##### 









UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





FORM 10-K




| |   |                                                                                         
| | - | ----------------------------------------------------------------------------------------
| | x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended December 31, 2005


OR




| |   |                                                                                             
| | - | --------------------------------------------------------------------------------------------
| | o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934

Commission File
No. 0-22832


ALLIED CAPITAL CORPORATION


(Exact Name of Registrant as specified in its Charter)


|                                                   |  |                                         
|-------------------------------------------------- |  | ----------------------------------------
|Maryland                                           |  | 52-1081052                              
|(State or Other Jurisdiction
    of Incorporation) |  | (I.R.S. Employer
    Identification No.)
|                                                  
|1919 Pennsylvania Avenue NW
    Washington, D.C.   |  | 20006                                   
|(Address of Principal Executive Office)            |  | (Zip Code)                              

Registrants Telephone Number, Including Area Code:
(202) 331-1112


Securities Registered Pursuant to Section 12(b) of the
Act:


|                                |  |                        
|------------------------------- |  | -----------------------
|                                |  | Name of Each Exchange  
|Title of Each Class             |  | On Which Registered    
|                                |  |                        
|Common Stock, $0.0001 par value |  | New York Stock Exchange

Securities Registered Pursuant to Section 12(g) of the
Act:


NONE


o x


o x


x o


x


12b-2  x o o


o x




DOCUMENTS INCORPORATED BY REFERENCE












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TABLE OF CONTENTS


|           |  |                                                                                                                  |     |      |     | 
|---------- |  | ---------------------------------------------------------------------------------------------------------------- | --- | ---- | --- | 
|           |  |                                                                                                                  |     | Page
|           |  |                                                                                                                  |     |     
|PART I    
|Item 1.    |  | Business                                                                                                         |     |      | 3   | 
|Item 1A.   |  | Risk Factors                                                                                                     |     |      | 18  | 
|Item 1B.   |  | Unresolved Staff Comments                                                                                        |     |      | 23  | 
|Item 2.    |  | Properties                                                                                                       |     |      | 24  | 
|Item 3.    |  | Legal Proceedings                                                                                                |     |      | 24  | 
|Item 4.    |  | Submission of Matters to a Vote of Security Holders                                                              |     |      | 24  | 
|          
|PART II   
|Item 5.    |  | Market for Registrants Common Equity, Related Stockholder
    Matters and Issuer Purchases of Equity Securities |     |      | 25  | 
|Item 6.    |  | Selected Financial Data                                                                                          |     |      | 27  | 
|Item 7.    |  | Managements Discussion and Analysis of Financial Condition
    and Results of Operations                        |     |      | 29  | 
|Item 7A.   |  | Quantitative and Qualitative Disclosures about Market Risk                                                       |     |      | 57  | 
|Item 8.    |  | Financial Statements and Supplementary Data                                                                      |     |      | 59  | 
|Item 9.    |  | Changes in and Disagreements with Accountants on Accounting and
    Financial Disclosure                         |     |      | 110 | 
|Item 9A.   |  | Controls and Procedures                                                                                          |     |      | 110 | 
|Item 9B.   |  | Other Information                                                                                                |     |      | 110 | 
|          
|PART III  
|Item 10.   |  | Directors and Executive Officers of the Registrant                                                               |     |      | 110 | 
|Item 11.   |  | Executive Compensation                                                                                           |     |      | 111 | 
|Item 12.   |  | Security Ownership of Certain Beneficial Owners and Management
    and Related Stockholder Matters               |     |      | 111 | 
|Item 13.   |  | Certain Relationships and Related Transactions                                                                   |     |      | 111 | 
|Item 14.   |  | Principal Accountant Fees and Services                                                                           |     |      | 111 | 
|          
|PART IV   
|Item 15.   |  | Exhibits and Financial Statement Schedules                                                                       |     |      | 111 | 
|Signatures |  |                                                                                                                  | 115 |     

2



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PART I


Item 1.     Business.


General








Private Equity Investing






3



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Private Finance Portfolio.


4



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|               |  |                            
|-------------- |  | ---------------------------
| Buyouts      |  |  Recapitalizations        
| Acquisitions |  |  Note purchases           
| Growth       |  |  Other types of financings





| |   |                                                 
| | - | ------------------------------------------------
| |  | Management team with meaningful equity ownership
|
| |  | Dominant or defensible market position          
|
| |  | High return on invested capital                 
|
| |  | Stable operating margins                        
|
| |  | Ability to generate free cash flow              
|
| |  | Well-constructed balance sheet                  



|                         |  |                      
|------------------------ |  | ---------------------
| Business
    Services  |  |  Healthcare Services
| Financial
    Services |  |  Energy Services    
| Consumer
    Products  |  |                      









5



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6



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|                                            |  |                                                                                                                                                                                                                                                                                                                                                                   |  |                      |       |               |       |   |       |              |  |  |       | 
|------------------------------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------- | ----- | ------------- | ----- | - | ----- | ------------ |  |  | ----- | 
|                                            |  |                                                                                                                                                                                                                                                                                                                                                                   |  | At December 31, 2005 |      
|($ in millions)                             |  |                                                                                                                                                                                                                                                                                                                                                                   |  |                      |      
|                                            |  |                                                                                                                                                                                                                                                                                                                                                                   |  |                      |       | Percentage of |      
|Portfolio Company                           |  | Company Information                                                                                                                                                                                                                                                                                                                                               |  | Cost                 |       |               | Value |   |       | Total Assets | 
|                                            |  |                                                                                                                                                                                                                                                                                                                                                                   |  |                      |       |               |       |   |       |              | 
|Advantage Sales & Marketing,
    Inc.(1)(2) |  | Sales and marketing agency providing outsourced sales,
    merchandising, and marketing services to the consumer packaged
    goods industry.                                                                                                                                                                                                                     |  | $                    | 257.7 |               |       | $ | 660.4 |              |  |  | 16.4% | 
|Business Loan Express,
    LLC(1)           |  | Originates, sells, and services primarily real estate secured
    small business loans specifically for businesses with financing
    needs of up to $4.0 million. Provides SBA 7(a) loans,
    conventional small business loans and small investment real
    estate loans. Nationwide non-bank preferred lender in the
    SBAs 7(a) guaranteed loan program. |  | $                    | 299.4 |               |       | $ | 357.1 |              |  |  | 8.9%  | 
|Mercury Air Centers, Inc.                   |  | Owns and operates fixed base operations under long-term leases
    from local airport authorities, which generally consist of
    terminal and hangar complexes that service the needs of the
    general aviation community.                                                                                                                                     |  | $                    | 113.3 |               |       | $ | 167.1 |              |  |  | 4.2%  | 
|Financial Pacific Company                   |  | Specialized commercial finance company that leases
    business-essential equipment to small businesses nationwide.                                                                                                                                                                                                                                               |  | $                    | 95.0  |               |       | $ | 127.2 |              |  |  | 3.2%  | 
|Meineke Car Care Centers, Inc.              |  | Business format franchisor in the car care sector of the
    automotive aftermarket industry with approximately 900 locations
    worldwide.                                                                                                                                                                                                                      |  | $                    | 126.5 |               |       | $ | 126.2 |              |  |  | 3.1%  | 
|Norwesco, Inc.                              |  | Designs, manufactures and markets a broad assortment of
    polyethylene tanks primarily to the agricultural and septic tank
    markets.                                                                                                                                                                                                                         |  | $                    | 120.0 |               |       | $ | 120.0 |              |  |  | 3.0%  | 
|Triview Investments, Inc.                   |  | Holds investments in Triax Holdings, LLC, a developer and
    marketer of specialty pharmaceutical products with a focus on
    dermatology, and Longview Cable & Data LLC, a
    multi-system cable operator.                                                                                                                                                    |  | $                    | 151.7 |               |       | $ | 87.0  |              |  |  | 2.2%  | 
|Insight Pharmaceuticals Corporation         |  | Over-the-counter pharmaceutical company with a broad portfolio
    of 20 brands, including Sucrets, Anacin, NIX and Bonine.                                                                                                                                                                                                                                       |  | $                    | 89.6  |               |       | $ | 85.3  |              |  |  | 2.1%  | 
|STS Operating, Inc.                         |  | Distributes systems, components and engineering services for
    hydraulic, pneumatic, electronic and filtration systems.                                                                                                                                                                                                                                         |  | $                    | 10.1  |               |       | $ | 72.1  |              |  |  | 1.8%  | 
|Healthy Pet Corp.                           |  | Veterinary hospitals offering medical and surgical services,
    specialized treatments, diagnostic services, pharmaceutical
    products, as well as routine health exams and vaccinations.                                                                                                                                                                      |  | $                    | 68.4  |               |       | $ | 68.4  |              |  |  | 1.7%  | 






|    |                                                                                                                                                                                                                                            
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | See Managements Discussion and Analysis of Financial
    Condition and Results of Operations.                                                                                                                                           
|   
|(2) | In March 2006, we announced that we had signed a definitive
    agreement to sell a majority interest in Advantage. See
    Managements Discussion and Analysis of Financial
    Condition and Results of Operations for further detail.

7



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|                       |       |      |    |     |      |  |    |     |  
|---------------------- | ----- | ---- | -- | --- | ---- |  | -- | --- | -
|                       |       | 2005 |    |     | 2004 | 
|                       |       |      |    |     |      | 
|Industry               |       |      |    |     |      |  |    |    
|Business services      |       |      | 45 | %   |      |  | 32 | %  
|Financial services     |       |      | 15 |     |      |  | 21 |    
|Consumer products      |       |      | 14 |     |      |  | 20 |    
|Industrial products    |       |      | 10 |     |      |  | 8  |    
|Retail                 |       |      | 3  |     |      |  | 2  |    
|Healthcare services    |       |      | 2  |     |      |  | 8  |    
|Energy services        |       |      | 2  |     |      |  | 2  |    
|Broadcasting and cable |       |      | 1  |     |      |  | 2  |    
|Other(1)               |       |      | 8  |     |      |  | 5  |    
|                       |       |      |    |     |      | 
|                       | Total |      |    | 100 | %    |  |    | 100 | %
|                       |       |      |    |     |      | 






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

Commercial Real Estate Finance Portfolio.




Business Processes


Business Development and New Deal Origination.




New Deal Underwriting and Investment Execution.


8



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| |   |                                                                                                                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Initial investment screening;                                                                                                                                                                          
|
| |  | Initial investment committee approval;                                                                                                                                                                 
|
| |  | Due diligence, structuring and negotiation;                                                                                                                                                            
|
| |  | Internal review of diligence results;                                                                                                                                                                  
|
| |  | Final investment committee approval;                                                                                                                                                                   
|
| |  | Approval by the Executive Committee of the Board of Directors
    (for all debt investments that represent a commitment equal to
    or greater than $20 million and every buyout transaction);
    and
|
| |  | Funding of the investment (due diligence must be completed with
    final investment committee approval and Executive Committee
    approval, as needed, before funds are disbursed).                  



Portfolio Monitoring and Development.


9



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Portfolio Grading




Portfolio Valuation






10



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Valuation Methodology.






11



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Valuation Process.




| |   |                                                                                                                                                                                                                                                                                                         
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Our valuation process begins with each portfolio company or
    investment being initially valued by the deal team, led by the
    Managing Director or senior officer who is responsible for the
    portfolio company relationship.                                                                   
|
| |  | The CVO reviews the preliminary valuation as determined by the
    deal team.                                                                                                                                                                                                                           
|
| |  | The CVO, members of the valuation team, and third-party
    consultants, as applicable (see below), meet with each Managing
    Director or responsible senior officer to discuss the
    preliminary valuation determined and documented by the deal team
    for each of their respective investments.
|
| |  | The CEO, COO, CFO and the managing directors meet with the CVO
    to discuss the preliminary valuation results.                                                                                                                                                                                        
|
| |  | Valuation documentation is distributed to the members of the
    Board of Directors.                                                                                                                                                                                                                    
|
| |  | The Audit Committee of the Board of Directors meets with the
    third-party consultants (see below) to discuss the assistance
    provided and results.                                                                                                                                                
|
| |  | The Board of Directors and the CVO meet to discuss and review
    valuations.                                                                                                                                                                                                                           
|
| |  | To the extent there are changes or if additional information is
    deemed necessary, a
    follow-up Board meeting
    may take place.                                                                                                                                                                 
|
| |  | The Board of Directors determines the fair value of the
    portfolio in good faith.                                                                                                                                                                                                                    



12



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Disposition of Investments






Dividends






13



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Corporate Structure and Offices






14



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20006-3434 331-1112.


Available Information


10-K, 10-Q, 8-K 10-K 10-K.


Employees




Certain Government Regulations




Business Development Company.






| |   |                                                                                                                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Securities purchased in transactions not involving any public
    offering, the issuer of which is an eligible portfolio company;                                                                                  
|
| |  | Securities received in exchange for or distributed with respect
    to securities described in the bullet above or pursuant to the
    exercise of options, warrants or rights relating to such
    securities; and
|
| |  | Cash, cash items, government securities or high quality debt
    securities (within the meaning of the 1940 Act), maturing in one
    year or less from the time of investment.                                    





| |   |                                                                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | does not have a class of securities with respect to which a
    broker may extend margin credit at the time the acquisition is
    made;               
|
| |  | is actively controlled by the business development company and
    has an affiliate of a business development company on its board
    of directors; or
|
| |  | meets such other criteria as may be established by the SEC.                                                                                            



15



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1-800-SEC-0330.






16



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Small Business Administration Regulations.








Regulated Investment Company Status.








17



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Compliance with the Sarbanes-Oxley Act of 2002.




| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Our Chief Executive Officer and Chief Financial Officer certify
    the financial statements contained in our periodic reports
    through the filing of Section 302 certifications;                                                                                                                                                                                                                                                                                                     
|
| |  | Our periodic reports disclose our conclusions about the
    effectiveness of our disclosure controls and procedures;                                                                                                                                                                                                                                                                                                                                                                     
|
| |  | Our annual report on
    Form 10-K contains
    a report from our management on internal control over financial
    reporting, including a statement that our management is
    responsible for establishing and maintaining adequate internal
    control over financial reporting as well as our
    managements assessment of the effectiveness of our
    internal control over financial reporting, which must be audited
    by our independent registered public accounting firm;
|
| |  | Our periodic reports disclose whether there were significant
    changes in our internal control over financial reporting or in
    other factors that could significantly affect our internal
    control over financial reporting subsequent to the date of their
    evaluation, including any corrective actions with regard to
    significant deficiencies and material weaknesses; and                                                                                            
|
| |  | We may not make any loan to any director or executive officer
    and we may not materially modify any existing loans.                                                                                                                                                                                                                                                                                                                                                                   





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.


18



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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.






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




19



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


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


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


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


20



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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
dividends.


21



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


We operate in a competitive market for investment
opportunities.


Our business depends on our key personnel.


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


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


22



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


Our common stock price may be volatile.




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

Item 1B. Unresolved Staff Comments




23



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Item 2. Properties.


20006-3434.




|        |                   
|------- | ------------------
|Item 3. | Legal Proceedings.











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




24



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PART II


Item 5. Market For Registrants Common Equity,
Related Stockholder Matters and Issuer Purchases of Equity
Securities.




Quarterly Stock Prices for 2005 and 2004


|      |  |      |       |  |      |   |       |    |  |   |       |  |  |    |       |  |    |   |       |    |  |   |       |  |  |   |       |  |  |   |       | 
|----- |  | ---- | ----- |  | ---- | - | ----- | -- |  | - | ----- |  |  | -- | ----- |  | -- | - | ----- | -- |  | - | ----- |  |  | - | ----- |  |  | - | ----- | 
|      |  | 2005 |       |  | 2004 |  
|      |  |      |       |  |      |  
|      |  | Q1   |       |  | Q2   |   |       | Q3 |  |   | Q4    |  |  | Q1 |       |  | Q2 |   |       | Q3 |  |   | Q4    | 
|      |  |      |       |  |      |   |       |    |  |   |       |  |  |    |       |  |    |   |       |    |  |   |       | 
|High  |  | $    | 27.84 |  |      | $ | 29.29 |    |  | $ | 29.17 |  |  | $  | 30.80 |  |    | $ | 30.85 |    |  | $ | 30.25 |  |  | $ | 25.80 |  |  | $ | 28.47 | 
|Low   |  | $    | 24.89 |  |      | $ | 25.83 |    |  | $ | 26.92 |  |  | $  | 26.11 |  |    | $ | 27.15 |    |  | $ | 23.06 |  |  | $ | 22.22 |  |  | $ | 24.46 | 
|Close |  | $    | 26.10 |  |      | $ | 29.11 |    |  | $ | 28.63 |  |  | $  | 29.37 |  |    | $ | 30.29 |    |  | $ | 24.42 |  |  | $ | 24.39 |  |  | $ | 25.84 | 



Dividend Declarations




|                  |                         |             |                    |  |              |  |                    |        |  |   |      |      | 
|----------------- | ----------------------- | ----------- | ------------------ |  | ------------ |  | ------------------ | ------ |  | - | ---- | ---- | 
|Date Declared     |                         | Record Date |                    |  | Payment Date |  |                    | Amount | 
|                  |                         |             |                    |  |              |  |                    |        | 
|February 1, 2005  |                         |             | March 18, 2005     |  |              |  | March 31, 2005     |        |  | $ | 0.57 |     
|April 27, 2005    |                         |             | June 10, 2005      |  |              |  | June 30, 2005      |        |  | $ | 0.57 |     
|July 22, 2005     |                         |             | September 9, 2005  |  |              |  | September 30, 2005 |        |  | $ | 0.58 |     
|October 21, 2005  |                         |             | December 9, 2005   |  |              |  | December 29, 2005  |        |  | $ | 0.58 |     
|December 9, 2005  |                         |             | December 28, 2005  |  |              |  | January 27, 2006   |        |  | $ | 0.03 |     
|                  |                         |             |                    |  |              |  |                    |        | 
|                  | Total declared for 2005 |             |                    |  |              |  |                    |        |  |   | $    | 2.33 | 
|                  |                         |             |                    |  |              |  |                    |        | 
|January 30, 2004  |                         |             | March 12, 2004     |  |              |  | March 31, 2004     |        |  | $ | 0.57 |     
|April 15, 2004    |                         |             | June 11, 2004      |  |              |  | June 30, 2004      |        |  | $ | 0.57 |     
|July 22, 2004     |                         |             | September 10, 2004 |  |              |  | September 30, 2004 |        |  | $ | 0.57 |     
|October 22, 2004  |                         |             | December 10, 2004  |  |              |  | December 30, 2004  |        |  | $ | 0.57 |     
|December 10, 2004 |                         |             | December 29, 2004  |  |              |  | January 28, 2005   |        |  | $ | 0.02 |     
|                  |                         |             |                    |  |              |  |                    |        | 
|                  | Total declared for 2004 |             |                    |  |              |  |                    |        |  |   | $    | 2.30 | 
|                  |                         |             |                    |  |              |  |                    |        | 

Sales of Unregistered Securities




25



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Issuer Purchases of Equity Securities




|                   |                        |              |        |        |                  |   |       |       | 
|------------------ | ---------------------- | ------------ | ------ | ------ | ---------------- | - | ----- | ----- | 
|                   |                        | Total Number |        |        | Weighted Average |  
|                   |                        | of Shares    |        |        | Price Paid       |  
|                   |                        | Purchased    |        |        | Per Share        |  
|                   |                        |              |        |        |                  |  
|2005 DCP
    I(1)  |                        |              |        |        |                  |   |       |      
|                   | 10/1/2005  10/31/2005 |              |        | 52     |                  |   | $     | 28.13 | 
|                   | 11/1/2005  11/30/2005 |              |        |       |                  |   |       |      | 
|                   | 12/1/2005  12/31/2005 |              |        |       |                  |   |       |      | 
|2005 DCP
    II(2) |                        |              |        |        |                  |   |       |      
|                   | 10/1/2005  10/31/2005 |              |        | 12,991 |                  |   |       | 28.13 | 
|                   | 11/1/2005  11/30/2005 |              |        |       |                  |   |       |      | 
|                   | 12/1/2005  12/31/2005 |              |        | 53,370 |                  |   |       | 29.35 | 
|                   |                        |              |        |        |                  |  
|Total              |                        |              | 66,413 |        |                  | $ | 29.11 |      
|                   |                        |              |        |        |                  |  






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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 to purchase
    shares of our common stock in the market.                                                                                                                                                             

Equity Compensation Plan Information




|                                                       |  |                     |            |  |                     |                     |              |                      |  |  |           | 
|------------------------------------------------------ |  | ------------------- | ---------- |  | ------------------- | ------------------- | ------------ | -------------------- |  |  | --------- | 
|                                                       |  |                     |            |  |                     | Number of           |             
|                                                       |  |                     |            |  |                     | securities          |             
|                                                       |  |                     |            |  |                     | remaining available |             
|                                                       |  |                     |            |  |                     | for future issuance |             
|                                                       |  | Number of           |            |  |                     |                     | under equity |                     
|                                                       |  | Securities to be    |            |  |                     |                     | compensation |                     
|                                                       |  | issued upon         |            |  | Weighted-average    |                     |              | plans (excluding     | 
|                                                       |  | exercise of         |            |  | exercise price of   |                     |              | securities reflected | 
|                                                       |  | outstanding options |            |  | outstanding options |                     |              | in column (a))       | 
|Plan Category                                          |  | (a)                 |            |  | (b)                 |                     |              | (c)                  | 
|                                                       |  |                     |            |  |                     |                     |              |                      | 
|Equity compensation plans approved by stockholders     |  |                     | 22,259,228 |  |                     | $                   | 24.52        |                      |  |  | 3,038,162 | 
|Equity compensation plans not approved by stockholders |  |                     |           |  |                     |                     |             |                      |  |  |          | 
|                                                       |  |                     |            |  |                     |                     |              |                      | 
|Total                                                  |  |                     | 22,259,228 |  |                     | $                   | 24.52        |                      |  |  | 3,038,162 | 
|                                                       |  |                     |            |  |                     |                     |              |                      | 

26



---



##### 



Item 6. Selected Financial Data.


SELECTED CONDENSED CONSOLIDATED FINANCIAL DATA


See Managements Discussion and Analysis of
Financial Condition and Results of Operations below for
more information.


|                                                     |                                                       |                                             |         |         |         |   |         |         |         |   |         |         |         |      |         |         |         |   |         |         |         | 
|---------------------------------------------------- | ----------------------------------------------------- | ------------------------------------------- | ------- | ------- | ------- | - | ------- | ------- | ------- | - | ------- | ------- | ------- | ---- | ------- | ------- | ------- | - | ------- | ------- | ------- | 
|                                                     |                                                       | Year Ended December 31,                     |        
|                                                     |                                                       |                                             |        
|(in thousands,                                       |                                                       | 2005                                        |         |         | 2004    |   |         | 2003    |         |   | 2002    |         |         | 2001 |        
|except per share data)                               |                                                       |                                             |         |         |         |   |         |         |         |   |         |         |         |      |        
|Operating Data:                                      |                                                       |                                             |         |         |         |   |         |         |         |   |         |         |         |      |         |         |         |   |         |        
|Interest and related portfolio income:               |                                                       |                                             |         |         |         |   |         |         |         |   |         |         |         |      |         |         |         |   |         |        
|                                                     | Interest and dividends                                |                                             | $       | 317,153 |         |   | $       | 319,642 |         |   | $       | 290,719 |         |      | $       | 264,042 |         |   | $       | 240,464 |        
|                                                     | Loan prepayment premiums                              |                                             |         | 6,250   |         |   |         | 5,502   |         |   |         | 8,172   |         |      |         | 2,776   |         |   |         | 2,504   |        
|                                                     | Fees and other income                                 |                                             |         | 50,749  |         |   |         | 41,946  |         |   |         | 30,338  |         |      |         | 43,110  |         |   |         | 46,142  |        
|                                                     |                                                       |                                             |         |         |         |   |         |         |         |   |         |         |         |      |        
|                                                     |                                                       | Total interest and related portfolio income |         |         | 374,152 |   |         |         | 367,090 |   |         |         | 329,229 |      |         |         | 309,928 |   |         |         | 289,110 | 
|                                                     |                                                       |                                             |         |         |         |   |         |         |         |   |         |         |         |      |        
|Expenses:                                            |                                                       |                                             |         |         |         |   |         |         |         |   |         |         |         |      |         |         |         |   |         |        
|                                                     | Interest                                              |                                             |         | 76,798  |         |   |         | 75,650  |         |   |         | 77,233  |         |      |         | 70,443  |         |   |         | 65,104  |        
|                                                     | Employee                                              |                                             |         | 78,300  |         |   |         | 53,739  |         |   |         | 36,945  |         |      |         | 33,126  |         |   |         | 29,656  |        
|                                                     | Administrative                                        |                                             |         | 70,267  |         |   |         | 34,686  |         |   |         | 22,387  |         |      |         | 21,504  |         |   |         | 15,299  |        
|                                                     |                                                       |                                             |         |         |         |   |         |         |         |   |         |         |         |      |        
|                                                     |                                                       | Total operating expenses                    |         |         | 225,365 |   |         |         | 164,075 |   |         |         | 136,565 |      |         |         | 125,073 |   |         |         | 110,059 | 
|                                                     |                                                       |                                             |         |         |         |   |         |         |         |   |         |         |         |      |        
|Net investment income before income taxes            |                                                       |                                             | 148,787 |         |         |   | 203,015 |         |         |   | 192,664 |         |         |      | 184,855 |         |         |   | 179,051 |        
|                                                     | Income tax expense (benefit), including excise tax    |                                             |         | 11,561  |         |   |         | 2,057   |         |   |         | (2,466  | )       |      |         | 930     |         |   |         | (412    | )      
|                                                     |                                                       |                                             |         |         |         |   |         |         |         |   |         |         |         |      |        
|Net investment income                                |                                                       |                                             | 137,226 |         |         |   | 200,958 |         |         |   | 195,130 |         |         |      | 183,925 |         |         |   | 179,463 |        
|                                                     |                                                       |                                             |         |         |         |   |         |         |         |   |         |         |         |      |        
|Net realized and unrealized gains (losses):          |                                                       |                                             |         |         |         |   |         |         |         |   |         |         |         |      |         |         |         |   |         |        
|                                                     | Net realized gains                                    |                                             |         | 273,496 |         |   |         | 117,240 |         |   |         | 75,347  |         |      |         | 44,937  |         |   |         | 661     |        
|                                                     | Net change in unrealized appreciation or depreciation |                                             |         | 462,092 |         |   |         | (68,712 | )       |   |         | (78,466 | )       |      |         | (571    | )       |   |         | 20,603  |        
|                                                     |                                                       |                                             |         |         |         |   |         |         |         |   |         |         |         |      |        
|                                                     |                                                       | Total net gains (losses)                    |         |         | 735,588 |   |         |         | 48,528  |   |         |         | (3,119  | )    |         |         | 44,366  |   |         |         | 21,264  | 
|                                                     |                                                       |                                             |         |         |         |   |         |         |         |   |         |         |         |      |        
|Net increase in net assets resulting from operations |                                                       | $                                           | 872,814 |         |         | $ | 249,486 |         |         | $ | 192,011 |         |         | $    | 228,291 |         |         | $ | 200,727 |        
|                                                     |                                                       |                                             |         |         |         |   |         |         |         |   |         |         |         |      |        
|Per Share:                                           |                                                       |                                             |         |         |         |   |         |         |         |   |         |         |         |      |         |         |         |   |         |        
|Diluted earnings per common share                    |                                                       | $                                           | 6.36    |         |         | $ | 1.88    |         |         | $ | 1.62    |         |         | $    | 2.20    |         |         | $ | 2.16    |        
|Dividends per common
    share(1)                    |                                                       | $                                           | 2.33    |         |         | $ | 2.30    |         |         | $ | 2.28    |         |         | $    | 2.23    |         |         | $ | 2.01    |        
|Weighted average common shares outstanding  diluted |                                                       |                                             | 137,274 |         |         |   | 132,458 |         |         |   | 118,351 |         |         |      | 103,574 |         |         |   | 93,003  |        

