                |                            |                    |                                 |       |                  |         |  |                |      |      |          |       |         |         |  |  |          |      |         |       |         |         |          |  |      |       |         |       |          |        
|Total portfolio                                                 |                            | $                  | 3,460.4                         |       |                  |         |  |                |      | $    | 2,570.5  |       |         |         |  |  |          | $    | 3,460.4 |       |         |         |          |  |      | $     | 2,570.5 |       |          |         |  |  |      | $    | 3,479.3 |         |         |         |  | 
|                                                                |                            |                    |                                 |       |                  |         |  |                |      |      |          |       |         |         |  |  |          |      |         |       |         |         |          |  |      |       |         |       |          |        
|Investments
    funded(1)                                       |                            | $                  | 441.5                           |       |                  |         |  |                |      | $    | 298.0    |       |         |         |  |  |          | $    | 1,237.3 |       |         |         |          |  |      | $     | 466.3   |       |          |         |  |  |      | $    | 1,462.3 |         |         |         |  | 
|Change in accrued or reinvested interest and dividends          |                            | $                  | (7.1                            | )     |                  |         |  |                |      | $    | 6.5      |       |         |         |  |  |          | $    | (11.3   | )     |         |         |          |  |      | $     | 14.4    |       |          |         |  |  |      | $    | 24.6    |         |         |         |  | 
|Principal collections related to investment repayments or sales |                            | $                  | 415.7                           |       |                  |         |  |                |      | $    | 178.8    |       |         |         |  |  |          | $    | 752.4   |       |         |         |          |  |      | $     | 330.0   |       |          |         |  |  |      | $    | 703.9   |         |         |         |  | 




|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Investments funded for the six months ended June 30, 2006,
    included a $150 million subordinated debt investment in
    Advantage Sales & Marketing, Inc. received in
    conjunction with the sale of Advantage and a $30 million
    subordinated debt investment in STS Operating, Inc.
    received in conjunction with the sale of STS. See discussion
    below.                                                                                    
|   
|(2) | The weighted average yield on loans and debt securities is
    computed as the (a) annual stated interest plus the annual
    amortization of loan origination fees, original issue discount,
    and market discount on accruing loans and debt securities less
    the annual amortization of loan origination costs, divided by
    (b) total loans and debt securities at value. The weighted
    average yield is computed as of the balance sheet date.







58



---



##### 





Investments Funded.


|                           |                          |                                        |      |          |                    |  |  |        |          |   |          |       |       |          |  |      |          |   |       |         |         |  |  |      |      |  
|-------------------------- | ------------------------ | -------------------------------------- | ---- | -------- | ------------------ |  |  | ------ | -------- | - | -------- | ----- | ----- | -------- |  | ---- | -------- | - | ----- | ------- | ------- |  |  | ---- | ---- | -
|                           |                          | For the Six Months Ended June 30, 2006 |     
|                           |                          |                                        |     
|                           |                          | Debt Investments                       |      |          | Buyout Investments |  |  | Total  |         
|                           |                          |                                        |      |          |                    |  |  |        |         
|                           |                          |                                        |      | Weighted |                    |  |  |        | Weighted |   |          |       |       | Weighted | 
|                           |                          |                                        |      | Average  |                    |  |  |        | Average  |   |          |       |       | Average  | 
|                           |                          | Amount                                 |      |          | Yield(1)           |  |  | Amount |          |   | Yield(1) |       |       | Amount   |  |      | Yield(1) |  
|($ in millions)            |                          |                                        |      |          |                    |  |  |        |          |   |          |       |       |          |  |      |          |  
|Loans and debt securities: |                          |                                        |      |          |                    |  |  |        |          |   |          |       |       |          |  |      |          |   |       |         |         |  |  |     
|                           | Senior
    loans(4)      |                                        | $    | 149.4    |                    |  |  | 9.3    | %        |   | $        | 121.6 |       |          |  | 8.8  | %        |   | $     | 271.0   |         |  |  | 9.1  | %   
|                           | Unitranche
    debt(2)   |                                        |      | 255.9    |                    |  |  | 10.6   | %        |   |          |      |       |          |  |     |          |   |       | 255.9   |         |  |  | 10.6 | %   
|                           | Subordinated
    debt(3) |                                        |      | 374.8    |                    |  |  | 13.0   | %        |   |          | 189.1 |       |          |  | 13.7 | %        |   |       | 563.9   |         |  |  | 13.2 | %   
|                           |                          |                                        |      |          |                    |  |  |        |          |   |          |       |       |          |  |      |          |  
|                           |                          | Total loans and debt securities        |      |          | 780.1              |  |  |        | 11.5     | % |          |       | 310.7 |          |  |      | 11.8     | % |       |         | 1,090.8 |  |  |      | 11.5 | %
|Equity                     |                          |                                        | 54.6 |          |                    |  |  |        |          |   | 91.9     |       |       |          |  |      |          |   | 146.5 |         |         |  |  |     
|                           |                          |                                        |      |          |                    |  |  |        |          |   |          |       |       |          |  |      |          |  
|                           | Total                    |                                        | $    | 834.7    |                    |  |  |        |          |   | $        | 402.6 |       |          |  |      |          |   | $     | 1,237.3 |         |  |  |      |     
|                           |                          |                                        |      |          |                    |  |  |        |          |   |          |       |       |          |  |      |          |  

|                           |                        |                                        |      |          |                    |  |  |        |          |   |          |       |       |          |  |      |          |   |      |       |       |  |  |      |      |  
|-------------------------- | ---------------------- | -------------------------------------- | ---- | -------- | ------------------ |  |  | ------ | -------- | - | -------- | ----- | ----- | -------- |  | ---- | -------- | - | ---- | ----- | ----- |  |  | ---- | ---- | -
|                           |                        | For the Six Months Ended June 30, 2005 |     
|                           |                        |                                        |     
|                           |                        | Debt Investments                       |      |          | Buyout Investments |  |  | Total  |         
|                           |                        |                                        |      |          |                    |  |  |        |         
|                           |                        |                                        |      | Weighted |                    |  |  |        | Weighted |   |          |       |       | Weighted | 
|                           |                        |                                        |      | Average  |                    |  |  |        | Average  |   |          |       |       | Average  | 
|                           |                        | Amount                                 |      |          | Yield(1)           |  |  | Amount |          |   | Yield(1) |       |       | Amount   |  |      | Yield(1) |  
|($ in millions)            |                        |                                        |      |          |                    |  |  |        |          |   |          |       |       |          |  |      |          |  
|Loans and debt securities: |                        |                                        |      |          |                    |  |  |        |          |   |          |       |       |          |  |      |          |   |      |       |       |  |  |     
|                           | Senior loans           |                                        | $    | 19.5     |                    |  |  | 12.1   | %        |   | $        | 77.7  |       |          |  | 5.9  | %        |   | $    | 97.2  |       |  |  | 7.1  | %   
|                           | Unitranche
    debt(2) |                                        |      | 59.2     |                    |  |  | 10.8   | %        |   |          |      |       |          |  |     |          |   |      | 59.2  |       |  |  | 10.8 | %   
|                           | Subordinated debt      |                                        |      | 140.0    |                    |  |  | 12.9   | %        |   |          | 110.6 |       |          |  | 13.2 | %        |   |      | 250.6 |       |  |  | 13.0 | %   
|                           |                        |                                        |      |          |                    |  |  |        |          |   |          |       |       |          |  |      |          |  
|                           |                        | Total loans and debt securities        |      |          | 218.7              |  |  |        | 12.3     | % |          |       | 188.3 |          |  |      | 10.2     | % |      |       | 407.0 |  |  |      | 11.3 | %
|Equity                     |                        |                                        | 15.5 |          |                    |  |  |        |          |   | 43.8     |       |       |          |  |      |          |   | 59.3 |       |       |  |  |     
|                           |                        |                                        |      |          |                    |  |  |        |          |   |          |       |       |          |  |      |          |  
|                           | Total                  |                                        | $    | 234.2    |                    |  |  |        |          |   | $        | 232.1 |       |          |  |      |          |   | $    | 466.3 |       |  |  |      |     
|                           |                        |                                        |      |          |                    |  |  |        |          |   |          |       |       |          |  |      |          |  






|    |                                                                                                                                                                                                                                                                                                                                                                                      
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The weighted average yield on interest-bearing investments is
    computed as the (a) annual stated interest on accruing
    interest-bearing investments, divided by (b) total
    interest-bearing investments funded.                                                                                                                                                             
|   
|(2) | Unitranche debt is a single debt investment that is a blend of
    senior and subordinated debt terms. The yield on a unitranche
    investment reflects the blended yield of senior and subordinated
    debt combined.                                                                                                                                                             
|   
|(3) | Debt investments for the six months ended June 30, 2006,
    included a $150 million, 12.0% subordinated debt investment
    in Advantage Sales & Marketing, Inc. received in conjunction
    with the sale of Advantage and a $30 million, 15.0%
    subordinated debt investment in STS Operating, Inc.
    received in conjunction with the sale of STS. See discussion
    below.
|   
|(4) | Senior loans funded for the six months ended June 30, 2006,
    included $163.6 million that was repaid during the six
    months ended June 30, 2006.                                                                                                                                                                                                                               

59



---



##### 



|                           |                        |                                      |      |          |                    |  |  |        |          |   |          |       |       |          |  |      |          |   |       |         |         |  |  |      |      |  
|-------------------------- | ---------------------- | ------------------------------------ | ---- | -------- | ------------------ |  |  | ------ | -------- | - | -------- | ----- | ----- | -------- |  | ---- | -------- | - | ----- | ------- | ------- |  |  | ---- | ---- | -
|                           |                        | For the Year Ended December 31, 2005 |     
|                           |                        |                                      |     
|                           |                        | Debt Investments                     |      |          | Buyout Investments |  |  | Total  |         
|                           |                        |                                      |      |          |                    |  |  |        |         
|                           |                        |                                      |      | Weighted |                    |  |  |        | Weighted |   |          |       |       | Weighted | 
|                           |                        |                                      |      | Average  |                    |  |  |        | Average  |   |          |       |       | Average  | 
|                           |                        | Amount                               |      |          | Yield(1)           |  |  | Amount |          |   | Yield(1) |       |       | Amount   |  |      | Yield(1) |  
|($ in millions)            |                        |                                      |      |          |                    |  |  |        |          |   |          |       |       |          |  |      |          |  
|Loans and debt securities: |                        |                                      |      |          |                    |  |  |        |          |   |          |       |       |          |  |      |          |   |       |         |         |  |  |     
|                           | Senior
    loans(3)    |                                      | $    | 76.8     |                    |  |  | 10.0   | %        |   | $        | 250.2 |       |          |  | 6.4  | %        |   | $     | 327.0   |         |  |  | 7.2  | %   
|                           | Unitranche
    debt(2) |                                      |      | 259.5    |                    |  |  | 10.5   | %        |   |          |      |       |          |  |     |          |   |       | 259.5   |         |  |  | 10.5 | %   
|                           | Subordinated debt      |                                      |      | 296.9    |                    |  |  | 12.3   | %        |   |          | 330.9 |       |          |  | 12.5 | %        |   |       | 627.8   |         |  |  | 12.4 | %   
|                           |                        |                                      |      |          |                    |  |  |        |          |   |          |       |       |          |  |      |          |  
|                           |                        | Total loans and debt securities      |      |          | 633.2              |  |  |        | 11.3     | % |          |       | 581.1 |          |  |      | 9.9      | % |       |         | 1,214.3 |  |  |      | 10.6 | %
|Equity                     |                        |                                      | 82.5 |          |                    |  |  |        |          |   | 165.5    |       |       |          |  |      |          |   | 248.0 |         |         |  |  |     
|                           |                        |                                      |      |          |                    |  |  |        |          |   |          |       |       |          |  |      |          |  
|                           | Total                  |                                      | $    | 715.7    |                    |  |  |        |          |   | $        | 746.6 |       |          |  |      |          |   | $     | 1,462.3 |         |  |  |      |     
|                           |                        |                                      |      |          |                    |  |  |        |          |   |          |       |       |          |  |      |          |  






|    |                                                                                                                                                                                                                         
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The weighted average yield on interest-bearing investments is
    computed as the (a) annual stated interest on accruing
    interest-bearing investments, divided by (b) total
    interest-bearing investments funded.
|   
|(2) | Unitranche debt is a single debt investment that is a blend of
    senior and subordinated debt terms. The yield on a unitranche
    investment reflects the blended yield of senior and subordinated
    debt combined.
|   
|(3) | Buyout senior loans funded included $174.9 million that was
    repaid during the year.                                                                                                                                 









Portfolio Yield.


