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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, 2007


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) 721-6100


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
    Nasdaq Global Select Market

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


NONE


o x


o x


x o


o


12b-2  x o o o




o x




DOCUMENTS INCORPORATED BY REFERENCE












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TABLE OF CONTENTS


|           |  |                                                                                                                  |     |      |     | 
|---------- |  | ---------------------------------------------------------------------------------------------------------------- | --- | ---- | --- | 
|           |  |                                                                                                                  |     | Page
|           |  |                                                                                                                  |     |     
|PART I    
|Item 1.    |  | Business                                                                                                         |     |      | 1   | 
|Item 1A.   |  | Risk Factors                                                                                                     |     |      | 18  | 
|Item 1B.   |  | Unresolved Staff Comments                                                                                        |     |      | 25  | 
|Item 2.    |  | Properties                                                                                                       |     |      | 25  | 
|Item 3.    |  | Legal Proceedings                                                                                                |     |      | 25  | 
|Item 4.    |  | Submission of Matters to a Vote of Security Holders                                                              |     |      | 26  | 
|PART II   
|Item 5.    |  | Market for Registrants Common Equity, Related Stockholder
    Matters and Issuer Purchases of Equity Securities |     |      | 26  | 
|Item 6.    |  | Selected Financial Data                                                                                          |     |      | 30  | 
|Item 7.    |  | Managements Discussion and Analysis of Financial Condition
    and Results of Operations                        |     |      | 32  | 
|Item 7A.   |  | Quantitative and Qualitative Disclosures about Market Risk                                                       |     |      | 71  | 
|Item 8.    |  | Financial Statements and Supplementary Data                                                                      |     |      | 72  | 
|Item 9.    |  | Changes in and Disagreements with Accountants on Accounting and
    Financial Disclosure                         |     |      | 139 | 
|Item 9A.   |  | Controls and Procedures                                                                                          |     |      | 139 | 
|Item 9B.   |  | Other Information                                                                                                |     |      | 139 | 
|PART III  
|Item 10.   |  | Directors, Executive Officers and Corporate Governance                                                           |     |      | 139 | 
|Item 11.   |  | Executive Compensation                                                                                           |     |      | 140 | 
|Item 12.   |  | Security Ownership of Certain Beneficial Owners and Management
    and Related Stockholder Matters               |     |      | 140 | 
|Item 13.   |  | Certain Relationships and Related Transactions, and Director
    Independence                                    |     |      | 140 | 
|Item 14.   |  | Principal Accountant Fees and Services                                                                           |     |      | 140 | 
|PART IV   
|Item 15.   |  | Exhibits and Financial Statement Schedules                                                                       |     |      | 140 | 
|Signatures |  |                                                                                                                  | 145 |     
|EX-23     
|EX-31.1   
|EX-31.2   
|EX-32.1   
|EX-32.2   





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PART I





Item 1.     Business.


General














Private Equity Investing




1



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and/or non-cash


2



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Private Finance Portfolio.




|               |  |                            
|-------------- |  | ---------------------------
| 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   |  |  Financial Services
| Consumer
    Products   |  |  Consumer Services 
| Industrial
    Products |  |  Retail            



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5



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|                                                             |  |                                                                                                                                                                                                                                                                                                 |  |                      |       |              |                |   |       |       |               |   |              |  |  |  |      | 
|------------------------------------------------------------ |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------- | ----- | ------------ | -------------- | - | ----- | ----- | ------------- | - | ------------ |  |  |  | ---- | 
|                                                             |  |                                                                                                                                                                                                                                                                                                 |  | At December 31, 2007 |      
|($ in millions)                                              |  |                                                                                                                                                                                                                                                                                                 |  |                      |      
|                                                             |  |                                                                                                                                                                                                                                                                                                 |  |                      |       | Unrealized   |                |   |      
|Portfolio                                                    |  |                                                                                                                                                                                                                                                                                                 |  |                      |       | Appreciation |                |   |       |       | Percentage of |  
|Company                                                      |  | Company Information                                                                                                                                                                                                                                                                             |  | Cost                 |       |              | (Depreciation) |   |       | Value |               |   | Total Assets | 
|                                                             |  |                                                                                                                                                                                                                                                                                                 |  |                      |       |              |                |   |       |       |               |   |              | 
|Norwesco, Inc.                                               |  | Designs, manufactures and markets a broad assortment of
    polyethylene tanks primarily to the agricultural and septic tank
    markets.                                                                                                                                                       |  | $                    | 121.0 |              |                | $ | 79.5  |       |               | $ | 200.5        |  |  |  | 3.8% | 
|                                                            
|EarthColor, Inc.                                             |  | Commercial printer focused on providing a one-stop printing
    solution of electronic pre-press, printing and finishing
    primarily for promotional products such as direct mail pieces,
    brochures, product information and free standing inserts.                                       |  | $                    | 200.0 |              |                | $ | (10.9 | )     |               | $ | 189.1        |  |  |  | 3.6% | 
|                                                            
|Advantage Sales & Marketing, Inc.                            |  | Sales and marketing agency providing outsourced sales,
    merchandising, and marketing services to the consumer packaged
    goods industry.                                                                                                                                                   |  | $                    | 154.8 |              |                | $ | 11.0  |       |               | $ | 165.8        |  |  |  | 3.2% | 
|                                                            
|BenefitMall, Inc.                                            |  | Insurance general agency providing brokers with products, tools,
    and services that make selling employee benefits to small
    businesses more efficient.                                                                                                                                   |  | $                    | 127.4 |              |                | $ | 36.9  |       |               | $ | 164.3        |  |  |  | 3.2% | 
|                                                            
|WMA Equity Corporation and Affiliates d/b/a/ Wear Me Apparel |  | Designer and marketer of licensed and private childrens
    apparel.                                                                                                                                                                                                                           |  | $                    | 183.1 |              |                | $ | (32.1 | )     |               | $ | 151.0        |  |  |  | 2.9% | 
|                                                            
|Driven Brands, Inc.                                          |  | Business format franchisor in the car care sector of the
    automotive aftermarket industry and in the general car care
    services with approximately 1,100 locations worldwide operating
    primarily under the Meineke Car Care Centers
    ®
    and Econo Lube N
    Tune®
    brands. |  | $                    | 149.2 |              |                | $ | (13.5 | )     |               | $ | 135.7        |  |  |  | 2.6% | 
|                                                            
|Financial Pacific Company                                    |  | Specialized commercial finance company that leases
    business-essential equipment to small businesses nationwide.                                                                                                                                                                             |  | $                    | 97.9  |              |                | $ | 32.8  |       |               | $ | 130.7        |  |  |  | 2.5% | 
|                                                            
|Huddle House, Inc.                                           |  | Franchisor of value-priced, full service family dining
    restaurants primarily in the Southeast.                                                                                                                                                                                              |  | $                    | 101.2 |              |                | $ | 2.6   |       |               | $ | 103.8        |  |  |  | 2.0% | 
|                                                            
|The Step2 Company, LLC                                       |  | Manufacturer of branded plastic childrens and home
    products manufactured through a rotational molding process.                                                                                                                                                                             |  | $                    | 98.2  |              |                | $ | 0.5   |       |               | $ | 98.7         |  |  |  | 1.9% | 
|                                                            
|Woodstream Corporation                                       |  | Manufactures and markets poison free pest control and pet and
    wildlife caring control products.                                                                                                                                                                                             |  | $                    | 97.1  |              |                |   |      |       |               | $ | 97.1         |  |  |  | 1.9% | 