27



---



##### 



|                                                               |  |                 |           |  |      |   |           |      |  |   |           |  |  |      |           |  |  |   |           | 
|-------------------------------------------------------------- |  | --------------- | --------- |  | ---- | - | --------- | ---- |  | - | --------- |  |  | ---- | --------- |  |  | - | --------- | 
|                                                               |  | At December 31, |          
|                                                               |  |                 |          
|(in thousands,                                                 |  | 2005            |           |  | 2004 |   |           | 2003 |  |   | 2002      |  |  | 2001 |          
|except per share data)                                         |  |                 |           |  |      |   |           |      |  |   |           |  |  |      |          
|Balance Sheet Data:                                            |  |                 |           |  |      |   |           |      |  |   |           |  |  |      |           |  |  |   |           | 
|Portfolio at value                                             |  | $               | 3,606,355 |  |      | $ | 3,013,411 |      |  | $ | 2,584,599 |  |  | $    | 2,488,167 |  |  | $ | 2,329,590 | 
|Total assets                                                   |  |                 | 4,025,880 |  |      |   | 3,260,998 |      |  |   | 3,019,870 |  |  |      | 2,794,319 |  |  |   | 2,460,713 | 
|Total debt
    outstanding(2)                                  |  |                 | 1,284,790 |  |      |   | 1,176,568 |      |  |   | 954,200   |  |  |      | 998,450   |  |  |   | 1,020,806 | 
|Preferred stock issued to Small Business
    Administration(2) |  |                 |          |  |      |   |          |      |  |   | 6,000     |  |  |      | 7,000     |  |  |   | 7,000     | 
|Shareholders equity                                           |  |                 | 2,620,546 |  |      |   | 1,979,778 |      |  |   | 1,914,577 |  |  |      | 1,546,071 |  |  |   | 1,352,123 | 
|Shareholders equity per common share (net asset
    value)(3) |  | $               | 19.17     |  |      | $ | 14.87     |      |  | $ | 14.94     |  |  | $    | 14.22     |  |  | $ | 13.57     | 
|Common shares outstanding at end of year                       |  |                 | 136,697   |  |      |   | 133,099   |      |  |   | 128,118   |  |  |      | 108,698   |  |  |   | 99,607    | 

|                                                                |  |                         |           |   |      |   |           |      |  |   |         |   |  |      |         |   |  |   |         |  
|--------------------------------------------------------------- |  | ----------------------- | --------- | - | ---- | - | --------- | ---- |  | - | ------- | - |  | ---- | ------- | - |  | - | ------- | -
|                                                                |  | Year Ended December 31, |          
|                                                                |  |                         |          
|                                                                |  | 2005                    |           |   | 2004 |   |           | 2003 |  |   | 2002    |   |  | 2001 |        
|                                                                |  |                         |           |   |      |   |           |      |  |   |         |   |  |      |        
|Other Data:                                                     |  |                         |           |   |      |   |           |      |  |   |         |   |  |      |         |   |  |   |         |  
|Investments funded                                              |  | $                       | 1,675,773 |   |      | $ | 1,524,523 |      |  | $ | 931,450 |   |  | $    | 506,376 |   |  | $ | 680,329 |  
|Principal collections related to investment repayments or sales |  |                         | 1,503,388 |   |      |   | 909,189   |      |  |   | 788,328 |   |  |      | 356,641 |   |  |   | 204,441 |  
|Realized gains                                                  |  |                         | 343,061   |   |      |   | 267,702   |      |  |   | 94,305  |   |  |      | 95,562  |   |  |   | 10,107  |  
|Realized losses                                                 |  |                         | (69,565   | ) |      |   | (150,462  | )    |  |   | (18,958 | ) |  |      | (50,625 | ) |  |   | (9,446  | )

|                                                     |  |       |         |  |       |   |         |       |  |   |         |  |  |       |         |  |       |   |         |       |  |   |        |  |  |   |        |  |  |   |        | 
|---------------------------------------------------- |  | ----- | ------- |  | ----- | - | ------- | ----- |  | - | ------- |  |  | ----- | ------- |  | ----- | - | ------- | ----- |  | - | ------ |  |  | - | ------ |  |  | - | ------ | 
|                                                     |  | 2005  |         |  | 2004  |  
|                                                     |  |       |         |  |       |  
|(in thousands,                                       |  | Qtr 4 |         |  | Qtr 3 |   |         | Qtr 2 |  |   | Qtr 1   |  |  | Qtr 4 |         |  | Qtr 3 |   |         | Qtr 2 |  |   | Qtr 1  | 
|except per share data)                               |  |       |         |  |       |   |         |       |  |   |         |  |  |       |         |  |       |   |         |       |  |   |        | 
|Quarterly Data (unaudited):                          |  |       |         |  |       |   |         |       |  |   |         |  |  |       |         |  |       |   |         |       |  |   |        |  |  |   |        |  |  |   |        | 
|Total interest and related portfolio income          |  | $     | 98,169  |  |       | $ | 94,857  |       |  | $ | 86,207  |  |  | $     | 94,919  |  |       | $ | 100,962 |       |  | $ | 96,863 |  |  | $ | 87,500 |  |  | $ | 81,765 | 
|Net investment income                                |  |       | 37,073  |  |       |   | 46,134  |       |  |   | 15,267  |  |  |       | 38,752  |  |       |   | 54,678  |       |  |   | 52,745 |  |  |   | 48,990 |  |  |   | 44,545 | 
|Net increase in net assets resulting from operations |  |       | 328,140 |  |       |   | 113,168 |       |  |   | 311,885 |  |  |       | 119,621 |  |       |   | 47,837  |       |  |   | 85,999 |  |  |   | 95,342 |  |  |   | 20,308 | 
|Diluted earnings per common share                    |  |       | 2.36    |  |       |   | 0.82    |       |  |   | 2.29    |  |  |       | 0.88    |  |       |   | 0.35    |       |  |   | 0.66   |  |  |   | 0.73   |  |  |   | 0.15   | 
|Dividends declared per common
    share(4)           |  |       | 0.61    |  |       |   | 0.58    |       |  |   | 0.57    |  |  |       | 0.57    |  |       |   | 0.59    |       |  |   | 0.57   |  |  |   | 0.57   |  |  |   | 0.57   | 
|Net asset value per common
    share(3)              |  |       | 19.17   |  |       |   | 17.37   |       |  |   | 17.01   |  |  |       | 15.22   |  |       |   | 14.87   |       |  |   | 14.90  |  |  |   | 14.77  |  |  |   | 14.60  | 




|    |                                                                                                                                                                                                                                                                                                                                                                                                
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Dividends are based on taxable income, which differs from income
    for financial reporting purposes.                                                                                                                                                                                                                                                                                         
|   
|(2) | See Managements Discussion and Analysis of Financial
    Condition and Results of Operations for more information
    regarding our level of indebtedness.                                                                                                                                                                                                                                  
|(3) | We determine net asset value per common share as of the last day
    of the period presented. The net asset values shown are based on
    outstanding shares at the end of each period presented.                                                                                                                                                                                              
|(4) | Dividends declared per common share for the fourth quarter of
    2004 included the regular quarterly dividend of $0.57 per common
    share and an extra dividend of $0.02 per common share. Dividends
    declared per common share for the fourth quarter of 2005
    included the regular quarterly dividend of $0.58 per common
    share and an extra dividend of $0.03 per common share.

28



---



##### 



Item 7. Managements Discussion and Analysis
of Financial Condition and Results of Operations.


The information contained in this section should be read in
conjunction with our Consolidated Financial Statements and the
Notes thereto. In addition, this annual report on
Form 10-K 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 in Risk Factors above. Other factors that
could cause actual results to differ materially include:




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

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


OVERVIEW








|                               |  |      |    |   |      |  |    |      |  |  |    |  
|------------------------------ |  | ---- | -- | - | ---- |  | -- | ---- |  |  | -- | -
|                               |  | 2005 |    |   | 2004 |  |    | 2003 | 
|                               |  |      |    |   |      |  |    |      | 
|Private finance                |  |      | 96 | % |      |  | 76 | %    |  |  | 74 | %
|Commercial real estate finance |  |      | 4  | % |      |  | 24 | %    |  |  | 26 | %



29



---



##### 







PORTFOLIO AND INVESTMENT ACTIVITY




|                                                                    |  |                          |         |   |      |   |         |      |  |   |         |  
|------------------------------------------------------------------- |  | ------------------------ | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                                    |  | At and for the           |        
|                                                                    |  | Years Ended December 31, |        
|                                                                    |  |                          |        
|                                                                    |  | 2005                     |         |   | 2004 |   |         | 2003 | 
|($ in millions)                                                     |  |                          |         |   |      |   |         |      | 
|Portfolio at value                                                  |  | $                        | 3,606.4 |   |      | $ | 3,013.4 |      |  | $ | 2,584.6 |  
|Investments funded                                                  |  | $                        | 1,675.8 |   |      | $ | 1,524.5 |      |  | $ | 931.5   |  
|Change in accrued or reinvested interest and dividends              |  | $                        | 6.6     |   |      | $ | 52.2    |      |  | $ | 45.0    |  
|Principal collections related to investment repayments
    or sales |  | $                        | 1,503.4 |   |      | $ | 909.2   |      |  | $ | 788.3   |  
|Yield on interest-bearing
    investments(1)                        |  |                          | 12.8    | % |      |   | 14.0    | %    |  |   | 14.7    | %




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

Private Finance




|                                                                |                           |                          |         |         |      |   |         |         |  |   |         |         | 
|--------------------------------------------------------------- | ------------------------- | ------------------------ | ------- | ------- | ---- | - | ------- | ------- |  | - | ------- | ------- | 
|                                                                |                           | At and for the           |        
|                                                                |                           | Years Ended December 31, |        
|                                                                |                           |                          |        
|                                                                |                           | 2005                     |         |         | 2004 |   |         | 2003    | 
|($ in millions)                                                 |                           |                          |         |         |      |   |         |         | 
|Portfolio at value:                                             |                           |                          |         |         |      |   |         |         |  |   |         |        
|                                                                | Loans and debt securities |                          | $       | 2,094.9 |      |   | $       | 1,602.9 |  |   | $       | 1,214.9 | 
|                                                                | Equity securities         |                          |         | 1,384.4 |      |   |         | 699.2   |  |   |         | 687.8   | 
|                                                                |                           |                          |         |         |      |   |         |         | 
|Total portfolio                                                 |                           | $                        | 3,479.3 |         |      | $ | 2,302.1 |         |  | $ | 1,902.7 |        
|                                                                |                           |                          |         |         |      |   |         |         | 
|Investments
    funded(1)                                       |                           | $                        | 1,462.3 |         |      | $ | 1,140.8 |         |  | $ | 498.0   |        
|Change in accrued or reinvested interest and dividends          |                           | $                        | 24.6    |         |      | $ | 45.6    |         |  | $ | 41.8    |        
|Principal collections related to investment repayments or sales |                           | $                        | 703.9   |         |      | $ | 551.9   |         |  | $ | 318.6   |        
|Yield on interest-bearing
    investments(2)                    |                           |                          | 13.0    | %       |      |   | 13.9    | %       |  |   | 15.0    | %      






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Investments funded for the year ended December 31, 2004,
    included a $47.5 million subordinated debt investment in
    The Hillman Companies, Inc. received in conjunction with the
    sale of Hillman as discussed below.                                                                                                                                                                                                                               
|   
|(2) | The weighted average yield on loans and debt securities is
    computed as the (a) annual stated interest plus the annual
    amortization of loan origination fees, original issue discount,
    and market discount on accruing loans and debt securities less
    the annual amortization of loan origination costs, divided by
    (b) total loans and debt securities at value. The weighted
    average yield is computed as of the balance sheet date.

30



---



##### 







Investments Funded.


|                                |                        |                         |       |          |                    |  |      |        |          |  |          |       |  |          |     |      |          |  |         |         |  |  |      |      |  
|------------------------------- | ---------------------- | ----------------------- | ----- | -------- | ------------------ |  | ---- | ------ | -------- |  | -------- | ----- |  | -------- | --- | ---- | -------- |  | ------- | ------- |  |  | ---- | ---- | -
|                                |                        | 2005 Investments Funded |      
|                                |                        |                         |      
|                                |                        | 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. The yield on a unitranche
    investment reflects the blended yield of senior and subordinated
    debt combined.      
|   
|(3) | Buyout senior loans funded include $217.2 million which was
    repaid during the year.                                                                                                                                 

31



---



##### 



|                                |                        |                         |       |          |                    |  |      |        |          |  |          |       |  |          |      |      |          |  |       |         |  |  |      |      |  
|------------------------------- | ---------------------- | ----------------------- | ----- | -------- | ------------------ |  | ---- | ------ | -------- |  | -------- | ----- |  | -------- | ---- | ---- | -------- |  | ----- | ------- |  |  | ---- | ---- | -
|                                |                        | 2004 Investments Funded |      
|                                |                        |                         |      
|                                |                        | 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           |                         | $     | 25.1     |                    |  |      | 9.1    | %        |  | $        | 140.8 |  |          |      | 7.2  | %        |  | $     | 165.9   |  |  |      | 7.5  | %
|                                | Unitranche
    debt(2) |                         |       | 18.9     |                    |  |      | 13.0   | %        |  |          |      |  |          |      |     |          |  |       | 18.9    |  |  |      | 13.0 | %
|                                | Subordinated debt      |                         |       | 396.4    |                    |  |      | 13.4   | %        |  |          | 320.1 |  |          |      | 15.5 | %        |  |       | 716.5   |  |  |      | 14.4 | %
|                                |                        |                         |       |          |                    |  |      |        |          |  |          |       |  |          |      |      |          | 
|Total loans and debt securities |                        |                         | 440.4 |          |                    |  | 13.2 | %      |          |  | 460.9    |       |  |          | 13.0 | %    |          |  | 901.3 |         |  |  | 13.1 | %   
|Equity                          |                        |                         | 72.3  |          |                    |  |      |        |          |  | 167.2    |       |  |          |      |      |          |  | 239.5 |         |  |  |      |     
|                                |                        |                         |       |          |                    |  |      |        |          |  |          |       |  |          |      |      |          | 
|                                | Total                  |                         | $     | 512.7    |                    |  |      |        |          |  | $        | 628.1 |  |          |      |      |          |  | $     | 1,140.8 |  |  |      |      |  
|                                |                        |                         |       |          |                    |  |      |        |          |  |          |       |  |          |      |      |          | 

|                                |                        |                         |       |          |                    |  |      |        |          |  |          |      |  |          |     |      |          |  |       |       |  |  |      |      |  
|------------------------------- | ---------------------- | ----------------------- | ----- | -------- | ------------------ |  | ---- | ------ | -------- |  | -------- | ---- |  | -------- | --- | ---- | -------- |  | ----- | ----- |  |  | ---- | ---- | -
|                                |                        | 2003 Investments Funded |      
|                                |                        |                         |      
|                                |                        | 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           |                         | $     | 44.6     |                    |  |      | 9.4    | %        |  | $        | 28.6 |  |          |     | 2.6  | %        |  | $     | 73.2  |  |  |      | 6.7  | %
|                                | Unitranche
    debt(2) |                         |       | 25.0     |                    |  |      | 15.5   | %        |  |          |     |  |          |     |     |          |  |       | 25.0  |  |  |      | 15.5 | %
|                                | Subordinated debt      |                         |       | 354.8    |                    |  |      | 14.6   | %        |  |          | 1.2  |  |          |     | 25.0 | %        |  |       | 356.0 |  |  |      | 14.6 | %
|                                |                        |                         |       |          |                    |  |      |        |          |  |          |      |  |          |     |      |          | 
|Total loans and debt securities |                        |                         | 424.4 |          |                    |  | 14.1 | %      |          |  | 29.8     |      |  |          | 3.5 | %    |          |  | 454.2 |       |  |  | 13.4 | %   
|Equity                          |                        |                         | 15.6  |          |                    |  |      |        |          |  | 28.2     |      |  |          |     |      |          |  | 43.8  |       |  |  |      |     
|                                |                        |                         |       |          |                    |  |      |        |          |  |          |      |  |          |     |      |          | 
|                                | Total                  |                         | $     | 440.0    |                    |  |      |        |          |  | $        | 58.0 |  |          |     |      |          |  | $     | 498.0 |  |  |      |      |  
|                                |                        |                         |       |          |                    |  |      |        |          |  |          |      |  |          |     |      |          | 






|    |                                                                                                                                                                                                                         
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The weighted average yield on interest-bearing investments is
    computed as the (a) annual stated interest on accruing
    interest-bearing investments, divided by (b) total
    interest-bearing investments funded.
|   
|(2) | Unitranche debt is a single debt investment that is a blend of
    senior and subordinated debt. The yield on a unitranche
    investment reflects the blended yield of senior and subordinated
    debt combined.      







Portfolio Yield.


32



---



##### 





Outstanding Investment Commitments.




| |   |                                                                                                                                                                                                                                                                                                                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | $33.3 million in the form of debt to Promo Works, LLC.                                                                                                                                                                                                                                                                                                                                                
|
| |  | $20.0 million in the form of debt to Business Loan Express,
    LLC.                                                                                                                                                                                                                                                                                                                                  
|
| |  | $14.0 million in the form of debt to S.B. Restaurant
    Company.                                                                                                                                                                                                                                                                                                                                     
|
| |  | $12.5 million in the form of equity to eight private
    venture capital funds.                                                                                                                                                                                                                                                                                                                       
|
| |  | $12.0 million in the form of debt and equity to Amerex
    Group, LLC.                                                                                                                                                                                                                                                                                                                                
|
| |  | $7.8 million in the form of debt to Mercury Air Centers,
    Inc.                                                                                                                                                                                                                                                                                                                                     
|
| |  | $7.5 million in the form of equity to Pennsylvania Avenue
    Investors, L.P., a limited partnership controlled by us that
    invests in private equity buyout funds.                                                                                                                                                                                                                                
|
| |  | $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% 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
    December 31, 2005:

|                                                                                      |          |           |      |      |        |        |     |             |  |   |      |      | 
|------------------------------------------------------------------------------------- | -------- | --------- | ---- | ---- | ------ | ------ | --- | ----------- |  | - | ---- | ---- | 
|                                                                                      |          |           |      |      |        | Amount |    
|                                                                                      |          | Committed |      |      | Amount |        |     | Available   | 
|                                                                                      |          | Amount    |      |      | Drawn  |        |     | to be Drawn | 
|($ in millions)                                                                       |          |           |      |      |        |        |     |             | 
|Subordinated debt to support warehouse facilities &
    warehousing
    activities(1) |          | $         | 40.0 |      |        | $      |    |             |  | $ | 40.0 |     
|Revolving line of credit for working capital                                          |          |           | 4.0  |      |        |        | 0.6 |             |  |   | 3.4  |     
|                                                                                      |          |           |      |      |        |        |     |             | 
|                                                                                      | Total(2) |           | $    | 44.0 |        |        | $   | 0.6         |  |   | $    | 43.4 | 
|                                                                                      |          |           |      |      |        |        |     |             | 

| | 
| | 
| | 

| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | Callidus has a secured warehouse credit facilities with a third
    party for up to $400 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
    $40 million subordinated debt commitment for Callidus to
    draw upon to provide first loss capital as needed to support the
    warehouse facility.
| | (2) | Subsequent to December 31, 2005, we provided Callidus with
    a new $50.0 million revolving credit facility to support
    its purchase of middle market senior loans pending the sale of
    such loans to its warehouse credit facilities.                                                                                                                                                                                                                              



| |                                                                                                                                                    
| | ---------------------------------------------------------------------------------------------------------------------------------------------------
| | In addition, we had a commitment to Callidus to purchase
    preferred equity in future CLO transactions of
    $32.4 million at December 31, 2005.





Advantage Sales & Marketing,
Inc.


33



---



##### 





|                      |       |      |      |      |      |   |      |      | 
|--------------------- | ----- | ---- | ---- | ---- | ---- | - | ---- | ---- | 
|                      |       | 2005 |      |      | 2004 |  
|($ in millions)       |       |      |      |      |      |  
|Interest income       |       | $    | 30.9 |      |      | $ | 15.5 |     
|Fees and other income |       |      | 6.5  |      |      |   | 5.8  |     
|                      |       |      |      |      |      |  
|                      | Total |      | $    | 37.4 |      |   | $    | 21.3 | 
|                      |       |      |      |      |      |  









Business Loan Express,
LLC.




|                         |       |      |      |      |      |   |      |      |  |   |      |      | 
|------------------------ | ----- | ---- | ---- | ---- | ---- | - | ---- | ---- |  | - | ---- | ---- | 
|                         |       | 2005 |      |      | 2004 |   |      | 2003 | 
|($ in millions)          |       |      |      |      |      |   |      |      | 
|Interest income          |       | $    | 14.3 |      |      | $ | 23.2 |      |  | $ | 21.9 |     
|Dividend income          |       |      | 14.0 |      |      |   | 14.8 |      |  |   | 7.8  |     
|Loan prepayment premiums |       |      |     |      |      |   |     |      |  |   | 0.1  |     
|Fees and other income    |       |      | 9.2  |      |      |   | 12.0 |      |  |   | 16.9 |     
|                         |       |      |      |      |      |   |      |      | 
|                         | Total |      | $    | 37.5 |      |   | $    | 50.0 |  |   | $    | 46.7 | 
|                         |       |      |      |      |      |   |      |      | 



34



---



##### 













The Hillman Companies, Inc.


35



---



##### 



Commercial Real Estate Finance




|                                                                       |                                |                                         |       |       |          |  |  |       |  |   |          |       |  |       |  |       |          |   |       |       |  |  |  |       | 
|---------------------------------------------------------------------- | ------------------------------ | --------------------------------------- | ----- | ----- | -------- |  |  | ----- |  | - | -------- | ----- |  | ----- |  | ----- | -------- | - | ----- | ----- |  |  |  | ----- | 
|                                                                       |                                | At and for the Years Ended December 31, |      
|                                                                       |                                |                                         |      
|                                                                       |                                | 2005                                    |       |       | 2004     |  |  | 2003  | 
|                                                                       |                                |                                         |       |       |          |  |  |       | 
|                                                                       |                                | Value                                   |       |       | Yield(1) |  |  | Value |  |   | Yield(1) |       |  | Value |  |       | Yield(1) |  
|($ in millions)                                                        |                                |                                         |       |       |          |  |  |       |  |   |          |       |  |       |  |       |          |  
|Portfolio at value:                                                    |                                |                                         |       |       |          |  |  |       |  |   |          |       |  |       |  |       |          |   |       |       |  |  |  |      
|                                                                       | CMBS bonds                     |                                         | $     |      |          |  |  |       |  |   | $        | 373.8 |  |       |  | 14.6% |          |   | $     | 394.0 |  |  |  | 14.1% | 
|                                                                       | CDO bonds and preferred shares |                                         |       |      |          |  |  |       |  |   |          | 212.6 |  |       |  | 16.8% |          |   |       | 186.6 |  |  |  | 16.7% | 
|                                                                       | Commercial mortgage loans      |                                         |       | 102.6 |          |  |  | 7.6%  |  |   |          | 95.0  |  |       |  | 6.8%  |          |   |       | 83.6  |  |  |  | 8.6%  | 
|                                                                       | Real estate owned              |                                         |       | 13.9  |          |  |  |       |  |   |          | 16.9  |  |       |  |       |          |   |       | 12.8  |  |  |  |       | 
|                                                                       | Equity interests               |                                         |       | 10.6  |          |  |  |       |  |   |          | 13.0  |  |       |  |       |          |   |       | 4.9   |  |  |  |       | 
|                                                                       |                                |                                         |       |       |          |  |  |       |  |   |          |       |  |       |  |       |          |  
|Total portfolio                                                        |                                | $                                       | 127.1 |       |          |  |  |       |  | $ | 711.3    |       |  |       |  |       |          | $ | 681.9 |       |  |  |  |      
|                                                                       |                                |                                         |       |       |          |  |  |       |  |   |          |       |  |       |  |       |          |  
|Investments funded                                                     |                                | $                                       | 213.5 |       |          |  |  |       |  | $ | 383.7    |       |  |       |  |       |          | $ | 433.5 |       |  |  |  |      
|Change in accrued or reinvested interest                               |                                | $                                       | (18.0 | )     |          |  |  |       |  | $ | 6.6      |       |  |       |  |       |          | $ | 3.2   |       |  |  |  |      
|Principal collections related to investment repayments or
    sales(2) |                                | $                                       | 799.5 |       |          |  |  |       |  | $ | 357.3    |       |  |       |  |       |          | $ | 469.7 |       |  |  |  |      




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



|                                             |       |        |       |       |          |   |        |        |   |   |       |       | 
|-------------------------------------------- | ----- | ------ | ----- | ----- | -------- | - | ------ | ------ | - | - | ----- | ----- | 
|                                             |       | Face   |       |       |          |   | Amount |       
|                                             |       | Amount |       |       | Discount |   |        | Funded |  
|($ in millions)                              |       |        |       |       |          |   |        |        |  
|For the Year Ended December 31, 2005         |       |        |       |       |          |   |        |        |   |   |       |      
|CMBS bonds (4 new
    issuances)(2)          |       | $      | 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 | 
|                                             |       |        |       |       |          |   |        |        |  
|For the Year Ended December 31, 2004         |       |        |       |       |          |   |        |        |   |   |       |      
|CMBS bonds (13 new
    issuances(1))         |       | $      | 419.1 |       |          | $ | (183.7 | )      |   | $ | 235.4 |      
|CDO bonds and preferred shares (3 issuances) |       |        | 40.5  |       |          |   | (0.1   | )      |   |   | 40.4  |      
|Commercial mortgage loans                    |       |        | 112.1 |       |          |   | (8.2   | )      |   |   | 103.9 |      
|Equity interests                             |       |        | 4.0   |       |          |   |       |        |   |   | 4.0   |      
|                                             |       |        |       |       |          |   |        |        |  
|                                             | Total |        | $     | 575.7 |          |   | $      | (192.0 | ) |   | $     | 383.7 | 
|                                             |       |        |       |       |          |   |        |        |  
|For the Year Ended December 31, 2003         |       |        |       |       |          |   |        |        |   |   |       |      
|CMBS bonds (15 new
    issuances(1))         |       | $      | 508.5 |       |          | $ | (225.9 | )      |   | $ | 282.6 |      
|CDO bonds and preferred shares (3 issuances) |       |        | 145.8 |       |          |   | (0.4   | )      |   |   | 145.4 |      
|Commercial mortgage loans                    |       |        | 3.0   |       |          |   |       |        |   |   | 3.0   |      
|Equity interests                             |       |        | 2.5   |       |          |   |       |        |   |   | 2.5   |      
|                                             |       |        |       |       |          |   |        |        |  
|                                             | Total |        | $     | 659.8 |          |   | $      | (226.3 | ) |   | $     | 433.5 | 
|                                             |       |        |       |       |          |   |        |        |  




|    |                                                                                                             
|--- | ------------------------------------------------------------------------------------------------------------
|(1) | CMBS investments also include investments in issuances in which
    we have previously purchased CMBS bonds.
|(2) | The CMBS bonds invested in during the year ended
    December 31, 2005, were sold on May 3, 2005.           