60



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##### 



Outstanding Investment Commitments.




| |   |                                                                                                                                                                                                                                                                                                                                                                                                                         
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | $88.3 million in the form of revolving senior debt
    facilities to nineteen companies.                                                                                                                                                                                                                                                                                                                                
|
| |  | $50.7 million in the form of equity to fifteen private
    equity and venture capital funds.                                                                                                                                                                                                                                                                                                                            
|
| |  | $24.2 million in the form of debt to Promo Works, LLC.                                                                                                                                                                                                                                                                                                                                                                  
|
| |  | $23.9 million in the form of debt to S.B. Restaurant
    Company.                                                                                                                                                                                                                                                                                                                                                       
|
| |  | $9.0 million in the form of debt to Integrity Interactive
    Corp.                                                                                                                                                                                                                                                                                                                                                     
|
| |  | $7.6 million in the form of debt to Carlisle Wide Plank
    Floors, Inc.                                                                                                                                                                                                                                                                                                                                                
|
| |  | $6.5 million in co-investment commitments to Pine Creek
    Equity Partners, LLC.                                                                                                                                                                                                                                                                                                                                       
|
| |  | We have various commitments to Callidus Capital Corporation
    (Callidus), which owns 80% (subject to dilution) of Callidus
    Capital Management, LLC, an asset management company that
    structures and manages collateralized debt obligations (CDOs),
    collateralized loan obligations (CLOs), and other related
    investments. Our commitment to Callidus consisted of the
    following at June 30, 2006:

|                                                                                      |       |           |      |      |        |        |     |             |  |   |      |      | 
|------------------------------------------------------------------------------------- | ----- | --------- | ---- | ---- | ------ | ------ | --- | ----------- |  | - | ---- | ---- | 
|                                                                                      |       |           |      |      |        | Amount |    
|                                                                                      |       | Committed |      |      | Amount |        |     | Available   | 
|                                                                                      |       | Amount    |      |      | Drawn  |        |     | to be Drawn | 
|($ in millions)                                                                       |       |           |      |      |        |        |     |             | 
|Subordinated debt to support warehouse facilities &
    warehousing
    activities(1) |       | $         | 36.0 |      |        | $      |    |             |  | $ | 36.0 |     
|Revolving line of credit for working capital                                          |       |           | 4.0  |      |        |        | 1.6 |             |  |   | 2.4  |     
|                                                                                      |       |           |      |      |        |        |     |             | 
|                                                                                      | Total |           | $    | 40.0 |        |        | $   | 1.6         |  |   | $    | 38.4 | 
|                                                                                      |       |           |      |      |        |        |     |             | 

| | 
| | 
| | 

| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | Callidus has a secured warehouse credit facility with a third
    party for up to $240 million. The facility is used
    primarily to finance the acquisition of loans pending
    securitization through a CDO or CLO. In conjunction with this
    warehouse credit facility, we have agreed to designate our
    $36 million subordinated debt commitment for Callidus to
    draw upon to provide first loss capital as needed to support the
    warehouse facility.



| |                                                                                                                                                 
| | ------------------------------------------------------------------------------------------------------------------------------------------------
| | In addition, at June 30, 2006, we had a commitment to
    Callidus to purchase preferred equity in future CLO transactions
    of $77.0 million.





Business Loan Express,
LLC.




|                      |                                             |      |     |      |      |   |     |      | 
|--------------------- | ------------------------------------------- | ---- | --- | ---- | ---- | - | --- | ---- | 
|                      |                                             | 2006 |     |      | 2005 |  
|($ in millions)       |                                             |      |     |      |      |  
|Interest income       |                                             | $    | 7.8 |      |      | $ | 6.9 |     
|Dividend income       |                                             |      |    |      |      |   | 5.0 |     
|Fees and other income |                                             |      | 4.3 |      |      |   | 4.7 |     
|                      |                                             |      |     |      |      |  
|                      | Total interest and related portfolio income |      | $   | 12.1 |      |   | $   | 16.6 | 
|                      |                                             |      |     |      |      |  

61



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##### 

















62



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##### 



Advantage Sales & Marketing,
Inc.


post-closing








Commercial Real Estate Finance




|                                                                       |                           |                             |       |      |                           |  |  |                |  |              |          |       |  |       |  |      |          |   |       |       |  |  |          |      |  |       |       |       |          |  |  |      |  |   |       |       |  |  |  |      | 
|---------------------------------------------------------------------- | ------------------------- | --------------------------- | ----- | ---- | ------------------------- |  |  | -------------- |  | ------------ | -------- | ----- |  | ----- |  | ---- | -------- | - | ----- | ----- |  |  | -------- | ---- |  | ----- | ----- | ----- | -------- |  |  | ---- |  | - | ----- | ----- |  |  |  | ---- | 
|                                                                       |                           | At and for the              |       |      | At and for the            |  |  |               
|                                                                       |                           | Three Months Ended June 30, |       |      | Six Months Ended June 30, |  |  | At and for     | 
|                                                                       |                           |                             |       |      |                           |  |  | the Year Ended | 
|                                                                       |                           |                             |       |      |                           |  |  |                |  | December 31, |         
|                                                                       |                           | 2006                        |       |      | 2005                      |  |  | 2006           |  |              | 2005     |       |  | 2005  | 
|                                                                       |                           |                             |       |      |                           |  |  |                |  |              |          |       |  |       | 
|                                                                       |                           | Value                       |       |      | Yield(1)                  |  |  | Value          |  |              | Yield(1) |       |  | Value |  |      | Yield(1) |   |       | Value |  |  | Yield(1) |      |  | Value |       |       | Yield(1) | 
|($ in millions)                                                        |                           |                             |       |      |                           |  |  |                |  |              |          |       |  |       |  |      |          |   |       |       |  |  |          |      |  |       |       |       |          | 
|Portfolio at value:                                                    |                           |                             |       |      |                           |  |  |                |  |              |          |       |  |       |  |      |          |   |       |       |  |  |          |      |  |       |       |       |          |  |  |      |  |   |       |       |  |  |  |     
|                                                                       | Commercial mortgage loans |                             | $     | 96.5 |                           |  |  | 8.1%           |  |              | $        | 116.1 |  |       |  | 6.7% |          |   | $     | 96.5  |  |  |          | 8.1% |  |       | $     | 116.1 |          |  |  | 6.7% |  |   | $     | 102.6 |  |  |  | 7.6% | 
|                                                                       | Real estate owned         |                             |       | 14.6 |                           |  |  |                |  |              |          | 16.6  |  |       |  |      |          |   |       | 14.6  |  |  |          |      |  |       |       | 16.6  |          |  |  |      |  |   |       | 13.9  |  |  |  |      | 
|                                                                       | Equity interests          |                             |       | 22.0 |                           |  |  |                |  |              |          | 11.1  |  |       |  |      |          |   |       | 22.0  |  |  |          |      |  |       |       | 11.1  |          |  |  |      |  |   |       | 10.6  |  |  |  |      | 
|                                                                       |                           |                             |       |      |                           |  |  |                |  |              |          |       |  |       |  |      |          |   |       |       |  |  |          |      |  |       |       |       |          | 
|Total portfolio                                                        |                           | $                           | 133.1 |      |                           |  |  |                |  | $            | 143.8    |       |  |       |  |      |          | $ | 133.1 |       |  |  |          |      |  | $     | 143.8 |       |          |  |  |      |  | $ | 127.1 |       |  |  |  |     
|                                                                       |                           |                             |       |      |                           |  |  |                |  |              |          |       |  |       |  |      |          |   |       |       |  |  |          |      |  |       |       |       |          | 
|Investments funded                                                     |                           | $                           | 11.9  |      |                           |  |  |                |  | $            | 91.3     |       |  |       |  |      |          | $ | 13.9  |       |  |  |          |      |  | $     | 188.6 |       |          |  |  |      |  | $ | 213.5 |       |  |  |  |     
|Change in accrued or reinvested interest                               |                           | $                           | (0.5  | )    |                           |  |  |                |  | $            | (20.6    | )     |  |       |  |      |          | $ | 0.5   |       |  |  |          |      |  | $     | (18.0 | )     |          |  |  |      |  | $ | (18.0 | )     |  |  |  |     
|Principal collections related to investment repayments or
    sales(2) |                           | $                           | 13.5  |      |                           |  |  |                |  | $            | 753.8    |       |  |       |  |      |          | $ | 17.2  |       |  |  |          |      |  | $     | 760.8 |       |          |  |  |      |  | $ | 799.5 |       |  |  |  |     




|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The weighted average yield on the commercial mortgage loans is
    computed as the (a) annual stated interest plus the annual
    amortization of loan origination fees, original issue discount,
    and market discount on accruing interest-bearing investments
    less the annual amortization of origination costs, divided by
    (b) total interest-bearing investments at value. The
    weighted average yield is computed as of the balance sheet date.
|   
|(2) | Principal collections related to investment repayments or sales
    for the year ended December 31, 2005, included
    $718.1 million related to the sale of our CMBS and CDO
    portfolio in May 2005.                                                                                                                                                                                                                                                          

63



---



##### 





|                                       |       |        |       |       |          |   |        |        |   |   |       |       | 
|-------------------------------------- | ----- | ------ | ----- | ----- | -------- | - | ------ | ------ | - | - | ----- | ----- | 
|                                       |       | Face   |       |       |          |   | Amount |       
|                                       |       | Amount |       |       | Discount |   |        | Funded |  
|($ in millions)                        |       |        |       |       |          |   |        |        |  
|For the Six Months Ended June 30, 2006 |       |        |       |       |          |   |        |        |   |   |       |      
|Commercial mortgage loans              |       | $      | 7.4   |       |          | $ |       |        |   | $ | 7.4   |      
|Equity interests                       |       |        | 6.5   |       |          |   |       |        |   |   | 6.5   |      
|                                       |       |        |       |       |          |   |        |        |  
|                                       | Total |        | $     | 13.9  |          |   | $      |       |   |   | $     | 13.9  | 
|                                       |       |        |       |       |          |   |        |        |  
|For the Six Months Ended June 30, 2005 |       |        |       |       |          |   |        |        |   |   |       |      
|CMBS bonds (4 new
    issuances)(1)    |       | $      | 211.5 |       |          | $ | (90.5  | )      |   | $ | 121.0 |      
|Commercial mortgage loans              |       |        | 67.1  |       |          |   | (0.9   | )      |   |   | 66.2  |      
|Equity interests                       |       |        | 1.4   |       |          |   |       |        |   |   | 1.4   |      
|                                       |       |        |       |       |          |   |        |        |  
|                                       | Total |        | $     | 280.0 |          |   | $      | (91.4  | ) |   | $     | 188.6 | 
|                                       |       |        |       |       |          |   |        |        |  
|For the Year Ended December 31, 2005   |       |        |       |       |          |   |        |        |   |   |       |      
|CMBS bonds (4 new
    issuances)(1)    |       | $      | 211.5 |       |          | $ | (90.5  | )      |   | $ | 121.0 |      
|Commercial mortgage loans              |       |        | 88.5  |       |          |   | (0.8   | )      |   |   | 87.7  |      
|Equity interests                       |       |        | 4.8   |       |          |   |       |        |   |   | 4.8   |      
|                                       |       |        |       |       |          |   |        |        |  
|                                       | Total |        | $     | 304.8 |          |   | $      | (91.3  | ) |   | $     | 213.5 | 
|                                       |       |        |       |       |          |   |        |        |  




|    |                                                                     
|--- | --------------------------------------------------------------------
|(1) | The CMBS bonds invested in during 2005 were sold on May 3,
    2005.