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|                    |       |      |    |     |      |  |    |     |  
|------------------- | ----- | ---- | -- | --- | ---- |  | -- | --- | -
|                    |       | 2007 |    |     | 2006 | 
|                    |       |      |    |     |      | 
|Industry            |       |      |    |     |      |  |    |    
|Business services   |       |      | 37 | %   |      |  | 39 | %  
|Consumer products   |       |      | 25 |     |      |  | 20 |    
|Industrial products |       |      | 10 |     |      |  | 9  |    
|Financial services  |       |      | 7  |     |      |  | 9  |    
|CLO/CDO(1)          |       |      | 6  |     |      |  | 3  |    
|Retail              |       |      | 4  |     |      |  | 6  |    
|Consumer services   |       |      | 4  |     |      |  | 6  |    
|Healthcare services |       |      | 3  |     |      |  | 3  |    
|Other               |       |      | 4  |     |      |  | 5  |    
|                    |       |      |    |     |      | 
|                    | Total |      |    | 100 | %    |  |    | 100 | %
|                    |       |      |    |     |      | 






|    |                                                                                                                                                       
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | These funds primarily invest in senior corporate loans. Certain
    of these funds are managed by Callidus, a portfolio company of
    Allied Capital.

Commercial Real Estate Finance Portfolio.




Managed Funds




Allied Capital Senior Debt Fund, L.P.


7



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Unitranche Fund LLC.




AGILE Fund I, LLC.








8



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Business Processes


Business Development and New Deal Origination.






New Deal Underwriting and Investment Execution.






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| |   |                                                                                                                                                                                                              
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Initial investment screening;                                                                                                                                                                                
|
| |  | Initial investment committee approval;                                                                                                                                                                       
|
| |  | Due diligence, structuring and negotiation;                                                                                                                                                                  
|
| |  | Internal review of diligence results, including peer review;                                                                                                                                                 
|
| |  | Final investment committee approval;                                                                                                                                                                         
|
| |  | Approval by the Investment Review 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 Board Investment Review
    Committee approval, as needed, before funds are disbursed).          



Portfolio Monitoring and Development.








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Portfolio Grading




Portfolio Valuation






Valuation Process.




| |   |                                                                                                                                                                                                                                                                                                         
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Our valuation process begins with each portfolio company or
    investment being initially valued by the investment
    professionals, led by the Managing Director or senior officer
    who is responsible for the portfolio company relationship (the
    Deal Team).                                
|
| |  | The CVO and third-party valuation consultants, as applicable
    (see below), review the preliminary valuation documentation as
    prepared by the Deal Team.                                                                                                                                          
|
| |  | The CVO, members of the valuation team, and third-party
    consultants (see below), as applicable, 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.

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| |   |                                                                                                                                                                                                                                       
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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 separately
    from the full Board of Directors with the third-party
    consultants (see below) to discuss the assistance provided and
    results. The CVO attends this meeting.
|
| |  | The CVO discusses and reviews the valuations with the Board of
    Directors.                                                                                                                                                         
|
| |  | 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.                                                                                                                                                  







Disposition of Investments






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Dividends








13



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Corporate Structure and Offices




20006-3434 721-6100.


Available Information


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


Employees




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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 controlled by the business development company and has an
    affiliate of a business development company on its board of
    directors;
|
| |  | does not have any class of securities listed on a national
    securities exchange; or                                                     
|
| |  | meets such other criteria as may be established by the SEC.                                                                                









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1-800-SEC-0330.




Regulated Investment Company Status.








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;

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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, and an attestation
    report on the effectiveness of our internal control over
    financial reporting issued 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.


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






Fair Value Measurements


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




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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. co-investments,


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




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




We may not borrow money unless we maintain asset coverage for
indebtedness of at least 200%, which may affect returns to
shareholders.


Changes in interest rates may affect our cost of capital and
net investment income.




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We will continue to need additional capital to grow because
we must distribute our income.


Loss of regulated investment company tax treatment would
substantially reduce net assets and income available for debt
service and dividends.


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


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We operate in a competitive market for investment
opportunities.


There are potential conflicts of interest between us and the
funds managed by us.






Our business depends on our key personnel.


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


Failure to invest a sufficient portion of our assets in
qualifying assets could preclude us from investing in accordance
with our current business strategy.


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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.                                                                                                                                                                             

The trading market or market value of our publicly issued
debt securities may be volatile.




| |   |                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------
| |  | the time remaining to the maturity of these debt securities;                                          
|
| |  | the outstanding principal amount of debt securities with terms
    identical to these debt securities;
|
| |  | the supply of debt securities trading in the secondary market,
    if any;                            
|
| |  | the redemption or repayment features, if any, of these debt
    securities;                           
|
| |  | the level, direction and volatility of market interest rates
    generally; and                       
|
| |  | market rates of interest higher or lower than rates borne by the
    debt securities.                 



Our credit ratings may not reflect all risks of an investment
in the debt securities.


24



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Terms relating to redemption may materially adversely affect
the return on the debt securities.





Item 1B. Unresolved Staff Comments







Item 2. Properties.


20006-3434.