36



---



##### 





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










Hedging Activities




37



---



##### 







Accrued Interest and Dividends Receivable




|                               |                                     |       |      |     |      |   |      |      |      | 
|------------------------------ | ----------------------------------- | ----- | ---- | --- | ---- | - | ---- | ---- | ---- | 
|                               |                                     | 2005  |      |     | 2004 |  
|($ in millions)                |                                     |       |      |     |      |  
|Private finance                |                                     | $     | 58.7 |     |      | $ | 59.8 |     
|Commercial real estate finance |                                     |       |      |     |      |   |      |     
|                               | CMBS and CDO bonds                  |       |      |    |      |   |      | 18.9 |     
|                               | Commercial mortgage loans and other |       |      | 1.7 |      |   |      | 0.8  |     
|                               |                                     |       |      |     |      |  
|                               |                                     | Total |      | $   | 60.4 |   |      | $    | 79.5 | 
|                               |                                     |       |      |     |      |  



Portfolio Asset Quality


Portfolio by Grade.




|                |  |           |         |  |                 |  |       |             |  |   |                 |  |  |  |       |  
|--------------- |  | --------- | ------- |  | --------------- |  | ----- | ----------- |  | - | --------------- |  |  |  | ----- | -
|                |  | 2005      |         |  | 2004            | 
|                |  |           |         |  |                 | 
|                |  | Portfolio |         |  | Percentage of   |  |       | Portfolio   |  |   | Percentage of   | 
|Grade           |  | at Value  |         |  | Total Portfolio |  |       | at Value(1) |  |   | Total Portfolio | 
|                |  |           |         |  |                 |  |       |             |  |   |                 | 
|($ in millions) |  |           |         |  |                 |  |       |            
|1               |  | $         | 1,643.0 |  |                 |  | 45.6  | %           |  | $ | 952.5           |  |  |  | 31.6  | %
|2               |  |           | 1,730.8 |  |                 |  | 48.0  |             |  |   | 1,850.5         |  |  |  | 61.4  |  
|3               |  |           | 149.1   |  |                 |  | 4.1   |             |  |   | 121.2           |  |  |  | 4.0   |  
|4               |  |           | 26.5    |  |                 |  | 0.7   |             |  |   | 11.7            |  |  |  | 0.4   |  
|5               |  |           | 57.0    |  |                 |  | 1.6   |             |  |   | 77.5            |  |  |  | 2.6   |  
|                |  |           |         |  |                 |  |       |             |  |   |                 | 
|                |  | $         | 3,606.4 |  |                 |  | 100.0 | %           |  | $ | 3,013.4         |  |  |  | 100.0 | %
|                |  |           |         |  |                 |  |       |             |  |   |                 | 

| | 
| | 
| | 

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



38



---



##### 









Loans and Debt Securities on Non-Accrual Status.


|                                                                                    |                                |                               |  |      |       |  |  |      |       | 
|----------------------------------------------------------------------------------- | ------------------------------ | ----------------------------- |  | ---- | ----- |  |  | ---- | ----- | 
|                                                                                    |                                | 2005                          |  |      | 2004  | 
|($ in millions)                                                                     |                                |                               |  |      |       | 
|Loans and debt securities in workout status (classified as
    Grade 4 or
    5)(1) |                                |                               |  |      |       |  |  |     
|                                                                                    | Private finance                |                               |  |      |       |  |  |      |      
|                                                                                    |                                | Companies more than 25% owned |  | $    | 15.6  |  |  | $    | 34.4  | 
|                                                                                    |                                | Companies less than 5% owned  |  |      | 11.4  |  |  |      | 16.5  | 
|                                                                                    | Commercial real estate finance |                               |  | 12.9 |       |  |  | 5.6  |      
|Loans and debt securities not in workout status                                     |                                |                               |  |      |       |  |  |     
|                                                                                    | Private finance                |                               |  |      |       |  |  |      |      
|                                                                                    |                                | Companies more than 25% owned |  |      | 58.0  |  |  |      | 29.4  | 
|                                                                                    |                                | Companies 5% to 25% owned     |  |      | 0.5   |  |  |      | 0.7   | 
|                                                                                    |                                | Companies less than 5% owned  |  |      | 49.5  |  |  |      | 15.8  | 
|                                                                                    | Commercial real estate finance |                               |  | 7.9  |       |  |  | 12.5 |      
|                                                                                    |                                |                               |  |      |       | 
|                                                                                    |                                | Total                         |  | $    | 155.8 |  |  | $    | 114.9 | 
|                                                                                    |                                |                               |  |      |       | 
|                                                                                    |                                | Percentage of total portfolio |  |      | 4.3%  |  |  |      | 3.8%  | 




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

Loans and Debt Securities Over 90 Days Delinquent.


|                               |                           |                               |      |     |      |   |      |      |       | 
|------------------------------ | ------------------------- | ----------------------------- | ---- | --- | ---- | - | ---- | ---- | ----- | 
|                               |                           | 2005                          |      |     | 2004 |  
|                               |                           |                               |      |     |      |  
|($ in millions)                |                           |                               |      |    
|Private finance                |                           | $                             | 74.6 |     |      | $ | 73.5 |     
|Commercial real estate finance |                           |                               |      |     |      |   |      |     
|                               | CMBS bonds                |                               |      |    |      |   |      | 49.0 |      
|                               | Commercial mortgage loans |                               |      | 6.1 |      |   |      | 10.1 |      
|                               |                           |                               |      |     |      |  
|                               |                           | Total                         |      | $   | 80.7 |   |      | $    | 132.6 | 
|                               |                           |                               |      |     |      |  
|                               |                           | Percentage of total portfolio |      |     | 2.2% |   |      |      | 4.4%  | 





39



---



##### 





and


40



---



##### 



RESULTS OF OPERATIONS


Comparison of the Years Ended December 31, 2005, 2004,
and 2003




|                                                     |                                                       |                                                    |         |         |         |   |         |         |         |   |        |         |         |      |     |     |         |    |         |         |         |   |         |         |         |   |        |        |        |  |    |     |    |  
|---------------------------------------------------- | ----------------------------------------------------- | -------------------------------------------------- | ------- | ------- | ------- | - | ------- | ------- | ------- | - | ------ | ------- | ------- | ---- | --- | --- | ------- | -- | ------- | ------- | ------- | - | ------- | ------- | ------- | - | ------ | ------ | ------ |  | -- | --- | -- | -
|                                                     |                                                       |                                                    |         |         |         |   |         | Percent |         |   |        |         |         |      |     |     | Percent |   
|                                                     |                                                       | 2005                                               |         |         | 2004    |   |         | Change  |         |   | Change |         |         | 2004 |     |     | 2003    |    |         | Change  |         |   | Change  |        
|(in thousands, except per share amounts)             |                                                       |                                                    |         |         |         |   |         |         |         |   |        |         |         |      |     |     |         |    |         |         |         |   |         |        
|Interest and Related Portfolio Income                |                                                       |                                                    |         |         |         |   |         |         |         |   |        |         |         |      |     |     |         |    |         |         |         |   |         |         |         |   |        |        |        |  |    |    
|                                                     | Interest and dividends                                |                                                    | $       | 317,153 |         |   | $       | 319,642 |         |   | $      | (2,489  | )       |      |     | (1  | )%      |    | $       | 319,642 |         |   | $       | 290,719 |         |   | $      | 28,923 |        |  |    | 10  | % 
|                                                     | Loan prepayment premiums                              |                                                    |         | 6,250   |         |   |         | 5,502   |         |   |        | 748     |         |      |     | 14  | %       |    |         | 5,502   |         |   |         | 8,172   |         |   |        | (2,670 | )      |  |    | (33 | )%
|                                                     | Fees and other income                                 |                                                    |         | 50,749  |         |   |         | 41,946  |         |   |        | 8,803   |         |      |     | 21  | %       |    |         | 41,946  |         |   |         | 30,338  |         |   |        | 11,608 |        |  |    | 38  | % 
|                                                     |                                                       |                                                    |         |         |         |   |         |         |         |   |        |         |         |      |     |     |         |    |         |         |         |   |         |        
|                                                     |                                                       | Total interest and related portfolio income        |         |         | 374,152 |   |         |         | 367,090 |   |        |         | 7,062   |      |     |     | 2       | %  |         |         | 367,090 |   |         |         | 329,229 |   |        |        | 37,861 |  |    |     | 11 | %
|                                                     |                                                       |                                                    |         |         |         |   |         |         |         |   |        |         |         |      |     |     |         |    |         |         |         |   |         |        
|Expenses                                             |                                                       |                                                    |         |         |         |   |         |         |         |   |        |         |         |      |     |     |         |    |         |         |         |   |         |         |         |   |        |        |        |  |    |    
|                                                     | Interest                                              |                                                    |         | 76,798  |         |   |         | 75,650  |         |   |        | 1,148   |         |      |     | 2   | %       |    |         | 75,650  |         |   |         | 77,233  |         |   |        | (1,583 | )      |  |    | (2  | )%
|                                                     | Employee                                              |                                                    |         | 78,300  |         |   |         | 53,739  |         |   |        | 24,561  |         |      |     | 46  | %       |    |         | 53,739  |         |   |         | 36,945  |         |   |        | 16,794 |        |  |    | 45  | % 
|                                                     | Administrative                                        |                                                    |         | 70,267  |         |   |         | 34,686  |         |   |        | 35,581  |         |      |     | 103 | %       |    |         | 34,686  |         |   |         | 22,387  |         |   |        | 12,299 |        |  |    | 55  | % 
|                                                     |                                                       |                                                    |         |         |         |   |         |         |         |   |        |         |         |      |     |     |         |    |         |         |         |   |         |        
|                                                     |                                                       | Total operating expenses                           |         |         | 225,365 |   |         |         | 164,075 |   |        |         | 61,290  |      |     |     | 37      | %  |         |         | 164,075 |   |         |         | 136,565 |   |        |        | 27,510 |  |    |     | 20 | %
|                                                     |                                                       |                                                    |         |         |         |   |         |         |         |   |        |         |         |      |     |     |         |    |         |         |         |   |         |        
|                                                     |                                                       | Net investment income before income taxes          |         |         | 148,787 |   |         |         | 203,015 |   |        |         | (54,228 | )    |     |     | (27     | )% |         |         | 203,015 |   |         |         | 192,664 |   |        |        | 10,351 |  |    |     | 5  | %
|                                                     |                                                       | Income tax expense (benefit), including excise tax |         |         | 11,561  |   |         |         | 2,057   |   |        |         | 9,504   |      |     |     | **      |    |         |         | 2,057   |   |         |         | (2,466  | ) |        |        | 4,523  |  |    |     | ** |  
|                                                     |                                                       |                                                    |         |         |         |   |         |         |         |   |        |         |         |      |     |     |         |    |         |         |         |   |         |        
|                                                     |                                                       | Net investment income                              |         |         | 137,226 |   |         |         | 200,958 |   |        |         | (63,732 | )    |     |     | (32     | )% |         |         | 200,958 |   |         |         | 195,130 |   |        |        | 5,828  |  |    |     | 3  | %
|                                                     |                                                       |                                                    |         |         |         |   |         |         |         |   |        |         |         |      |     |     |         |    |         |         |         |   |         |        
|Net Realized and Unrealized Gains (Losses)           |                                                       |                                                    |         |         |         |   |         |         |         |   |        |         |         |      |     |     |         |    |         |         |         |   |         |         |         |   |        |        |        |  |    |    
|                                                     | Net realized gains                                    |                                                    |         | 273,496 |         |   |         | 117,240 |         |   |        | 156,256 |         |      |     | 133 | %       |    |         | 117,240 |         |   |         | 75,347  |         |   |        | 41,893 |        |  |    | 56  | % 
|                                                     | Net change in unrealized appreciation or depreciation |                                                    |         | 462,092 |         |   |         | (68,712 | )       |   |        | 530,804 |         |      |     | *   |         |    |         | (68,712 | )       |   |         | (78,466 | )       |   |        | 9,754  |        |  |    | *   |   
|                                                     |                                                       |                                                    |         |         |         |   |         |         |         |   |        |         |         |      |     |     |         |    |         |         |         |   |         |        
|                                                     |                                                       | Total net gains (losses)                           |         |         | 735,588 |   |         |         | 48,528  |   |        |         | 687,060 |      |     |     | *       |    |         |         | 48,528  |   |         |         | (3,119  | ) |        |        | 51,647 |  |    |     | *  |  
|                                                     |                                                       |                                                    |         |         |         |   |         |         |         |   |        |         |         |      |     |     |         |    |         |         |         |   |         |        
|                                                     |                                                       | Net income                                         |         | $       | 872,814 |   |         | $       | 249,486 |   |        | $       | 623,328 |      |     |     | 250     | %  |         | $       | 249,486 |   |         | $       | 192,011 |   |        | $      | 57,475 |  |    |     | 30 | %
|                                                     |                                                       |                                                    |         |         |         |   |         |         |         |   |        |         |         |      |     |     |         |    |         |         |         |   |         |        
|Diluted earnings per common share                    |                                                       | $                                                  | 6.36    |         |         | $ | 1.88    |         |         | $ | 4.48   |         |         |      | 238 | %   |         | $  | 1.88    |         |         | $ | 1.62    |         |         | $ | 0.26   |        |        |  | 16 | %  
|                                                     |                                                       |                                                    |         |         |         |   |         |         |         |   |        |         |         |      |     |     |         |    |         |         |         |   |         |        
|Weighted average common shares outstanding  diluted |                                                       |                                                    | 137,274 |         |         |   | 132,458 |         |         |   | 4,816  |         |         |      | 4   | %   |         |    | 132,458 |         |         |   | 118,351 |         |         |   | 14,107 |        |        |  | 12 | %  






| |   |                                                                                                                                
| | - | -------------------------------------------------------------------------------------------------------------------------------
| | * | Net change in unrealized appreciation or depreciation and net
    gains (losses) can fluctuate significantly from year to year.



|   |                                     
|-- | ------------------------------------
|** | Percentage change is not meaningful.

Total Interest and Related Portfolio Income.




|                |                                           |                              |      |       |       |  |      |       |       |  |      |       |       | 
|--------------- | ----------------------------------------- | ---------------------------- | ---- | ----- | ----- |  | ---- | ----- | ----- |  | ---- | ----- | ----- | 
|                |                                           | 2005                         |      |       | 2004  |  |      | 2003  |      
|($ in millions) |                                           |                              |      |       |       |  |      |       |      
|Interest        |                                           |                              |      |       |       |  |      |       |       |  |      |      
|                | Private finance loans and debt securities |                              | $    | 251.0 |       |  | $    | 195.2 |       |  | $    | 177.3 |      
|                | CMBS and CDO portfolio                    |                              |      | 29.4  |       |  |      | 93.3  |       |  |      | 86.2  |      
|                | Commercial mortgage loans                 |                              |      | 7.6   |       |  |      | 9.4   |       |  |      | 9.0   |      
|                | Cash and cash equivalents and other       |                              |      | 9.4   |       |  |      | 3.1   |       |  |      | 2.8   |      
|                |                                           |                              |      |       |       |  |      |       |      
|                |                                           | Total interest               |      |       | 297.4 |  |      |       | 301.0 |  |      |       | 275.3 | 
|Dividends       |                                           |                              | 19.8 |       |       |  | 18.6 |       |       |  | 15.4 |      
|                |                                           |                              |      |       |       |  |      |       |      
|                |                                           | Total interest and dividends |      | $     | 317.2 |  |      | $     | 319.6 |  |      | $     | 290.7 | 
|                |                                           |                              |      |       |       |  |      |       |      



41



---



##### 





|                                    |  |      |         |   |      |   |         |      |  |   |         |  
|----------------------------------- |  | ---- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                    |  | 2005 |         |   | 2004 |   |         | 2003 | 
|($ in millions)                     |  |      |         |   |      |   |         |      | 
|Interest-bearing portfolio at value |  | $    | 2,211.4 |   |      | $ | 2,301.2 |      |  | $ | 1,891.9 |  
|Portfolio yield                     |  |      | 12.8    | % |      |   | 14.0    | %    |  |   | 14.7    | %











42



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##### 





|                                                                                                |                             |      |      |      |      |   |      |      |  |   |      |      | 
|----------------------------------------------------------------------------------------------- | --------------------------- | ---- | ---- | ---- | ---- | - | ---- | ---- |  | - | ---- | ---- | 
|                                                                                                |                             | 2005 |      |      | 2004 |   |      | 2003 | 
|($ in millions)                                                                                 |                             |      |      |      |      |   |      |      | 
|Structuring and diligence                                                                       |                             | $    | 24.6 |      |      | $ | 18.4 |      |  | $ | 6.1  |     
|Transaction and other services provided to portfolio companies                                  |                             |      | 2.9  |      |      |   | 3.2  |      |  |   | 4.5  |     
|Management, consulting and other services provided to portfolio
    companies and guaranty fees |                             |      | 20.8 |      |      |   | 17.4 |      |  |   | 18.7 |     
|Other income                                                                                    |                             |      | 2.4  |      |      |   | 2.9  |      |  |   | 1.0  |     
|                                                                                                |                             |      |      |      |      |   |      |      | 
|                                                                                                | Total fees and other income |      | $    | 50.7 |      |   | $    | 41.9 |  |   | $    | 30.3 | 
|                                                                                                |                             |      |      |      |      |   |      |      | 











|                |  |      |      |  |      |   |      |      |  |   |      | 
|--------------- |  | ---- | ---- |  | ---- | - | ---- | ---- |  | - | ---- | 
|                |  | 2005 |      |  | 2004 |   |      | 2003 | 
|($ in millions) |  |      |      |  |      |   |      |      | 
|Advantage(1)    |  | $    | 37.4 |  |      | $ | 21.3 |      |  | $ |     | 
|BLX             |  | $    | 37.5 |  |      | $ | 50.0 |      |  | $ | 46.7 | 
|Hillman(1)      |  | $    |     |  |      | $ | 2.5  |      |  | $ | 9.7  | 




|    |                                                      
|--- | -----------------------------------------------------
|(1) | Includes income from our controlled investments only.

Operating Expenses.


|                             |  |      |         |   |      |   |         |      |  |   |       |  
|---------------------------- |  | ---- | ------- | - | ---- | - | ------- | ---- |  | - | ----- | -
|                             |  | 2005 |         |   | 2004 |   |         | 2003 | 
|($ in millions)              |  |      |         |   |      |   |         |      | 
|Total outstanding debt       |  | $    | 1,284.8 |   |      | $ | 1,176.6 |      |  | $ | 954.2 |  
|Average outstanding debt     |  | $    | 1,087.1 |   |      | $ | 985.6   |      |  | $ | 943.5 |  
|Weighted average
    cost(1) |  |      | 6.5     | % |      |   | 6.6     | %    |  |   | 7.5   | %




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

43



---



##### 







|                                     |                        |      |      |      |      |   |      |      |  |   |      |      | 
|------------------------------------ | ---------------------- | ---- | ---- | ---- | ---- | - | ---- | ---- |  | - | ---- | ---- | 
|                                     |                        | 2005 |      |      | 2004 |   |      | 2003 | 
|($ in millions)                      |                        |      |      |      |      |   |      |      | 
|Salaries and employee benefits       |                        | $    | 57.3 |      |      | $ | 40.7 |      |  | $ | 28.3 |     
|Individual performance award (IPA)   |                        |      | 7.0  |      |      |   | 13.4 |      |  |   |     |     
|IPA mark to market expense (benefit) |                        |      | 2.0  |      |      |   | (0.4 | )    |  |   |     |     
|Individual performance bonus (IPB)   |                        |      | 6.9  |      |      |   |     |      |  |   |     |     
|Transition compensation, net         |                        |      | 5.1  |      |      |   |     |      |  |   |     |     
|Retention award                      |                        |      |     |      |      |   |     |      |  |   | 8.6  |     
|                                     |                        |      |      |      |      |   |      |      | 
|                                     | Total employee expense |      | $    | 78.3 |      |   | $    | 53.7 |  |   | $    | 36.9 | 
|                                     |                        |      |      |      |      |   |      |      | 
|Number of employees at end of period |                        |      | 131  |      |      |   | 162  |      |  |   | 125  |     









bi-weekly




44



---



##### 



Share-Based Payment




|                                                               |                               |      |      |      |      |   |      |      |  |   |      |      | 
|-------------------------------------------------------------- | ----------------------------- | ---- | ---- | ---- | ---- | - | ---- | ---- |  | - | ---- | ---- | 
|                                                               |                               | 2005 |      |      | 2004 |   |      | 2003 | 
|($ in millions)                                                |                               |      |      |      |      |   |      |      | 
|Administrative expenses, excluding investigation related costs |                               | $    | 33.9 |      |      | $ | 30.1 |      |  | $ | 22.4 |     
|Investigation related costs                                    |                               |      | 36.4 |      |      |   | 4.6  |      |  |   |     |     
|                                                               |                               |      |      |      |      |   |      |      | 
|                                                               | Total administrative expenses |      | $    | 70.3 |      |   | $    | 34.7 |  |   | $    | 22.4 | 
|                                                               |                               |      |      |      |      |   |      |      | 







| |   |                                                                                                                                                                                                                                                                                                                                                              
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | a net increase in accounting, consulting, and other fees of
    $1.7 million. This increase is primarily attributable to
    fees associated with the implementation of the requirements
    under the Sarbanes-Oxley Act of 2002 (including Section 404) and
    valuation assistance,                                                                      
|
| |  | an increase in deal costs related to evaluating potential new
    investments of $1.6 million. Costs related to mezzanine
    lending are generally paid by the borrower, however, costs
    related to buyout investments are generally funded by us.
    Accordingly, if a prospective deal does not close, we incur
    expenses that are not recoverable,
|
| |  | an increase in expenses related to portfolio development and
    workout activities of $1.5 million,                                                                                                                                                                                                                                                         
|
| |  | an increase in rent of $1.4 million associated with the
    opening of an office in Los Angeles, CA and expanding our office
    space in Chicago, IL and New York, NY, and                                                                                                                                                                                  
|
| |  | an increase in other expenses, including stock record expense,
    insurance premiums and directors fees of
    $1.1 million, and travel expenses of $0.8 million.                                                                                                                                                                                          

45



---



##### 





Income Tax Expense (Benefit), Including Excise
Tax.


|                             |                                                    |      |     |      |      |   |     |      |  |   |      |      |  
|---------------------------- | -------------------------------------------------- | ---- | --- | ---- | ---- | - | --- | ---- |  | - | ---- | ---- | -
|                             |                                                    | 2005 |     |      | 2004 |   |     | 2003 | 
|($ in millions)              |                                                    |      |     |      |      |   |     |      | 
|Income tax expense (benefit) |                                                    | $    | 5.4 |      |      | $ | 1.1 |      |  | $ | (2.5 | )   
|Excise tax expense           |                                                    |      | 6.2 |      |      |   | 1.0 |      |  |   |     |     
|                             |                                                    |      |     |      |      |   |     |      | 
|                             | Income tax expense (benefit), including excise tax |      | $   | 11.6 |      |   | $   | 2.1  |  |   | $    | (2.5 | )
|                             |                                                    |      |     |      |      |   |     |      | 



Realized Gains and Losses.


|                   |  |      |       |   |      |   |        |      |  |   |       |  
|------------------ |  | ---- | ----- | - | ---- | - | ------ | ---- |  | - | ----- | -
|                   |  | 2005 |       |   | 2004 |   |        | 2003 | 
|($ in millions)    |  |      |       |   |      |   |        |      | 
|Realized gains     |  | $    | 343.1 |   |      | $ | 267.7  |      |  | $ | 94.3  |  
|Realized losses    |  |      | (69.6 | ) |      |   | (150.5 | )    |  |   | (19.0 | )
|                   |  |      |       |   |      |   |        |      | 
|Net realized gains |  | $    | 273.5 |   |      | $ | 117.2  |      |  | $ | 75.3  |  
|                   |  |      |       |   |      |   |        |      | 



|                                                                                                |                |         |        |       |      |   |        |       |   |   |       |       |  
|----------------------------------------------------------------------------------------------- | -------------- | ------- | ------ | ----- | ---- | - | ------ | ----- | - | - | ----- | ----- | -
|                                                                                                |                | 2005(1) |        |       | 2004 |   |        | 2003  |  
|($ in millions)                                                                                 |                |         |        |       |      |   |        |       |  
|Reversal of previously recorded net unrealized appreciation
    associated with realized gains  |                | $       | (108.0 | )     |      | $ | (210.5 | )     |   | $ | (78.5 | )    
|Reversal of previously recorded net unrealized depreciation
    associated with realized losses |                |         | 68.0   |       |      |   | 151.8  |       |   |   | 20.3  |      
|                                                                                                |                |         |        |       |      |   |        |       |  
|                                                                                                | Total reversal |         | $      | (40.0 | )    |   | $      | (58.7 | ) |   | $     | (58.2 | )
|                                                                                                |                |         |        |       |      |   |        |       |  

| |  | 
| |  | 
| |  | 

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

46



---



##### 





($ in millions)


|                                      |                              |        |       |       | 
|------------------------------------- | ---------------------------- | ------ | ----- | ----- | 
|2005                                  |                             
|                                      |                             
|Portfolio Company                     |                              | Amount |      
|                                      |                              |        |      
|Private Finance:                      |                              |        |       |      
|Housecall Medical Resources, Inc.     |                              | $      | 53.7  |      
|Fairchild Industrial Products Company |                              |        | 16.2  |      
|Apogen Technologies Inc.              |                              |        | 9.0   |      
|Polaris Pool Systems, Inc.            |                              |        | 7.4   |      
|MasterPlan, Inc.                      |                              |        | 3.7   |      
|U.S. Security Holdings, Inc.          |                              |        | 3.3   |      
|Ginsey Industries, Inc.               |                              |        | 2.8   |      
|E-Talk Corporation                    |                              |        | 1.6   |      
|Professional Paint, Inc.              |                              |        | 1.6   |      
|Oriental Trading Company, Inc.        |                              |        | 1.0   |      
|Woodstream Corporation                |                              |        | 0.9   |      
|Impact Innovations Group, LLC         |                              |        | 0.8   |      
|DCS Business Services, Inc.           |                              |        | 0.7   |      
|Other                                 |                              |        | 3.4   |      
|                                      |                              |        |      
|                                      | Total private finance        |        |       | 106.1 | 
|                                      |                              |        |      
|Commercial Real Estate:               |                              |        |       |      
|CMBS/CDO assets,
    net(1)           |                              |        | 227.7 |      
|Other                                 |                              |        | 9.3   |      
|                                      |                              |        |      
|                                      | Total commercial real estate |        |       | 237.0 | 
|                                      |                              |        |      
|Total gross realized gains            |                              | $      | 343.1 |      
|                                      |                              |        |      

|                                   |                              |        |       |       | 
|---------------------------------- | ---------------------------- | ------ | ----- | ----- | 
|2004                               |                             
|                                   |                             
|Portfolio Company                  |                              | Amount |      
|                                   |                              |        |      
|Private Finance:                   |                              |        |       |      
|The Hillman Companies, Inc.        |                              | $      | 150.3 |      
|CorrFlex Graphics, LLC             |                              |        | 25.7  |      
|Professional Paint, Inc.           |                              |        | 13.7  |      
|Impact Innovations Group, LLC      |                              |        | 11.1  |      
|The Hartz Mountain Corporation     |                              |        | 8.3   |      
|Housecall Medical Resources, Inc.  |                              |        | 7.2   |      
|International Fiber Corporation    |                              |        | 5.2   |      
|CBA-Mezzanine Capital Finance, LLC |                              |        | 4.1   |      
|United Pet Group, Inc.             |                              |        | 3.8   |      
|Oahu Waste Services, Inc.          |                              |        | 2.8   |      
|Grant Broadcasting Systems II      |                              |        | 2.7   |      
|Matrics, Inc.                      |                              |        | 2.1   |      
|SmartMail, LLC                     |                              |        | 2.1   |      
|Other                              |                              |        | 7.6   |      
|                                   |                              |        |      
|                                   | Total private finance        |        |       | 246.7 | 
|                                   |                              |        |      
|Commercial Real Estate:            |                              |        |       |      
|CMBS/CDO assets,
    net(1)        |                              |        | 17.4  |      
|Other                              |                              |        | 3.6   |      
|                                   |                              |        |      
|                                   | Total commercial real estate |        |       | 21.0  | 
|                                   |                              |        |      
|Total gross realized gains         |                              | $      | 267.7 |      
|                                   |                              |        |      

|                                   |                              |        |      |      | 
|---------------------------------- | ---------------------------- | ------ | ---- | ---- | 
|2003                               |                             
|                                   |                             
|Portfolio Company                  |                              | Amount |     
|                                   |                              |        |     
|Private Finance:                   |                              |        |      |     
|Blue Rhino Corporation             |                              | $      | 12.6 |     
|CyberRep                           |                              |        | 9.6  |     
|Morton Grove Pharmaceuticals, Inc. |                              |        | 8.5  |     
|Warn Industries, Inc.              |                              |        | 8.0  |     
|Woodstream Corporation             |                              |        | 6.6  |     
|Kirklands Inc.                    |                              |        | 3.0  |     
|Julius Koch USA, Inc.              |                              |        | 2.8  |     
|GC-Sun Holdings II, LP             |                              |        | 2.5  |     
|Interline Brands, Inc.             |                              |        | 1.7  |     
|WyoTech Acquisition Corporation    |                              |        | 1.3  |     
|Advantage Mayer, Inc.              |                              |        | 1.2  |     
|Other                              |                              |        | 3.2  |     
|                                   |                              |        |     
|                                   | Total private finance        |        |      | 61.0 | 
|                                   |                              |        |     
|Commercial Real Estate:            |                              |        |      |     
|CMBS/CDO assets,
    net(1)        |                              |        | 31.6 |     
|Other                              |                              |        | 1.7  |     
|                                   |                              |        |     
|                                   | Total commercial real estate |        |      | 33.3 | 
|                                   |                              |        |     
|Total gross realized gains         |                              | $      | 94.3 |     
|                                   |                              |        |     




|    |                                                                                                                                                                                
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Net of net realized losses from related hedges of
    $0.7 million, $3.8 million, and $2.9 million for
    the years ended December 31, 2005, 2004, and 2003,
    respectively.