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






64



---



##### 



Hedging Activities






OTHER ASSETS




PORTFOLIO ASSET QUALITY


Portfolio by Grade.




|                |  |           |         |  |                 |  |       |           |  |   |                 |  |  |  |       |  
|--------------- |  | --------- | ------- |  | --------------- |  | ----- | --------- |  | - | --------------- |  |  |  | ----- | -
|                |  | 2006      |         |  | 2005            | 
|                |  |           |         |  |                 | 
|                |  | Portfolio |         |  | Percentage of   |  |       | Portfolio |  |   | Percentage of   | 
|Grade           |  | at Value  |         |  | Total Portfolio |  |       | at Value  |  |   | Total Portfolio | 
|                |  |           |         |  |                 |  |       |           |  |   |                 | 
|($ in millions) |  |           |         |  |                 |  |       |          
|1               |  | $         | 1,241.2 |  |                 |  | 34.5  | %         |  | $ | 1,643.0         |  |  |  | 45.6  | %
|2               |  |           | 2,177.8 |  |                 |  | 60.6  |           |  |   | 1,730.8         |  |  |  | 48.0  |  
|3               |  |           | 93.1    |  |                 |  | 2.6   |           |  |   | 149.1           |  |  |  | 4.1   |  
|4               |  |           | 27.4    |  |                 |  | 0.8   |           |  |   | 26.5            |  |  |  | 0.7   |  
|5               |  |           | 54.0    |  |                 |  | 1.5   |           |  |   | 57.0            |  |  |  | 1.6   |  
|                |  |           |         |  |                 |  |       |           |  |   |                 | 
|                |  | $         | 3,593.5 |  |                 |  | 100.0 | %         |  | $ | 3,606.4         |  |  |  | 100.0 | %
|                |  |           |         |  |                 |  |       |           |  |   |                 | 

65



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##### 









Loans and Debt Securities on Non-Accrual Status.


|                                                                                    |                                |                               |  |      |       |  |  |      |       | 
|----------------------------------------------------------------------------------- | ------------------------------ | ----------------------------- |  | ---- | ----- |  |  | ---- | ----- | 
|                                                                                    |                                | 2006                          |  |      | 2005  | 
|($ in millions)                                                                     |                                |                               |  |      |       | 
|Loans and debt securities in workout status (classified as
    Grade 4
    or 5)(1)
|                                                                                    | Private finance                |                               |  |      |       |  |  |      |      
|                                                                                    |                                | Companies more than 25% owned |  | $    | 17.7  |  |  | $    | 15.6  | 
|                                                                                    |                                | Companies 5% to 25% owned     |  |      | 3.3   |  |  |      |      | 
|                                                                                    |                                | Companies less than 5% owned  |  |      | 24.6  |  |  |      | 11.4  | 
|                                                                                    | Commercial real estate finance |                               |  | 2.9  |       |  |  | 12.9 |      
|Loans and debt securities not in workout status                                     |                                |                               |  |      |       |  |  |     
|                                                                                    | Private finance                |                               |  |      |       |  |  |      |      
|                                                                                    |                                | Companies more than 25% owned |  |      | 40.8  |  |  |      | 58.0  | 
|                                                                                    |                                | Companies 5% to 25% owned     |  |      | 6.6   |  |  |      | 0.5   | 
|                                                                                    |                                | Companies less than 5% owned  |  |      | 3.9   |  |  |      | 49.5  | 
|                                                                                    | Commercial real estate finance |                               |  | 12.8 |       |  |  | 7.9  |      
|                                                                                    |                                |                               |  |      |       | 
|                                                                                    |                                | Total                         |  | $    | 112.6 |  |  | $    | 155.8 | 
|                                                                                    |                                |                               |  |      |       | 
|                                                                                    |                                | Percentage of total portfolio |  |      | 3.1%  |  |  |      | 4.3%  | 




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

Loans and Debt Securities Over 90 Days Delinquent.


|                          |                               |      |      |      |      |   |      |      | 
|------------------------- | ----------------------------- | ---- | ---- | ---- | ---- | - | ---- | ---- | 
|                          |                               | 2006 |      |      | 2005 |  
|                          |                               |      |      |      |      |  
|($ in millions)           |                               |      |      |     
|Private finance           |                               | $    | 47.2 |      |      | $ | 74.6 |     
|Commercial mortgage loans |                               |      | 3.7  |      |      |   | 6.1  |     
|                          |                               |      |      |      |      |  
|                          | Total                         |      | $    | 50.9 |      |   | $    | 80.7 | 
|                          |                               |      |      |      |      |  
|                          | Percentage of total portfolio |      |      | 1.4% |      |   |      | 2.2% | 





66



---



##### 



and


PORTFOLIO RETURNS




67



---



##### 



RESULTS OF OPERATIONS


Comparison of Three and Six Months Ended June 30, 2006
and 2005




|                                                     |                                                       |                                             |         |          |         |   |            |         |                    |   |          |          |          |      |            |     |      |    |         |          |         |   |         |         |         |   |          |          |          |   |     |     |    |   
|---------------------------------------------------- | ----------------------------------------------------- | ------------------------------------------- | ------- | -------- | ------- | - | ---------- | ------- | ------------------ | - | -------- | -------- | -------- | ---- | ---------- | --- | ---- | -- | ------- | -------- | ------- | - | ------- | ------- | ------- | - | -------- | -------- | -------- | - | --- | --- | -- | --
|                                                     |                                                       | For the Three Months                        |         |          |         |   |            |         | For the Six Months |   |          |          |          |     
|                                                     |                                                       | Ended June 30,                              |         |          |         |   |            |         | Ended June 30,     |   |          |          |          |     
|                                                     |                                                       |                                             |         |          |         |   | Percentage |         |                    |   |          |          |          |      | Percentage |    
|                                                     |                                                       | 2006                                        |         |          | 2005    |   |            | Change  |                    |   | Change   |          |          | 2006 |            |     | 2005 |    |         | Change   |         |   | Change  |        
|($ in thousands, except per share amounts)           |                                                       |                                             |         |          |         |   |            |         |                    |   |          |          |          |      |            |     |      |    |         |          |         |   |         |        
|                                                     |                                                       | (unaudited)                                 |         |          |         |   |            |         | (unaudited)        |   |          |          |          |     
|Interest and Related Portfolio Income                |                                                       |                                             |         |          |         |   |            |         |                    |   |          |          |          |      |            |     |      |    |         |          |         |   |         |         |         |   |          |          |          |   |     |    
|                                                     | Interest and dividends                                |                                             | $       | 95,433   |         |   | $          | 71,330  |                    |   | $        | 24,103   |          |      |            | 34  | %    |    | $       | 184,314  |         |   | $       | 156,275 |         |   | $        | 28,039   |          |   |     | 18  | % 
|                                                     | Loan prepayment premiums                              |                                             |         | 1,745    |         |   |            | 853     |                    |   |          | 892      |          |      |            | 105 | %    |    |         | 7,031    |         |   |         | 2,530   |         |   |          | 4,501    |          |   |     | 178 | % 
|                                                     | Fees and other income                                 |                                             |         | 13,278   |         |   |            | 14,024  |                    |   |          | (746     | )        |      |            | (5  | )%   |    |         | 30,122   |         |   |         | 22,321  |         |   |          | 7,801    |          |   |     | 35  | % 
|                                                     |                                                       |                                             |         |          |         |   |            |         |                    |   |          |          |          |      |            |     |      |    |         |          |         |   |         |        
|                                                     |                                                       | Total interest and related portfolio income |         |          | 110,456 |   |            |         | 86,207             |   |          |          | 24,249   |      |            |     | 28   | %  |         |          | 221,467 |   |         |         | 181,126 |   |          |          | 40,341   |   |     |     | 22 | % 
|                                                     |                                                       |                                             |         |          |         |   |            |         |                    |   |          |          |          |      |            |     |      |    |         |          |         |   |         |        
|Expenses                                             |                                                       |                                             |         |          |         |   |            |         |                    |   |          |          |          |      |            |     |      |    |         |          |         |   |         |         |         |   |          |          |          |   |     |    
|                                                     | Interest                                              |                                             |         | 21,607   |         |   |            | 19,154  |                    |   |          | 2,453    |          |      |            | 13  | %    |    |         | 45,907   |         |   |         | 39,379  |         |   |          | 6,528    |          |   |     | 17  | % 
|                                                     | Employee                                              |                                             |         | 20,398   |         |   |            | 22,877  |                    |   |          | (2,479   | )        |      |            | (11 | )%   |    |         | 41,826   |         |   |         | 38,333  |         |   |          | 3,493    |          |   |     | 9   | % 
|                                                     | Stock options                                         |                                             |         | 4,597    |         |   |            |        |                    |   |          | 4,597    |          |      |            | 100 | %    |    |         | 8,203    |         |   |         |        |         |   |          | 8,203    |          |   |     | 100 | % 
|                                                     | Administrative                                        |                                             |         | 9,861    |         |   |            | 23,048  |                    |   |          | (13,187  | )        |      |            | (57 | )%   |    |         | 21,380   |         |   |         | 43,802  |         |   |          | (22,422  | )        |   |     | (51 | )%
|                                                     |                                                       |                                             |         |          |         |   |            |         |                    |   |          |          |          |      |            |     |      |    |         |          |         |   |         |        
|                                                     |                                                       | Total operating expenses                    |         |          | 56,463  |   |            |         | 65,079             |   |          |          | (8,616   | )    |            |     | (13  | )% |         |          | 117,316 |   |         |         | 121,514 |   |          |          | (4,198   | ) |     |     | (3 | )%
|                                                     |                                                       |                                             |         |          |         |   |            |         |                    |   |          |          |          |      |            |     |      |    |         |          |         |   |         |        
|Net investment income before income taxes            |                                                       |                                             | 53,993  |          |         |   | 21,128     |         |                    |   | 32,865   |          |          |      | 156        | %   |      |    | 104,151 |          |         |   | 59,612  |         |         |   | 44,539   |          |          |   | 75  | %  
|Income tax expense, including excise tax             |                                                       |                                             | 3,798   |          |         |   | 5,861      |         |                    |   | (2,063   | )        |          |      | (35        | )%  |      |    | 12,656  |          |         |   | 5,593   |         |         |   | 7,063    |          |          |   | 126 | %  
|                                                     |                                                       |                                             |         |          |         |   |            |         |                    |   |          |          |          |      |            |     |      |    |         |          |         |   |         |        
|Net investment income                                |                                                       |                                             | 50,195  |          |         |   | 15,267     |         |                    |   | 34,928   |          |          |      | 229        | %   |      |    | 91,495  |          |         |   | 54,019  |         |         |   | 37,476   |          |          |   | 69  | %  
|                                                     |                                                       |                                             |         |          |         |   |            |         |                    |   |          |          |          |      |            |     |      |    |         |          |         |   |         |        
|Net Realized and Unrealized Gains (Losses)           |                                                       |                                             |         |          |         |   |            |         |                    |   |          |          |          |      |            |     |      |    |         |          |         |   |         |         |         |   |          |          |          |   |     |    
|                                                     | Net realized gains                                    |                                             |         | 100,240  |         |   |            | 207,496 |                    |   |          | (107,256 | )        |      |            | *   |      |    |         | 533,075  |         |   |         | 217,781 |         |   |          | 315,294  |          |   |     | *   |   
|                                                     | Net change in unrealized appreciation or depreciation |                                             |         | (116,706 | )       |   |            | 89,122  |                    |   |          | (205,828 | )        |      |            | *   |      |    |         | (491,254 | )       |   |         | 159,706 |         |   |          | (650,960 | )        |   |     | *   |   
|                                                     |                                                       |                                             |         |          |         |   |            |         |                    |   |          |          |          |      |            |     |      |    |         |          |         |   |         |        
|                                                     |                                                       | Total net gains                             |         |          | (16,466 | ) |            |         | 296,618            |   |          |          | (313,084 | )    |            |     | *    |    |         |          | 41,821  |   |         |         | 377,487 |   |          |          | (335,666 | ) |     |     | *  |   
|                                                     |                                                       |                                             |         |          |         |   |            |         |                    |   |          |          |          |      |            |     |      |    |         |          |         |   |         |        
|Net income                                           |                                                       | $                                           | 33,729  |          |         | $ | 311,885    |         |                    | $ | (278,156 | )        |          |      | (89        | )%  |      | $  | 133,316 |          |         | $ | 431,506 |         |         | $ | (298,190 | )        |          |   | (69 | )% 
|                                                     |                                                       |                                             |         |          |         |   |            |         |                    |   |          |          |          |      |            |     |      |    |         |          |         |   |         |        
|Diluted earnings per common share                    |                                                       | $                                           | 0.24    |          |         | $ | 2.29       |         |                    | $ | (2.05    | )        |          |      | (90        | )%  |      | $  | 0.94    |          |         | $ | 3.17    |         |         | $ | (2. 23   | )        |          |   | (70 | )% 
|                                                     |                                                       |                                             |         |          |         |   |            |         |                    |   |          |          |          |      |            |     |      |    |         |          |         |   |         |        
|Weighted average common shares outstanding  diluted |                                                       |                                             | 143,213 |          |         |   | 136,381    |         |                    |   | 6,832    |          |          |      | 5          | %   |      |    | 142,466 |          |         |   | 135,982 |         |         |   | 6,484    |          |          |   | 5   | %  