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







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10b-5









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







PART II





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




Quarterly Stock Prices for 2007 and 2006


|      |  |      |       |  |      |   |       |    |  |   |       |  |  |    |       |  |    |   |       |    |  |   |       |  |  |   |       |  |  |   |       | 
|----- |  | ---- | ----- |  | ---- | - | ----- | -- |  | - | ----- |  |  | -- | ----- |  | -- | - | ----- | -- |  | - | ----- |  |  | - | ----- |  |  | - | ----- | 
|      |  | 2007 |       |  | 2006 |  
|      |  |      |       |  |      |  
|      |  | Q1   |       |  | Q2   |   |       | Q3 |  |   | Q4    |  |  | Q1 |       |  | Q2 |   |       | Q3 |  |   | Q4    | 
|      |  |      |       |  |      |   |       |    |  |   |       |  |  |    |       |  |    |   |       |    |  |   |       | 
|High  |  | $    | 32.98 |  |      | $ | 32.96 |    |  | $ | 32.87 |  |  | $  | 30.90 |  |    | $ | 30.68 |    |  | $ | 31.32 |  |  | $ | 30.88 |  |  | $ | 32.70 | 
|Low   |  | $    | 28.05 |  |      | $ | 28.90 |    |  | $ | 27.10 |  |  | $  | 21.15 |  |    | $ | 28.51 |    |  | $ | 28.77 |  |  | $ | 27.30 |  |  | $ | 29.99 | 
|Close |  | $    | 28.81 |  |      | $ | 30.96 |    |  | $ | 29.39 |  |  | $  | 21.50 |  |    | $ | 30.60 |    |  | $ | 28.77 |  |  | $ | 30.21 |  |  | $ | 32.68 | 



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Dividend Declarations




|                   |                         |             |                    |  |              |  |                    |        |  |   |      |      | 
|------------------ | ----------------------- | ----------- | ------------------ |  | ------------ |  | ------------------ | ------ |  | - | ---- | ---- | 
|Date Declared      |                         | Record Date |                    |  | Payment Date |  |                    | Amount | 
|                   |                         |             |                    |  |              |  |                    |        | 
|February 2, 2007   |                         |             | March 16, 2007     |  |              |  | March 28, 2007     |        |  | $ | 0.63 |     
|April 24, 2007     |                         |             | June 15, 2007      |  |              |  | June 27, 2007      |        |  | $ | 0.64 |     
|July 27, 2007      |                         |             | September 14, 2007 |  |              |  | September 26, 2007 |        |  | $ | 0.65 |     
|July 27, 2007      |                         |             | December 14, 2007  |  |              |  | December 26, 2007  |        |  | $ | 0.65 |     
|September 14, 2007 |                         |             | December 14, 2007  |  |              |  | December 27, 2007  |        |  | $ | 0.07 |     
|                   |                         |             |                    |  |              |  |                    |        | 
|                   | Total declared for 2007 |             |                    |  |              |  |                    |        |  |   | $    | 2.64 | 
|                   |                         |             |                    |  |              |  |                    |        | 
|January 20, 2006   |                         |             | March 17, 2006     |  |              |  | March 31, 2006     |        |  | $ | 0.59 |     
|April 21, 2006     |                         |             | June 16, 2006      |  |              |  | June 30, 2006      |        |  | $ | 0.60 |     
|July 21, 2006      |                         |             | September 15, 2006 |  |              |  | September 29, 2006 |        |  | $ | 0.61 |     
|October 20, 2006   |                         |             | December 15, 2006  |  |              |  | December 27, 2006  |        |  | $ | 0.62 |     
|December 12, 2006  |                         |             | December 22, 2006  |  |              |  | January 19, 2007   |        |  | $ | 0.05 |     
|                   |                         |             |                    |  |              |  |                    |        | 
|                   | Total declared for 2006 |             |                    |  |              |  |                    |        |  |   | $    | 2.47 | 
|                   |                         |             |                    |  |              |  |                    |        | 



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Performance Graph




Shareholder Return Performance Graph


Five-Year Cumulative Total
Return(1)


(Through December 31, 2007)










|    |                                                                               
|--- | ------------------------------------------------------------------------------
|(1) | Total return includes reinvestment of dividends through
    December 31, 2007.

Sales of Unregistered Securities






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Issuer Purchases of Equity Securities




|                   |                        |              |         |         |                  |   |       |       | 
|------------------ | ---------------------- | ------------ | ------- | ------- | ---------------- | - | ----- | ----- | 
|                   |                        | Total Number |         |         | Weighted Average |  
|                   |                        | of Shares    |         |         | Price Paid       |  
|                   |                        | Purchased    |         |         | Per Share        |  
|                   |                        |              |         |         |                  |  
|2005 DCP
    I(1)  |                        |              |         |         |                  |   |       |      
|                   | 10/1/2007  10/31/2007 |              |         | 115     |                  |   | $     | 29.69 | 
|                   | 11/1/2007  11/30/2007 |              |         |        |                  |   |       |      | 
|                   | 12/1/2007  12/31/2007 |              |         |        |                  |   |       |      | 
|2005 DCP
    II(2) |                        |              |         |         |                  |   |       |      
|                   | 10/1/2007  10/31/2007 |              |         | 26,392  |                  |   | $     | 29.69 | 
|                   | 11/1/2007  11/30/2007 |              |         |        |                  |   |       |      | 
|                   | 12/1/2007  12/31/2007 |              |         | 107,000 |                  |   | $     | 22.29 | 
|                   |                        |              |         |         |                  |  
|Total              |                        |              | 133,507 |         |                  | $ | 23.76 |      
|                   |                        |              |         |         |                  |  






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The 2005 DCP I is an unfunded plan, as defined by the Code,
    that provides for the deferral of compensation by our directors,
    employees, and consultants. In addition, we made contributions
    to 2005 DCP I on compensation deemed ineligible for a
    401(k) contribution. Our directors, employees, or consultants
    were eligible to participate in the plan at such time and for
    such period as designated by the Board of Directors. The 2005
    DCP I is administered through a trust by a third-party
    trustee, and we fund this plan through cash contributions.
    Directors were able to choose to defer directors fees
    through the 2005 DCP I, and to invest such deferred income
    in shares of our common stock. To the extent a director elected
    to invest in our common stock, the trustee of the 2005
    DCP I was required to use such deferred directors
    fees to purchase shares of our common stock in the market.                                                                                                
|   
|(2) | We have a long-term incentive compensation program whereby we
    will generally determine an individual performance award (IPA)
    for certain officers annually at the beginning of each year. The
    Compensation Committee may adjust the IPAs as needed, or make
    new awards as new officers are hired. In conjunction with the
    program, we instituted the DCP II plans, which are unfunded
    plans as defined by the Code that are administered through a
    trust by a third-party trustee. The IPAs were deposited in the
    trust in four equal installments, generally on a quarterly basis
    in the form of cash and the 2005 DCP II required the
    trustee to use the cash to purchase shares of our common stock
    in the market. See discussion below on the termination of the
    deferred compensation arrangements. For 2008, the Compensation
    Committee has determined that the IPAs will be paid in cash in
    two equal installments during the year to eligible officers, as
    long as the recipient remains employed by us.