($ in millions)


|                                |                              |        |      |      | 
|------------------------------- | ---------------------------- | ------ | ---- | ---- | 
|2005                            |                             
|                                |                             
|Portfolio Company               |                              | Amount |     
|                                |                              |        |     
|Private Finance:                |                              |        |      |     
|Norstan Apparel Shops, Inc.     |                              | $      | 18.5 |     
|Acme Paging, L.P.               |                              |        | 13.8 |     
|E-Talk Corporation              |                              |        | 9.0  |     
|Garden Ridge Corporation        |                              |        | 7.1  |     
|HealthASPex, Inc.               |                              |        | 3.5  |     
|MortgageRamp, Inc.              |                              |        | 3.5  |     
|Maui Body Works, Inc.           |                              |        | 2.7  |     
|Packaging Advantage Corporation |                              |        | 2.2  |     
|Other                           |                              |        | 3.7  |     
|                                |                              |        |     
|                                | Total private finance        |        |      | 64.0 | 
|                                |                              |        |     
|Commercial Real Estate:         |                              |        |      |     
|Other                           |                              |        | 5.6  |     
|                                |                              |        |     
|                                | Total commercial real estate |        |      | 5.6  | 
|                                |                              |        |     
|Total gross realized losses     |                              | $      | 69.6 |     
|                                |                              |        |     

|                                          |                       |                              |       |       |     | 
|----------------------------------------- | --------------------- | ---------------------------- | ----- | ----- | --- | 
|2004                                      |                      
|                                          |                      
|Portfolio Company                         |                       | Amount                       |      
|                                          |                       |                              |      
|Private Finance:                          |                       |                              |       |      
|American Healthcare Services, Inc.        |                       | $                            | 32.9  |      
|The Color Factory, Inc.                   |                       |                              | 24.5  |      
|Executive Greetings, Inc.                 |                       |                              | 19.3  |      
|Sydran Food Services II, L.P.             |                       |                              | 18.2  |      
|Ace Products, Inc.                        |                       |                              | 17.6  |      
|Prosperco Finanz Holding AG               |                       |                              | 7.5   |      
|Logic Bay Corporation                     |                       |                              | 5.0   |      
|Sun States Refrigerated Services, Inc.    |                       |                              | 4.7   |      
|Chickasaw Sales & Marketing, Inc.         |                       |                              | 3.8   |      
|Sure-Tel, Inc.                            |                       |                              | 2.3   |      
|Liberty-Pittsburgh Systems, Inc.          |                       |                              | 2.0   |      
|EDM Consulting, LLC                       |                       |                              | 1.9   |      
|Pico Products, Inc.                       |                       |                              | 1.7   |      
|Impact Innovations Group, LLC             |                       |                              | 1.7   |      
|Interline Brands, Inc.                    |                       |                              | 1.3   |      
|Startec Global Communications Corporation |                       |                              | 1.1   |      
|Other                                     |                       |                              | 2.7   |      
|                                          |                       |                              |      
|                                          | Total private finance |                              |       | 148.2 |    
|                                          |                       |                              |      
|Commercial Real Estate:                   |                       |                              |       |      
|Other                                     |                       |                              | 2.3   |      
|                                          |                       |                              |      
|                                          |                       | Total commercial real estate |       |       | 2.3 | 
|                                          |                       |                              |      
|Total gross realized losses               |                       | $                            | 150.5 |      
|                                          |                       |                              |      

|                             |                              |        |      |      | 
|---------------------------- | ---------------------------- | ------ | ---- | ---- | 
|2003                         |                             
|                             |                             
|Portfolio Company            |                              | Amount |     
|                             |                              |        |     
|Private Finance:             |                              |        |      |     
|Allied Office Products, Inc. |                              | $      | 7.7  |     
|Candlewood Hotel Company     |                              |        | 2.7  |     
|North American Archery, LLC  |                              |        | 2.1  |     
|Other                        |                              |        | 0.5  |     
|                             |                              |        |     
|                             | Total private finance        |        |      | 13.0 | 
|                             |                              |        |     
|Commercial Real Estate:      |                              |        |      |     
|Other                        |                              |        | 6.0  |     
|                             |                              |        |     
|                             | Total commercial real estate |        |      | 6.0  | 
|                             |                              |        |     
|Total gross realized losses  |                              | $      | 19.0 |     
|                             |                              |        |     

47



---



##### 



Change in Unrealized Appreciation or Depreciation.






Valuation Methodology  Private Finance.




48



---



##### 













49



---



##### 





|                                                                     |  |      |      |   |      |  |      |    |  |  |      |   |  |    |      |   |    |  |      |    |  |  |      |   |  |  |      |   |  |  |      |  
|-------------------------------------------------------------------- |  | ---- | ---- | - | ---- |  | ---- | -- |  |  | ---- | - |  | -- | ---- | - | -- |  | ---- | -- |  |  | ---- | - |  |  | ---- | - |  |  | ---- | -
|                                                                     |  | 2005 |      |   | 2004 | 
|                                                                     |  |      |      |   |      | 
|                                                                     |  | Q1   |      |   | Q2   |  |      | Q3 |  |  | Q4   |   |  | Q1 |      |   | Q2 |  |      | Q3 |  |  | Q4   |  
|                                                                     |  |      |      |   |      |  |      |    |  |  |      |   |  |    |      |   |    |  |      |    |  |  |      |  
|Number of private finance portfolio companies reviewed:              |  |      |      |   |      |  |      |    |  |  |      |   |  |    |      |   |    |  |      |    |  |  |      |   |  |  |      |   |  |  |      |  
|Duff &
    Phelps(1)                                                 |  |      | 35   |   |      |  | 72   |    |  |  | 88   |   |  |    | 78   |   |    |  | 22   |    |  |  | 33   |   |  |  | 28   |   |  |  | 22   |  
|Houlihan
    Lokey(2)                                                |  |      | 1    |   |      |  | 1    |    |  |  | 3    |   |  |    | 3    |   |    |  |     |    |  |  |     |   |  |  |     |   |  |  |     |  
|                                                                     |  |      |      |  
|Total number of private finance portfolio companies reviewed
    (3) |  |      | 36   |   |      |  | 72   |    |  |  | 89   |   |  |    | 80   |   |    |  | 22   |    |  |  | 33   |   |  |  | 28   |   |  |  | 22   |  
|                                                                     |  |      |      |  
|Percentage of private finance portfolio reviewed at value:           |  |      |      |   |      |  |      |    |  |  |      |   |  |    |      |   |    |  |      |    |  |  |      |   |  |  |      |   |  |  |      |  
|Duff &
    Phelps(1)                                                 |  |      | 59.6 | % |      |  | 83.0 | %  |  |  | 86.6 | % |  |    | 87.9 | % |    |  | 19.9 | %  |  |  | 21.6 | % |  |  | 26.6 | % |  |  | 42.2 | %
|Houlihan
    Lokey(2)                                                |  |      | 14.9 | % |      |  | 14.9 | %  |  |  | 18.9 | % |  |    | 23.5 | % |    |  |     |    |  |  |     |   |  |  |     |   |  |  |     |  
|                                                                     |  |      |      |  
|Percentage of private finance portfolio reviewed at value
    (3)    |  |      | 74.5 | % |      |  | 83.0 | %  |  |  | 89.3 | % |  |    | 92.4 | % |    |  | 19.9 | %  |  |  | 21.6 | % |  |  | 26.6 | % |  |  | 42.2 | %
|                                                                     |  |      |      |  






|    |                                                                                                                                                                                                                                 
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | During the third quarter of 2005, S&P Corporate Value
    Consulting merged with Duff & Phelps, LLC, a financial
    advisory and investment banking firm. The merged company
    operates under the name of Duff & Phelps, LLC.
|   
|(2) | Houlihan Lokey was initially engaged in the first quarter of
    2005.                                                                                                                                                          
|   
|(3) | Duff & Phelps and Houlihan Lokey both reviewed Advantage
    Sales & Marketing, Inc. in Q2, Q3 and Q4 2005. In addition,
    Duff & Phelps and Houlihan Lokey both reviewed one other
    portfolio company in Q3 2005.         



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


Net Change in Unrealized Appreciation or Depreciation.


|                                                                                            |  |         |        |   |         |   |        |         |  |   |       |  
|------------------------------------------------------------------------------------------- |  | ------- | ------ | - | ------- | - | ------ | ------- |  | - | ----- | -
|                                                                                            |  | 2005(1) |        |   | 2004(1) |   |        | 2003(1) | 
|($ in millions)                                                                             |  |         |        |   |         |   |        |         | 
|Net unrealized appreciation or depreciation                                                 |  | $       | 502.1  |   |         | $ | (10.0  | )       |  | $ | (20.3 | )
|Reversal of previously recorded unrealized appreciation
    associated with realized gains  |  |         | (108.0 | ) |         |   | (210.5 | )       |  |   | (78.5 | )
|Reversal of previously recorded unrealized depreciation
    associated with realized losses |  |         | 68.0   |   |         |   | 151.8  |         |  |   | 20.3  |  
|                                                                                            |  |         |        |   |         |   |        |         | 
|Net change in unrealized appreciation or depreciation                                       |  | $       | 462.1  |   |         | $ | (68.7  | )       |  | $ | (78.5 | )
|                                                                                            |  |         |        |   |         |   |        |         | 




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

50



---



##### 





Advantage Sales & Marketing, Inc. pre- post-closing


Business Loan Express, LLC.






Per Share Amounts.


OTHER MATTERS


Regulated Investment Company Status.


51



---



##### 









FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES




|                                                    |                                                                        |      |         |         |      |   |         |         |  |   |       |         | 
|--------------------------------------------------- | ---------------------------------------------------------------------- | ---- | ------- | ------- | ---- | - | ------- | ------- |  | - | ----- | ------- | 
|                                                    |                                                                        | 2005 |         |         | 2004 |   |         | 2003    | 
|($ in millions)                                     |                                                                        |      |         |         |      |   |         |         | 
|Net cash provided by (used in) operating activities |                                                                        | $    | 116.0   |         |      | $ | (179.3  | )       |  | $ | 80.3  |        
|Add: portfolio investments funded                   |                                                                        |      | 1,668.1 |         |      |   | 1,472.4 |         |  |   | 930.6 |        
|                                                    |                                                                        |      |         |         |      |   |         |         | 
|                                                    | Total cash provided by operating activities before new
    investments |      | $       | 1,784.1 |      |   | $       | 1,293.1 |  |   | $     | 1,010.9 | 
|                                                    |                                                                        |      |         |         |      |   |         |         | 







52



---



##### 















|                                                                                                             |  |      |         |   |      |   |         |  
|------------------------------------------------------------------------------------------------------------ |  | ---- | ------- | - | ---- | - | ------- | -
|($ in millions)                                                                                              |  | 2005 |         |   | 2004 |  
|                                                                                                             |  |      |         |   |      |  
|Liquidity portfolio (including money market securities:
    2005-$100.0; 2004-$0)                            |  | $    | 200.3   |   |      | $ |        |  
|Cash and investments in money market securities (including money
    market securities: 2005-$22.0; 2004-$0) |  | $    | 53.3    |   |      | $ | 57.2    |  
|Total assets                                                                                                 |  | $    | 4,025.9 |   |      | $ | 3,261.0 |  
|Total debt outstanding                                                                                       |  | $    | 1,284.8 |   |      | $ | 1,176.6 |  
|Total shareholders equity                                                                                   |  | $    | 2,620.5 |   |      | $ | 1,979.8 |  
|Debt to equity ratio                                                                                         |  |      | 0.49    |   |      |   | 0.59    |  
|Asset coverage
    ratio(1)                                                                                  |  |      | 309     | % |      |   | 280     | %




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



53



---



##### 











|                              |                         |                                    |       |         |             |  |      |          |         |  |          |      |     |             |       |       |          |  |       |       |         |  |     |      |     |      
|----------------------------- | ----------------------- | ---------------------------------- | ----- | ------- | ----------- |  | ---- | -------- | ------- |  | -------- | ---- | --- | ----------- | ----- | ----- | -------- |  | ----- | ----- | ------- |  | --- | ---- | --- | -----
|                              |                         | 2005                               |       |         | 2004        | 
|                              |                         |                                    |       |         |             | 
|                              |                         |                                    |       | Annual  |             |  |      |          | Annual  | 
|                              |                         | Facility                           |       |         | Amount      |  |      | Interest |         |  | Facility |      |     | Amount      |       |       | Interest | 
|                              |                         | Amount                             |       |         | Outstanding |  |      | Cost(1)  |         |  | Amount   |      |     | Outstanding |       |       | Cost(1)  | 
|($ in millions)               |                         |                                    |       |         |             |  |      |          |         |  |          |      |     |             |       |       |          | 
|Notes payable and debentures: |                         |                                    |       |         |             |  |      |          |         |  |          |      |     |             |       |       |          |  |       |       |         |  |     |     
|                              | Unsecured notes payable |                                    | $     | 1,164.5 |             |  | $    | 1,164.5  |         |  |          | 6.2  | %   |             | $     | 981.4 |          |  | $     | 981.4 |         |  |     | 6.5  | %  
|                              | SBA debentures          |                                    |       | 28.5    |             |  |      | 28.5     |         |  |          | 7.5  | %   |             |       | 84.8  |          |  |       | 77.5  |         |  |     | 8.2  | %  
|                              | OPIC loan               |                                    |       |        |             |  |      |         |         |  |          |     |     |             |       | 5.7   |          |  |       | 5.7   |         |  |     | 6.6  | %  
|                              |                         |                                    |       |         |             |  |      |          |         |  |          |      |     |             |       |       |          | 
|                              |                         | Total notes payable and debentures |       |         | 1,193.0     |  |      |          | 1,193.0 |  |          |      | 6.3 | %           |       |       | 1,071.9  |  |       |       | 1,064.6 |  |     |      | 6.6 | %    
|Revolving line of credit      |                         |                                    | 772.5 |         |             |  | 91.8 |          |         |  | 5.6      | %(2) |     |             | 552.5 |       |          |  | 112.0 |       |         |  | 4.7 | %(2)
|                              |                         |                                    |       |         |             |  |      |          |         |  |          |      |     |             |       |       |          | 
|                              |                         | Total debt                         |       | $       | 1,965.5     |  |      | $        | 1,284.8 |  |          |      | 6.5 | %(3)        |       | $     | 1,624.4  |  |       | $     | 1,176.6 |  |     |      | 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 and other facility fees that are
    recognized into interest expense over the contractual life of
    the respective borrowings, divided by (b) debt outstanding
    on the balance sheet date.
|   
|(2) | The 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 and other facility fees of $3.3 million and
    $1.8 million at December 31, 2005 and 2004,
    respectively.                       
|   
|(3) | The annual interest cost for total debt includes the annual cost
    of commitment fees and other facility fees regardless of the
    amount outstanding on the facility as of the balance sheet date.                                                                                                                                                      

54



---



##### 



Unsecured Notes Payable.




Small Business Administration Debentures.


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 |                               | $    | 1,164.5              |         |       | $   | 175.0 |       |  | $    |  |     |      | $    | 153.0 |       |  | $   | 267.0 |       |  | $   | 408.0 |       |  | $   | 161.5 |      
|                                | SBA debentures                    |                               |      | 28.5                 |         |       |     |      |       |  |      |  |     |      |      |      |       |  |     |      |       |  |     |      |       |  |     | 28.5  |      
|Revolving line of
    credit(1) |                                   |                               | 91.8 |                      |         |       |    |       |       |  |     |   |     |      | 91.8 |       |       |  |    |       |       |  |    |       |       |  |    |      
|Operating leases                |                                   |                               | 29.0 |                      |         |       | 4.5 |       |       |  | 4.4  |   |     |      | 4.5  |       |       |  | 4.6 |       |       |  | 4.4 |       |       |  | 6.6 |      
|                                |                                   |                               |      |                      |         |       |     |       |       |  |      |   |     |      |      |       |       |  |     |       |      
|                                |                                   | Total contractual obligations |      | $                    | 1,313.8 |       |     | $     | 179.5 |  |      | $ | 4.4 |      |      | $     | 249.3 |  |     | $     | 271.6 |  |     | $     | 412.4 |  |     | $     | 196.6 | 
|                                |                                   |                               |      |                      |         |       |     |       |       |  |      |   |     |      |      |       |       |  |     |       |      




|    |                                                                                                                                                                                      
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | At December 31, 2005, $643.6 million remained unused
    and available, net of amounts committed for standby letters of
    credit of $37.1 million issued under the credit facility.

55



---



##### 



Off-Balance Sheet Arrangements




|                                 |                   |       |       |                                          |      |       |     |      |  |   |       |       |  |      |      |      |      |   |      |     |  |   |   |   |  |   |     |     | 
|-------------------------------- | ----------------- | ----- | ----- | ---------------------------------------- | ---- | ----- | --- | ---- |  | - | ----- | ----- |  | ---- | ---- | ---- | ---- | - | ---- | --- |  | - | - | - |  | - | --- | --- | 
|                                 |                   |       |       | Amount of Commitment Expiration Per Year |     
|                                 |                   |       |       |                                          |     
|                                 |                   |       |       |                                          |      | After |    
|                                 |                   | Total |       |                                          | 2006 |       |     | 2007 |  |   | 2008  |       |  | 2009 |      |      | 2010 |   | 2010 |    
|($ in millions)                  |                   |       |       |                                          |      |       |     |      |  |   |       |       |  |      |      |      |      |   |      |    
|Guarantees                       |                   | $     | 148.6 |                                          |      | $     | 1.3 |      |  | $ | 136.2 |       |  | $    | 3.1  |      |      | $ | 2.5  |     |  | $ |  |   |  | $ | 5.5 |    
|Standby letters of
    credit(1) |                   |       | 37.1  |                                          |      |       | 0.1 |      |  |   |      |       |  |      | 37.0 |      |      |   |     |     |  |   |  |   |  |   |    |    
|                                 |                   |       |       |                                          |      |       |     |      |  |   |       |       |  |      |      |      |      |   |      |     | 
|                                 | Total commitments |       | $     | 185.7                                    |      |       | $   | 1.4  |  |   | $     | 136.2 |  |      | $    | 40.1 |      |   | $    | 2.5 |  |   | $ |  |  |   | $   | 5.5 | 
|                                 |                   |       |       |                                          |      |       |     |      |  |   |       |       |  |      |      |      |      |   |      |     | 




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



CRITICAL ACCOUNTING POLICIES




Valuation of Portfolio Investments.


Loans and Debt Securities.




56



---



##### 





Equity Securities.






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


Fee Income.


Item 7A. Quantitative and Qualitative Disclosure about
Market Risk.




57



---



##### 













58



---



##### 



Item 8. Financial Statements and Supplementary
Data.


|                                                                                                            |  |      |    | 
|----------------------------------------------------------------------------------------------------------- |  | ---- | -- | 
|                                                                                                            |  | Page |   
|                                                                                                            |  |      |   
|Managements Report on Internal Control over Financial
    Reporting                                        |  |      | 60 | 
|Reports of Independent Registered Public Accounting Firm                                                    |  |      | 61 | 
|Consolidated Balance Sheet  December 31, 2005
    and 2004                                                 |  |      | 64 | 
|Consolidated Statement of Operations  For the Years
    Ended December 31, 2005, 2004, and 2003            |  |      | 65 | 
|Consolidated Statement of Changes in Net Assets  For
    the Years Ended December 31, 2005, 2004, and 2003 |  |      | 66 | 
|Consolidated Statement of Cash Flows  For the Years
    Ended December 31, 2005, 2004, and 2003            |  |      | 67 | 
|Consolidated Statement of Investments 
    December 31, 2005                                               |  |      | 68 | 
|Notes to Consolidated Financial Statements                                                                  |  |      | 78 | 

59



---



##### 



Managements Report on Internal Control over Financial
Reporting


13a-15(f). Internal Control  Integrated Framework Internal Control  Integrated
Framework,


60



---



##### 



Report of Independent Registered Public Accounting Firm


The Board of Directors and Shareholders


Allied Capital Corporation:


Internal Control 
Integrated Framework








Internal
Control  Integrated Framework Internal Control 
Integrated Framework


61



---



##### 












62



---



##### 



Report of Independent Registered Public Accounting Firm











Internal Control 
Integrated Framework









63



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##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


CONSOLIDATED BALANCE SHEET


|                                                                |                                                                                                                                                                   |                                                                            |                                                                   |           |              |           |        |           |           |           | 
|--------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------- | ----------------------------------------------------------------- | --------- | ------------ | --------- | ------ | --------- | --------- | --------- | 
|                                                                |                                                                                                                                                                   | December 31,                                                               |                                                                   |           | December 31, |          
|                                                                |                                                                                                                                                                   | 2005                                                                       |                                                                   |           | 2004         |          
|(in thousands, except per share amounts)                        |                                                                                                                                                                   |                                                                            |                                                                   |           |              |          
|ASSETS                                                         
|Portfolio at value:                                             |                                                                                                                                                                   |                                                                            |                                                                   |           |              |           |        |          
|                                                                | Private finance                                                                                                                                                   |                                                                            |                                                                   |           |              |           |        |           |          
|                                                                |                                                                                                                                                                   | Companies more than 25% owned (cost: 2005-$1,489,782;
    2004-$1,389,342) |                                                                   | $         | 1,887,651    |           |        | $         | 1,359,641 |          
|                                                                |                                                                                                                                                                   | Companies 5% to 25% owned (cost: 2005-$168,373; 2004-$194,750)             |                                                                   |           | 158,806      |           |        |           | 188,902   |          
|                                                                |                                                                                                                                                                   | Companies less than 5% owned (cost: 2005-$1,448,268;
    2004-$800,828)    |                                                                   |           | 1,432,833    |           |        |           | 753,543   |          
|                                                                |                                                                                                                                                                   |                                                                            |                                                                   |           |              |          
|                                                                |                                                                                                                                                                   |                                                                            | Total private finance (cost: 2005-$3,106,423; 2004-$2,384,920)    |           |              | 3,479,290 |        |           |           | 2,302,086 | 
|                                                                | Commercial real estate finance (cost: 2005-$131,695;
    2004-$722,612)                                                                                           |                                                                            |                                                                   | 127,065   |              |           |        | 711,325   |          
|                                                                |                                                                                                                                                                   |                                                                            |                                                                   |           |              |          
|                                                                |                                                                                                                                                                   |                                                                            | Total portfolio at value (cost: 2005-$3,238,118; 2004-$3,107,532) |           |              | 3,606,355 |        |           |           | 3,013,411 | 
|                                                                |                                                                                                                                                                   |                                                                            |                                                                   |           |              |          
|U.S. Treasury bills                                             |                                                                                                                                                                   |                                                                            | 100,305                                                           |           |              |           |       |          
|Investments in money market securities                          |                                                                                                                                                                   |                                                                            | 121,967                                                           |           |              |           |       |          
|Deposits of proceeds from sales of borrowed Treasury securities |                                                                                                                                                                   |                                                                            | 17,666                                                            |           |              |           | 38,226 |          
|Accrued interest and dividends receivable                       |                                                                                                                                                                   |                                                                            | 60,366                                                            |           |              |           | 79,489 |          
|Other assets                                                    |                                                                                                                                                                   |                                                                            | 87,858                                                            |           |              |           | 72,712 |          
|Cash                                                            |                                                                                                                                                                   |                                                                            | 31,363                                                            |           |              |           | 57,160 |          
|                                                                |                                                                                                                                                                   |                                                                            |                                                                   |           |              |          
|                                                                |                                                                                                                                                                   |                                                                            | Total assets                                                      |           | $            | 4,025,880 |        |           | $         | 3,260,998 | 
|                                                                |                                                                                                                                                                   |                                                                            |                                                                   |           |              |          
|LIABILITIES AND SHAREHOLDERS EQUITY                           
|Liabilities:                                                    |                                                                                                                                                                   |                                                                            |                                                                   |           |              |           |        |          
|                                                                | Notes payable and debentures (maturing within one year:
    2005-$175,000; 2004-$169,000)                                                                         |                                                                            | $                                                                 | 1,193,040 |              |           | $      | 1,064,568 |          
|                                                                | Revolving line of credit                                                                                                                                          |                                                                            |                                                                   | 91,750    |              |           |        | 112,000   |          
|                                                                | Obligations to replenish borrowed Treasury securities                                                                                                             |                                                                            |                                                                   | 17,666    |              |           |        | 38,226    |          
|                                                                | Accounts payable and other liabilities                                                                                                                            |                                                                            |                                                                   | 102,878   |              |           |        | 66,426    |          
|                                                                |                                                                                                                                                                   |                                                                            |                                                                   |           |              |          
|                                                                |                                                                                                                                                                   |                                                                            | Total liabilities                                                 |           |              | 1,405,334 |        |           |           | 1,281,220 | 
|                                                                |                                                                                                                                                                   |                                                                            |                                                                   |           |              |          
|Commitments and contingencies                                   |                                                                                                                                                                   |                                                                            |                                                                   |           |              |           |        |          
|Shareholders equity:                                           |                                                                                                                                                                   |                                                                            |                                                                   |           |              |           |        |          
|                                                                | Common stock, $0.0001 par value, 200,000 shares authorized;
    136,697 and 133,099 shares issued and outstanding at
    December 31, 2005 and 2004, respectively |                                                                            |                                                                   | 14        |              |           |        | 13        |          
|                                                                | Additional paid-in capital                                                                                                                                        |                                                                            |                                                                   | 2,177,283 |              |           |        | 2,094,421 |          
|                                                                | Common stock held in deferred compensation trust                                                                                                                  |                                                                            |                                                                   | (19,460   | )            |           |        | (13,503   | )        
|                                                                | Notes receivable from sale of common stock                                                                                                                        |                                                                            |                                                                   | (3,868    | )            |           |        | (5,470    | )        
|                                                                | Net unrealized appreciation (depreciation) on portfolio                                                                                                           |                                                                            |                                                                   | 354,325   |              |           |        | (107,767  | )        
|                                                                | Undistributed (distributions in excess of) earnings                                                                                                               |                                                                            |                                                                   | 112,252   |              |           |        | 12,084    |          
|                                                                |                                                                                                                                                                   |                                                                            |                                                                   |           |              |          
|                                                                |                                                                                                                                                                   |                                                                            | Total shareholders equity                                        |           |              | 2,620,546 |        |           |           | 1,979,778 | 
|                                                                |                                                                                                                                                                   |                                                                            |                                                                   |           |              |          
|                                                                |                                                                                                                                                                   |                                                                            | Total liabilities and shareholders equity                        |           | $            | 4,025,880 |        |           | $         | 3,260,998 | 
|                                                                |                                                                                                                                                                   |                                                                            |                                                                   |           |              |          
|Net asset value per common share                                |                                                                                                                                                                   | $                                                                          | 19.17                                                             |           |              | $         | 14.87  |          
|                                                                |                                                                                                                                                                   |                                                                            |                                                                   |           |              |          



64



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##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