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

68



---



##### 



Total Interest and Related Portfolio Income.


Interest and Dividends.


|                |                                                          |                              |     |      |              |  |     |      |      |  |      |       |       |  |     |       |       | 
|--------------- | -------------------------------------------------------- | ---------------------------- | --- | ---- | ------------ |  | --- | ---- | ---- |  | ---- | ----- | ----- |  | --- | ----- | ----- | 
|                |                                                          | For the Three                |     |      | For the Six  | 
|                |                                                          | Months Ended                 |     |      | Months Ended | 
|                |                                                          | June 30,                     |     |      | June 30,     | 
|                |                                                          |                              |     |      |              | 
|                |                                                          | 2006                         |     |      | 2005         |  |     | 2006 |      |  | 2005 |      
|($ in millions) |                                                          |                              |     |      |              |  |     |      |      |  |      |      
|Interest        |                                                          |                              |     |      |              |  |     |      |      |  |      |       |       |  |     |      
|                | Private finance loans and debt securities                |                              | $   | 88.6 |              |  | $   | 53.1 |      |  | $    | 171.2 |       |  | $   | 109.9 |      
|                | CMBS and CDO portfolio                                   |                              |     |     |              |  |     | 7.3  |      |  |      |      |       |  |     | 29.4  |      
|                | Commercial mortgage loans                                |                              |     | 2.1  |              |  |     | 2.0  |      |  |      | 4.8   |       |  |     | 3.5   |      
|                | Cash and cash equivalents, U.S. Treasury bills and other |                              |     | 2.9  |              |  |     | 3.6  |      |  |      | 5.9   |       |  |     | 4.1   |      
|                |                                                          |                              |     |      |              |  |     |      |      |  |      |      
|                |                                                          | Total interest               |     |      | 93.6         |  |     |      | 66.0 |  |      |       | 181.9 |  |     |       | 146.9 | 
|Dividends       |                                                          |                              | 1.8 |      |              |  | 5.3 |      |      |  | 2.4  |       |       |  | 9.4 |      
|                |                                                          |                              |     |      |              |  |     |      |      |  |      |      
|                |                                                          | Total interest and dividends |     | $    | 95.4         |  |     | $    | 71.3 |  |      | $     | 184.3 |  |     | $     | 156.3 | 
|                |                                                          |                              |     |      |              |  |     |      |      |  |      |      







|                                          |       |       |         |         |          |  |      |       |   |   |          |         |  |  |      |      |  
|----------------------------------------- | ----- | ----- | ------- | ------- | -------- |  | ---- | ----- | - | - | -------- | ------- |  |  | ---- | ---- | -
|                                          |       | 2006  |         |         | 2005     | 
|                                          |       |       |         |         |          | 
|                                          |       | Value |         |         | Yield(1) |  |      | Value |   |   | Yield(1) |        
|($ in millions)                           |       |       |         |         |          |  |      |       |   |   |          |        
|Private finance loans and debt securities |       | $     | 2,491.2 |         |          |  | 12.7 | %     |   | $ | 1,633.0  |         |  |  | 13.7 | %   
|CMBS and CDO
    portfolio(2)             |       |       |        |         |          |  |     |       |   |   |         |         |  |  |     |     
|Commercial mortgage loans                 |       |       | 96.5    |         |          |  | 8.1  | %     |   |   | 116.1    |         |  |  | 6.7  | %   
|                                          |       |       |         |         |          |  |      |       |   |   |          |        
|                                          | Total |       | $       | 2,587.7 |          |  |      | 12.6  | % |   | $        | 1,749.1 |  |  |      | 13.2 | %
|                                          |       |       |         |         |          |  |      |       |   |   |          |        






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The weighted average yield on loans and debt securities is
    computed as the (a) annual stated interest plus the annual
    amortization of loan origination fees, original issue discount,
    and market discount on accruing loans and debt securities less
    the annual amortization of loan origination costs, divided by
    (b) total loans and debt securities at value. The weighted
    average yield is computed as of the balance sheet date.
|   
|(2) | The CMBS and CDO portfolio was sold on May 3, 2005. See
    discussion above.                                                                                                                                                                                                                                                                                                                                                                                



69



---



##### 







Loan Prepayment Premiums.


Fees and Other Income.




|                                                                              |                             |               |     |      |              |   |     |      |  |   |      |      |  |   |     |      | 
|----------------------------------------------------------------------------- | --------------------------- | ------------- | --- | ---- | ------------ | - | --- | ---- |  | - | ---- | ---- |  | - | --- | ---- | 
|                                                                              |                             | For the Three |     |      | For the Six  |  
|                                                                              |                             | Months Ended  |     |      | Months Ended |  
|                                                                              |                             | June 30,      |     |      | June 30,     |  
|                                                                              |                             |               |     |      |              |  
|                                                                              |                             | 2006          |     |      | 2005         |   |     | 2006 |  |   | 2005 |     
|($ in millions)                                                               |                             |               |     |      |              |   |     |      |  |   |      |     
|Structuring and diligence                                                     |                             | $             | 8.0 |      |              | $ | 7.5 |      |  | $ | 19.0 |      |  | $ | 8.9 |     
|Management, consulting and other services provided to portfolio
    companies |                             |               | 2.3 |      |              |   | 3.6 |      |  |   | 6.4  |      |  |   | 6.8 |     
|Commitment, guaranty, transaction and other fees from portfolio
    companies |                             |               | 2.9 |      |              |   | 2.0 |      |  |   | 4.6  |      |  |   | 4.8 |     
|Other income                                                                  |                             |               | 0.1 |      |              |   | 0.9 |      |  |   | 0.1  |      |  |   | 1.8 |     
|                                                                              |                             |               |     |      |              |   |     |      |  |   |      |     
|                                                                              | Total fees and other income |               | $   | 13.3 |              |   | $   | 14.0 |  |   | $    | 30.1 |  |   | $   | 22.3 | 
|                                                                              |                             |               |     |      |              |   |     |      |  |   |      |     



70



---



##### 









BLX and Advantage.




|                |  |               |     |  |              |   |     |      |  |   |      |  |  |   |      | 
|--------------- |  | ------------- | --- |  | ------------ | - | --- | ---- |  | - | ---- |  |  | - | ---- | 
|                |  | For the Three |     |  | For the Six  |  
|                |  | Months Ended  |     |  | Months Ended |  
|                |  | June 30,      |     |  | June 30,     |  
|                |  |               |     |  |              |  
|                |  | 2006          |     |  | 2005         |   |     | 2006 |  |   | 2005 | 
|($ in millions) |  |               |     |  |              |   |     |      |  |   |      | 
|BLX             |  | $             | 6.0 |  |              | $ | 8.8 |      |  | $ | 12.1 |  |  | $ | 16.6 | 
|Advantage(1)    |  | $             |    |  |              | $ | 9.4 |      |  | $ | 14.1 |  |  | $ | 18.5 | 




|    |                                                                                                                                                        
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes income from the period we held a majority equity
    interest only. See Portfolio and Investment
    Activity above for further discussion.

Operating Expenses.