29



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##### Table of Contents






Item 6. Selected Financial Data.


SELECTED CONDENSED CONSOLIDATED FINANCIAL DATA




|                                                               |                                                       |                                             |         |          |         |   |         |          |         |   |         |         |         |      |         |         |         |   |         |         |         |  
|-------------------------------------------------------------- | ----------------------------------------------------- | ------------------------------------------- | ------- | -------- | ------- | - | ------- | -------- | ------- | - | ------- | ------- | ------- | ---- | ------- | ------- | ------- | - | ------- | ------- | ------- | -
|                                                               |                                                       | Year Ended December 31,                     |        
|                                                               |                                                       |                                             |        
|(in thousands,                                                 |                                                       | 2007                                        |         |          | 2006    |   |         | 2005     |         |   | 2004    |         |         | 2003 |        
|except per share data)                                         |                                                       |                                             |         |          |         |   |         |          |         |   |         |         |         |      |        
|Operating Data:                                                |                                                       |                                             |         |          |         |   |         |          |         |   |         |         |         |      |         |         |         |   |         |        
|Interest and related portfolio income:                         |                                                       |                                             |         |          |         |   |         |          |         |   |         |         |         |      |         |         |         |   |         |        
|                                                               | Interest and dividends                                |                                             |         | 417,576  |         |   | $       | 386,427  |         |   | $       | 317,153 |         |      | $       | 319,642 |         |   | $       | 290,719 |        
|                                                               | Fees and other income                                 |                                             |         | 44,129   |         |   |         | 66,131   |         |   |         | 56,999  |         |      |         | 47,448  |         |   |         | 38,510  |        
|                                                               |                                                       |                                             |         |          |         |   |         |          |         |   |         |         |         |      |        
|                                                               |                                                       | Total interest and related portfolio income |         |          | 461,705 |   |         |          | 452,558 |   |         |         | 374,152 |      |         |         | 367,090 |   |         |         | 329,229 |  
|                                                               |                                                       |                                             |         |          |         |   |         |          |         |   |         |         |         |      |        
|Expenses:                                                      |                                                       |                                             |         |          |         |   |         |          |         |   |         |         |         |      |         |         |         |   |         |        
|                                                               | Interest                                              |                                             |         | 132,080  |         |   |         | 100,600  |         |   |         | 77,352  |         |      |         | 75,650  |         |   |         | 77,233  |        
|                                                               | Employee                                              |                                             |         | 89,155   |         |   |         | 92,902   |         |   |         | 78,300  |         |      |         | 53,739  |         |   |         | 36,945  |        
|                                                               | Employee stock
    options(1)                         |                                             |         | 35,233   |         |   |         | 15,599   |         |   |         |        |         |      |         |        |         |   |         |        |        
|                                                               | Administrative                                        |                                             |         | 50,580   |         |   |         | 39,005   |         |   |         | 69,713  |         |      |         | 34,686  |         |   |         | 22,387  |        
|                                                               |                                                       |                                             |         |          |         |   |         |          |         |   |         |         |         |      |        
|                                                               |                                                       | Total operating expenses                    |         |          | 307,048 |   |         |          | 248,106 |   |         |         | 225,365 |      |         |         | 164,075 |   |         |         | 136,565 |  
|                                                               |                                                       |                                             |         |          |         |   |         |          |         |   |         |         |         |      |        
|Net investment income before income taxes                      |                                                       |                                             | 154,657 |          |         |   | 204,452 |          |         |   | 148,787 |         |         |      | 203,015 |         |         |   | 192,664 |        
|                                                               | Income tax expense (benefit), including excise tax    |                                             |         | 13,624   |         |   |         | 15,221   |         |   |         | 11,561  |         |      |         | 2,057   |         |   |         | (2,466  | )      
|                                                               |                                                       |                                             |         |          |         |   |         |          |         |   |         |         |         |      |        
|Net investment income                                          |                                                       |                                             | 141,033 |          |         |   | 189,231 |          |         |   | 137,226 |         |         |      | 200,958 |         |         |   | 195,130 |        
|                                                               |                                                       |                                             |         |          |         |   |         |          |         |   |         |         |         |      |        
|Net realized and unrealized gains (losses):                    |                                                       |                                             |         |          |         |   |         |          |         |   |         |         |         |      |         |         |         |   |         |        
|                                                               | Net realized gains                                    |                                             |         | 268,513  |         |   |         | 533,301  |         |   |         | 273,496 |         |      |         | 117,240 |         |   |         | 75,347  |        
|                                                               | Net change in unrealized appreciation or depreciation |                                             |         | (256,243 | )       |   |         | (477,409 | )       |   |         | 462,092 |         |      |         | (68,712 | )       |   |         | (78,466 | )      
|                                                               |                                                       |                                             |         |          |         |   |         |          |         |   |         |         |         |      |        
|                                                               |                                                       | Total net gains (losses)                    |         |          | 12,270  |   |         |          | 55,892  |   |         |         | 735,588 |      |         |         | 48,528  |   |         |         | (3,119  | )
|                                                               |                                                       |                                             |         |          |         |   |         |          |         |   |         |         |         |      |        
|Net increase in net assets resulting from operations           |                                                       | $                                           | 153,303 |          |         | $ | 245,123 |          |         | $ | 872,814 |         |         | $    | 249,486 |         |         | $ | 192,011 |        
|                                                               |                                                       |                                             |         |          |         |   |         |          |         |   |         |         |         |      |        
|Per Share:                                                     |                                                       |                                             |         |          |         |   |         |          |         |   |         |         |         |      |         |         |         |   |         |        
|Diluted earnings per common share                              |                                                       | $                                           | 0.99    |          |         | $ | 1.68    |          |         | $ | 6.36    |         |         | $    | 1.88    |         |         | $ | 1.62    |        
|Net investment income plus net realized gains per
    share(2) |                                                       | $                                           | 2.65    |          |         | $ | 4.96    |          |         | $ | 2.99    |         |         | $    | 2.40    |         |         | $ | 2.28    |        
|Dividends per common
    share(2)                              |                                                       | $                                           | 2.64    |          |         | $ | 2.47    |          |         | $ | 2.33    |         |         | $    | 2.30    |         |         | $ | 2.28    |        
|Weighted average common shares outstanding  diluted           |                                                       |                                             | 154,687 |          |         |   | 145,599 |          |         |   | 137,274 |         |         |      | 132,458 |         |         |   | 118,351 |        