CONSOLIDATED STATEMENT OF OPERATIONS


|                                                     |                                                       |                               |                                             |         |         |         |         |         |         |         |         |         |         |         |  
|---------------------------------------------------- | ----------------------------------------------------- | ----------------------------- | ------------------------------------------- | ------- | ------- | ------- | ------- | ------- | ------- | ------- | ------- | ------- | ------- | ------- | -
|                                                     |                                                       | For the Years Ended           |                                            
|                                                     |                                                       | December 31,                  |                                            
|                                                     |                                                       |                               |                                            
|                                                     |                                                       | 2005                          |                                             |         | 2004    |         |         | 2003    |        
|(in thousands, except per share amounts)             |                                                       |                               |                                             |         |         |         |         |         |        
|Interest and Related Portfolio Income:               |                                                       |                               |                                             |         |         |         |         |         |         |         |         |        
|                                                     | Interest and dividends                                |                               |                                             |         |         |         |         |         |         |         |         |         |        
|                                                     |                                                       | Companies more than 25% owned |                                             | $       | 122,450 |         |         | $       | 91,710  |         |         | $       | 62,563  |        
|                                                     |                                                       | Companies 5% to 25% owned     |                                             |         | 21,924  |         |         |         | 25,702  |         |         |         | 25,727  |        
|                                                     |                                                       | Companies less than 5% owned  |                                             |         | 172,779 |         |         |         | 202,230 |         |         |         | 202,429 |        
|                                                     |                                                       |                               |                                             |         |         |         |         |         |        
|                                                     |                                                       |                               | Total interest and dividends                |         |         | 317,153 |         |         |         | 319,642 |         |         |         | 290,719 |  
|                                                     | Loan prepayment premiums                              |                               |                                             |         |         |         |         |         |         |         |         |         |        
|                                                     |                                                       | Companies more than 25% owned |                                             |         | 692     |         |         |         |        |         |         |         | 141     |        
|                                                     |                                                       | Companies 5% to 25% owned     |                                             |         |        |         |         |         | 765     |         |         |         | 685     |        
|                                                     |                                                       | Companies less than 5% owned  |                                             |         | 5,558   |         |         |         | 4,737   |         |         |         | 7,346   |        
|                                                     |                                                       |                               |                                             |         |         |         |         |         |        
|                                                     |                                                       |                               | Total loan prepayment premiums              |         |         | 6,250   |         |         |         | 5,502   |         |         |         | 8,172   |  
|                                                     | Fees and other income                                 |                               |                                             |         |         |         |         |         |         |         |         |         |        
|                                                     |                                                       | Companies more than 25% owned |                                             |         | 26,673  |         |         |         | 29,774  |         |         |         | 18,862  |        
|                                                     |                                                       | Companies 5% to 25% owned     |                                             |         | 124     |         |         |         | 1,618   |         |         |         | 629     |        
|                                                     |                                                       | Companies less than 5% owned  |                                             |         | 23,952  |         |         |         | 10,554  |         |         |         | 10,847  |        
|                                                     |                                                       |                               |                                             |         |         |         |         |         |        
|                                                     |                                                       |                               | Total fees and other income                 |         |         | 50,749  |         |         |         | 41,946  |         |         |         | 30,338  |  
|                                                     |                                                       |                               |                                             |         |         |         |         |         |        
|                                                     |                                                       |                               | Total interest and related portfolio income |         |         | 374,152 |         |         |         | 367,090 |         |         |         | 329,229 |  
|                                                     |                                                       |                               |                                             |         |         |         |         |         |        
|Expenses:                                            |                                                       |                               |                                             |         |         |         |         |         |         |         |         |        
|                                                     | Interest                                              |                               |                                             | 76,798  |         |         |         | 75,650  |         |         |         | 77,233  |        
|                                                     | Employee                                              |                               |                                             | 78,300  |         |         |         | 53,739  |         |         |         | 36,945  |        
|                                                     | Administrative                                        |                               |                                             | 70,267  |         |         |         | 34,686  |         |         |         | 22,387  |        
|                                                     |                                                       |                               |                                             |         |         |         |         |         |        
|                                                     |                                                       |                               | Total operating expenses                    |         |         | 225,365 |         |         |         | 164,075 |         |         |         | 136,565 |  
|                                                     |                                                       |                               |                                             |         |         |         |         |         |        
|Net investment income before income taxes            |                                                       |                               | 148,787                                     |         |         |         | 203,015 |         |         |         | 192,664 |        
|Income tax expense (benefit), including excise tax   |                                                       |                               | 11,561                                      |         |         |         | 2,057   |         |         |         | (2,466  | )      
|                                                     |                                                       |                               |                                             |         |         |         |         |         |        
|Net investment income                                |                                                       |                               | 137,226                                     |         |         |         | 200,958 |         |         |         | 195,130 |        
|                                                     |                                                       |                               |                                             |         |         |         |         |         |        
|Net Realized and Unrealized Gains (Losses)           |                                                       |                               |                                             |         |         |         |         |         |         |         |         |        
|                                                     | Net realized gains (losses)                           |                               |                                             |         |         |         |         |         |         |         |         |         |        
|                                                     |                                                       | Companies more than 25% owned |                                             |         | 33,237  |         |         |         | 86,812  |         |         |         | 1,302   |        
|                                                     |                                                       | Companies 5% to 25% owned     |                                             |         | 5,285   |         |         |         | 43,818  |         |         |         | 19,975  |        
|                                                     |                                                       | Companies less than 5% owned  |                                             |         | 234,974 |         |         |         | (13,390 | )       |         |         | 54,070  |        
|                                                     |                                                       |                               |                                             |         |         |         |         |         |        
|                                                     |                                                       |                               | Total net realized gains                    |         |         | 273,496 |         |         |         | 117,240 |         |         |         | 75,347  |  
|                                                     | Net change in unrealized appreciation or depreciation |                               |                                             | 462,092 |         |         |         | (68,712 | )       |         |         | (78,466 | )      
|                                                     |                                                       |                               |                                             |         |         |         |         |         |        
|                                                     |                                                       |                               | Total net gains (losses)                    |         |         | 735,588 |         |         |         | 48,528  |         |         |         | (3,119  | )
|                                                     |                                                       |                               |                                             |         |         |         |         |         |        
|Net increase in net assets resulting from operations |                                                       | $                             | 872,814                                     |         |         | $       | 249,486 |         |         | $       | 192,011 |        
|                                                     |                                                       |                               |                                             |         |         |         |         |         |        
|Basic earnings per common share                      |                                                       | $                             | 6.48                                        |         |         | $       | 1.92    |         |         | $       | 1.64    |        
|                                                     |                                                       |                               |                                             |         |         |         |         |         |        
|Diluted earnings per common share                    |                                                       | $                             | 6.36                                        |         |         | $       | 1.88    |         |         | $       | 1.62    |        
|                                                     |                                                       |                               |                                             |         |         |         |         |         |        
|Weighted average common shares outstanding  basic   |                                                       |                               | 134,700                                     |         |         |         | 129,828 |         |         |         | 116,747 |        
|                                                     |                                                       |                               |                                             |         |         |         |         |         |        
|Weighted average common shares outstanding  diluted |                                                       |                               | 137,274                                     |         |         |         | 132,458 |         |         |         | 118,351 |        
|                                                     |                                                       |                               |                                             |         |         |         |         |         |        



65



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ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


CONSOLIDATED STATEMENT OF CHANGES IN NET ASSETS


|                                         |                                                                  |                                                                          |           |          |          |   |           |          |          |   |           |          |          |  
|---------------------------------------- | ---------------------------------------------------------------- | ------------------------------------------------------------------------ | --------- | -------- | -------- | - | --------- | -------- | -------- | - | --------- | -------- | -------- | -
|                                         |                                                                  | For the Years Ended December 31,                                         |          
|                                         |                                                                  |                                                                          |          
|                                         |                                                                  | 2005                                                                     |           |          | 2004     |   |           | 2003     |         
|(in thousands, except per share amounts) |                                                                  |                                                                          |           |          |          |   |           |          |         
|Operations                               |                                                                  |                                                                          |           |          |          |   |           |          |          |   |           |         
|                                         | Net investment income                                            |                                                                          | $         | 137,226  |          |   | $         | 200,958  |          |   | $         | 195,130  |         
|                                         | Net realized gains                                               |                                                                          |           | 273,496  |          |   |           | 117,240  |          |   |           | 75,347   |         
|                                         | Net change in unrealized appreciation or depreciation            |                                                                          |           | 462,092  |          |   |           | (68,712  | )        |   |           | (78,466  | )       
|                                         |                                                                  |                                                                          |           |          |          |   |           |          |         
|                                         |                                                                  | Net increase in net assets resulting from operations                     |           |          | 872,814  |   |           |          | 249,486  |   |           |          | 192,011  |  
|                                         |                                                                  |                                                                          |           |          |          |   |           |          |         
|Shareholder distributions                |                                                                  |                                                                          |           |          |          |   |           |          |          |   |           |         
|                                         | Common stock dividends                                           |                                                                          |           | (314,509 | )        |   |           | (299,326 | )        |   |           | (267,838 | )       
|                                         | Preferred stock dividends                                        |                                                                          |           | (10      | )        |   |           | (62      | )        |   |           | (210     | )       
|                                         |                                                                  |                                                                          |           |          |          |   |           |          |         
|                                         |                                                                  | Net decrease in net assets resulting from shareholder
    distributions  |           |          | (314,519 | ) |           |          | (299,388 | ) |           |          | (268,048 | )
|                                         |                                                                  |                                                                          |           |          |          |   |           |          |         
|Capital share transactions               |                                                                  |                                                                          |           |          |          |   |           |          |          |   |           |         
|                                         | Sale of common stock                                             |                                                                          |           |         |          |   |           | 70,251   |          |   |           | 422,005  |         
|                                         | Issuance of common stock for portfolio investments               |                                                                          |           | 7,200    |          |   |           | 3,227    |          |   |           | 884      |         
|                                         | Issuance of common stock upon the exercise of stock options      |                                                                          |           | 66,688   |          |   |           | 32,274   |          |   |           | 8,571    |         
|                                         | Issuance of common stock in lieu of cash distributions           |                                                                          |           | 9,257    |          |   |           | 5,836    |          |   |           | 6,598    |         
|                                         | Net decrease in notes receivable from sale of common stock       |                                                                          |           | 1,602    |          |   |           | 13,162   |          |   |           | 6,072    |         
|                                         | Purchase of common stock held in deferred compensation trust     |                                                                          |           | (7,968   | )        |   |           | (13,687  | )        |   |           |         |         
|                                         | Distribution of common stock held in deferred compensation trust |                                                                          |           | 2,011    |          |   |           | 184      |          |   |           |         |         
|                                         | Other                                                            |                                                                          |           | 3,683    |          |   |           | 3,856    |          |   |           | 413      |         
|                                         |                                                                  |                                                                          |           |          |          |   |           |          |         
|                                         |                                                                  | Net increase in net assets resulting from capital share
    transactions |           |          | 82,473   |   |           |          | 115,103  |   |           |          | 444,543  |  
|                                         |                                                                  |                                                                          |           |          |          |   |           |          |         
|                                         |                                                                  | Total net increase in net assets                                         |           |          | 640,768  |   |           |          | 65,201   |   |           |          | 368,506  |  
|Net assets at beginning of year          |                                                                  |                                                                          | 1,979,778 |          |          |   | 1,914,577 |          |          |   | 1,546,071 |         
|                                         |                                                                  |                                                                          |           |          |          |   |           |          |         
|Net assets at end of year                |                                                                  | $                                                                        | 2,620,546 |          |          | $ | 1,979,778 |          |          | $ | 1,914,577 |         
|                                         |                                                                  |                                                                          |           |          |          |   |           |          |         
|Net asset value per common share         |                                                                  | $                                                                        | 19.17     |          |          | $ | 14.87     |          |          | $ | 14.94     |         
|                                         |                                                                  |                                                                          |           |          |          |   |           |          |         
|Common shares outstanding at end of year |                                                                  |                                                                          | 136,697   |          |          |   | 133,099   |          |          |   | 128,118   |         
|                                         |                                                                  |                                                                          |           |          |          |   |           |          |         



66



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##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


CONSOLIDATED STATEMENT OF CASH FLOWS


|                                     |                                                               |                                                                                                                                 |                                                     |          |            |          |          |          |            |          |         |          |          |         | 
|------------------------------------ | ------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------- | -------- | ---------- | -------- | -------- | -------- | ---------- | -------- | ------- | -------- | -------- | ------- | 
|                                     |                                                               | For the Years Ended December 31,                                                                                                |                                                    
|                                     |                                                               |                                                                                                                                 |                                                    
|                                     |                                                               | 2005                                                                                                                            |                                                     |          | 2004       |          |          | 2003     |           
|(in thousands)                       |                                                               |                                                                                                                                 |                                                     |          |            |          |          |          |           
|Cash flows from operating activities |                                                               |                                                                                                                                 |                                                     |          |            |          |          |          |            |          |         |         
|                                     | Net increase in net assets resulting from operations          |                                                                                                                                 | $                                                   | 872,814  |            |          | $        | 249,486  |            |          | $       | 192,011  |         
|                                     | Adjustments                                                   |                                                                                                                                 |                                                     |          |            |          |          |          |            |          |         |          |         
|                                     |                                                               | Portfolio investments                                                                                                           |                                                     |          | (1,668,113 | )        |          |          | (1,472,396 | )        |         |          | (930,566 | )      
|                                     |                                                               | Principal collections related to investment repayments or sales                                                                 |                                                     |          | 1,503,388  |          |          |          | 909,189    |          |         |          | 788,328  |        
|                                     |                                                               | Change in accrued or reinvested interest and dividends                                                                          |                                                     |          | (6,594     | )        |          |          | (52,193    | )        |         |          | (44,952  | )      
|                                     |                                                               | Amortization of discounts and fees                                                                                              |                                                     |          | (1,564     | )        |          |          | (5,235     | )        |         |          | (12,514  | )      
|                                     |                                                               | Change in U.S. Treasury bills                                                                                                   |                                                     |          | (100,000   | )        |          |          |           |          |         |          |         |        
|                                     |                                                               | Change in investments in money market securities                                                                                |                                                     |          | (121,967   | )        |          |          |           |          |         |          |         |        
|                                     |                                                               | Changes in other assets and liabilities                                                                                         |                                                     |          | 33,023     |          |          |          | 18,716     |          |         |          | (9,352   | )      
|                                     |                                                               | Depreciation and amortization                                                                                                   |                                                     |          | 1,820      |          |          |          | 1,433      |          |         |          | 1,638    |        
|                                     |                                                               | Realized gains from the receipt of notes and other securities as
    consideration from sale of investments, net of collections |                                                     |          | (4,293     | )        |          |          | (47,497    | )        |         |          | (1,668   | )      
|                                     |                                                               | Realized losses                                                                                                                 |                                                     |          | 69,565     |          |          |          | 150,462    |          |         |          | 18,958   |        
|                                     |                                                               | Net change in unrealized (appreciation) or depreciation                                                                         |                                                     |          | (462,092   | )        |          |          | 68,712     |          |         |          | 78,466   |        
|                                     |                                                               |                                                                                                                                 |                                                     |          |            |          |          |          |           
|                                     |                                                               |                                                                                                                                 | Net cash provided by (used in) operating activities |          |            | 115,987  |          |          |            | (179,323 | )       |          |          | 80,349  | 
|                                     |                                                               |                                                                                                                                 |                                                     |          |            |          |          |          |           
|Cash flows from financing activities |                                                               |                                                                                                                                 |                                                     |          |            |          |          |          |            |          |         |         
|                                     | Sale of common stock                                          |                                                                                                                                 |                                                     |         |            |          |          | 70,251   |            |          |         | 422,005  |         
|                                     | Sale of common stock upon the exercise of stock options       |                                                                                                                                 |                                                     | 66,688   |            |          |          | 32,274   |            |          |         | 8,571    |         
|                                     | Collections of notes receivable from sale of common stock     |                                                                                                                                 |                                                     | 1,602    |            |          |          | 13,162   |            |          |         | 6,072    |         
|                                     | Borrowings under notes payable and debentures                 |                                                                                                                                 |                                                     | 350,000  |            |          |          | 340,212  |            |          |         | 300,000  |         
|                                     | Repayments on notes payable and debentures                    |                                                                                                                                 |                                                     | (219,700 | )          |          |          | (231,000 | )          |          |         | (140,000 | )       
|                                     | Net borrowings under (repayments on) revolving line of credit |                                                                                                                                 |                                                     | (20,250  | )          |          |          | 112,000  |            |          |         | (204,250 | )       
|                                     | Redemption of preferred stock                                 |                                                                                                                                 |                                                     |         |            |          |          | (7,000   | )          |          |         |         |         
|                                     | Purchase of common stock held in deferred compensation trust  |                                                                                                                                 |                                                     | (7,968   | )          |          |          | (13,687  | )          |          |         |         |         
|                                     | Other financing activities                                    |                                                                                                                                 |                                                     | (8,333   | )          |          |          | (3,004   | )          |          |         | (5,137   | )       
|                                     | Common stock dividends and distributions paid                 |                                                                                                                                 |                                                     | (303,813 | )          |          |          | (290,830 | )          |          |         | (264,419 | )       
|                                     | Preferred stock dividends paid                                |                                                                                                                                 |                                                     | (10      | )          |          |          | (62      | )          |          |         | (210     | )       
|                                     |                                                               |                                                                                                                                 |                                                     |          |            |          |          |          |           
|                                     |                                                               |                                                                                                                                 | Net cash provided by (used in) financing activities |          |            | (141,784 | )        |          |            | 22,316   |         |          |          | 122,632 | 
|                                     |                                                               |                                                                                                                                 |                                                     |          |            |          |          |          |           
|Net increase (decrease) in cash      |                                                               |                                                                                                                                 | (25,797                                             | )        |            |          | (157,007 | )        |            |          | 202,981 |         
|Cash at beginning of year            |                                                               |                                                                                                                                 | 57,160                                              |          |            |          | 214,167  |          |            |          | 11,186  |         
|                                     |                                                               |                                                                                                                                 |                                                     |          |            |          |          |          |           
|Cash at end of year                  |                                                               | $                                                                                                                               | 31,363                                              |          |            | $        | 57,160   |          |            | $        | 214,167 |         
|                                     |                                                               |                                                                                                                                 |                                                     |          |            |          |          |          |           



67



---



##### 



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.                                                                                                                                                                                





68



---



##### 



|                                                      |                       |                                               |                                                    |                   |        |        |      |   |        |        |  |   |        |        | 
|----------------------------------------------------- | --------------------- | --------------------------------------------- | -------------------------------------------------- | ----------------- | ------ | ------ | ---- | - | ------ | ------ |  | - | ------ | ------ | 
|                                                      |                       |                                               |                                                    | 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.                                                                                                                                                           





69



---



##### 



|                                        |                        |                                            |                                      |                   |        |        |           |   |        |        |           |   |        |        | 
|--------------------------------------- | ---------------------- | ------------------------------------------ | ------------------------------------ | ----------------- | ------ | ------ | --------- | - | ------ | ------ | --------- | - | ------ | ------ | 
|                                        |                        |                                            |                                      | 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.





70



---



##### 



|                                           |                       |                                                           |                                            |                   |        |       |         |   |        |       |         |   |        |       | 
|------------------------------------------ | --------------------- | --------------------------------------------------------- | ------------------------------------------ | ----------------- | ------ | ----- | ------- | - | ------ | ----- | ------- | - | ------ | ----- | 
|                                           |                       |                                                           |                                            | 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.                                                                                                                                                           





71



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##### 



|                                                     |                               |                                      |                                  |                   |        |       |      |   |        |        |  |   |        |        | 
|---------------------------------------------------- | ----------------------------- | ------------------------------------ | -------------------------------- | ----------------- | ------ | ----- | ---- | - | ------ | ------ |  | - | ------ | ------ | 
|                                                     |                               |                                      |                                  | 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 Corporation, a portfolio
    company of Allied Capital.                                                                                                                                                                





72



---



##### 



|                                              |                        |                                            |                                            |                   |        |        |      |   |        |        |  |   |        |        | 
|--------------------------------------------- | ---------------------- | ------------------------------------------ | ------------------------------------------ | ----------------- | ------ | ------ | ---- | - | ------ | ------ |  | - | ------ | ------ | 
|                                              |                        |                                            |                                            | 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.                                                                                                                                                         





73



---



##### 



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





74



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##### 



|                                        |                        |                                              |                                    |                   |        |        |      |   |        |        |  |   |        |        | 
|--------------------------------------- | ---------------------- | -------------------------------------------- | ---------------------------------- | ----------------- | ------ | ------ | ---- | - | ------ | ------ |  | - | ------ | ------ | 
|                                        |                        |                                              |                                    | 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.                                                     





75



---



##### 



|                                                    |                     |                                             |                           |                   |        |   |           |   |        |       |           |   |        |       | 
|--------------------------------------------------- | ------------------- | ------------------------------------------- | ------------------------- | ----------------- | ------ | - | --------- | - | ------ | ----- | --------- | - | ------ | ----- | 
|                                                    |                     |                                             |                           | 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.                                                                                                                                                           





76



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##### 



|                                       |  |  |  |  |  |  |  | 
|-------------------------------------- |  |  |  |  |  |  |  | 
|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.                                                                                                                                                                           





77



---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note 1. Organization










Note 2. Summary of Significant Accounting Policies


Basis of Presentation










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



78



---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




Note 2. Summary of Significant Accounting Policies,
continued






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









79



---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




Note 2. Summary of Significant Accounting Policies,
continued




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









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









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



80



---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




Note 2. Summary of Significant Accounting Policies,
continued




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





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

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




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





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





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

Accounting
for Stock Issued to Employees Accounting for


81



---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




Note 2. Summary of Significant Accounting Policies,
continued


Stock-Based Compensation


|                                                                                                                                                 |             |      |         |      |      |   |         |      |  |   |         |      | 
|------------------------------------------------------------------------------------------------------------------------------------------------ | ----------- | ---- | ------- | ---- | ---- | - | ------- | ---- |  | - | ------- | ---- | 
|                                                                                                                                                 |             | 2005 |         |      | 2004 |   |         | 2003 | 
|(in thousands, except per share amounts)                                                                                                         |             |      |         |      |      |   |         |      | 
|Net increase in net assets resulting from operations as reported                                                                                 |             | $    | 872,814 |      |      | $ | 249,486 |      |  | $ | 192,011 |     
|Less total stock-based employee compensation expense determined
    under fair value based method for all awards, net of related tax
    effects |             |      | (12,717 | )    |      |   | (16,908 | )    |  |   | (12,294 | )   
|                                                                                                                                                 |             |      |         |      |      |   |         |      | 
|Pro forma net increase in net assets resulting from operations                                                                                   |             |      | 860,097 |      |      |   | 232,578 |      |  |   | 179,717 |     
|Less preferred stock dividends                                                                                                                   |             |      | (10     | )    |      |   | (62     | )    |  |   | (210    | )   
|                                                                                                                                                 |             |      |         |      |      |   |         |      | 
|Pro forma net income available to common shareholders                                                                                            |             | $    | 860,087 |      |      | $ | 232,516 |      |  | $ | 179,507 |     
|                                                                                                                                                 |             |      |         |      |      |   |         |      | 
|Basic earnings per common share:                                                                                                                 |             |      |         |      |      |   |         |      |  |   |         |     
|                                                                                                                                                 | As reported |      | $       | 6.48 |      |   | $       | 1.92 |  |   | $       | 1.64 | 
|                                                                                                                                                 | Pro forma   |      | $       | 6.39 |      |   | $       | 1.79 |  |   | $       | 1.54 | 
|Diluted earnings per common share:                                                                                                               |             |      |         |      |      |   |         |      |  |   |         |     
|                                                                                                                                                 | As reported |      | $       | 6.36 |      |   | $       | 1.88 |  |   | $       | 1.62 | 
|                                                                                                                                                 | Pro forma   |      | $       | 6.27 |      |   | $       | 1.76 |  |   | $       | 1.52 | 



|                                       |  |      |      |   |      |   |      |      |  |   |      |  
|-------------------------------------- |  | ---- | ---- | - | ---- | - | ---- | ---- |  | - | ---- | -
|                                       |  | 2005 |      |   | 2004 |   |      | 2003 | 
|                                       |  |      |      |   |      |   |      |      | 
|Risk-free interest rate                |  |      | 4.1  | % |      |   | 2.9  | %    |  |   | 2.8  | %
|Expected life                          |  |      | 5.0  |   |      |   | 5.0  |      |  |   | 5.0  |  
|Expected volatility                    |  |      | 35.1 | % |      |   | 37.0 | %    |  |   | 38.4 | %
|Dividend yield                         |  |      | 9.0  | % |      |   | 8.8  | %    |  |   | 8.9  | %
|Weighted average fair value per option |  | $    | 3.94 |   |      | $ | 4.17 |      |  | $ | 3.47 |  



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





82



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##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


Note 2. Summary of Significant Accounting Policies,
continued






| |                      
| | ---------------------
| | Per Share Information





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







| |                                 
| | --------------------------------
| | Recent Accounting Pronouncements

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




83



---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


Note 2. Summary of Significant Accounting Policies,
continued




Note 3. Portfolio




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



|                           |                        |                                        |         |           |           |  |           |           |           |  |      |      |      |       |         |           |           |  |         |           |           |  |  |      |      |  
|-------------------------- | ---------------------- | -------------------------------------- | ------- | --------- | --------- |  | --------- | --------- | --------- |  | ---- | ---- | ---- | ----- | ------- | --------- | --------- |  | ------- | --------- | --------- |  |  | ---- | ---- | -
|                           |                        | 2005                                   |         |           | 2004      | 
|                           |                        |                                        |         |           |           | 
|                           |                        | Cost                                   |         |           | Value     |  |           | Yield(1)  |           |  | Cost |      |      | Value |         |           | Yield(1)  | 
|($ in thousands)           |                        |                                        |         |           |           |  |           |           |           |  |      |      |      |       |         |           |           | 
|Loans and debt securities: |                        |                                        |         |           |           |  |           |           |           |  |      |      |      |       |         |           |           |  |         |           |           |  |  |     
|                           | Senior loans           |                                        | $       | 284,680   |           |  | $         | 239,838   |           |  |      | 9.5  | %    |       | $       | 260,342   |           |  | $       | 234,628   |           |  |  | 8.5  | %   
|                           | Unitranche
    debt(2) |                                        |         | 294,201   |           |  |           | 294,201   |           |  |      | 11.4 | %    |       |         | 43,900    |           |  |         | 43,900    |           |  |  | 14.8 | %   
|                           | Subordinated debt      |                                        |         | 1,610,228 |           |  |           | 1,560,851 |           |  |      | 13.8 | %    |       |         | 1,375,613 |           |  |         | 1,324,341 |           |  |  | 14.9 | %   
|                           |                        |                                        |         |           |           |  |           |           |           |  |      |      |      |       |         |           |           | 
|                           |                        | Total loans and debt
    securities(3) |         |           | 2,189,109 |  |           |           | 2,094,890 |  |      |      | 13.0 | %     |         |           | 1,679,855 |  |         |           | 1,602,869 |  |  |      | 13.9 | %
|Equity securities          |                        |                                        | 917,314 |           |           |  | 1,384,400 |           |           |  |      |      |      |       | 705,065 |           |           |  | 699,217 |           |           |  |  |     
|                           |                        |                                        |         |           |           |  |           |           |           |  |      |      |      |       |         |           |           | 
|                           |                        | Total                                  |         | $         | 3,106,423 |  |           | $         | 3,479,290 |  |      |      |      |       |         | $         | 2,384,920 |  |         | $         | 2,302,086 |  |  |      |      |  
|                           |                        |                                        |         |           |           |  |           |           |           |  |      |      |      |       |         |           |           | 




|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The weighted average yield on loans and debt securities is
    computed as the (a) annual stated interest plus the annual
    amortization of loan origination fees, original issue discount,
    and market discount on accruing loans and debt securities less
    the annual amortization of loan origination costs, divided by
    (b) total loans and debt securities at value. At
    December 31, 2005 and 2004, the cost and value of loans and
    debt securities include the Class A equity interests in BLX
    and the guaranteed dividend yield on these equity interests is
    included in interest income. The weighted average yield is
    computed as of the balance sheet date.
|   
|(2) | Unitranche debt is a single debt investment that is a blend of
    senior and subordinated debt.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   
|(3) | The total principal balance outstanding on loans and debt
    securities was $2,216.3 million and $1,709.6 million
    at December 31, 2005 and 2004, respectively. The difference
    between principal and cost is represented by unamortized loan
    origination fees and costs, original issue discounts, and market
    discounts totaling $27.2 million and $29.8 million at
    December 31, 2005 and 2004, respectively.                                                                                                                                                                                                                                                                   





84



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##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




Note 3. Portfolio, continued








Advantage Sales and Marketing, Inc.




|                      |                                             |      |      |      |      |   |      |      | 
|--------------------- | ------------------------------------------- | ---- | ---- | ---- | ---- | - | ---- | ---- | 
|                      |                                             | 2005 |      |      | 2004 |  
|($ in millions)       |                                             |      |      |      |      |  
|Interest income       |                                             | $    | 30.9 |      |      | $ | 15.5 |     
|Fees and other income |                                             |      | 6.5  |      |      |   | 5.8  |     
|                      |                                             |      |      |      |      |  
|                      | Total interest and related portfolio income |      | $    | 37.4 |      |   | $    | 21.3 | 
|                      |                                             |      |      |      |      |  







85



---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




Note 3. Portfolio, continued


Business Loan Express, LLC.




|                                                                      |                                             |      |      |      |      |   |      |      |  |   |      |      | 
|--------------------------------------------------------------------- | ------------------------------------------- | ---- | ---- | ---- | ---- | - | ---- | ---- |  | - | ---- | ---- | 
|                                                                      |                                             | 2005 |      |      | 2004 |   |      | 2003 | 
|($ in millions)                                                       |                                             |      |      |      |      |   |      |      | 
|Interest income on subordinated debt and Class A equity
    interests |                                             | $    | 14.3 |      |      | $ | 23.2 |      |  | $ | 21.9 |     
|Dividend income on Class B equity interests                           |                                             |      | 14.0 |      |      |   | 14.8 |      |  |   | 7.8  |     
|Loan prepayment premiums                                              |                                             |      |     |      |      |   |     |      |  |   | 0.1  |     
|Fees and other income                                                 |                                             |      | 9.2  |      |      |   | 12.0 |      |  |   | 16.9 |     
|                                                                      |                                             |      |      |      |      |   |      |      | 
|                                                                      | Total interest and related portfolio income |      | $    | 37.5 |      |   | $    | 50.0 |  |   | $    | 46.7 | 
|                                                                      |                                             |      |      |      |      |   |      |      | 











built-in


86



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##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




Note 3. Portfolio, continued


10-year






The Hillman Companies, Inc.