Interest Expense.


|                             |  |                    |         |   |                  |   |         |      |  |   |         |   |  |   |         |  
|---------------------------- |  | ------------------ | ------- | - | ---------------- | - | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|                             |  | At and for the     |         |   | At and for the   |  
|                             |  | Three Months Ended |         |   | Six Months Ended |  
|                             |  | June 30,           |         |   | June 30,         |  
|                             |  |                    |         |   |                  |  
|                             |  | 2006               |         |   | 2005             |   |         | 2006 |  |   | 2005    |  
|($ in millions)              |  |                    |         |   |                  |   |         |      |  |   |         |  
|Total outstanding debt       |  | $                  | 1,208.9 |   |                  | $ | 986.5   |      |  | $ | 1,208.9 |   |  | $ | 986.5   |  
|Average outstanding debt     |  | $                  | 1,301.1 |   |                  | $ | 1,071.0 |      |  | $ | 1,395.8 |   |  | $ | 1,097.9 |  
|Weighted average
    cost(1) |  |                    | 6.6     | % |                  |   | 6.8     | %    |  |   | 6.6     | % |  |   | 6.8     | %




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



71



---



##### 



Employee Expense.


|                                     |                        |               |      |      |              |   |      |      |  |   |      |      |  |   |      |      | 
|------------------------------------ | ---------------------- | ------------- | ---- | ---- | ------------ | - | ---- | ---- |  | - | ---- | ---- |  | - | ---- | ---- | 
|                                     |                        | For the Three |      |      | For the Six  |  
|                                     |                        | Months Ended  |      |      | Months Ended |  
|                                     |                        | June 30,      |      |      | June 30,     |  
|                                     |                        |               |      |      |              |  
|                                     |                        | 2006          |      |      | 2005         |   |      | 2006 |  |   | 2005 |     
|($ in millions)                      |                        |               |      |      |              |   |      |      |  |   |      |     
|Salaries and employee benefits       |                        | $             | 17.6 |      |              | $ | 11.7 |      |  | $ | 35.0 |      |  | $ | 23.5 |     
|Transition compensation, net         |                        |               |     |      |              |   | 5.5  |      |  |   |     |      |  |   | 5.5  |     
|Individual performance award (IPA)   |                        |               | 2.1  |      |              |   | 1.9  |      |  |   | 3.8  |      |  |   | 3.8  |     
|IPA mark to market expense (benefit) |                        |               | (1.5 | )    |              |   | 1.8  |      |  |   | (0.6 | )    |  |   | 1.9  |     
|Individual performance bonus (IPB)   |                        |               | 2.2  |      |              |   | 2.0  |      |  |   | 3.6  |      |  |   | 3.6  |     
|                                     |                        |               |      |      |              |   |      |      |  |   |      |     
|                                     | Total employee expense |               | $    | 20.4 |              |   | $    | 22.9 |  |   | $    | 41.8 |  |   | $    | 38.3 | 
|                                     |                        |               |      |      |              |   |      |      |  |   |      |     
|Number of employees at end of period |                        |               | 166  |      |              |   | 152  |      |  |   | 166  |      |  |   | 152  |     







bi-weekly




72



---



##### 





in-the in-the


in-the in-the-money.


Employee Stock Options Expense. Share-Based Payment


|                               |                                                            |                            |   |     |              |  |   |     |     | 
|------------------------------ | ---------------------------------------------------------- | -------------------------- | - | --- | ------------ |  | - | --- | --- | 
|                               |                                                            | For the Three              |   |     | For the Six  | 
|                               |                                                            | Months Ended               |   |     | Months Ended | 
|                               |                                                            | June 30,                   |   |     | June 30,     | 
|                               |                                                            |                            |   |     |              | 
|($ in millions)                |                                                            | 2006                       |   |     | 2006         | 
|Employee Stock Option Expense: |                                                            |                            |   |     |              |  |   |    
|                               | Previously awarded, unvested options as of January 1, 2006 |                            | $ | 3.3 |              |  | $ | 6.7 |    
|                               | Options granted on or after January 1, 2006                |                            |   | 1.3 |              |  |   | 1.5 |    
|                               |                                                            |                            |   |     |              | 
|                               |                                                            | Total stock option expense |   | $   | 4.6          |  |   | $   | 8.2 | 
|                               |                                                            |                            |   |     |              | 



73



---



##### 





Administrative Expense.


|                            |                               |               |     |     |               |   |      |      |  |   |      |      |  |   |      |      | 
|--------------------------- | ----------------------------- | ------------- | --- | --- | ------------- | - | ---- | ---- |  | - | ---- | ---- |  | - | ---- | ---- | 
|                            |                               | For the Three |     |     | For the Six   |  
|                            |                               | Months Ending |     |     | Months Ending |  
|                            |                               | June 30,      |     |     | June 30,      |  
|                            |                               |               |     |     |               |  
|                            |                               | 2006          |     |     | 2005          |   |      | 2006 |  |   | 2005 |     
|($ in millions)             |                               |               |     |     |               |   |      |      |  |   |      |     
|Administrative expenses     |                               | $             | 9.4 |     |               | $ | 9.6  |      |  | $ | 18.0 |      |  | $ | 18.1 |     
|Investigation related costs |                               |               | 0.5 |     |               |   | 13.5 |      |  |   | 3.4  |      |  |   | 25.7 |     
|                            |                               |               |     |     |               |   |      |      |  |   |      |     
|                            | Total administrative expenses |               | $   | 9.9 |               |   | $    | 23.1 |  |   | $    | 21.4 |  |   | $    | 43.8 | 
|                            |                               |               |     |     |               |   |      |      |  |   |      |     



Income Tax Expense, Including Excise
Tax.


|                        |                                          |               |     |     |              |   |     |      |  |   |      |      |  |   |     |     | 
|----------------------- | ---------------------------------------- | ------------- | --- | --- | ------------ | - | --- | ---- |  | - | ---- | ---- |  | - | --- | --- | 
|                        |                                          | For the Three |     |     | For the Six  |  
|                        |                                          | Months Ended  |     |     | Months Ended |  
|                        |                                          | June 30,      |     |     | June 30,     |  
|                        |                                          |               |     |     |              |  
|                        |                                          | 2006          |     |     | 2005         |   |     | 2006 |  |   | 2005 |     
|($ in millions)         |                                          |               |     |     |              |   |     |      |  |   |      |     
|Income tax expense, net |                                          | $             | 0.6 |     |              | $ | 1.9 |      |  | $ | 1.1  |      |  | $ | 1.6 |    
|Excise tax expense      |                                          |               | 3.2 |     |              |   | 4.0 |      |  |   | 11.6 |      |  |   | 4.0 |    
|                        |                                          |               |     |     |              |   |     |      |  |   |      |     
|                        | Income tax expense, including excise tax |               | $   | 3.8 |              |   | $   | 5.9  |  |   | $    | 12.7 |  |   | $   | 5.6 | 
|                        |                                          |               |     |     |              |   |     |      |  |   |      |     



Realized Gains and Losses.


74



---



##### 





|                   |  |               |       |   |              |   |       |      |  |   |       |   |  |   |       |  
|------------------ |  | ------------- | ----- | - | ------------ | - | ----- | ---- |  | - | ----- | - |  | - | ----- | -
|                   |  | For the Three |       |   | For the Six  |  
|                   |  | Months Ended  |       |   | Months Ended |  
|                   |  | June 30,      |       |   | June 30,     |  
|                   |  |               |       |   |              |  
|                   |  | 2006          |       |   | 2005         |   |       | 2006 |  |   | 2005  |  
|($ in millions)    |  |               |       |   |              |   |       |      |  |   |       |  
|Realized gains     |  | $             | 101.0 |   |              | $ | 244.7 |      |  | $ | 537.5 |   |  | $ | 259.4 |  
|Realized losses    |  |               | (0.8  | ) |              |   | (37.2 | )    |  |   | (4.4  | ) |  |   | (41.6 | )
|                   |  |               |       |   |              |   |       |      |  |   |       |  
|Net realized gains |  | $             | 100.2 |   |              | $ | 207.5 |      |  | $ | 533.1 |   |  | $ | 217.8 |  
|                   |  |               |       |   |              |   |       |      |  |   |       |  



|                                                                                            |                |               |       |       |              |   |       |      |  |   |        |        |   |   |       |      | 
|------------------------------------------------------------------------------------------- | -------------- | ------------- | ----- | ----- | ------------ | - | ----- | ---- |  | - | ------ | ------ | - | - | ----- | ---- | 
|                                                                                            |                | For the Three |       |       | For the Six  |  
|                                                                                            |                | Months Ended  |       |       | Months Ended |  
|                                                                                            |                | June 30,      |       |       | June 30,     |  
|                                                                                            |                |               |       |       |              |  
|($ in millions)                                                                             |                | 2006          |       |       | 2005         |   |       | 2006 |  |   | 2005   |       
|                                                                                            |                |               |       |       |              |   |       |      |  |   |        |       
|Reversal of previously recorded unrealized appreciation
    associated with realized gains  |                | $             | (95.6 | )     |              | $ | (16.6 | )    |  | $ | (489.2 | )      |   | $ | (26.5 | )   
|Reversal of previously recorded unrealized depreciation
    associated with realized losses |                |               | 0.5   |       |              |   | 37.1  |      |  |   | 3.2    |        |   |   | 41.9  |     
|                                                                                            |                |               |       |       |              |   |       |      |  |   |        |       
|                                                                                            | Total reversal |               | $     | (95.1 | )            |   | $     | 20.5 |  |   | $      | (486.0 | ) |   | $     | 15.4 | 
|                                                                                            |                |               |       |       |              |   |       |      |  |   |        |       



($ in millions)


|                                  |                       |        |       |       | 
|--------------------------------- | --------------------- | ------ | ----- | ----- | 
|2006                              |                      
|                                  |                      
|Portfolio Company                 |                       | Amount |      
|                                  |                       |        |      
|Private Finance:                  |                       |        |       |      
|STS Operating, Inc.               |                       | $      | 94.8  |      
|United Site Services, Inc.        |                       |        | 3.3   |      
|MHF Logistical Solutions, Inc.    |                       |        | 1.2   |      
|Advantage Sales & Marketing, Inc. |                       |        | 0.6   |      
|Other                             |                       |        | 1.1   |      
|                                  |                       |        |      
|                                  | Total private finance |        |       | 101.0 | 
|                                  |                       |        |      
|Total gross realized gains        |                       | $      | 101.0 |      
|                                  |                       |        |      

|                           |                              |        |       |       | 
|-------------------------- | ---------------------------- | ------ | ----- | ----- | 
|2005                       |                             
|                           |                             
|Portfolio Company          |                              | Amount |      
|                           |                              |        |      
|Private Finance:           |                              |        |       |      
|Master Plan, Inc.          |                              | $      | 3.7   |      
|Ginsey Industries, Inc.    |                              |        | 2.8   |      
|E-Talk Corporation         |                              |        | 1.6   |      
|Professional Paint, Inc.   |                              |        | 1.0   |      
|Other                      |                              |        | 1.0   |      
|                           |                              |        |      
|                           | Total private finance        |        |       | 10.1  | 
|                           |                              |        |      
|Commercial Real Estate:    |                              |        |       |      
|CMBS/CDO asset
    net(1)  |                              |        | 227.7 |      
|Other                      |                              |        | 6.9   |      
|                           |                              |        |      
|                           | Total commercial real estate |        |       | 234.6 | 
|                           |                              |        |      
|Total gross realized gains |                              | $      | 244.7 |      
|                           |                              |        |      






|    |                                                                                                             
|--- | ------------------------------------------------------------------------------------------------------------
|(1) | Net of net realized losses from related hedges of
    $0.7 million for the three months ended June 30, 2005.

STS Operating, Inc.