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|                                                               |  |                 |           |  |      |   |           |      |  |   |           |  |  |      |           |  |  |   |           |  
|-------------------------------------------------------------- |  | --------------- | --------- |  | ---- | - | --------- | ---- |  | - | --------- |  |  | ---- | --------- |  |  | - | --------- | -
|                                                               |  | At December 31, |          
|                                                               |  |                 |          
|(in thousands,                                                 |  | 2007            |           |  | 2006 |   |           | 2005 |  |   | 2004      |  |  | 2003 |          
|except per share data)                                         |  |                 |           |  |      |   |           |      |  |   |           |  |  |      |          
|Balance Sheet Data:                                            |  |                 |           |  |      |   |           |      |  |   |           |  |  |      |           |  |  |   |           |  
|Portfolio at value                                             |  | $               | 4,780,521 |  |      | $ | 4,496,084 |      |  | $ | 3,606,355 |  |  | $    | 3,013,411 |  |  | $ | 2,584,599 |  
|Total assets                                                   |  |                 | 5,214,576 |  |      |   | 4,887,505 |      |  |   | 4,025,880 |  |  |      | 3,260,998 |  |  |   | 3,019,870 |  
|Total debt
    outstanding(3)                                  |  |                 | 2,289,470 |  |      |   | 1,899,144 |      |  |   | 1,284,790 |  |  |      | 1,176,568 |  |  |   | 954,200   |  
|Undistributed (distributions in excess of) earnings            |  |                 | 535,853   |  |      |   | 502,163   |      |  |   | 112,252   |  |  |      | 12,084    |  |  |   | (13,401   | )
|Shareholders equity                                           |  |                 | 2,771,847 |  |      |   | 2,841,244 |      |  |   | 2,620,546 |  |  |      | 1,979,778 |  |  |   | 1,914,577 |  
|Shareholders equity per common share (net asset
    value)(4) |  | $               | 17.54     |  |      | $ | 19.12     |      |  | $ | 19.17     |  |  | $    | 14.87     |  |  | $ | 14.94     |  
|Common shares outstanding at end of year                       |  |                 | 158,002   |  |      |   | 148,575   |      |  |   | 136,697   |  |  |      | 133,099   |  |  |   | 128,118   |  

|                                                                    |  |                         |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |         |  
|------------------------------------------------------------------- |  | ----------------------- | --------- | - | ---- | - | --------- | ---- |  | - | --------- | - |  | ---- | --------- | - |  | - | ------- | -
|                                                                    |  | Year Ended December 31, |          
|                                                                    |  |                         |          
|                                                                    |  | 2007                    |           |   | 2006 |   |           | 2005 |  |   | 2004      |   |  | 2003 |          
|                                                                    |  |                         |           |   |      |   |           |      |  |   |           |   |  |      |          
|Other Data:                                                         |  |                         |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |         |  
|Investments funded                                                  |  | $                       | 1,845,973 |   |      | $ | 2,437,828 |      |  | $ | 1,675,773 |   |  | $    | 1,524,523 |   |  | $ | 931,450 |  
|Principal collections related to investment
    repayments or sales |  |                         | 1,211,550 |   |      |   | 1,055,347 |      |  |   | 1,503,388 |   |  |      | 909,189   |   |  |   | 788,328 |  
|Realized gains                                                      |  |                         | 400,510   |   |      |   | 557,470   |      |  |   | 343,061   |   |  |      | 267,702   |   |  |   | 94,305  |  
|Realized losses                                                     |  |                         | (131,997  | ) |      |   | (24,169   | )    |  |   | (69,565   | ) |  |      | (150,462  | ) |  |   | (18,958 | )

|                                                                |  |       |         |  |       |   |         |       |  |   |         |  |  |       |         |  |       |   |         |       |  |   |         |  |  |   |         |  |  |   |         | 
|--------------------------------------------------------------- |  | ----- | ------- |  | ----- | - | ------- | ----- |  | - | ------- |  |  | ----- | ------- |  | ----- | - | ------- | ----- |  | - | ------- |  |  | - | ------- |  |  | - | ------- | 
|                                                                |  | 2007  |         |  | 2006  |  
|                                                                |  |       |         |  |       |  
|(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                     |  | $     | 117,709 |  |       | $ | 118,368 |       |  | $ | 117,676 |  |  | $     | 107,952 |  |       | $ | 117,708 |       |  | $ | 113,383 |  |  | $ | 110,456 |  |  | $ | 111,011 | 
|Net investment income                                           |  |       | 58,040  |  |       |   | 18,318  |       |  |   | 25,175  |  |  |       | 39,500  |  |       |   | 49,078  |       |  |   | 48,658  |  |  |   | 50,195  |  |  |   | 41,300  | 
|Net increase (decrease) in net assets resulting from operations |  |       | 27,527  |  |       |   | (96,468 | )     |  |   | 89,158  |  |  |       | 133,086 |  |       |   | 33,921  |       |  |   | 77,886  |  |  |   | 33,729  |  |  |   | 99,587  | 
|Diluted earnings (loss) per common share                        |  | $     | 0.18    |  |       | $ | (0.62   | )     |  | $ | 0.57    |  |  | $     | 0.87    |  |       | $ | 0.23    |       |  | $ | 0.53    |  |  | $ | 0.24    |  |  | $ | 0.70    | 
|Dividends declared per common share
    (5)                     |  |       | 0.72    |  |       |   | 0.65    |       |  |   | 0.64    |  |  |       | 0.63    |  |       |   | 0.67    |       |  |   | 0.61    |  |  |   | 0.60    |  |  |   | 0.59    | 
|Net asset value per common
    share(4)                         |  |       | 17.54   |  |       |   | 17.90   |       |  |   | 19.59   |  |  |       | 19.58   |  |       |   | 19.12   |       |  |   | 19.38   |  |  |   | 19.17   |  |  |   | 19.50   | 




|    |                                                                                                                                                                                                                                                                                                                                                                                                
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Effective January 1, 2006, we adopted the provisions of
    Statement No. 123 (Revised 2004), Share-Based
    Payment. See Item 7. Managements Discussion
    and Analysis of Financial Condition and Results of
    Operations below.                                                                                                                                                      
|(2) | Dividends are based on taxable income, which differs from income
    for financial reporting purposes. Net investment income and net
    realized gains are the most significant components of our annual
    taxable income from which dividends are paid. See
    Item 7. Managements Discussion and Analysis of
    Financial Condition and Results of Operations below.                 
|(3) | See Item 7. Managements Discussion and Analysis
    of Financial Condition and Results of Operations for more
    information regarding our level of indebtedness.                                                                                                                                                                                                                          
|(4) | 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.                                                                                                                                                                                              
|(5) | Dividends declared per common share for the fourth quarter of
    2007 included the regular quarterly dividend of $0.65 per common
    share and an extra dividend of $0.07 per common share. Dividends
    declared per common share for the fourth quarter of 2006
    included the regular quarterly dividend of $0.62 per common
    share and an extra dividend of $0.05 per common share.