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


87



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##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


Note 3. Portfolio, continued








|                 |                                    |      |       |         |      |   |       |       | 
|---------------- | ---------------------------------- | ---- | ----- | ------- | ---- | - | ----- | ----- | 
|                 |                                    | 2005 |       |         | 2004 |  
|($ in millions)  |                                    |      |       |         |      |  
|Bonds            |                                    | $    | 230.7 |         |      | $ |      |      
|Syndicated Loans |                                    |      | 704.0 |         |      |   | 377.0 |      
|Cash(1)          |                                    |      | 238.4 |         |      |   | 12.7  |      
|                 |                                    |      |       |         |      |  
|                 | Total underlying collateral assets |      | $     | 1,173.1 |      |   | $     | 389.7 | 
|                 |                                    |      |       |         |      |  




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





88



---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


Note 3. Portfolio, continued


Loans and Debt Securities on Non-Accrual Status.


|                                                                             |                               |       |   |        |         |  |   |        |        | 
|---------------------------------------------------------------------------- | ----------------------------- | ----- | - | ------ | ------- |  | - | ------ | ------ | 
|                                                                             |                               | 2005  |   |        | 2004    | 
|($ in thousands)                                                             |                               |       |   |        |         | 
|Loans and debt securities in workout status (classified as
    Grade 4 or 5) |                               |       |   |        |         |  |   |       
|                                                                             | Companies more than 25% owned |       | $ | 15,622 |         |  | $ | 34,374 |       
|                                                                             | Companies less than 5% owned  |       |   | 11,417 |         |  |   | 16,550 |       
|Loans and debt securities not in workout status                              |                               |       |   |        |         |  |   |       
|                                                                             | Companies more than 25% owned |       |   | 58,047 |         |  |   | 29,368 |       
|                                                                             | Companies 5% to 25% owned     |       |   | 534    |         |  |   | 678    |       
|                                                                             | Companies less than 5% owned  |       |   | 49,458 |         |  |   | 15,864 |       
|                                                                             |                               |       |   |        |         | 
|                                                                             |                               | Total |   | $      | 135,078 |  |   | $      | 96,834 | 
|                                                                             |                               |       |   |        |         | 

Industry and Geographic Compositions.


|                         |       |      |    |     |      |  |    |     |  
|------------------------ | ----- | ---- | -- | --- | ---- |  | -- | --- | -
|                         |       | 2005 |    |     | 2004 | 
|                         |       |      |    |     |      | 
|Industry                 |       |      |    |     |      |  |    |    
|Business services        |       |      | 45 | %   |      |  | 32 | %  
|Financial services       |       |      | 15 |     |      |  | 21 |    
|Consumer products        |       |      | 14 |     |      |  | 20 |    
|Industrial products      |       |      | 10 |     |      |  | 8  |    
|Retail                   |       |      | 3  |     |      |  | 2  |    
|Healthcare services      |       |      | 2  |     |      |  | 8  |    
|Energy services          |       |      | 2  |     |      |  | 2  |    
|Broadcasting and cable   |       |      | 1  |     |      |  | 2  |    
|Other(1)                 |       |      | 8  |     |      |  | 5  |    
|                         |       |      |    |     |      | 
|                         | Total |      |    | 100 | %    |  |    | 100 | %
|                         |       |      |    |     |      | 
|Geographic
    Region(2) |       |      |    |     |      |  |    |    
|West                     |       |      | 34 | %   |      |  | 27 | %  
|Mid-Atlantic             |       |      | 29 |     |      |  | 40 |    
|Midwest                  |       |      | 21 |     |      |  | 15 |    
|Southeast                |       |      | 12 |     |      |  | 14 |    
|Northeast                |       |      | 4  |     |      |  | 4  |    
|                         |       |      |    |     |      | 
|                         | Total |      |    | 100 | %    |  |    | 100 | %
|                         |       |      |    |     |      | 




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



|    |                                                                                                                                                                                                                                              
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | The geographic region for the private finance portfolio depicts
    the location of the headquarters for the Companys
    portfolio companies. The portfolio companies may have a number
    of other locations in other geographic regions.

89



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##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




Note 3. Portfolio, continued




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



|                               |       |      |         |         |       |   |         |          |  |  |      |  |  |       |         |         |          |   |         |         |  |  |       |  | 
|------------------------------ | ----- | ---- | ------- | ------- | ----- | - | ------- | -------- |  |  | ---- |  |  | ----- | ------- | ------- | -------- | - | ------- | ------- |  |  | ----- |  | 
|                               |       | 2005 |         |         | 2004  |  
|                               |       |      |         |         |       |  
|                               |       | Cost |         |         | Value |   |         | Yield(1) |  |  | Cost |  |  | Value |         |         | Yield(1) |  
|($ in thousands)               |       |      |         |         |       |   |         |          |  |  |      |  |  |       |         |         |          |  
|CMBS bonds                     |       | $    |        |         |       | $ |        |          |  |  |      |  |  | $     | 383,310 |         |          | $ | 373,805 |         |  |  | 14.6% | 
|CDO bonds and preferred shares |       |      |        |         |       |   |        |          |  |  |      |  |  |       | 212,590 |         |          |   | 212,573 |         |  |  | 16.8% | 
|Commercial mortgage loans      |       |      | 103,878 |         |       |   | 102,569 |          |  |  | 7.6% |  |  |       | 99,373  |         |          |   | 95,056  |         |  |  | 6.8%  | 
|Real estate owned              |       |      | 14,240  |         |       |   | 13,932  |          |  |  |      |  |  |       | 16,170  |         |          |   | 16,871  |         |  |  |       | 
|Equity interests               |       |      | 13,577  |         |       |   | 10,564  |          |  |  |      |  |  |       | 11,169  |         |          |   | 13,020  |         |  |  |       | 
|                               |       |      |         |         |       |   |         |          |  |  |      |  |  |       |         |         |          |  
|                               | Total |      | $       | 131,695 |       |   | $       | 127,065  |  |  |      |  |  |       | $       | 722,612 |          |   | $       | 711,325 |  |  |       |  | 
|                               |       |      |         |         |       |   |         |          |  |  |      |  |  |       |         |         |          |  




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

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








90



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##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




Note 3. Portfolio, continued


CMBS.


|                        |  |      |           |  
|----------------------- |  | ---- | --------- | -
|                        |  | 2004 |          
|($ in thousands)        |  |      |          
|Face                    |  | $    | 1,043,688 |  
|Original issue discount |  |      | (660,378  | )
|                        |  |      |          
|Cost                    |  | $    | 383,310   |  
|                        |  |      |          
|Value                   |  | $    | 373,805   |  
|                        |  |      |          



|                 |       |      |         |            |       |   |         |         |  |  |      |       |  
|---------------- | ----- | ---- | ------- | ---------- | ----- | - | ------- | ------- |  |  | ---- | ----- | -
|                 |       | 2004 |        
|                 |       |      |        
|                 |       |      |         | Percentage |      
|                 |       |      |         | of Total   |      
|                 |       | Cost |         |            | Value |   |         | Value   | 
|($ in thousands) |       |      |         |            |       |   |         |         | 
|AA               |       | $    | 4,669   |            |       | $ | 4,658   |         |  |  | 1.2  | %    
|A                |       |      | 4,549   |            |       |   | 4,539   |         |  |  | 1.2  |      
|BBB-             |       |      | 9,029   |            |       |   | 9,016   |         |  |  | 2.4  |      
|BB+              |       |      | 7,195   |            |       |   | 7,695   |         |  |  | 2.1  |      
|BB               |       |      | 5,940   |            |       |   | 5,952   |         |  |  | 1.6  |      
|BB-              |       |      | 7,490   |            |       |   | 7,676   |         |  |  | 2.1  |      
|B+               |       |      | 13,123  |            |       |   | 15,318  |         |  |  | 4.1  |      
|B                |       |      | 61,767  |            |       |   | 62,582  |         |  |  | 16.7 |      
|B-               |       |      | 89,341  |            |       |   | 88,099  |         |  |  | 23.6 |      
|CCC+             |       |      | 22,506  |            |       |   | 18,585  |         |  |  | 5.0  |      
|CCC              |       |      | 24,078  |            |       |   | 20,306  |         |  |  | 5.4  |      
|CCC-             |       |      |        |            |       |   |        |         |  |  |     |      
|CC               |       |      | 998     |            |       |   | 610     |         |  |  | 0.2  |      
|Unrated          |       |      | 132,625 |            |       |   | 128,769 |         |  |  | 34.4 |      
|                 |       |      |         |            |       |   |         |         | 
|                 | Total |      | $       | 383,310    |       |   | $       | 373,805 |  |  |      | 100.0 | %
|                 |       |      |         |            |       |   |         |         | 



91



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##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




Note 3. Portfolio, continued




|                                                                     |  |      |         | 
|-------------------------------------------------------------------- |  | ---- | ------- | 
|                                                                     |  | 2004 |        
|($ in millions)                                                      |  |      |        
|Approximate number of loans and REO
    properties(1)                |  |      | 6,200   | 
|Total outstanding principal balance                                  |  |      | $42,759 | 
|Loans over 30 days delinquent or classified as REO
    properties(2) |  |      | 1.6%(3) | 




|    |                                                                                                                                                                                                                                                                                                                      
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes approximately 39 REO properties obtained through the
    foreclosure of commercial mortgage loans at December 31,
    2004.                                                                                                                                                                                 
|   
|(2) | As a percentage of total outstanding principal balance.                                                                                                                                                                                                                                                              
|   
|(3) | At December 31, 2004, the Companys investments
    included bonds in the first loss, unrated bond class in 43
    separate CMBS issuances. For these issuances, loans over
    30 days delinquent or classified as REO properties were
    1.7% of the total outstanding principal balance at
    December 31, 2004.









CDOs.




92



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##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




Note 3. Portfolio, continued






|                                       |                  |      |          |          | 
|-------------------------------------- | ---------------- | ---- | -------- | -------- | 
|($ in millions)                        |                  | 2004 |         
|                                       |                  |      |         
|Investment grade REIT
    debt(1)      |                  |      | $1,532.5 |         
|Investment grade CMBS
    bonds(2)     |                  |      | 918.8    |         
|Non-investment grade CMBS
    bonds(3) |                  |      | 1,636.4  |         
|Other collateral                       |                  |      | 355.8    |         
|                                       |                  |      |         
|                                       | Total collateral |      |          | $4,443.5 | 
|                                       |                  |      |         




|    |                                                     
|--- | ----------------------------------------------------
|(1) | Issued by 44 REITs for the period presented.        
|(2) | Issued in 121 transactions for the period presented.
|(3) | Issued in 109 transactions for the period presented.





Commercial Mortgage Loans and Equity Interests.




93



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##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


Note 3. Portfolio, continued




|                  |       |      |    |     |      |  |    |     |  
|----------------- | ----- | ---- | -- | --- | ---- |  | -- | --- | -
|                  |       | 2005 |    |     | 2004 | 
|                  |       |      |    |     |      | 
|Property Type     |       |      |    |     |      |  |    |    
|Hospitality       |       |      | 37 | %   |      |  | 49 | %  
|Housing           |       |      | 30 |     |      |  | 5  |    
|Retail            |       |      | 16 |     |      |  | 21 |    
|Office            |       |      | 11 |     |      |  | 17 |    
|Other             |       |      | 6  |     |      |  | 8  |    
|                  |       |      |    |     |      | 
|                  | Total |      |    | 100 | %    |  |    | 100 | %
|                  |       |      |    |     |      | 
|Geographic Region |       |      |    |     |      |  |    |    
|Mid-Atlantic      |       |      | 31 | %   |      |  | 20 | %  
|Southeast         |       |      | 25 |     |      |  | 26 |    
|Midwest           |       |      | 21 |     |      |  | 30 |    
|West              |       |      | 18 |     |      |  | 16 |    
|Northeast         |       |      | 5  |     |      |  | 8  |    
|                  |       |      |    |     |      | 
|                  | Total |      |    | 100 | %    |  |    | 100 | %
|                  |       |      |    |     |      | 

Note 4. Debt




|                              |                         |                                    |         |           |           |  |        |           |           |  |          |      |      |        |         |           |           |  |         |           |           |  |     |      |      |  
|----------------------------- | ----------------------- | ---------------------------------- | ------- | --------- | --------- |  | ------ | --------- | --------- |  | -------- | ---- | ---- | ------ | ------- | --------- | --------- |  | ------- | --------- | --------- |  | --- | ---- | ---- | -
|                              |                         | 2005                               |         |           | 2004      | 
|                              |                         |                                    |         |           |           | 
|                              |                         |                                    |         | Annual    |           |  |        |           | Annual    | 
|                              |                         | Facility                           |         |           | Amount    |  |        | Interest  |           |  | Facility |      |      | Amount |         |           | Interest  | 
|                              |                         | Amount                             |         |           | Drawn     |  |        | Cost(1)   |           |  | Amount   |      |      | Drawn  |         |           | Cost(1)   | 
|($ in thousands)              |                         |                                    |         |           |           |  |        |           |           |  |          |      |      |        |         |           |           | 
|Notes payable and debentures: |                         |                                    |         |           |           |  |        |           |           |  |          |      |      |        |         |           |           |  |         |           |           |  |     |     
|                              | Unsecured notes payable |                                    | $       | 1,164,540 |           |  | $      | 1,164,540 |           |  |          | 6.2  | %    |        | $       | 981,368   |           |  | $       | 981,368   |           |  |     | 6.5  | %   
|                              | SBA debentures          |                                    |         | 28,500    |           |  |        | 28,500    |           |  |          | 7.5  | %    |        |         | 84,800    |           |  |         | 77,500    |           |  |     | 8.2  | %   
|                              | OPIC loan               |                                    |         |          |           |  |        |          |           |  |          |     |      |        |         | 5,700     |           |  |         | 5,700     |           |  |     | 6.6  | %   
|                              |                         |                                    |         |           |           |  |        |           |           |  |          |      |      |        |         |           |           | 
|                              |                         | Total notes payable and debentures |         |           | 1,193,040 |  |        |           | 1,193,040 |  |          |      | 6.3  | %      |         |           | 1,071,868 |  |         |           | 1,064,568 |  |     |      | 6.6  | %
|Revolving line of credit      |                         |                                    | 772,500 |           |           |  | 91,750 |           |           |  | 5.6      | %(2) |      |        | 552,500 |           |           |  | 112,000 |           |           |  | 4.7 | %(2)
|                              |                         |                                    |         |           |           |  |        |           |           |  |          |      |      |        |         |           |           | 
|                              | Total debt              |                                    | $       | 1,965,540 |           |  | $      | 1,284,790 |           |  |          | 6.5  | %(3) |        | $       | 1,624,368 |           |  | $       | 1,176,568 |           |  |     | 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 and other facility fees that are recognized
    into interest expense over the contractual life of the
    respective borrowings, divided by (b) debt outstanding on the
    balance sheet date.
|   
|(2) | The 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 and other facility fees of $3.3 million and
    $1.8 million at December 31, 2005 and 2004,
    respectively.                       
|   
|(3) | The annual interest cost for total debt includes the annual cost
    of commitment fees and other facility fees regardless of the
    amount outstanding on the facility as of the balance sheet date.                                                                                                                                                      

Notes Payable and Debentures


Unsecured Notes Payable.


94



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##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


Note 4. Debt, continued










SBA Debentures.


Scheduled Maturities.


|           |       |                  |         |           | 
|---------- | ----- | ---------------- | ------- | --------- | 
|Year       |       | Amount Maturing  |        
|           |       |                  |        
|           |       | ($ in thousands) |        
|2006       |       | $                | 175,000 |          
|2007       |       |                  |        |          
|2008       |       |                  | 153,000 |          
|2009       |       |                  | 267,040 |          
|2010       |       |                  | 408,000 |          
|Thereafter |       |                  | 190,000 |          
|           |       |                  |        
|          
|           | Total |                  | $       | 1,193,040 | 
|           |       |                  |        



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



95



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##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




Note 4. Debt, continued












| |                   
| | ------------------
| | Fair Value of Debt





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



Note 5. Guarantees




96



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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                       |       | $     | 148.6 |       |      | $ | 1.3 |      |  | $ | 136.2 |       |  | $    | 3.1  |      |      | $ | 2.5        |     |  | $ |  |   |  | $ | 5.5 |    
|Standby letters of
    credit(1) |       |       | 37.1  |       |      |   | 0.1 |      |  |   |      |       |  |      | 37.0 |      |      |   |           |     |  |   |  |   |  |   |    |    
|                                 |       |       |       |       |      |   |     |      |  |   |       |       |  |      |      |      |      |   |            |     | 
|                                 | Total |       | $     | 185.7 |      |   | $   | 1.4  |  |   | $     | 136.2 |  |      | $    | 40.1 |      |   | $          | 2.5 |  |   | $ |  |  |   | $   | 5.5 | 
|                                 |       |       |       |       |      |   |     |      |  |   |       |       |  |      |      |      |      |   |            |     | 




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





Note 6. Shareholders Equity




|                                        |              |         |   |      |  |   |        |        |  |   |         |         | 
|--------------------------------------- | ------------ | ------- | - | ---- |  | - | ------ | ------ |  | - | ------- | ------- | 
|                                        |              | 2005(1) |   | 2004 |  |   | 2003   |       
|(in thousands)                          |              |         |   |      |  |   |        |       
|Number of common shares                 |              |         |  |      |  |   | 3,000  |        |  |   | 18,700  |        
|                                        |              |         |   |      |  |   |        |        | 
|Gross proceeds                          |              | $       |  |      |  | $ | 75,000 |        |  | $ | 442,680 |        
|Less costs, including underwriting fees |              |         |  |      |  |   | (4,749 | )      |  |   | (20,675 | )      
|                                        |              |         |   |      |  |   |        |        | 
|                                        | Net proceeds |         | $ |     |  |   | $      | 70,251 |  |   | $       | 422,005 | 
|                                        |              |         |   |      |  |   |        |        | 




|    |                                                                                       
|--- | --------------------------------------------------------------------------------------
|(1) | The Company did not sell any common stock during the year ended
    December 31, 2005.



97



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ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




Note 6. Shareholders Equity, continued








|                                         |  |      |       |  |      |   |       |      |  |   |       | 
|---------------------------------------- |  | ---- | ----- |  | ---- | - | ----- | ---- |  | - | ----- | 
|                                         |  | 2005 |       |  | 2004 |   |       | 2003 | 
|(in thousands, except per share amounts) |  |      |       |  |      |   |       |      | 
|Shares issued                            |  |      | 331   |  |      |   | 222   |      |  |   | 279   | 
|Average price per share                  |  | $    | 28.00 |  |      | $ | 26.34 |      |  | $ | 23.60 | 

Note 7. Earnings Per Common Share




|                                                         |  |      |         |   |      |   |         |      |  |   |         |  
|-------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                         |  | 2005 |         |   | 2004 |   |         | 2003 | 
|(in thousands, except per share amounts)                 |  |      |         |   |      |   |         |      | 
|Net increase in net assets resulting from operations     |  | $    | 872,814 |   |      | $ | 249,486 |      |  | $ | 192,011 |  
|Less preferred stock dividends                           |  |      | (10     | ) |      |   | (62     | )    |  |   | (210    | )
|                                                         |  |      |         |   |      |   |         |      | 
|Income available to common shareholders                  |  | $    | 872,804 |   |      | $ | 249,424 |      |  | $ | 191,801 |  
|                                                         |  |      |         |   |      |   |         |      | 
|Weighted average common shares
    outstanding  basic   |  |      | 134,700 |   |      |   | 129,828 |      |  |   | 116,747 |  
|Dilutive options outstanding to officers                 |  |      | 2,574   |   |      |   | 2,630   |      |  |   | 1,604   |  
|                                                         |  |      |         |   |      |   |         |      | 
|Weighted average common shares
    outstanding  diluted |  |      | 137,274 |   |      |   | 132,458 |      |  |   | 118,351 |  
|                                                         |  |      |         |   |      |   |         |      | 
|Basic earnings per common share                          |  | $    | 6.48    |   |      | $ | 1.92    |      |  | $ | 1.64    |  
|                                                         |  |      |         |   |      |   |         |      | 
|Diluted earnings per common share                        |  | $    | 6.36    |   |      | $ | 1.88    |      |  | $ | 1.62    |  
|                                                         |  |      |         |   |      |   |         |      | 

Note 8. Employee Compensation Plans




98



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##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




Note 8. Employee Compensation Plans, continued










99



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ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




Note 8. Employee Compensation Plans, continued








|                                     |                   |      |     |     |      |   |      |      | 
|------------------------------------ | ----------------- | ---- | --- | --- | ---- | - | ---- | ---- | 
|                                     |                   | 2005 |     |     | 2004 |  
|($ in millions)                      |                   |      |     |     |      |  
|IPA contributions                    |                   | $    | 7.0 |     |      | $ | 13.4 |     
|IPA mark to market expense (benefit) |                   |      | 2.0 |     |      |   | (0.4 | )   
|                                     |                   |      |     |     |      |  
|                                     | Total IPA expense |      | $   | 9.0 |      |   | $    | 13.0 | 
|                                     |                   |      |     |     |      |  

bi-weekly


Note 9. Stock Option Plan




| |                
| | ---------------
| | The Option Plan







100



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##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




Note 9. Stock Option Plan, continued




|                                         |  |        |        |                |           |   |       | 
|---------------------------------------- |  | ------ | ------ | -------------- | --------- | - | ----- | 
|                                         |  |        |        | Weighted       |          
|                                         |  |        |        | Average        |          
|                                         |  |        |        | Exercise Price |          
|                                         |  | Shares |        |                | Per Share |  
|(in thousands, except per share amounts) |  |        |        |                |           |  
|Options outstanding at January 1, 2003   |  |        | 14,689 |                |           | $ | 20.57 | 
|                                         |  |        |        |                |           |  
|Granted                                  |  |        | 1,045  |                |           | $ | 22.74 | 
|Exercised                                |  |        | (408   | )              |           | $ | 21.01 | 
|Forfeited                                |  |        | (442   | )              |           | $ | 21.66 | 
|                                         |  |        |        |                |           |  
|Options outstanding at December 31, 2003 |  |        | 14,884 |                |           | $ | 20.68 | 
|                                         |  |        |        |                |           |  
|Granted                                  |  |        | 8,170  |                |           | $ | 28.34 | 
|Exercised                                |  |        | (1,635 | )              |           | $ | 19.73 | 
|Forfeited                                |  |        | (1,059 | )              |           | $ | 26.07 | 
|                                         |  |        |        |                |           |  
|Options outstanding at December 31, 2004 |  |        | 20,360 |                |           | $ | 23.55 | 
|                                         |  |        |        |                |           |  
|Granted                                  |  |        | 6,815  |                |           | $ | 27.37 | 
|Exercised                                |  |        | (2,988 | )              |           | $ | 22.32 | 
|Forfeited                                |  |        | (1,928 | )              |           | $ | 27.83 | 
|                                         |  |        |        |                |           |  
|Options outstanding at December 31, 2005 |  |        | 22,259 |                |           | $ | 24.52 | 
|                                         |  |        |        |                |           |  



|                                                   |  |             |        |          |                  |  |          |          |  |   |             |          |  |          |        |  |  |   |       | 
|-------------------------------------------------- |  | ----------- | ------ | -------- | ---------------- |  | -------- | -------- |  | - | ----------- | -------- |  | -------- | ------ |  |  | - | ----- | 
|                                                   |  | Outstanding |        |          |                 
|                                                   |  |             |        |          | Exercisable      | 
|                                                   |  |             |        | Weighted |                  |  |          |          |  |  
|                                                   |  |             |        | Average  |                  |  | Weighted |          |  |   |             | Weighted | 
|                                                   |  | Total       |        |          | Remaining        |  |          | Average  |  |   | Total       |          |  | Average  |       
|Range of                                           |  | Number      |        |          | Contractual Life |  |          | Exercise |  |   | Number      |          |  | Exercise |       
|Exercise Prices                                    |  | Outstanding |        |          | (Years)          |  |          | Price    |  |   | Exercisable |          |  | Price    |       
|                                                   |  |             |        |          |                  |  |          |          |  |   |             |          |  |          |       
|(in thousands, except per share amounts and years) |  |             |       
|$16.81  $17.75                                    |  |             | 2,244  |          |                  |  | 4.36     |          |  | $ | 16.92       |          |  |          | 2,244  |  |  | $ | 16.92 | 
|$17.88  $21.38                                    |  |             | 2,056  |          |                  |  | 2.23     |          |  | $ | 20.99       |          |  |          | 2,056  |  |  | $ | 20.99 | 
|$21.52                                             |  |             | 3,423  |          |                  |  | 6.95     |          |  | $ | 21.52       |          |  |          | 3,423  |  |  | $ | 21.52 | 
|$21.59  $24.15                                    |  |             | 2,334  |          |                  |  | 6.17     |          |  | $ | 22.07       |          |  |          | 2,072  |  |  | $ | 21.92 | 
|$24.44  $26.80                                    |  |             | 1,965  |          |                  |  | 8.45     |          |  | $ | 26.14       |          |  |          | 1,023  |  |  | $ | 26.16 | 
|$27.00  $27.38                                    |  |             | 240    |          |                  |  | 8.17     |          |  | $ | 27.12       |          |  |          | 125    |  |  | $ | 27.15 | 
|$27.51                                             |  |             | 5,575  |          |                  |  | 9.59     |          |  | $ | 27.51       |          |  |          |       |  |  | $ |      | 
|$28.98                                             |  |             | 4,422  |          |                  |  | 8.19     |          |  | $ | 28.98       |          |  |          | 2,205  |  |  | $ | 28.98 | 
|                                                   |  |             |        |          |                  |  |          |          |  |   |             |          |  |          |       
|                                                   |  |             | 22,259 |          |                  |  | 7.22     |          |  | $ | 24.52       |          |  |          | 13,148 |  |  | $ | 22.38 | 
|                                                   |  |             |        |          |                  |  |          |          |  |   |             |          |  |          |       

101



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##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