75



---



##### 







($ in millions)


|                            |                       |                              |     |     |     | 
|--------------------------- | --------------------- | ---------------------------- | --- | --- | --- | 
|2006                        |                      
|                            |                      
|Portfolio Company           |                       | Amount                       |    
|                            |                       |                              |    
|Private Finance:            |                       |                              |     |    
|Other                       |                       | $                            | 0.3 |    
|                            |                       |                              |    
|                            | Total private finance |                              |     | 0.3 |    
|                            |                       |                              |    
|Commercial Real Estate:     |                       |                              |     |    
|Other                       |                       |                              | 0.5 |    
|                            |                       |                              |    
|                            |                       | Total commercial real estate |     |     | 0.5 | 
|                            |                       |                              |    
|Total gross realized losses |                       | $                            | 0.8 |    
|                            |                       |                              |    

|                            |                              |        |      |      | 
|--------------------------- | ---------------------------- | ------ | ---- | ---- | 
|2005                        |                             
|                            |                             
|Portfolio Company           |                              | Amount |     
|                            |                              |        |     
|Private Finance:            |                              |        |      |     
|Norstan Apparel Shops, Inc. |                              | $      | 18.5 |     
|E-Talk Corporation          |                              |        | 9.0  |     
|Garden Ridge Corporation    |                              |        | 7.1  |     
|Other                       |                              |        | 0.3  |     
|                            |                              |        |     
|                            | Total private finance        |        |      | 34.9 | 
|                            |                              |        |     
|Commercial Real Estate:     |                              |        |      |     
|Other                       |                              |        | 2.3  |     
|                            |                              |        |     
|                            | Total commercial real estate |        |      | 2.3  | 
|                            |                              |        |     
|Total gross realized losses |                              | $      | 37.2 |     
|                            |                              |        |     



($ in millions)


|                                  |                              |        |       |       | 
|--------------------------------- | ---------------------------- | ------ | ----- | ----- | 
|2006                              |                             
|                                  |                             
|Portfolio Company                 |                              | Amount |      
|                                  |                              |        |      
|Private Finance:                  |                              |        |       |      
|Advantage Sales & Marketing, Inc. |                              | $      | 433.7 |      
|STS Operating, Inc.               |                              |        | 94.8  |      
|United Site Services, Inc.        |                              |        | 3.3   |      
|Nobel Learning Communities, Inc.  |                              |        | 1.5   |      
|MHF Logisitical Solutions, Inc.   |                              |        | 1.2   |      
|The Debt Exchange, Inc.           |                              |        | 1.1   |      
|Other                             |                              |        | 1.3   |      
|                                  |                              |        |      
|                                  | Total private finance        |        |       | 536.9 | 
|                                  |                              |        |      
|Commercial Real Estate:           |                              |        |       |      
|Other                             |                              |        | 0.6   |      
|                                  |                              |        |      
|                                  | Total commercial real estate |        |       | 0.6   | 
|                                  |                              |        |      
|Total gross realized gains        |                              | $      | 537.5 |      
|                                  |                              |        |      

|                               |                              |        |       |       | 
|------------------------------ | ---------------------------- | ------ | ----- | ----- | 
|2005                           |                             
|                               |                             
|Portfolio Company              |                              | Amount |      
|                               |                              |        |      
|Private Finance:               |                              |        |       |      
|Polaris Pool System, Inc.      |                              | $      | 7.4   |      
|Master Plan, Inc.              |                              |        | 3.7   |      
|U.S. Security Holdings, Inc.   |                              |        | 3.3   |      
|Ginsey Industries, Inc.        |                              |        | 2.8   |      
|E-Talk Corporation             |                              |        | 1.6   |      
|Professional Paint, Inc.       |                              |        | 1.0   |      
|Oriental Trading Company, Inc. |                              |        | 1.0   |      
|Other                          |                              |        | 3.5   |      
|                               |                              |        |      
|                               | Total private finance        |        |       | 24.3  | 
|                               |                              |        |      
|Commercial Real Estate:        |                              |        |       |      
|CMBS/CDO assets,
    net(1)    |                              |        | 227.7 |      
|Other                          |                              |        | 7.4   |      
|                               |                              |        |      
|                               | Total commercial real estate |        |       | 235.1 | 
|                               |                              |        |      
|Total gross realized gains     |                              | $      | 259.4 |      
|                               |                              |        |      






|    |                                                                                                           
|--- | ----------------------------------------------------------------------------------------------------------
|(1) | Net of net realized losses from related hedges of
    $0.7 million for the six months ended June 30, 2005.

76



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##### 





($ in millions)


|                                 |                       |                              |     |     |     | 
|-------------------------------- | --------------------- | ---------------------------- | --- | --- | --- | 
|2006                             |                      
|                                 |                      
|Portfolio Company                |                       | Amount                       |    
|                                 |                       |                              |    
|Private Finance:                 |                       |                              |     |    
|Aspen Pet Products, Inc.         |                       | $                            | 1.6 |    
|Nobel Learning Communities, Inc. |                       |                              | 1.4 |    
|Other                            |                       |                              | 0.6 |    
|                                 |                       |                              |    
|                                 | Total private finance |                              |     | 3.6 |    
|                                 |                       |                              |    
|Commercial Real Estate:          |                       |                              |     |    
|Other                            |                       |                              | 0.8 |    
|                                 |                       |                              |    
|                                 |                       | Total commercial real estate |     |     | 0.8 | 
|                                 |                       |                              |    
|Total gross realized losses      |                       | $                            | 4.4 |    
|                                 |                       |                              |    

|                            |                              |        |      |      | 
|--------------------------- | ---------------------------- | ------ | ---- | ---- | 
|2005                        |                             
|                            |                             
|Portfolio Company           |                              | Amount |     
|                            |                              |        |     
|Private Finance:            |                              |        |      |     
|Norstan Apparel Shops, Inc. |                              | $      | 18.5 |     
|E-Talk Corporation          |                              |        | 9.0  |     
|Garden Ridge Corporation    |                              |        | 7.1  |     
|Alderwoods Group, Inc.      |                              |        | 0.8  |     
|Other                       |                              |        | 0.7  |     
|                            |                              |        |     
|                            | Total private finance        |        |      | 36.1 | 
|                            |                              |        |     
|Commercial Real Estate:     |                              |        |      |     
|Other                       |                              |        | 5.5  |     
|                            |                              |        |     
|                            | Total commercial real estate |        |      | 5.5  | 
|                            |                              |        |     
|Total gross realized losses |                              | $      | 41.6 |     
|                            |                              |        |     

Change in Unrealized Appreciation or Depreciation.






77



---



##### 



Valuation Methodology  Private Finance.










78



---



##### 







|                                                          |  |      |      |   |      |  |      |    |  |  |      |   |  |  |      |  
|--------------------------------------------------------- |  | ---- | ---- | - | ---- |  | ---- | -- |  |  | ---- | - |  |  | ---- | -
|                                                          |  | 2006 |      |   | 2005 | 
|                                                          |  |      |      |   |      | 
|                                                          |  | Q1   |      |   | Q2   |  |      | Q1 |  |  | Q2   |  
|                                                          |  |      |      |   |      |  |      |    |  |  |      |  
|Number of private finance portfolio companies reviewed    |  |      | 78   |   |      |  | 78   |    |  |  | 36   |   |  |  | 72   |  
|Percentage of private finance portfolio reviewed at value |  |      | 87.0 | % |      |  | 89.6 | %  |  |  | 74.5 | % |  |  | 83.0 | %



Valuation Methodology  CDO and CLO Bonds and
Preferred Shares/Income Notes (CDO/CLO Assets).


Net Change in Unrealized Appreciation or Depreciation.


|                                                                                            |  |               |        |   |              |   |       |         |  |   |         |   |  |   |       |  
|------------------------------------------------------------------------------------------- |  | ------------- | ------ | - | ------------ | - | ----- | ------- |  | - | ------- | - |  | - | ----- | -
|                                                                                            |  | For the Three |        |   | For the Six  |  
|                                                                                            |  | Months Ended  |        |   | Months Ended |  
|                                                                                            |  | June 30,      |        |   | June 30,     |  
|                                                                                            |  |               |        |   |              |  
|                                                                                            |  | 2006(1)       |        |   | 2005(1)      |   |       | 2006(1) |  |   | 2005(1) |  
|($ in millions)                                                                             |  |               |        |   |              |   |       |         |  |   |         |  
|Net unrealized appreciation or depreciation                                                 |  | $             | (21.6  | ) |              | $ | 68.6  |         |  | $ | (5.3    | ) |  | $ | 144.3 |  
|Reversal of previously recorded unrealized appreciation
    associated with realized gains  |  |               | (95.6  | ) |              |   | (16.6 | )       |  |   | (489.2  | ) |  |   | (26.5 | )
|Reversal of previously recorded unrealized depreciation
    associated with realized losses |  |               | 0.5    |   |              |   | 37.1  |         |  |   | 3.2     |   |  |   | 41.9  |  
|                                                                                            |  |               |        |   |              |   |       |         |  |   |         |  
|Net change in unrealized appreciation or depreciation                                       |  | $             | (116.7 | ) |              | $ | 89.1  |         |  | $ | (491.3  | ) |  | $ | 159.7 |  
|                                                                                            |  |               |        |   |              |   |       |         |  |   |         |  






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



79



---



##### 



Business Loan Express, LLC.






Per Share Amounts.


OTHER MATTERS


Regulated Investment Company Status.






80



---



##### 







FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES


Dividends and Distributions










81



---



##### 









Liquidity and Capital Resources




|                                                                                                                                        |  |      |         |   |      |   |         |  
|--------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|($ in millions)                                                                                                                         |  | 2006 |         |   | 2005 |  
|                                                                                                                                        |  |      |         |   |      |  
|Liquidity portfolio (including money market and other
    securities: 2006-$75.3; 2005-$100.0)                                          |  | $    | 201.2   |   |      | $ | 200.3   |  
|Cash and investments in money market and other securities
    (including money market and other securities: 2006-$22.5;
    2005-$22.0) |  | $    | 25.6    |   |      | $ | 53.3    |  
|Total assets                                                                                                                            |  | $    | 4,011.2 |   |      | $ | 4,025.9 |  
|Total debt outstanding                                                                                                                  |  | $    | 1,208.9 |   |      | $ | 1,284.8 |  
|Total shareholders equity                                                                                                              |  | $    | 2,690.0 |   |      | $ | 2,620.5 |  
|Debt to equity ratio                                                                                                                    |  |      | 0.45    |   |      |   | 0.49    |  
|Asset coverage
    ratio(1)                                                                                                             |  |      | 326     | % |      |   | 309     | %




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

82



---



##### 





|                              |       |       |       |       |       |  |      |       |  |   |       |       |  |  |      |      | 
|----------------------------- | ----- | ----- | ----- | ----- | ----- |  | ---- | ----- |  | - | ----- | ----- |  |  | ---- | ---- | 
|                              |       | 2006  |       |       | 2005  | 
|                              |       |       |       |       |       | 
|($ in millions)               |       | Value |       |       | Yield |  |      | Value |  |   | Yield |      
|                              |       |       |       |       |       |  |      |       |  |   |       |      
|U.S. Treasury
    bills(1)    |       | $     | 125.9 |       |       |  | 4.9% |       |  | $ | 100.3 |       |  |  | 4.3% |     
|Money market securities       |       |       | 55.3  |       |       |  | 5.0% |       |  |   | 100.0 |       |  |  | 4.1% |     
|Certificate of
    Deposit(1) |       |       | 20.0  |       |       |  | 5.6% |       |  |   |      |       |  |  |     |     
|                              |       |       |       |       |       |  |      |       |  |   |       |      
|                              | Total |       | $     | 201.2 |       |  |      | 5.0%  |  |   | $     | 200.3 |  |  |      | 4.2% | 
|                              |       |       |       |       |       |  |      |       |  |   |       |      




|    |                                                              
|--- | -------------------------------------------------------------
|(1) | The Treasury bills and certificate of deposit mature in 2006.