31



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##### Table of Contents






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, including economic downturns or
    recessions;                                            
|
| |  | risks associated with possible disruption in our operations
    due to terrorism;                                  
|
| |  | future changes in laws or regulations or changes in
    accounting principles; and                                 
|
| |  | other risks and uncertainties as may be detailed from time to
    time in our public announcements and SEC filings.

Financial or other information presented for private finance
portfolio companies has been obtained from the portfolio
companies, and 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






|                               |  |      |    |   |      |  |    |      |  |  |    |  
|------------------------------ |  | ---- | -- | - | ---- |  | -- | ---- |  |  | -- | -
|                               |  | 2007 |    |   | 2006 |  |    | 2005 | 
|                               |  |      |    |   |      |  |    |      | 
|Private finance                |  |      | 97 | % |      |  | 97 | %    |  |  | 96 | %
|Commercial real estate finance |  |      | 3  | % |      |  | 3  | %    |  |  | 4  | %



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##### Table of Contents







PORTFOLIO AND INVESTMENT ACTIVITY




|                                                                       |  |                          |         |   |      |   |         |      |  |   |         |  
|---------------------------------------------------------------------- |  | ------------------------ | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                                       |  | At and for the           |        
|                                                                       |  | Years Ended December 31, |        
|                                                                       |  |                          |        
|                                                                       |  | 2007                     |         |   | 2006 |   |         | 2005 | 
|($ in millions)                                                        |  |                          |         |   |      |   |         |      | 
|Portfolio at value                                                     |  | $                        | 4,780.5 |   |      | $ | 4,496.1 |      |  | $ | 3,606.4 |  
|Investments
    funded(1)                                              |  | $                        | 1,846.0 |   |      | $ | 2,437.8 |      |  | $ | 1,675.8 |  
|Change in accrued or reinvested interest and dividends                 |  | $                        | 23.9    |   |      | $ | 8.2     |      |  | $ | 6.6     |  
|Principal collections related to investment repayments
    or sales(2) |  | $                        | 1,211.6 |   |      | $ | 1,055.3 |      |  | $ | 1,503.4 |  
|Yield on interest-bearing
    investments(3)                           |  |                          | 12.1    | % |      |   | 11.9    | %    |  |   | 12.8    | %




|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Investments funded included investments acquired through the
    issuance of our common stock as consideration totaling
    $7.2 million for the year ended December 31, 2005. See
    also  Private Finance below.                                                                                                                                                                                                                                                                                                                                                                                  
|   
|(2) | Principal collections related to investment repayments or sales
    for the year ended December 31, 2007, included collections
    of $224.2 million related to the sale of loans to the
    Allied Capital Senior Debt Fund, L.P. See discussion above.                                                                                                                                                                                                                                                                                                                                                
|   
|(3) | The weighted average yield on interest-bearing investments is
    computed as the (a) annual stated interest on accruing
    loans and debt securities plus the annual amortization of loan
    origination fees, original issue discount, and market discount
    on accruing loans and debt securities less the annual
    amortization of loan origination costs, plus the effective
    interest yield on the preferred
    shares/income notes of CLOs
    divided by (b) total interest-bearing investments at
    value. The weighted average yield is computed as of the balance
    sheet date.

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##### Table of Contents



Private Finance




|                                                                       |                                               |                          |                                 |         |          |         |  |       |       |       |          |         |         |         |  |       |          |       |         |         |         |         |  |       |       |       | 
|---------------------------------------------------------------------- | --------------------------------------------- | ------------------------ | ------------------------------- | ------- | -------- | ------- |  | ----- | ----- | ----- | -------- | ------- | ------- | ------- |  | ----- | -------- | ----- | ------- | ------- | ------- | ------- |  | ----- | ----- | ----- | 
|                                                                       |                                               | At and for the           |                                
|                                                                       |                                               | Years Ended December 31, |                                
|                                                                       |                                               |                          |                                
|                                                                       |                                               | 2007                     |                                 |         | 2006     |         |  | 2005  |      
|                                                                       |                                               |                          |                                 |         |          |         |  |       |      
|                                                                       |                                               | Value                    |                                 |         | Yield(1) |         |  | Value |       |       | Yield(1) |         |         | Value   |  |       | Yield(1) |      
|($ in millions)                                                        |                                               |                          |                                 |         |          |         |  |       |       |       |          |         |         |         |  |       |          |      
|Portfolio at value:                                                    |                                               |                          |                                 |         |          |         |  |       |       |       |          |         |         |         |  |       |          |       |         |         |         |         |  |      
|                                                                       | Loans and debt securities:                    |                          |                                 |         |          |         |  |       |       |       |          |         |         |         |  |       |          |       |         |         |         |         |  |       |      
|                                                                       |                                               | Senior loans             |                                 | $       | 344.3    |         |  |       | 7.7%  |       |          | $       | 405.2   |         |  |       | 8.4%     |       |         | $       | 239.8   |         |  |       | 9.5%  |      
|                                                                       |                                               | Unitranche debt          |                                 |         | 653.9    |         |  |       | 11.5% |       |          |         | 799.2   |         |  |       | 11.2%    |       |         |         | 294.2   |         |  |       | 11.4% |      
|                                                                       |                                               | Subordinated debt        |                                 |         | 2,416.4  |         |  |       | 12.8% |       |          |         | 1,980.8 |         |  |       | 12.9%    |       |         |         | 1,560.9 |         |  |       | 13.8% |      
|                                                                       |                                               |                          |                                 |         |          |         |  |       |       |       |          |         |         |         |  |       |          |      
|                                                                       |                                               |                          | Total loans and debt securities |         |          | 3,414.6 |  |       |       | 12.1% |          |         |         | 3,185.2 |  |       |          | 11.9% |         |         |         | 2,094.9 |  |       |       | 13.0% | 
|Equity securities:                                                     |                                               |                          |                                 |         |          |         |  |       |       |       |          |         |         |         |  |       |          |       |         |         |         |         |  |      
|                                                                       | Preferred shares/income notes of CLOs
    (2) |                          |                                 | 203.0   |          |         |  | 14.6% |       |       |          | 97.2    |         |         |  | 15.5% |          |       |         | 72.3    |         |         |  | 13.7% |      
|                                                                       | Other equity securities                       |                          |                                 | 1,041.7 |          |         |  |       |       |       |          | 1,095.5 |         |         |  |       |          |       |         | 1,312.1 |         |         |  |       |      
|                                                                       |                                               |                          |                                 |         |          |         |  |       |       |       |          |         |         |         |  |       |          |      
|                                                                       |                                               | Total equity securities  |                                 |         | 1,244.7  |         |  |       |       |       |          |         | 1,192.7 |         |  |       |          |       |         |         | 1,384.4 |         |  |       |       |      
|                                                                       |                                               |                          |                                 |         |          |         |  |       |       |       |          |         |         |         |  |       |          |      
|Total portfolio                                                        |                                               | $                        | 4,659.3                         |         |          |         |  |       |       | $     | 4,377.9  |         |         |         |  |       |          | $     | 3,479.3 |         |         |         |  |      
|                                                                       |                                               |                          |                                 |         |          |         |  |       |       |       |          |         |         |         |  |       |          |      
|Investments
    funded(3)                                              |                                               | $                        | $1,828.0                        |         |          |         |  |       |       | $     | 2,423.4  |         |         |         |  |       |          | $     | 1,462.3 |         |         |         |  |      
|Change in accrued or reinvested interest and dividends                 |                                               | $                        | 24.6                            |         |          |         |  |       |       | $     | 7.2      |         |         |         |  |       |          | $     | 24.6    |         |         |         |  |      
|Principal collections related to investment repayments or
    sales(4) |                                               | $                        | 1,188.2                         |         |          |         |  |       |       | $     | 1,015.4  |         |         |         |  |       |          | $     | 703.9   |         |         |         |  |      