Note 9. Stock Option Plan, continued


Accounting for Stock Issued to
Employees,


Notes Receivable from the
Sale of Common Stock




Note 10. Dividends and Distributions and Taxes




|                                         |                                            |        |        |         |           |   |      |        |  |   |           |         |  |        |      |      |           |   |        |         |  |   |      |      | 
|---------------------------------------- | ------------------------------------------ | ------ | ------ | ------- | --------- | - | ---- | ------ |  | - | --------- | ------- |  | ------ | ---- | ---- | --------- | - | ------ | ------- |  | - | ---- | ---- | 
|                                         |                                            | 2005   |        |         | 2004      |   |      | 2003   | 
|                                         |                                            |        |        |         |           |   |      |        | 
|                                         |                                            | Total  |        |         | Total Per |   |      | Total  |  |   | Total Per |         |  | Total  |      |      | Total Per |  
|                                         |                                            | Amount |        |         | Share     |   |      | Amount |  |   | Share     |         |  | Amount |      |      | Share     |  
|                                         |                                            |        |        |         |           |   |      |        |  |   |           |         |  |        |      |      |           |  
|(in thousands, except per share amounts) |                                            |        |        |         |           |   |      |        |  |   |           |        
|First quarter                            |                                            | $      | 76,100 |         |           | $ | 0.57 |        |  | $ | 73,357    |         |  | $      | 0.57 |      |           | $ | 62,971 |         |  | $ | 0.57 |     
|Second quarter                           |                                            |        | 76,229 |         |           |   | 0.57 |        |  |   | 73,465    |         |  |        | 0.57 |      |           |   | 64,503 |         |  |   | 0.57 |     
|Third quarter                            |                                            |        | 78,834 |         |           |   | 0.58 |        |  |   | 74,010    |         |  |        | 0.57 |      |           |   | 68,685 |         |  |   | 0.57 |     
|Fourth quarter                           |                                            |        | 79,247 |         |           |   | 0.58 |        |  |   | 75,833    |         |  |        | 0.57 |      |           |   | 71,679 |         |  |   | 0.57 |     
|Extra dividend                           |                                            |        | 4,099  |         |           |   | 0.03 |        |  |   | 2,661     |         |  |        | 0.02 |      |           |   |       |         |  |   |     |     
|                                         |                                            |        |        |         |           |   |      |        |  |   |           |         |  |        |      |      |           |  
|                                         | Total distributions to common shareholders |        | $      | 314,509 |           |   | $    | 2.33   |  |   | $         | 299,326 |  |        | $    | 2.30 |           |   | $      | 267,838 |  |   | $    | 2.28 | 
|                                         |                                            |        |        |         |           |   |      |        |  |   |           |         |  |        |      |      |           |  



|                                         |                                                             |        |         |         |           |   |      |        |  |   |           |         |  |        |      |      |           |   |         |         |  |   |      |      | 
|---------------------------------------- | ----------------------------------------------------------- | ------ | ------- | ------- | --------- | - | ---- | ------ |  | - | --------- | ------- |  | ------ | ---- | ---- | --------- | - | ------- | ------- |  | - | ---- | ---- | 
|                                         |                                                             | 2005   |         |         | 2004      |   |      | 2003   | 
|                                         |                                                             |        |         |         |           |   |      |        | 
|                                         |                                                             | Total  |         |         | Total Per |   |      | Total  |  |   | Total Per |         |  | Total  |      |      | Total Per |  
|                                         |                                                             | Amount |         |         | Share     |   |      | Amount |  |   | Share     |         |  | Amount |      |      | Share     |  
|                                         |                                                             |        |         |         |           |   |      |        |  |   |           |         |  |        |      |      |           |  
|(in thousands, except per share amounts) |                                                             |        |         |         |           |   |      |        |  |   |           |        
|Ordinary income                          |                                                             | $      | 157,255 |         |           | $ | 1.17 |        |  | $ | 145,365   |         |  | $      | 1.12 |      |           | $ | 212,272 |         |  | $ | 1.81 |     
|Long-term capital gains                  |                                                             |        | 157,254 |         |           |   | 1.16 |        |  |   | 153,961   |         |  |        | 1.18 |      |           |   | 55,566  |         |  |   | 0.47 |     
|                                         |                                                             |        |         |         |           |   |      |        |  |   |           |         |  |        |      |      |           |  
|                                         | Total distributions
    to common
    shareholders(1)(2)(3) |        | $       | 314,509 |           |   | $    | 2.33   |  |   | $         | 299,326 |  |        | $    | 2.30 |           |   | $       | 267,838 |  |   | $    | 2.28 | 
|                                         |                                                             |        |         |         |           |   |      |        |  |   |           |         |  |        |      |      |           |  




|    |                                                                                                                                                                                                                                                                                                                                                                                                                                
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | For the years ended December 31, 2005, 2004 and 2003,
    ordinary income included dividend income of approximately $0.03
    per share, $0.04 per share, and $0.05 per share,
    respectively, that qualified to be taxed at the 15% maximum
    capital gains rate. For the year ended December 31, 2005,
    capital gain income subject to the 25% rate on unrecognized Code
    section 1250 gains was $0.0097 per share.
|   
|(2) | For the year ended December 31, 2005, ordinary income that
    was classified as excess inclusion was $0.0063 per share.                                                                                                                                                                                                                                                                                                       
|   
|(3) | For certain eligible corporate shareholders, the dividend
    received deduction for 2005, 2004 and 2003 was $0.034 per share,
    $0.038 per share, and $0.044 per share, respectively.                                                                                                                                                                                                                                       

102



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ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




Note 10. Dividends and Distributions and Taxes,
continued




|                                                                             |                                                                            |                |         |          |         |   |         |         |         |   |         |        |         | 
|---------------------------------------------------------------------------- | -------------------------------------------------------------------------- | -------------- | ------- | -------- | ------- | - | ------- | ------- | ------- | - | ------- | ------ | ------- | 
|                                                                             |                                                                            | 2005           |         |          | 2004    |   |         | 2003    |        
|                                                                             |                                                                            |                |         |          |         |   |         |         |        
|($ in thousands)                                                             |                                                                            | (ESTIMATED)(1) |         |          |         |   |        
|Financial statement net increase in net assets resulting from
    operations |                                                                            | $              | 872,814 |          |         | $ | 249,486 |         |         | $ | 192,011 |       
|Adjustments:                                                                 |                                                                            |                |         |          |         |   |         |         |         |   |         |       
|                                                                             | Net change in unrealized appreciation or depreciation                      |                |         | (462,092 | )       |   |         | 68,712  |         |   |         | 78,466 |        
|                                                                             | Amortization of discounts and fees                                         |                |         | 17,527   |         |   |         | (5,420  | )       |   |         | 948    |        
|                                                                             | Interest- and dividend-related items                                       |                |         | 1,084    |         |   |         | 6,277   |         |   |         | (2,400 | )      
|                                                                             | Employee compensation-related items                                        |                |         | 2,449    |         |   |         | 7,081   |         |   |         | 2,902  |        
|                                                                             | Net income (loss) from partnerships and limited liability
    companies(2) |                |         | 24,753   |         |   |         | 8,646   |         |   |         | (1,316 | )      
|                                                                             | Realized gains recognized (deferred) through installment
    treatment(3)  |                |         | 954      |         |   |         | (33,733 | )       |   |         |       |        
|                                                                             | Net loss from consolidated SBIC subsidiary                                 |                |         | (10,677  | )       |   |         | 15,223  |         |   |         |       |        
|                                                                             | Net (income) loss from consolidated taxable subsidiary, net of
    tax     |                |         | (5,022   | )       |   |         | (1,008  | )       |   |         | 3,864  |        
|                                                                             | Other, including excise tax                                                |                |         | 10,520   |         |   |         | 7,913   |         |   |         | (8,160 | )      
|                                                                             |                                                                            |                |         |          |         |   |         |         |        
|                                                                             |                                                                            | Taxable income |         | $        | 452,310 |   |         | $       | 323,177 |   |         | $      | 266,315 | 
|                                                                             |                                                                            |                |         |          |         |   |         |         |        




|    |                                                                                                                                                                                                                                                                                                                                                                                         
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The Companys taxable income for 2005 is an estimate and
    will not be finally determined until the Company files its 2005
    tax return in September 2006. Therefore, the final taxable
    income may be different than this estimate.                                                                                                                                             
|   
|(2) | Includes taxable income passed through to the Company from
    Business Loan Express, LLC in excess of interest and
    related portfolio income from BLX included in the financial
    statements totaling $15.4 million, $10.0 million, and
    $3.4 million for the years ended December 31, 2005,
    2004 and 2003, respectively. See Note 3 for additional
    related disclosure.
|   
|(3) | 2004 includes the deferral of long-term capital gains through
    installment treatment related to the Companys sale of its
    control equity investment in Hillman.                                                                                                                                                                                                                  





103



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##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


Note 10. Dividends and Distributions and Taxes,
continued




|                                                                                                   |                                            |                |          |         |      |   |         |         |  |   |         |         | 
|-------------------------------------------------------------------------------------------------- | ------------------------------------------ | -------------- | -------- | ------- | ---- | - | ------- | ------- |  | - | ------- | ------- | 
|($ in thousands)                                                                                   |                                            | 2005           |          |         | 2004 |   |         | 2003    | 
|                                                                                                   |                                            |                |          |         |      |   |         |         | 
|                                                                                                   |                                            | (ESTIMATED)(1) |          |         |      |   |        
|Taxable income                                                                                     |                                            | $              | 452,310  |         |      | $ | 323,177 |         |  | $ | 266,315 |        
|Taxable income earned in current year and carried forward for
    distribution in next
    year(2) |                                            |                | (163,810 | )       |      |   | (26,009 | )       |  |   | (2,158  | )      
|Taxable income earned in prior year and carried forward and
    distributed in current year        |                                            |                | 26,009   |         |      |   | 2,158   |         |  |   | 3,681   |        
|                                                                                                   |                                            |                |          |         |      |   |         |         | 
|                                                                                                   | Total distributions to common shareholders |                | $        | 314,509 |      |   | $       | 299,326 |  |   | $       | 267,838 | 
|                                                                                                   |                                            |                |          |         |      |   |         |         | 




|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The Companys taxable income for 2005 is an estimate and
    will not be finally determined until the Company files its 2005
    tax return in September 2006. Therefore, the final taxable
    income and the taxable income earned in 2005 and carried forward
    for distribution in 2006 may be different than this estimate.                                                                                                                                                                            
|   
|(2) | Estimated taxable income for 2005 includes undistributed income
    of $163.8 million that is being carried over for
    distribution in 2006, which included approximately
    $72.4 million of ordinary income and $91.4 million of
    net long-term capital gains. Taxable income for 2004 included
    undistributed income of $26.0 million that was carried over
    for distribution in 2005, which included $5.6 million of
    ordinary income and $20.4 million of net long-term capital
    gains.











104



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##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


Note 10. Dividends and Distributions and Taxes,
continued




Note 11. Cash






|                  |            |      |        |        |      |   |        |        | 
|----------------- | ---------- | ---- | ------ | ------ | ---- | - | ------ | ------ | 
|                  |            | 2005 |        |        | 2004 |  
|($ in thousands)  |            |      |        |        |      |  
|Cash              |            | $    | 33,436 |        |      | $ | 57,576 |       
|Less escrows held |            |      | (2,073 | )      |      |   | (416   | )     
|                  |            |      |        |        |      |  
|                  | Total cash |      | $      | 31,363 |      |   | $      | 57,160 | 
|                  |            |      |        |        |      |  

Note 12. Supplemental Disclosure of Cash Flow
Information










| |   |                                                                                                                                                                                                                                                                                                                                                                   
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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 (see Note 3);                                                                                                                                                                                
|
| |  | 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.





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                 
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | notes or other securities received as consideration from the
    sale of investments of $56.6 million. The notes received
    for the year ended December 31, 2004, included a note
    received for $47.5 million in conjunction with the sale of
    the Companys investment in Hillman. During the second
    quarter of 2004, the Company sold a $5.0 million
    participation in its subordinated debt in

105



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##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




Note 12. Supplemental Disclosure of Cash Flow
Information, continued




| |   |                                                                                                                                                                                                                                             
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | Hillman to a third party, which reduced its investment, and no
    gain or loss resulted from the transaction;                                                                                                                              
|
| |  | an exchange of $93.7 million of subordinated debt in
    certain predecessor companies of Advantage Sales &
    Marketing, Inc. for new subordinated debt in Advantage;                                                                     
|
| |  | an exchange of existing debt securities with a cost basis of
    $46.4 million for new debt and common stock in Startec
    Global Communications Corporation;                                                                              
|
| |  | an exchange of existing debt securities with a cost basis of
    $13.1 million for new debt of $11.3 million with the
    remaining cost basis attributed to equity in Fairchild
    Industrial Products Company;                           
|
| |  | an exchange of existing loans with a cost basis of
    $11.1 million for a new loan and equity in Gordian Group,
    Inc.;                                                                                                                  
|
| |  | the repayment in kind of $12.7 million of existing debt in
    American Healthcare Services, Inc. with $10.0 million of
    debt in MedBridge Healthcare, LLC and $2.7 million of debt
    and equity from other companies;                 
|
| |  | an exchange of existing subordinated debt with a cost basis of
    $7.3 million for equity interests in an affiliate of Impact
    Innovations Group, LLC;                                                                                  
|
| |  | GAC acquired certain assets of Galaxy out of bankruptcy during
    the third quarter of 2004. The Company exchanged its
    $50.7 million outstanding debt in Galaxy for debt and
    equity in GAC to facilitate the asset acquisition; and
|
| |  | $25.5 million of CMBS bonds and LLC interests received
    from the securitization of commercial mortgage loans.                                                                                                                            





Note 13. Hedging Activities




106



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##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




Note 13. Hedging Activities, continued




|                                               |       |      |        |        |      |   |        |        | 
|---------------------------------------------- | ----- | ---- | ------ | ------ | ---- | - | ------ | ------ | 
|($ in thousands)                               |       |      |        |       
|Description of Issue                           |       | 2005 |        |        | 2004 |  
|                                               |       |      |        |        |      |  
|5-year Treasury securities, due December 2009  |       | $    |       |        |      | $ | 533    |       
|5-year Treasury securities, due April 2010     |       |      | 17,666 |        |      |   |       |       
|10-year Treasury securities, due February 2013 |       |      |       |        |      |   | 3,908  |       
|10-year Treasury securities, due February 2014 |       |      |       |        |      |   | 4,709  |       
|10-year Treasury securities, due August 2014   |       |      |       |        |      |   | 14,743 |       
|10-year Treasury securities, due November 2014 |       |      |       |        |      |   | 14,333 |       
|                                               |       |      |        |        |      |  
|                                               | Total |      | $      | 17,666 |      |   | $      | 38,226 | 
|                                               |       |      |        |        |      |  







107



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##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


Note 14. Financial Highlights


|                                                                                  |                              |                                                                 |           |      |      |   |           |      |       |   |           |      |       |  
|--------------------------------------------------------------------------------- | ---------------------------- | --------------------------------------------------------------- | --------- | ---- | ---- | - | --------- | ---- | ----- | - | --------- | ---- | ----- | -
|                                                                                  |                              | At and for the Years                                            |          
|                                                                                  |                              | Ended December 31,                                              |          
|                                                                                  |                              |                                                                 |          
|                                                                                  |                              | 2005                                                            |           |      | 2004 |   |           | 2003 |      
|                                                                                  |                              |                                                                 |           |      |      |   |           |      |      
|Per Common Share
    Data(1)                                                      |                              |                                                                 |           |      |      |   |           |      |       |   |           |     
|Net asset value, beginning of year                                                |                              | $                                                               | 14.87     |      |      | $ | 14.94     |      |       | $ | 14.22     |     
|                                                                                  |                              |                                                                 |           |      |      |   |           |      |      
|                                                                                  | Net investment
    income(1) |                                                                 |           | 1.00 |      |   |           | 1.52 |       |   |           | 1.65 |      
|                                                                                  | Net realized
    gains(1)(2) |                                                                 |           | 1.99 |      |   |           | 0.88 |       |   |           | 0.63 |      
|                                                                                  |                              |                                                                 |           |      |      |   |           |      |      
|                                                                                  |                              | Net investment income plus net realized
    gains(1)            |           |      | 2.99 |   |           |      | 2.40  |   |           |      | 2.28  |  
|                                                                                  |                              | Net change in unrealized appreciation or
    depreciation(1)(2) |           |      | 3.37 |   |           |      | (0.52 | ) |           |      | (0.66 | )
|                                                                                  |                              |                                                                 |           |      |      |   |           |      |      
|Net increase in net assets resulting from operations
    (1)                      |                              |                                                                 | 6.36      |      |      |   | 1.88      |      |       |   | 1.62      |     
|                                                                                  |                              |                                                                 |           |      |      |   |           |      |      
|Net decrease in net assets from shareholder distributions                         |                              |                                                                 | (2.33     | )    |      |   | (2.30     | )    |       |   | (2.28     | )   
|Net increase in net assets from capital share
    transactions(1)                 |                              |                                                                 | 0.27      |      |      |   | 0.35      |      |       |   | 1.38      |     
|                                                                                  |                              |                                                                 |           |      |      |   |           |      |      
|Net asset value, end of year                                                      |                              | $                                                               | 19.17     |      |      | $ | 14.87     |      |       | $ | 14.94     |     
|                                                                                  |                              |                                                                 |           |      |      |   |           |      |      
|Market value, end of year                                                         |                              | $                                                               | 29.37     |      |      | $ | 25.84     |      |       | $ | 27.88     |     
|Total
    return(3)                                                               |                              |                                                                 | 23.5      | %    |      |   | 1.1       | %    |       |   | 40.5      | %   
|Ratios and Supplemental Data($ and shares in thousands, except per share amounts) |                              |                                                                 |           |      |      |   |           |      |       |   |           |     
|Ending net assets                                                                 |                              | $                                                               | 2,620,546 |      |      | $ | 1,979,778 |      |       | $ | 1,914,577 |     
|Common shares outstanding at end of year                                          |                              |                                                                 | 136,697   |      |      |   | 133,099   |      |       |   | 128,118   |     
|Diluted weighted average common shares outstanding                                |                              |                                                                 | 137,274   |      |      |   | 132,458   |      |       |   | 118,351   |     
|Employee and administrative expenses/average net assets                           |                              |                                                                 | 6.58      | %    |      |   | 4.65      | %    |       |   | 3.50      | %   
|Total operating expenses/average net assets                                       |                              |                                                                 | 9.99      | %    |      |   | 8.53      | %    |       |   | 8.06      | %   
|Net investment income/average net assets                                          |                              |                                                                 | 6.08      | %    |      |   | 10.45     | %    |       |   | 11.51     | %   
|Net increase in net assets resulting from operations/ average
    net assets      |                              |                                                                 | 38.68     | %    |      |   | 12.97     | %    |       |   | 11.33     | %   
|Portfolio turnover rate                                                           |                              |                                                                 | 47.72     | %    |      |   | 32.97     | %    |       |   | 31.12     | %   
|Average debt outstanding                                                          |                              | $                                                               | 1,087,118 |      |      | $ | 985,616   |      |       | $ | 943,507   |     
|Average debt per
    share(1)                                                     |                              | $                                                               | 7.92      |      |      | $ | 7.44      |      |       | $ | 7.97      |     




|    |                                                                                                                                
|--- | -------------------------------------------------------------------------------------------------------------------------------
|(1) | Based on diluted weighted average number of common shares
    outstanding for the year.                                        
|   
|(2) | Net realized gains and net change in unrealized appreciation or
    depreciation can fluctuate significantly from year to year.
|   
|(3) | Total return assumes the reinvestment of all dividends paid for
    the periods presented.                                     

Note 15. Selected Quarterly Data (Unaudited)


|                                                     |  |        |         |  |        |   |         |        |  |   |         |  |  |   |         | 
|---------------------------------------------------- |  | ------ | ------- |  | ------ | - | ------- | ------ |  | - | ------- |  |  | - | ------- | 
|                                                     |  | 2005   |        
|                                                     |  |        |        
|($ in thousands, except per share amounts)           |  | Qtr. 1 |         |  | Qtr. 2 |   |         | Qtr. 3 |  |   | Qtr. 4  | 
|                                                     |  |        |         |  |        |   |         |        |  |   |         | 
|Total interest and related portfolio income          |  | $      | 94,919  |  |        | $ | 86,207  |        |  | $ | 94,857  |  |  | $ | 98,169  | 
|Net investment income                                |  | $      | 38,752  |  |        | $ | 15,267  |        |  | $ | 46,134  |  |  | $ | 37,073  | 
|Net increase in net assets resulting from operations |  | $      | 119,621 |  |        | $ | 311,885 |        |  | $ | 113,168 |  |  | $ | 328,140 | 
|Basic earnings per common share                      |  | $      | 0.90    |  |        | $ | 2.33    |        |  | $ | 0.84    |  |  | $ | 2.40    | 
|Diluted earnings per common share                    |  | $      | 0.88    |  |        | $ | 2.29    |        |  | $ | 0.82    |  |  | $ | 2.36    | 

108



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##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




Note 15. Selected Quarterly Data (Unaudited),
continued


|                                                     |  |        |        |  |        |   |        |        |  |   |        |  |  |   |         | 
|---------------------------------------------------- |  | ------ | ------ |  | ------ | - | ------ | ------ |  | - | ------ |  |  | - | ------- | 
|                                                     |  | 2004   |       
|                                                     |  |        |       
|                                                     |  | Qtr. 1 |        |  | Qtr. 2 |   |        | Qtr. 3 |  |   | Qtr. 4 | 
|                                                     |  |        |        |  |        |   |        |        |  |   |        | 
|Total interest and related portfolio income          |  | $      | 81,765 |  |        | $ | 87,500 |        |  | $ | 96,863 |  |  | $ | 100,962 | 
|Net investment income                                |  | $      | 44,545 |  |        | $ | 48,990 |        |  | $ | 52,745 |  |  | $ | 54,678  | 
|Net increase in net assets resulting from operations |  | $      | 20,308 |  |        | $ | 95,342 |        |  | $ | 85,999 |  |  | $ | 47,837  | 
|Basic earnings per common share                      |  | $      | 0.16   |  |        | $ | 0.74   |        |  | $ | 0.67   |  |  | $ | 0.36    | 
|Diluted earnings per common share                    |  | $      | 0.15   |  |        | $ | 0.73   |        |  | $ | 0.66   |  |  | $ | 0.35    | 

Note 16. Litigation








109



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##### 



Item 9. Changes in and Disagreements with
Accountants on Accounting and Financial Disclosure.




Item 9A. Controls and Procedures.


Evaluation of Disclosure Controls and Procedures. 10-K, 13a-15(e)


Managements Annual Report on Internal
Control over Financial Reporting. 13a-15(f)


Attestation Report of the Registered Public
Accounting Firm.


Changes in Internal Control over Financial
Reporting. 13a-15(f)


Item 9B. Other Information.




PART III


Item 10. Directors and Executive Officers of the
Registrant.






110



---



##### 







Item 11. Executive Compensation.




Item 12. Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters.




Item 13. Certain Relationships and Related
Transactions.




Item 14. Principal Accountant Fees and Services.




PART IV


Item 15. Exhibits and Financial Statement Schedules






| |                                                                           
| | --------------------------------------------------------------------------
| | 1. The following financial statements are filed herewith under
    Item 8:



| |                                                                                                            
| | -----------------------------------------------------------------------------------------------------------
| | Managements Report on Internal Control Over Financial
    Reporting                                       
|
| | Reports of the Independent Registered Public Accounting Firm                                               
|
| | Consolidated Balance Sheet  December 31, 2005 and 2004                                                    
|
| | Consolidated Statement of Operations  For the Years
    Ended December 31, 2005, 2004, and 2003           
|
| | Consolidated Statement of Changes in Net Assets  For
    the Years Ended December 31, 2005, 2004, and 2003

111



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##### 





| |                                                                                                 
| | ------------------------------------------------------------------------------------------------
| | Consolidated Statement of Cash Flows  For the Years
    Ended December 31, 2005, 2004, and 2003
|
| | Consolidated Statement of Investments  December 31,
    2005                                   
|
| | Notes to Consolidated Financial Statements                                                      



| |                                                                       
| | ----------------------------------------------------------------------
| | 2. The following financial statement schedules are filed
    herewith:

Schedule 12-14 of Investments in and Advances to
Affiliates.




| |                                                                                                                                                                                                                                     
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In addition, there may be additional information not provided
    in a schedule because (i) such information is not required
    or (ii) the information required has been presented in the
    aforementioned financial statements.



| |                                                                                                  
| | -------------------------------------------------------------------------------------------------
| | 3. The following exhibits are filed herewith or incorporated by
    reference as set forth below:

|        |    |       |             |                                                                                                                                                                                                                                                                                                                                                             
|------- | -- | ----- | ----------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |       |            
|Number  |    |       | Description
|        |    |       |            
|        | 3  | .1    |             | Restated Articles of Incorporation. (Incorporated by
    reference to Exhibit a.1 filed with Allied Capitals
    Post-Effective Amendment No. 2 to registration statement on
    Form N-2 (File No. 333-67336) filed on March 22,
    2002).                                                                                                               
|        | 3  | .2    |             | Amended and Restated Bylaws. (Incorporated by reference to
    Exhibit 3.1. filed with Allied Capitals Form 8-K
    on January 24, 2006).                                                                                                                                                                                                                  
|        | 4  | .1    |             | Specimen Certificate of Allied Capitals Common Stock, par
    value $0.0001 per share. (Incorporated by reference to
    Exhibit d. filed with Allied Capitals registration
    statement on Form N-2 (File No. 333-51899) filed on
    May 6, 1998).                                                                                                     
|        | 4  | .2    |             | Form of debenture between certain subsidiaries of Allied Capital
    and the U.S. Small Business Administration. (Incorporated by
    reference to Exhibit 4.2 filed by a predecessor entity to
    Allied Capital on Form 10-K for the year ended
    December 31, 1996).                                                                                  
|        | 10 | .1    |             | Dividend Reinvestment Plan, as amended. (Incorporated by
    reference to Exhibit e. filed with Allied Capitals
    registration statement on Form N-2 (File
    No. 333-87862) filed on May 8, 2002).                                                                                                                                                     
|        | 10 | .2    |             | Credit Agreement, dated September 30, 2005.
    (Incorporated by reference to Exhibit 10.1 filed with
    Allied Capitals Form 8-K on October 3, 2005).                                                                                                                                                                                                    
|        | 10 | .2(a) |             | First Amendment to Credit Agreement, dated November 4,
    2005. (Incorporated by reference to Exhibit 10.2(a)
    filed with Allied Capitals Form 10-Q for the period
    ended September 30, 2005).                                                                                                                                                      
|        | 10 | .3    |             | Note Agreement, dated October 13, 2005. (Incorporated by
    reference to Exhibit 10.1 filed with Allied Capitals
    Form 8-K on October 14, 2005).                                                                                                                                                                                                       
|        | 10 | .5    |             | Note Agreement, dated as of May 1, 1999. (Incorporated
    by reference to Exhibit 10.5 filed with Allied
    Capitals Form 10-Q for the period ended June 30,
    1999).                                                                                                                                                                                  
|        | 10 | .12   |             | Note Agreement, dated as of October 15, 2000.
    (Incorporated by reference to Exhibit 10.4b filed with
    Allied Capitals Form 10-Q for the period ended
    September 30, 2000).                                                                                                                                                                       
|        | 10 | .13   |             | Note Agreement, dated as of October 15, 2001.
    (Incorporated by reference to Exhibit f.10 filed with
    Allied Capitals Post-Effective Amendment No. 1 to
    registration statement on Form N-2 (File
    No. 333-67336) filed on November 14, 2001).                                                                                                 
|        | 10 | .15   |             | Control Investor Guaranty Agreement, dated as of March 28,
    2001, between Allied Capital and Fleet National Bank and
    Business Loan Express, Inc. (Incorporated by reference to
    Exhibit f.14 filed with Allied Capitals Post-Effective
    Amendment No. 3 to registration statement on Form N-2
    (File No. 333-43534) filed on May 15, 2001).