83



---



##### 









|                              |                         |                                    |       |         |             |        |     |          |         |  |      |      |      |    
|----------------------------- | ----------------------- | ---------------------------------- | ----- | ------- | ----------- | ------ | --- | -------- | ------- |  | ---- | ---- | ---- | ---
|                              |                         |                                    |       |         |             | Annual |    
|                              |                         | Facility                           |       |         | Amount      |        |     | Interest |        
|                              |                         | Amount                             |       |         | Outstanding |        |     | Cost(1)  |        
|($ in millions)               |                         |                                    |       |         |             |        |     |          |        
|Notes payable and debentures: |                         |                                    |       |         |             |        |     |          |         |  |      |     
|                              | Unsecured notes payable |                                    | $     | 1,190.6 |             |        | $   | 1,190.6  |         |  |      | 6.2% |     
|                              | SBA debentures          |                                    |       | 16.5    |             |        |     | 16.5     |         |  |      | 7.4% |     
|                              |                         |                                    |       |         |             |        |     |          |        
|                              |                         | Total notes payable and debentures |       |         | 1,207.1     |        |     |          | 1,207.1 |  |      |      | 6.2% |    
|Revolving line of credit      |                         |                                    | 922.5 |         |             |        | 1.8 |          |         |  | 6.4% | (2) 
|                              |                         |                                    |       |         |             |        |     |          |        
|                              |                         | Total debt                         |       | $       | 2,129.6     |        |     | $        | 1,208.9 |  |      |      | 6.6% | (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 addition to
    the current interest rate payable, there were annual costs of
    commitment fees, other facility fees and the amortization of
    debt financing costs of $3.8 million at June 30, 2006.                                                                           
|   
|(3) | The annual interest cost for total debt includes the annual cost
    of commitment fees, other facility fees and the 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.                                                                                                                  

Unsecured Notes Payable.




Small Business Administration Debentures.


84



---



##### 



Revolving Line of Credit.








|                                |                                   |                               |      |                      |         |       |     |       |       |  |      |   |     |      |     |       |       |  |     |       |       |  |     |       |       |  |     |       |       | 
|------------------------------- | --------------------------------- | ----------------------------- | ---- | -------------------- | ------- | ----- | --- | ----- | ----- |  | ---- | - | --- | ---- | --- | ----- | ----- |  | --- | ----- | ----- |  | --- | ----- | ----- |  | --- | ----- | ----- | 
|                                |                                   |                               |      | Payments Due By Year |        
|                                |                                   |                               |      |                      |        
|                                |                                   |                               |      |                      |         | After |    
|                                |                                   | Total                         |      |                      | 2006    |       |     | 2007  |       |  | 2008 |   |     | 2009 |     |       | 2010  |  |     | 2010  |      
|($ in millions)                 |                                   |                               |      |                      |         |       |     |       |       |  |      |   |     |      |     |       |       |  |     |       |      
|Notes payable and debentures:   |                                   |                               |      |                      |         |       |     |       |       |  |      |   |     |      |     |       |       |  |     |       |       |  |     |       |       |  |     |      
|                                | Unsecured long-term notes payable |                               | $    | 1,190.6              |         |       | $   | 150.0 |       |  | $    |  |     |      | $   | 153.0 |       |  | $   | 268.1 |       |  | $   | 408.0 |       |  | $   | 211.5 |      
|                                | SBA debentures                    |                               |      | 16.5                 |         |       |     |      |       |  |      |  |     |      |     |      |       |  |     |      |       |  |     |      |       |  |     | 16.5  |      
|Revolving line of
    credit(1) |                                   |                               | 1.8  |                      |         |       |    |       |       |  |     |   |     |      | 1.8 |       |       |  |    |       |       |  |    |       |       |  |    |      
|Operating leases                |                                   |                               | 26.7 |                      |         |       | 2.2 |       |       |  | 4.4  |   |     |      | 4.5 |       |       |  | 4.6 |       |       |  | 4.4 |       |       |  | 6.6 |      
|                                |                                   |                               |      |                      |         |       |     |       |       |  |      |   |     |      |     |       |       |  |     |       |      
|                                |                                   | Total contractual obligations |      | $                    | 1,235.6 |       |     | $     | 152.2 |  |      | $ | 4.4 |      |     | $     | 159.3 |  |     | $     | 272.7 |  |     | $     | 412.4 |  |     | $     | 234.6 | 
|                                |                                   |                               |      |                      |         |       |     |       |       |  |      |   |     |      |     |       |       |  |     |       |      




|    |                                                                                                                                                                                  
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | At June 30, 2006, $882.5 million remained unused and
    available, net of amounts committed for standby letters of
    credit of $38.3 million issued under the credit facility.

85



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Off-Balance Sheet Arrangements




|                                 |                   |       |       |                                          |      |       |     |      |  |   |      |     |  |      |      |      |      |   |       |       |  |   |   |   |  |   |     |     | 
|-------------------------------- | ----------------- | ----- | ----- | ---------------------------------------- | ---- | ----- | --- | ---- |  | - | ---- | --- |  | ---- | ---- | ---- | ---- | - | ----- | ----- |  | - | - | - |  | - | --- | --- | 
|                                 |                   |       |       | Amount of Commitment Expiration Per Year |     
|                                 |                   |       |       |                                          |     
|                                 |                   |       |       |                                          |      | After |    
|                                 |                   | Total |       |                                          | 2006 |       |     | 2007 |  |   | 2008 |     |  | 2009 |      |      | 2010 |   | 2010  |      
|($ in millions)                  |                   |       |       |                                          |      |       |     |      |  |   |      |     |  |      |      |      |      |   |       |      
|Guarantees                       |                   | $     | 163.3 |                                          |      | $     | 2.5 |      |  | $ | 0.7  |     |  | $    | 3.0  |      |      | $ | 151.6 |       |  | $ |  |   |  | $ | 5.5 |    
|Standby letters of
    credit(1) |                   |       | 38.3  |                                          |      |       | 0.1 |      |  |   |     |     |  |      | 38.2 |      |      |   |      |       |  |   |  |   |  |   |    |    
|                                 |                   |       |       |                                          |      |       |     |      |  |   |      |     |  |      |      |      |      |   |       |       | 
|                                 | Total commitments |       | $     | 201.6                                    |      |       | $   | 2.6  |  |   | $    | 0.7 |  |      | $    | 41.2 |      |   | $     | 151.6 |  |   | $ |  |  |   | $   | 5.5 | 
|                                 |                   |       |       |                                          |      |       |     |      |  |   |      |     |  |      |      |      |      |   |       |       | 




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



CRITICAL ACCOUNTING POLICIES




Valuation of Portfolio Investments.


Loans and Debt Securities.


86



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Equity Securities.






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




87



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


Fee Income.


Item 3.  Quantitative and Qualitative
Disclosures About Market Risk




Item 4.  Controls and Procedures


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




88



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PART II. OTHER INFORMATION


Item 1.     Legal
Proceedings








89



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##### 



Item 1A.  Risk Factors


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


Our portfolio of investments is illiquid.


Investing in private companies involves a high degree of
risk.


Substantially all of our portfolio investments are recorded
at fair value as determined in good faith by our Board of
Directors and, as a result, there is uncertainty regarding the
value of our portfolio investments.




90



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




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


91



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##### 





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


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


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




92



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##### 



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.


93



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##### 





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


We operate in a competitive market for investment
opportunities.


Our business depends on our key personnel.


94



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##### 





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


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








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


95



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Our common stock price may be volatile.




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

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




Issuer Purchases of Equity Securities




96



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|                   |                       |              |        |        |                |   |       |       | 
|------------------ | --------------------- | ------------ | ------ | ------ | -------------- | - | ----- | ----- | 
|                   |                       | Total Number |        |        |               
|                   |                       | of Shares    |        |        | Average Price  |  
|                   |                       | Purchased    |        |        | Paid Per Share |  
|                   |                       |              |        |        |                |  
|2005 DCP
    I(1)  |                       |              |        |        |                |   |       |      
|                   | 4/1/2006 to 4/31/2006 |              |        | 78     |                |   | $     | 30.31 | 
|                   | 5/1/2006 to 5/28/2006 |              |        |       |                |   | $     |      | 
|                   | 6/1/2006 to 6/31/2006 |              |        |       |                |   | $     |      | 
|2005 DCP
    II(2) |                       |              |        |        |                |   |       |      
|                   | 4/1/2006 to 4/31/2006 |              |        | 14,149 |                |   | $     | 30.31 | 
|                   | 5/1/2006 to 5/28/2006 |              |        |       |                |   | $     |      | 
|                   | 6/1/2006 to 6/31/2006 |              |        | 70,500 |                |   | $     | 29.75 | 
|                   |                       |              |        |        |                |  
|Total              |                       |              | 84,727 |        |                | $ | 29.84 |      
|                   |                       |              |        |        |                |  






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

Item 3.  Defaults Upon Senior
Securities




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






| |    |                                                                                                                                                                                                    
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. | Election of Directors: Shareholders elected five directors of
    the Company, who will serve for three years, or until their
    successors are elected and qualified. Votes were cast as follows:

|                  |  |     |             |  |          |  |           | 
|----------------- |  | --- | ----------- |  | -------- |  | --------- | 
|                  |  | For |             |  | Withheld | 
|                  |  |     |             |  |          | 
|Ann Torre Bates   |  |     | 127,731,421 |  |          |  | 1,713,989 | 
|Edwin L. Harper   |  |     | 126,434,463 |  |          |  | 3,010,946 | 
|John I. Leahy     |  |     | 127,186,384 |  |          |  | 2,259,025 | 
|Alex J. Pollock   |  |     | 127,529,783 |  |          |  | 1,915,626 | 
|Guy T. Steuart II |  |     | 127,424,088 |  |          |  | 2,021,321 | 



| |                                                                                                                                                                                                                                                                                              
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The following directors are continuing as directors of the
    Company for their respective terms  Brooks H.
    Browne, John D. Firestone, Anthony T. Garcia,
    Lawrence I. Hebert, Robert E. Long, Marc F.
    Racicot, Laura W. van Roijen, Joan M. Sweeney, and
    William L. Walton.



| |    |                                                                                                                                                                               
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 2. | Ratification of the selection of KPMG LLP to serve as
    independent registered public accounting firm for the year
    ending December 31, 2006. Votes were cast as follows:

|    |             |  |         |  |         |         |  |  |         | 
|--- | ----------- |  | ------- |  | ------- | ------- |  |  | ------- | 
|For |             |  | Against |  |         | Abstain | 
|    |             |  |         |  |         |         | 
|    | 127,953,628 |  |         |  | 739,269 |         |  |  | 752,510 | 



| |    |                                                                                                                                                                                                                                                                          
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 3. | Approval of the issuance of up to 2,500,000 shares of
    common stock in exchange for the cancellation of vested
    in-the-money options granted to certain officers and directors
    in connection with a stock ownership initiative. Votes were cast
    as follows:

|    |            |  |         |  |            |         |  |  |                  |  |  |  |            | 
|--- | ---------- |  | ------- |  | ---------- | ------- |  |  | ---------------- |  |  |  | ---------- | 
|For |            |  | Against |  |            | Abstain |  |  | Broker Non-Votes | 
|    |            |  |         |  |            |         |  |  |                  | 
|    | 53,152,866 |  |         |  | 15,428,444 |         |  |  | 2,307,157        |  |  |  | 58,556,940 | 

Item 5.  Other Information




Item 6.  Exhibits




|        |   |    |             |                                                                                                                                                                                                                                              
|------- | - | -- | ----------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |   |    |            
|Number  |   |    | Description
|        |   |    |            
|        | 3 | .1 |             | Restated Articles of Incorporation. (Incorporated by
    reference to Exhibit a.1 filed with Allied Capitals
    Post-Effective Amendment No. 2 to registration statement on
    Form N-2 (File No. 333-67336) filed on March 22,
    2002).
|        | 3 | .2 |             | Amended and Restated Bylaws. (Incorporated by reference to
    Exhibit 3.1. filed with Allied Capitals Form 8-K
    on January 24, 2006).                                                                                                   