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The weighted average yield on loans and debt securities is
    computed as the (a) annual stated interest on accruing
    loans and debt securities plus the annual amortization of loan
    origination fees, original issue discount, and market discount
    on accruing loans and debt securities less the annual
    amortization of loan origination costs, divided by
    (b) total loans and debt securities at value. The weighted
    average yield on the preferred shares/income notes of CLOs is
    calculated as the (a) effective interest yield on the
    preferred shares/income notes of CLOs, divided by (b) preferred
    shares/income notes of CLOs at value. The weighted average
    yields are computed as of the balance sheet date.
|   
|(2) | Investments in the preferred shares/income notes of CLOs earn a
    current return that is included in interest income in the
    consolidated statement of operations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   
|(3) | Investments funded for the year ended December 31, 2006,
    included debt investments in certain portfolio companies
    received in conjunction with the sale of such companies. See
     Private Finance - Investments Funded
    below.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   
|(4) | Includes collections from the sale or repayment of senior loans
    totaling $393.4 million, $322.7 million, and
    $301.8 million for the years ended December 31, 2007,
    2006, and 2005, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    





34



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35



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Investments Funded.


|                                              |                        |                                 |       |          |                    |  |      |        |          |   |          |       |       |          |  |      |          |   |       |         |         |  |      |      |      |  
|--------------------------------------------- | ---------------------- | ------------------------------- | ----- | -------- | ------------------ |  | ---- | ------ | -------- | - | -------- | ----- | ----- | -------- |  | ---- | -------- | - | ----- | ------- | ------- |  | ---- | ---- | ---- | -
|                                              |                        | 2007 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           |                                 | $     | 249.0    |                    |  |      | 9.2    | %        |   | $        | 63.1  |       |          |  | 8.8  | %        |   | $     | 312.1   |         |  |      | 9.1  | %   
|                                              | Unitranche
    debt(2) |                                 |       | 109.1    |                    |  |      | 10.8   | %        |   |          | 74.9  |       |          |  | 13.0 | %        |   |       | 184.0   |         |  |      | 11.7 | %   
|                                              | Subordinated debt      |                                 |       | 719.4    | (4)                |  |      | 12.8   | %        |   |          | 197.6 |       |          |  | 12.1 | %        |   |       | 917.0   |         |  |      | 12.6 | %   
|                                              |                        |                                 |       |          |                    |  |      |        |          |   |          |       |       |          |  |      |          |  
|                                              |                        | Total loans and debt securities |       |          | 1,077.5            |  |      |        | 11.7     | % |          |       | 335.6 |          |  |      | 11.7     | % |       |         | 1,413.1 |  |      |      | 11.7 | %
|Preferred shares/income notes of CLOs
    (5) |                        |                                 | 116.2 |          |                    |  | 16.4 | %      |          |   |         |       |       |          |  |      |          |   | 116.2 |         |         |  | 16.4 | %   
|Equity                                        |                        |                                 | 152.7 | (6)      |                    |  |      |        |          |   | 146.0    |       |       |          |  |      |          |   | 298.7 |         |         |  |      |     
|                                              |                        |                                 |       |          |                    |  |      |        |          |   |          |       |       |          |  |      |          |  
|                                              | Total                  |                                 | $     | 1,346.4  |                    |  |      |        |          |   | $        | 481.6 |       |          |  |      |          |   | $     | 1,828.0 |         |  |      |      |     
|                                              |                        |                                 |       |          |                    |  |      |        |          |   |          |       |       |          |  |      |          |  