112



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##### 



|        |    |         |             |                                                                                                                                                                                                                                                                                                                            
|------- | -- | ------- | ----------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |         |            
|Number  |    |         | Description
|        |    |         |            
|        | 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.                                                                                                                                                                                                  
|        | 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.                                                                                                                                                                                                     
|        | 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 | .21     |             | Employment Agreement, dated January 1, 2004, between
    Allied Capital and William L. Walton. (Incorporated by
    reference to Exhibit 10.21 filed with Allied Capitals
    Form 10-K for the year ended December 31, 2003).                                                                                            
|        | 10 | .22     |             | Employment Agreement, dated January 1, 2004, between Allied
    Capital and Joan M. Sweeney. (Incorporated by reference
    to Exhibit 10.22 filed with Allied Capitals
    Form 10-K for the year ended December 31, 2003).                                                                                              
|        | 10 | .23     |             | Recission of Retention Agreement, dated October 27, 2005,
    between Allied Capital and John M. Scheurer.
    (Incorporated by reference to Exhibit 10.1 filed with
    Allied Capitals current report on Form 8-K filed on
    November 1, 2005).                                                                       
|        | 10 | .25     |             | Form of Custody Agreement with Riggs Bank N.A., which was
    assumed by PNC Bank through merger. (Incorporated by
    reference to Exhibit j.1 filed with Allied Capitals
    registration statement on Form N-2 (File
    No. 333-51899) filed on May 6, 1998).                                                         
|        | 10 | .26*    |             | Custodian Agreement with Chevy Chase Trust.                                                                                                                                                                                                                                                                                
|        | 10 | .27*    |             | Custodian Agreement with Bank of America.                                                                                                                                                                                                                                                                                  
|        | 10 | .28*    |             | Code of Ethics.                                                                                                                                                                                                                                                                                                            
|        | 10 | .30     |             | Agreement and Plan of Merger by and among Allied Capital, Allied
    Capital Lock Acquisition Corporation, and Sunsource, Inc dated
    June 18, 2001. (Incorporated by reference to
    Exhibit k.1 filed with Allied Capitals registration
    statement on Form N-2 (File No. 333-67336) filed on
    August 10, 2001).
|        | 10 | .31     |             | Note Agreement, dated as of May 14, 2003. (Incorporated
    by reference to Exhibit 10.31 filed with Allied
    Capitals Form 10-Q for the 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).                                                                                                  

113



---



##### 



|        |    |     |             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|------- | -- | --- | ----------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |     |            
|Number  |    |     | Description
|        |    |     |            
|        | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|        | 21 |     |             | Subsidiaries of Allied Capital and jurisdiction of
    incorporation/organization:     A.C.
    Corporation                                                                 Delaware     Allied
    Investments
    L.P.                                                       Maryland     Allied
    Investments,
    LLC                                                      Delaware     Allied
    Capital REIT,
    Inc.                                                     Maryland     Allied
    Capital Holdings
    LLC                                               Delaware     Allied
    Capital Beteiligungsberatung GmbH
    (inactive)        Germany
|        | 23 | *   |             | Report and Consent of KPMG LLP, independent registered public
    accounting firm.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|        | 31 | .1* |             | Certification of the Chief Executive Officer pursuant to Rule
    13a-14 of the Securities Exchange Act of 1934.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|        | 31 | .2* |             | Certification of the Chief Financial Officer pursuant to Rule
    13a-14 of the Securities Exchange Act of 1934.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|        | 32 | .1* |             | Certification of the Chief Executive Officer pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C.
    Section 1350.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|        | 32 | .2* |             | Certification of the Chief Financial Officer pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C.
    Section 1350.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   






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

114



---



##### 



SIGNATURES






| |                          
| | -------------------------
| | /s/ William L. Walton    
| |                          
| | William L. Walton        
| | Chairman of the Board and
| | Chief Executive Officer  



|                                         |  |                                                                        |  |               
|---------------------------------------- |  | ---------------------------------------------------------------------- |  | --------------
|                                         |  | Title                                                                  |  |               
|Signature                                |  | (Capacity)                                                             |  | Date          
|                                         |  |                                                                        |  |               
|/s/ William L. WaltonWilliam L. Walton   |  | Chairman and Chief Executive Officer (Principal Executive
    Officer) |  | March 10, 2006
|                                        
|/s/ Ann Torre BatesAnn Torre Bates       |  | Director                                                               |  | March 10, 2006
|                                        
|/s/ Brooks H. BrowneBrooks H. Browne     |  | Director                                                               |  | March 10, 2006
|                                        
|/s/ John D. FirestoneJohn D. Firestone   |  | Director                                                               |  | March 10, 2006
|                                        
|/s/ Anthony T. GarciaAnthony T. Garcia   |  | Director                                                               |  | March 10, 2006
|                                        
|/s/ Lawrence I. HebertLawrence I. Hebert |  | Director                                                               |  | March 10, 2006
|                                        
|/s/ John I. LeahyJohn I. Leahy           |  | Director                                                               |  | March 10, 2006
|                                        
|/s/ Robert E. LongRobert E. Long         |  | Director                                                               |  | March 10, 2006
|                                        
|/s/ Alex J. PollockAlex J. Pollock       |  | Director                                                               |  | March 10, 2006
|                                        
|/s/ Marc F. RacicotMarc F. Racicot       |  | Director                                                               |  | March 10, 2006
|                                        
|/s/ Guy T. Steuart IIGuy T. Steuart II   |  | Director                                                               |  | March 10, 2006

115



---



##### 



|                                           |  |                                                                          |  |               
|------------------------------------------ |  | ------------------------------------------------------------------------ |  | --------------
|                                           |  | Title                                                                    |  |               
|Signature                                  |  | (Capacity)                                                               |  | Date          
|                                           |  |                                                                          |  |               
|/s/ Joan M. SweeneyJoan M. Sweeney         |  | Director                                                                 |  | March 10, 2006
|                                          
|/s/ Laura W. van RoijenLaura W. van Roijen |  | Director                                                                 |  | March 10, 2006
|                                          
|/s/ Penni F. RollPenni F. Roll             |  | Chief Financial Officer (Principal Financial and Accounting
    Officer) |  | March 10, 2006

116



---



##### 



EXHIBIT INDEX


|        |    |        |             |                                                                                                                                        
|------- | -- | ------ | ----------- | ---------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |        |            
|Number  |    |        | Description
|        |    |        |            
|        | 10 | .17(a) |             | Amendment to The 2005 Allied Capital Corporation Non-Qualified
    Deferred Compensation Plan II, dated January 20, 2006.              
|        | 10 | .18(a) |             | Amendment to The 2005 Allied Capital Corporation Non-Qualified
    Deferred Compensation Plan, dated January 20, 2006.                 
|        | 10 | .26    |             | Custodian Agreement with Chevy Chase Trust.                                                                                            
|        | 10 | .27    |             | Custodian Agreement with Bank of America.                                                                                              
|        | 10 | .28    |             | Code of Ethics.                                                                                                                        
|        | 23 |        |             | Report and Consent of KPMG LLP, independent registered public
    accounting firm.                                                     
|        | 31 | .1     |             | Certification of the Chief Executive Officer pursuant to Rule
    13a-14 of the Securities Exchange Act of 1934.                       
|        | 31 | .2     |             | Certification of the Chief Financial Officer pursuant to Rule
    13a-14 of the Securities Exchange Act of 1934.                       
|        | 32 | .1     |             | Certification of the Chief Executive Officer pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C.
    Section 1350.
|        | 32 | .2     |             | Certification of the Chief Financial Officer pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C.
    Section 1350.

117



---



##### 



Schedule 12-14
 ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
 SCHEDULE OF INVESTMENTS IN AND ADVANCES TO AFFILIATES
 Amount of InterestPRIVATE FINANCE
        
        
        
        or
          DividendsPortfolio Company
        
        
        
        Credited
        
        
        
        
        
        
        December 31, 2004
        
        
        Gross
        
        
        Gross
        
        
        December 31, 2005(in thousands)
        
        Investment (1)
        
        to Income(7)
        
        
        Other(2)
        
        
        Value
        
        
        Additions (3)
        
        
        Reductions (4)
        
        
        ValueCompanies More Than 25% OwnedAcme
            Paging, L.P.
        
        Senior Loan(5)
        
        
        
        
        
        
        
        
        
        $
        
        
        
        $
        
        
        
        $
        
        
        
        $
        (Telecommunications)
        
        Subordinated Debt(5)
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        Equity Interests
        
        
        
        
        
        
        
        
        
        
        1,230
        
        
        
        
        
        
        
        (1,230
        )
        
        
        Common Stock
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        Advantage
            Sales & Marketing, Inc.
        
        Subordinated Debt
        $
        
        7,205
        
        
        
        
        
        
        
        59,729
        
        
        
        58
        
        
        
        
        
        
        
        59,787(Business
            Services)
        
        Subordinated Debt
        
        
        23,647
        
        
        
        
        
        
        
        125,498
        
        
        
        3,361
        
        
        
        (4,859
        )
        
        
        124,000Common Stock
        
        
        
        
        
        
        
        
        
        
        97,724
        
        
        
        378,854
        
        
        
        
        
        
        
        476,578Alaris
            Consulting, LLC
        
        Senior Loan(5)
        
        
        (64
        )
        
        
        
        
        
        
        4,663
        
        
        
        3,530
        
        
        
        (8,193
        )
        
        
        (Business
            Services)
        
        Equity Interests
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        140
        
        
        
        (140
        )
        
        
        American
            Healthcare Services, Inc. and Affiliates
        
        Senior Loan(5)
        
        
        (1
        )
        $
        
1
        
        
        

        4,225
        
        
        
        123
        
        
        
        (251
        )
        
        
        4,097(Healthcare
            Services)Avborne,
            Inc.
        
        Subordinated Debt
        
        
        (78
        )
        
        
        
        
        
        
        1,092
        
        
        
        
        
        
        
        (1,092
        )
        
        
        (Business
            Services)
        
        Preferred Stock
        
        
        
        
        
        
        
        
        
        
        7,320
        
        
        
        7,052
        
        
        
        (13,480
        )
        
        
        892Common Stock
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        Avborne
            Heavy Maintenance, Inc.
        
        Preferred Stock
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        2,401
        
        
        
        (2,401
        )
        
        
        (Business
            Services)
        
        Common Stock
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        Business Loan Express,
            LLC
        
        Subordinated Debt
        
        
        15
        
        
        
        
        
        
        
        
        
        
        
        10,000
        
        
        
        
        
        
        
        10,000(Financial Services)
        
        Subordinated Debt
        
        
        1
        
        
        
        
        
        
        
        44,615
        
        
        
        160
        
        
        
        (44,775
        )
        
        
        Class A Equity Interests
        
        
        14,282
        
        
        
        
        
        
        
        53,862
        
        
        
        6,831
        
        
        
        
        
        
        
        60,693Class B Equity Interests *
        
        
        13,999
        
        
        
        
        
        
        
        98,741
        
        
        
        48,169
        
        
        
        
        
        
        
        146,910Class C Equity Interests
        
        
        
        
        
        
        
        
        
        
        137,988
        
        
        
        1,533
        
        
        
        
        
        
        
        139,521Callidus Capital
            Corporation
        
        Senior Loan
        
        
        1,996
        
        
        
        
        
        
        
        42,213
        
        
        
        138,300
        
        
        
        (180,513
        )
        
        
        (Financial Services)
        
        Senior Loan
        
        
        113
        
        
        
        
        
        
        
        66
        
        
        
        3,201
        
        
        
        (2,667
        )
        
        
        600Subordinated Debt
        
        
        819
        
        
        
        
        
        
        
        4,051
        
        
        
        781
        
        
        
        
        
        
        
        4,832Common Stock
        
        
        
        
        
        
        
        
        
        
        3,600
        
        
        
        4,368
        
        
        
        
        
        
        
        7,968Diversified Group
            Administrators, Inc.
        
        Preferred Stock
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        728
        
        
        
        
        
        
        
        728(Business
            Services)
        
        Preferred Stock
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        841
        
        
        
        
        
        
        
        841Common Stock
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        502
        
        
        
        
        
        
        
        502Fairchild Industrial
            Products Company
        
        Senior Loan
        
        
        316
        
        
        
        
        
        
        
        7,038
        
        
        
        
        
        
        
        (7,038
        )
        
        
        (Industrial Products)
        
        Subordinated Debt
        
        
        255
        
        
        
        
        
        
        
        3,833
        
        
        
        
        
        
        
        (3,833
        )
        
        
        Common Stock
        
        
        
        
        
        
        
        
        
        
        2,123
        
        
        
        
        
        
        
        (2,123
        )
        
        
        Financial Pacific
            Company
        
        Subordinated Debt
        
        
        12,168
        
        
        
        
        
        
        
        68,473
        
        
        
        1,431
        
        
        
        
        
        
        
        69,904(Financial
            Services)
        
        Preferred Stock
        
        
        
        
        
        
        
        
        
        
        10,448
        
        
        
        2,668
        
        
        
        
        
        
        
        13,116Common Stock
        
        
        
        
        
        
        
        
        
        
        14,819
        
        
        
        29,361
        
        
        
        
        
        
        
        44,180ForeSite
            Towers, LLC
        
        Equity Interests *
        
        
        2,450
        
        
        
        
        
        
        
        21,511
        
        
        
        3,574
        
        
        
        (15,335
        )
        
        
        9,750(Tower Leasing)Global Communications, LLC
        
        Senior Loan (5)
        
        
        361
        
        
        
        
        
        
        
        13,990
        
        
        
        2,320
        
        
        
        (353
        )
        
        
        15,957(Business Services)
        
        Subordinated Debt (5)
        
        
        472
        
        
        
        
        
        
        
        10,472
        
        
        
        726
        
        
        
        
        
        
        
        11,198Preferred Equity Interest
        
        
        
        
        
        
        
        
        
        
        14,609
        
        
        
        
        
        
        
        (10,306
        )
        
        
        4,303Options
        
        
        
        
        
        
        
        
        
        
        2,161
        
        
        
        
        
        
        
        (2,161
        )
        
        
        Gordian
            Group, Inc.
        
        Senior Loan(5)
        
        
        (3
        )
        
        
        
        
        
        
        7,381
        
        
        
        2,000
        
        
        
        (5,220
        )
        
        
        4,161(Business
            Services)
        
        Common Stock
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        722
        
        
        
        (722
        )
        
        
        HealthASPex,
            Inc.
        
        Preferred Stock
        
        
        
        
        
        
        
        
        
        
        700
        
        
        
        
        
        
        
        (700
        )
        
        
        (Business
            Services)
        
        Preferred Stock
        
        
        
        
        
        
        
        
        
        
        1,753
        
        
        
        
        
        
        
        (1,753
        )
        
        
        Common Stock
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        Healthy Pet Corp.
        
        Senior Loan
        
        
        96
        
        
        
        
        
        
        
        
        
        
        
        4,100
        
        
        
        (14
        )
        
        
        4,086(Consumer Services)
        
        Subordinated Debt
        
        
        1,964
        
        
        
        
        
        
        
        
        
        
        
        38,535
        
        
        
        
        
        
        
        38,535Common Stock
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        25,766
        
        
        
        
        
        
        
        25,766HMT, Inc.
        
        Subordinated Debt
        
        
        531
        
        
        
        
        
        
        
        9,314
        
        
        
        686
        
        
        
        (10,000
        )
        
        
        (Energy
            Services)
        
        Preferred Stock
        
        
        
        
        
        
        
        
        
        
        2,537
        
        
        
        149
        
        
        
        (49
        )
        
        
        2,637Common Stock
        
        
        
        
        
        
        
        
        
        
        3,610
        
        
        
        1,733
        
        
        
        
        
        
        
        5,343Warrants
        
        
        
        
        
        
        
        
        
        
        1,390
        
        
        
        667
        
        
        
        
        
        
        
        2,057




---



##### 



Amount of InterestPRIVATE FINANCE
        
        
        
        or
          DividendsPortfolio Company
        
        
        
        Credited
        
        
        
        
        
        
        December 31, 2004
        
        
        Gross
        
        
        Gross
        
        
        December 31, 2005(in thousands)
        
        Investment (1)
        
        to Income(7)
        
        
        Other(2)
        
        
        Value
        
        
        Additions (3)
        
        
        Reductions (4)
        
        
        ValueHousecall
            Medical Resources, Inc.
        
        Subordinated Debt
        
        $
        1,463
        
        
        
        
        
        
        $
        15,610
        
        
        $
        326
        
        
        $
        (15,936
        )
        
        $
        (Healthcare
            Services)
        
        Common Stock
        
        
        
        
        
        
        
        
        
        
        31,898
        
        
        
        
        
        
        
        (31,898
        )
        
        
        Impact
            Innovations Group, LLC
        
        Equity Interests in Affiliate
        
        
        
        
        
        
        
        
        
        
        772
        
        
        
        
        
        
        
        (30
        )
        
        
        742(Business Services)Insight Pharmaceuticals
            Corporation
        
        Senior Loan
        
        
        3,917
        
        
        
        
        
        
        
        66,115
        
        
        
        355
        
        
        
        (66,470
        )
        
        
        (Consumer Products)
        
        Subordinated Debt
        
        
        7,156
        
        
        
        
        
        
        
        57,213
        
        
        
        58,876
        
        
        
        (57,791
        )
        
        
        58,298Preferred Stock
        
        
        
        
        
        
        
        
        
        
        25,000
        
        
        
        1,791
        
        
        
        
        
        
        
        26,791Common Stock
        
        
        
        
        
        
        
        
        
        
        6,325
        
        
        
        
        
        
        
        (6,089
        )
        
        
        236Jakel, Inc.
        
        Subordinated Debt (5)
        
        
        
        
        
        
        
        
        
        
        13,742
        
        
        
        
        
        
        
        (13,742
        )
        
        
        (Industrial Products)
        
        Preferred Stock
        
        
        
        
        
        
        
        
        
        
        836
        
        
        
        
        
        
        
        (836
        )
        
        
        Common Stock
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        Legacy Partners Group,
            LLC
        
        Senior Loan (5)
        
        
        
        
        
        
        
        
        
        
        6,647
        
        
        
        1,000
        
        
        
        (2,618
        )
        
        
        5,029(Financial Services)
        
        Subordinated Debt (5)
        
        
        
        
        
        
        
        
        
        
        1,896
        
        
        
        
        
        
        
        (1,896
        )
        
        
        Equity Interests
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        1,500
        
        
        
        (1,500
        )
        
        
        Litterer Beteiligungs-GmbH
        
        Subordinated Debt
        
        
        42
        
        
        
        
        
        
        
        715
        
        
        
        
        
        
        
        (94
        )
        
        
        621(Business Services)
        
        Equity Interest
        
        
        
        
        
        
        
        
        
        
        2,596
        
        
        
        54
        
        
        
        (424
        )
        
        
        2,226Maui Body Works,
            Inc.
        
        Common Stock
        
        
        
        
        
        
        
        
        
        
        1,080
        
        
        
        155
        
        
        
        (1,235
        )
        
        
        (Healthcare Services)Mercury Air Centers,
            Inc.
        
        Senior Loan
        
        
        2,383
        
        
        
        
        
        
        
        20,000
        
        
        
        11,720
        
        
        
        
        
        
        
        31,720(Business Services)
        
        Subordinated Debt
        
        
        6,374
        
        
        
        
        
        
        
        34,613
        
        
        
        12,011
        
        
        
        (105
        )
        
        
        46,519Common Stock
        
        
        
        
        
        
        
        
        
        
        31,214
        
        
        
        57,684
        
        
        
        
        
        
        
        88,898MVL Group, Inc.
        
        Senior Loan
        
        
        2,954
        
        
        
        
        
        
        
        15,080
        
        
        
        13,892
        
        
        
        (1,754
        )
        
        
        27,218(Business Services)
        
        Subordinated Debt
        
        
        4,050
        
        
        
        
        
        
        
        18,102
        
        
        
        14,315
        
        
        
        
        
        
        
        32,417Common Stock
        
        
        
        
        
        
        
        
        
        
        9,800
        
        
        
        
        
        
        
        (6,589
        )
        
        
        3,211Pennsylvania Avenue
            Investors, L.P.
        
        Equity Interests
        
        
        
        
        
        
        
        
        
        
        792
        
        
        
        1,549
        
        
        
        (477
        )
        
        
        1,864(Private Equity Fund)Powell Plant Farms,
            Inc.
        
        Senior Loan
        
        
        4,442
        
        
        
        
        
        
        
        23,192
        
        
        
        8,850
        
        
        
        (8,250
        )
        
        
        23,792(Consumer Products)
        
        Subordinated Debt (5)
        
        
        
        
        
        
        
        
        
        
        10,588
        
        
        
        
        
        
        
        (3,224
        )
        
        
        7,364Preferred Stock
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        Warrants
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        Redox Brands, Inc.
        
        Subordinated Debt
        
        
        168
        
        
        
        
        
        
        
        3,325
        
        
        
        60
        
        
        
        (3,385
        )
        
        
        (Consumer Products)
        
        Subordinated Debt
        
        
        528
        
        
        
        
        
        
        
        10,672
        
        
        
        570
        
        
        
        (11,242
        )
        
        
        Preferred Stock
        
        
        
        
        
        
        
        
        
        
        11,664
        
        
        
        433
        
        
        
        
        
        
        
        12,097Warrants
        
        
        
        
        
        
        
        
        
        
        584
        
        
        
        
        
        
        
        (84
        )
        
        
        500Service Champ, Inc.
        
        Subordinated Debt
        
        
        2,956
        
        
        
        
        
        
        
        
        
        
        
        26,906
        
        
        
        
        
        
        
        26,906(Business Services)
        
        Common Stock
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        13,662
        
        
        
        (343
        )
        
        
        13,319Staffing Partners
            Holding Company, Inc.
        
        Subordinated Debt (5)
        
        
        
        
        
        $
        741
        
        
        
        7,084
        
        
        
        
        
        
        
        (741
        )
        
        
        6,343(Business Services)
        
        Preferred Stock
        
        
        
        
        
        
        
        
        
        
        1,961
        
        
        
        
        
        
        
        (149
        )
        
        
        1,812Common Stock
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        Warrants
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        Startec Global Communications
          Corporation
        
        Senior Loan
        
        
        2,080
        
        
        
        
        
        
        
        16,521
        
        
        
        8,800
        
        
        
        (3,636
        )
        
        
        21,685(Telecommunications)
        
        Common Stock
        
        
        
        
        
        
        
        
        
        
        7,800
        
        
        
        
        
        
        
        (7,800
                       )
        
        
        STS Operating, Inc.
        
        Subordinated Debt
        
        
        1,365
        
        
        
        
        
        
        
        6,276
        
        
        
        8,662
        
        
        
        (8,345
        )
        
        
        6,593(Industrial Products)
        
        Common Stock
        
        
        
        
        
        
        
        
        
        
        9,632
        
        
        
        55,331
        
        
        
        
        
        
        
        64,963Options
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        560
        
        
        
        
        
        
        
        560Triview Investments, Inc.
        
        Senior Loan
        
        
        20
        
        
        
        
        
        
        
        
        
        
        
        7,449
        
        
        
        
        
        
        
        7,449(Broadcasting &
            Cable / Consumer Products)
        
        Subordinated Debt
        
        
        2,008
        
        
        
        
        
        
        
        
        
        
        
        30,845
        
        
        
        
        
        
        
        30,845Subordinated Debt (5)
        
        
        
        
        
        
        
        
        
        
        7,517
        
        
        
        23,003
        
        
        
        (11,000
        )
        
        
        19,520Common Stock
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        50,766
        
        
        
        (21,595
        )
        
        
        29,171Total companies
            more than 25% owned
        
        
        
        $
        122,450
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        $
        1,887,651Companies 5% to
            25% OwnedAir Evac Lifeteam
        
        Subordinated Debt
        
        $
        5,647
        
        
        
        
        
        
        $
        39,964
        
        
        $
        2,303
        
        
        $
        
        
        
        $
        42,267(Healthcare Services)
        
        Equity Interests
        
        
        
        
        
        
        
        
        
        
        1,092
        
        
        
        2,933
        
        
        
        
        
        
        
        4,025Aspen Pet Products,
            Inc.
        
        Subordinated Debt
        
        
        3,789
        
        
        
        
        
        
        
        18,784
        
        
        
        1,175
        
        
        
        
        
        
        
        19,959(Consumer Products)
        
        Preferred Stock
        
        
        
        
        
        
        
        
        
        
        897
        
        
        
        741
        
        
        
        
        
        
        
        1,638Common Stock
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        17
        
        
        
        
        
        
        
        17Warrants
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        Becker Underwood,
            Inc.
        
        Subordinated Debt
        
        
        3,468
        
        
        
        
        
        
        
        22,939
        
        
        
        604
        
        
        
        
        
        
        
        23,543(Industrial Products)
        
        Common Stock
        
        
        
        
        
        
        
        
        
        
        5,000
        
        
        
        812
        
        
        
        (3,612
        )
        
        
        2,200The Debt Exchange
            Inc.
        
        Preferred Stock
        
        
        
        
        
        
        
        
        
        
        1,457
        
        
        
        1,762
        
        
        
        
        
        
        
        3,219(Business Services)MasterPlan, Inc.
        
        Subordinated Debt
        
        
        48
        
        
        
        
        
        
        
        1,204
        
        
        
        
        
        
        
        (1,204
        )
        
        
        (Business Services)
        
        Common Stock
        
        
        
        
        
        
        
        
        
        
        3,300
        
        
        
        
        
        
        
        (3,300
        )
        
        
        MedBridge Healthcare,
            LLC
        
        Senior Loan
        
        
        200
        
        
        
        
        
        
        
        7,000
        
        
        
        93
        
        
        
        
        
        
        
        7,093(Healthcare Services)
        
        Subordinated Debt(5)
        
        
        225
        
        
        
        
        
        
        
        4,311
        
        
        
        499
        
        
        
        (4,276
        )
        
        
        534Convertible Subordinated
Debt (5)
        
        
        (1
        )
        
        
        30
        
        
        
        678
        
        
        
        
        
        
        
        (678
        )
        
        
        Equity Interests
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        800
        
        
        
        (800
        )
        
        
        MortgageRamp, Inc.
        
        Common Stock
        
        
        
        
        
        
        
        
        
        
        903
        
        
        
        
        
        
        
        (903
        )
        
        
        (Business Services)
 See related footnotes at the
end of this schedule.




---



##### 



Amount of InterestPRIVATE FINANCE
        
        
        
        or
          DividendsPortfolio Company
        
        
        
        Credited
        
        
        
        
        
        
        December 31, 2004
        
        
        Gross
        
        
        Gross
        
        
        
        December 31, 2005(in thousands)
        
        Investment (1)
        
        to Income (7)
        
        
        Other (2)
        
        
        Value
        
        
        Additions (3)
        
        
        Reductions (4)
        
        
        
        ValueNexcel Synthetics,
            LLC
        
        Subordinated Debt
        
        $
        1,554
        
        
        
        
        
        
        $
        10,211
        
        
        $
        377
        
        
        $
        
        
        
        
        $
        10,588(Consumer Products)
        
        Equity Interests
        
        
        
        
        
        
        
        
        
        
        687
        
        
        
        693
        
        
        
        (13
        )
        
        
        
        1,367Packaging Advantage
            Corporation
        
        Subordinated Debt
        
        
        808
        
        
        
        
        
        
        
        14,731
        
        
        
        2,480
        
        
        
        (17,211
        )
        
        
        
        (Business Services)
        
        Common Stock
        
        
        
        
        
        
        
        
        
        
        1,479
        
        
        
        
        
        
        
        (1,479
        )
        
        
        
        Warrants
        
        
        
        
        
        
        
        
        
        
        597
        
        
        
        23
        
        
        
        (620
        )
        
        
        
        Pres Air Trol LLC
        
        Unitranche Debt
        
        
        762
        
        
        
        
        
        
        
        6,021
        
        
        
        11
        
        
        
        (212
        )
        
        
        
        5,820(Industrial Products)
        
        Equity Interests
        
        
        
        
        
        
        
        
        
        
        900
        
        
        
        34
        
        
        
        (616
        )
        
        
        
        318Progressive International Corporation
        
        Subordinated Debt
        
        
        1,202
        
        
        
        
        
        
        
        7,221
        
        
        
        155
        
        
        
        
        
        
        
        
        7,376(Consumer Products)
        
        Preferred Stock
        
        
        
        
        
        
        
        
        
        
        586
        
        
        
        298
        
        
        
        
        
        
        
        
        884Common Stock
        
        
        
        
        
        
        
        
        
        
        13
        
        
        
        
        
        
        
        
        
        
        
        
        13Warrants
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        Soteria Imaging Services,
            LLC
        
        Subordinated Debt
        
        
        1,467
        
        
        
        
        
        
        
        8,340
        
        
        
        5,107
        
        
        
        
        
        
        
        
        13,447(Healthcare Services)
        
        Equity Interests
        
        
        
        
        
        
        
        
        
        
        2,114
        
        
        
        194
        
        
        
        
        
        
        
        
        2,308Universal Environmental
            Services, LLC
        
        Unitranche Debt
        
        
        1,875
        
        
        
        
        
        
        
        12,099
        
        
        
        13
        
        
        
        (1,250
        )
        
        
        
        10,862(Business Services)
        
        Equity Interests
        
        
        
        
        
        
        
        
        
        
        1,864
        
        
        
        328
        
        
        
        (864
        )
        
        
        
        1,328Total companies
            5% to 25% owned
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        $
        158,806Companies less
            than 5% owned (6)Border Foods, Inc.(Consumer Products)
        
        Subordinated Debt (5)
        
        $
        880
        
        
        
        
        
        
        
        12,510
        
        
        
        211
        
        
        
        (12,721
        )
        
        
        
        Preferred Stock
        
        
        
        
        
        
        
        
        
        
        2,000
        
        
        
        893
        
        
        
        (2,893
        )
        
        
        
        Common Stock
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        Warrants
        
        
        
        
        
        
        
        
        
        

        
        
        
        
        245
        
        
        
        (245
        )
        
        
        
        Total
        
        
        
        $
        21,924
 This schedule should be read in conjunction with the Companys
consolidated financial statements as of and for the year ended
December 31, 2005, including the consolidated statement of investments and Note 3 to the consolidated financial statements. Note 3 includes additional information regarding activities in the private finance portfolio for the year ended December 31, 2005. (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 December 31, 2005. (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, and the exchange of one or more existing securities for one or more
    new securities. 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 and the exchange of one or more existing
     securities for one or more new securities. 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 December 31, 2005, and is therefore considered non-income
    producing. Loans or debt securities on non-accrual status at the
end of the year may or may not have been on non-accrual status for
the full year ended December 31, 2005. (6) Data
    is included for these companies
    less than 5% owned at December 31, 2005, as these companies were included
    in the companies 5% to 25% owned category during the
    past year, however, due to changes in affiliation status were classified
    in the less than 5% owned category at December 31, 2005. (7) 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. * All or a portion of the dividend income on this investment
was or will be paid in the form of additional securities. Dividends paid-in-kind are also included in the
Gross Additions for the investment, as applicable.