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|        |    |       |             |                                                                                                                                                                                                                                                                                   
|------- | -- | ----- | ----------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |       |            
|Number  |    |       | Description
|        |    |       |            
|        | 4  | .1    |             | Specimen Certificate of Allied Capitals Common Stock, par
    value $0.0001 per share. (Incorporated by reference to
    Exhibit d. filed with Allied Capitals registration
    statement on Form N-2 (File No. 333-51899) filed on
    May 6, 1998).                           
|        | 4  | .2    |             | Form of debenture between certain subsidiaries of Allied Capital
    and the U.S. Small Business Administration. (Incorporated by
    reference to Exhibit 4.2 filed by a predecessor entity to
    Allied Capital on Form 10-K for the year ended
    December 31, 1996).        
|        | 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 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
    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 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 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.4 filed with Allied Capitals
    Form N-2/A (File No. 333-133755) filed on July 25,
    2006).                                                                                                         
|        | 10 | .1    |             | Dividend Reinvestment Plan, as amended. (Incorporated by
    reference to Exhibit e. filed with Allied Capitals
    registration statement on Form N-2 (File
    No. 333-87862) filed on May 8, 2002).                                                                           
|        | 10 | .2    |             | Credit Agreement, dated September 30, 2005.
    (Incorporated by reference to Exhibit 10.1 filed with
    Allied Capitals Form 8-K on October 3, 2005).                                                                                                                          
|        | 10 | .2(a) |             | First Amendment to Credit Agreement, dated November 4,
    2005. (Incorporated by reference to Exhibit 10.2(a)
    filed with Allied Capitals Form 10-Q for the period
    ended September 30, 2005).                                                                            
|        | 10 | .2(b) |             | Second Amendment to Credit Agreement, dated May 11,
    2006.(Incorporated by reference to Exhibit 10.1 filed
    with Allied Capitals Form 8-K filed on May 12,
    2006).                                                                                                      
|        | 10 | .2(c) |             | Third Amendment to Credit Agreement, dated May 19, 2006.
    (Incorporated by reference to Exhibit 10.1 filed with
    Allied Capitals Form 8-K filed on May 23,
    2006).                                                                                                      
|        | 10 | .3    |             | Note Agreement, dated October 13, 2005. (Incorporated by
    reference to Exhibit 10.1 filed with Allied Capitals
    Form 8-K on October 14, 2005).                                                                                                                             
|        | 10 | .4    |             | Note Agreement, dated May 1, 2006. (Incorporated by
    reference to Exhibit 10.1 filed with Allied Capitals
    Form 8-K on May 1, 2006).                                                                                                                                       
|        | 10 | .12   |             | Note Agreement, dated as of October 15, 2000.
    (Incorporated by reference to Exhibit 10.4b filed with
    Allied Capitals Form 10-Q for the period ended
    September 30, 2000).                                                                                             

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|        |    |        |             |                                                                                                                                                                                                                                                                                                                                     
|------- | -- | ------ | ----------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |        |            
|Number  |    |        | Description
|        |    |        |            
|        | 10 | .13    |             | Note Agreement, dated as of October 15, 2001.
    (Incorporated by reference to Exhibit f.10 filed with
    Allied Capitals Post-Effective Amendment No. 1 to
    registration statement on Form N-2 (File
    No. 333-67336) filed on November 14, 2001).                                                                         
|        | 10 | .15    |             | Control Investor Guaranty Agreement, dated as of March 17,
    2006, between Allied Capital and CitiBank, N.A. and Business
    Loan Express, LLC. (Incorporated by reference to
    Exhibit 10.1 filed with Allied Capitals
    Post-Effective Amendment No. 3 to registration statement on
    Form 8-K filed on March 23, 2006).
|        | 10 | .17    |             | The 2005 Allied Capital Corporation Non-Qualified Deferred
    Compensation Plan II. (Incorporated by reference to
    Exhibit 10.2 filed with Allied Capitals Form 8-K
    filed on December 21, 2005).                                                                                                                           
|        | 10 | .17(a) |             | Amendment to The 2005 Allied Capital Corporation Non-Qualified
    Deferred Compensation Plan II, dated January 20, 2006.
    (Incorporated by reference to Exhibit 10.17(a) filed
    with Allied Capitals Form 10-K for the year ended
    December 31, 2005).                                                                   
|        | 10 | .18    |             | The 2005 Allied Capital Corporation Non-Qualified Deferred
    Compensation Plan. (Incorporated by reference to
    Exhibit 10.1 filed with Allied Capitals Form 8-K
    filed on December 21, 2005).                                                                                                                              
|        | 10 | .18(a) |             | Amendment to The 2005 Allied Capital Corporation Non-Qualified
    Deferred Compensation Plan, dated January 20, 2006.
    (Incorporated by reference to Exhibit 10.18(a) filed
    with Allied Capitals Form 10-K for the year ended
    December 31, 2005).                                                                      
|        | 10 | .19    |             | Amended Stock Option Plan. (Incorporated by reference to
    Exhibit B of Allied Capitals definitive proxy
    statement for Allied Capitals 2004 Annual Meeting of
    Stockholders filed on March 30, 2004).                                                                                                                    
|        | 10 | .20(a) |             | Allied Capital Corporation 401(k) Plan, dated September 1,
    1999. (Incorporated by reference to Exhibit 4.4 filed
    with Allied Capitals registration statement on
    Form S-8 (File No. 333-88681) filed on October 8,
    1999).                                                                                           
|        | 10 | .20(b) |             | Amendment to Allied Capital Corporation 401(k) Plan, dated
    April 15, 2004. (Incorporated by reference to
    Exhibit 10.20(b) filed with Allied Capitals
    Form 10-Q for the period ended June 30, 2004).                                                                                                                    
|        | 10 | .20(c) |             | Amendment to Allied Capital Corporation 401(k) plan, dated
    November 1, 2005. (Incorporated by reference to Exhibit
    10.20(c) filed with Allied Capitals Form 10-Q for the
    quarter ended September 30, 2005).                                                                                                            
|        | 10 | .20(d) |             | Amendment to Allied Capital Corporation 401(k) plan, dated
    April 21, 2006. (Incorporated by reference to
    Exhibit i.4(c) filed with Allied Capitals
    Form N-2 (File No. 333-133755) filed on May 3,
    2006).                                                                                                           
|        | 10 | .21    |             | Employment Agreement, dated January 1, 2004, between Allied
    Capital and William L. Walton. (Incorporated by
    reference to Exhibit 10.21 filed with Allied Capitals
    Form 10-K for the year ended December 31, 2003).                                                                                                     
|        | 10 | .22    |             | Employment Agreement, dated January 1, 2004, between Allied
    Capital and Joan M. Sweeney. (Incorporated by reference
    to Exhibit 10.22 filed with Allied Capitals
    Form 10-K for the year ended December 31, 2003).                                                                                                       
|        | 10 | .23    |             | Recission of Retention Agreement, dated October 27, 2005,
    between Allied Capital and John M. Scheurer.
    (Incorporated by reference to Exhibit 10.1 filed with
    Allied Capitals current report on Form 8-K filed on
    November 1, 2005).                                                                                

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|        |    |      |             |                                                                                                                                                                                                                                                                   
|------- | -- | ---- | ----------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |      |            
|Number  |    |      | Description
|        |    |      |            
|        | 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, 2005).                                                                                                                  
|        | 10 | .29* |             | Custodian Agreement with Union Bank of California.                                                                                                                                                                                                                
|        | 10 | .30* |             | Custodian Agreement with M&T Bank.                                                                                                                                                                                                                                
|        | 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 | .32  |             | Amendment, dated as of April 30, 2003, to Note Agreement,
    dated as of April 30, 1998. (Incorporated by reference
    to Exhibit 10.32 filed with Allied Capitals
    Form 10-Q for the period ended March 31, 2003).                                         
|        | 10 | .33  |             | Amendment, dated as of April 30, 2003, to Note Agreement, dated
    as of May 1, 1999. (Incorporated by reference to
    Exhibit 10.33 filed with Allied Capitals
    Form 10-Q for the period ended March 31, 2003).                                            
|        | 10 | .35  |             | Amendment, dated as of April 30, 2003, to Note Agreement,
    dated as of October 15, 2000. (Incorporated by reference
    to Exhibit 10.35 filed with Allied Capitals
    Form 10-Q for the period ended March 31, 2003).                                       
|        | 10 | .36  |             | Amendment, dated as of April 30, 2003, to Note Agreement,
    dated as of October 15, 2001. (Incorporated by reference
    to Exhibit 10.36 filed with Allied Capitals
    Form 10-Q for the period ended March 31, 2003).                                       
|        | 10 | .37  |             | Form of Indemnification Agreement between Allied Capital and its
    directors and certain officers. (Incorporated by reference to
    Exhibit 10.37 filed with Allied Capitals
    Form 10-K for the year ended December 31, 2003).                             
|        | 10 | .38  |             | Note Agreement, dated as of March 25, 2004.
    (Incorporated by reference to Exhibit 10.38 filed with
    Allied Capitals Form 10-Q for the period ended
    March 31, 2004.)                                                                                   
|        | 10 | .39  |             | Note Agreement, dated as of November 15, 2004.
    (Incorporated by reference to Exhibit 99.1 filed with
    Allied Capitals current report on Form 8-K filed on
    November 18, 2004.)                                                                         
|        | 10 | .40  |             | Real Estate Securities Purchase Agreement. (Incorporated by
    reference to Exhibit 2.1 filed with Allied Capitals
    Form 8-K filed on May 4, 2005.)                                                                                                          
|        | 10 | .41  |             | Platform Assets Purchase Agreement. (Incorporated by
    reference to Exhibit 2.2 filed with Allied Capitals
    Form 8-K filed on May 4, 2005.)                                                                                                                 
|        | 10 | .42  |             | Transition Services Agreement. (Incorporated by reference to
    Exhibit 10.1 filed with Allied Capitals Form 8-K
    filed on May 4, 2005.)                                                                                                                     
|        | 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                                                                                                                                                                                                          

101



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##### 



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






102



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##### 



SIGNATURES






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

|                      |  |                                                                                    
|--------------------- |  | -----------------------------------------------------------------------------------
|                     
|Dated: August 9, 2006 |  | /s/ William L. WaltonWilliam
    L. Walton
    Chairman and Chief Executive Officer
|                     
|                      |  | /s/ Penni F. RollPenni
    F. Roll
    Chief Financial Officer                     

103



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##### 



EXHIBIT INDEX


|        |    |      |             |                                                                                                                                    
|------- | -- | ---- | ----------- | -----------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |      |            
|Number  |    |      | Description
|        |    |      |            
|        | 10 | .29* |             | Custodian Agreement with Union Bank of California.                                                                                 
|        | 10 | .30* |             | Custodian Agreement with M&T Bank.                                                                                                 
|        | 15 | .*   |             | Letter regarding Unaudited Interim Financial Information                                                                           
|        | 31 | .1*  |             | Certification of Chief Executive Officer Pursuant to
    Rule 13a-14 of the Securities Exchange Act of 1934.                       
|        | 31 | .2*  |             | Certification of Chief Financial Officer Pursuant to
    Rule 13a-14 of the Securities Exchange Act of 1934.                       
|        | 32 | .1*  |             | Certification of Chief Executive Officer Pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C.
    Section 1350.
|        | 32 | .2*  |             | Certification of Chief Financial Officer Pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C.
    Section 1350.