|                                              |                          |                                 |      |          |                    |  |      |        |          |   |          |         |       |          |  |      |          |   |       |         |         |  |      |      |      |  
|--------------------------------------------- | ------------------------ | ------------------------------- | ---- | -------- | ------------------ |  | ---- | ------ | -------- | - | -------- | ------- | ----- | -------- |  | ---- | -------- | - | ----- | ------- | ------- |  | ---- | ---- | ---- | -
|                                              |                          | 2006 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             |                                 | $    | 245.4    |                    |  |      | 9.4    | %        |   | $        | 239.8   |       |          |  | 8.9  | %        |   | $     | 485.2   |         |  |      | 9.2  | %   
|                                              | Unitranche
    debt(2)   |                                 |      | 471.7    |                    |  |      | 10.7   | %        |   |          | 146.5   |       |          |  | 12.9 | %        |   |       | 618.2   |         |  |      | 11.3 | %   
|                                              | Subordinated
    debt(3) |                                 |      | 510.7    |                    |  |      | 13.0   | %        |   |          | 423.8   |       |          |  | 14.4 | %        |   |       | 934.5   |         |  |      | 13.6 | %   
|                                              |                          |                                 |      |          |                    |  |      |        |          |   |          |         |       |          |  |      |          |  
|                                              |                          | Total loans and debt securities |      |          | 1,227.8            |  |      |        | 11.4     | % |          |         | 810.1 |          |  |      | 12.5     | % |       |         | 2,037.9 |  |      |      | 11.9 | %
|Preferred shares/income notes of CLOs
    (5) |                          |                                 | 26.1 |          |                    |  | 14.8 | %      |          |   |         |         |       |          |  |      |          |   | 26.1  |         |         |  | 14.8 | %   
|Equity                                        |                          |                                 | 65.3 |          |                    |  |      |        |          |   | 294.1    |         |       |          |  |      |          |   | 359.4 |         |         |  |      |     
|                                              |                          |                                 |      |          |                    |  |      |        |          |   |          |         |       |          |  |      |          |  
|                                              | Total                    |                                 | $    | 1,319.2  |                    |  |      |        |          |   | $        | 1,104.2 |       |          |  |      |          |   | $     | 2,423.4 |         |  |      |      |     
|                                              |                          |                                 |      |          |                    |  |      |        |          |   |          |         |       |          |  |      |          |  

|                                             |                        |                                 |      |          |                    |  |      |        |          |   |          |       |       |          |  |      |          |   |       |         |         |  |      |      |      |  
|-------------------------------------------- | ---------------------- | ------------------------------- | ---- | -------- | ------------------ |  | ---- | ------ | -------- | - | -------- | ----- | ----- | -------- |  | ---- | -------- | - | ----- | ------- | ------- |  | ---- | ---- | ---- | -
|                                             |                        | 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           |                                 | $    | 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    | (4)                |  |      | 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 | %
|Preferred shares/income notes of
    CLOs(5) |                        |                                 | 47.9 |          |                    |  | 14.2 | %      |          |   |         |       |       |          |  |      |          |   | 47.9  |         |         |  | 14.2 | %   
|Equity                                       |                        |                                 | 34.6 |          |                    |  |      |        |          |   | 165.5    |       |       |          |  |      |          |   | 200.1 |         |         |  |      |     
|                                             |                        |                                 |      |          |                    |  |      |        |          |   |          |       |       |          |  |      |          |  
|                                             | 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. The weighted average yield
    on the preferred shares/income notes of CLOs is calculated as
    the (a) effective interest yield on the preferred
    shares/income notes of CLOs, divided by (b) preferred
    shares/income notes of CLOs funded. The weighted average yield
    is calculated using yields as of the date an investment is
    funded.
|   
|(2) | Unitranche debt is generally in a first lien position. The yield
    on a unitranche investment reflects the blended yield of senior
    and subordinated debt.                                                                                                                                                                                                                                                                                                                                                                                                                    
|   
|(3) | Debt investments funded for the year ended December 31,
    2006, included a $150 million subordinated debt investment
    in Advantage Sales & Marketing, Inc. received in conjunction
    with the sale of Advantage and a $30 million subordinated
    debt investment in STS Operating, Inc. received in conjunction
    with the sale of STS.                                                                                                                                                                                                                                 
|   
|(4) | Subordinated debt investments for the years ended
    December 31, 2007 and 2005, included $45.3 million and
    $45.5 million, respectively, in investments in the bonds of
    collateralized loan obligations (CLOs) and one collateralized
    debt obligations (CDO). Certain of these CLOs and the CDO are
    managed by Callidus Capital Corporation (Callidus), a portfolio
    company controlled by us. These CLOs and the CDO primarily
    invest in senior corporate loans.                                                                                          
|   
|(5) | CLO equity investments included preferred shares/income notes of
    CLOs that primarily invest in senior corporate loans. Certain of
    these CLOs are managed by Callidus.                                                                                                                                                                                                                                                                                                                                                                                                      
|   
|(6) | Equity investments for the year ended December 31, 2007,
    included $31.8 million invested in the Allied Capital
    Senior Debt Fund, L.P. and $0.7 million invested in the
    Unitranche Fund LLC. See Managed Funds below.                                                                                                                                                                                                                                                                                                                                                 

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Yield.




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Outstanding Investment Commitments.


|                       |                                 |              |       |       |              |   |           |              |  |   |       |       |  |   |       |       | 
|---------------------- | ------------------------------- | ------------ | ----- | ----- | ------------ | - | --------- | ------------ |  | - | ----- | ----- |  | - | ----- | ----- | 
|                       |                                 | Companies    |       |       |              |   | Companies |              |  |  
|                       |                                 | More Than    |       |       | Companies 5% |   |           | Less Than 5% |  |   |      
|                       |                                 | 25% Owned(1) |       |       | to 25% Owned |   |           | Owned        |  |   | Total |      
|                       |                                 |              |       |       |              |   |           |              |  |   |       |      
|($ in millions)        |                                 |              |       |       |              |   |           |             
|Senior loans           |                                 | $            | 12.0  |       |              | $ | 13.0      |              |  | $ | 105.1 |       |  | $ | 130.1 | (2)  
|Unitranche debt        |                                 |              | 3.5   |       |              |   |          |              |  |   | 28.1  |       |  |   | 31.6  |      
|Subordinated debt      |                                 |              | 18.0  |       |              |   | 0.1       |              |  |   |      |       |  |   | 18.1  |      
|                       |                                 |              |       |       |              |   |           |              |  |   |       |      
|                       | Total loans and debt securities |              |       | 33.5  |              |   |           | 13.1         |  |   |       | 133.2 |  |   |       | 179.8 | 
|Unitranche
    Fund(3) |                                 |              | 524.3 |       |              |   |          |              |  |   |      |       |  |   | 524.3 |      
|Equity securities      |                                 |              | 96.6  |       |              |   | 10.2      |              |  |   | 71.5  |       |  |   | 178.3 | (4)  
|                       |                                 |              |       |       |              |   |           |              |  |   |       |      
|                       | Total                           |              | $     | 654.4 |              |   | $         | 23.3         |  |   | $     | 204.7 |  |   | $     | 882.4 | 
|                       |                                 |              |       |       |              |   |           |              |  |   |       |      

| | 
| | 
| | 

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

|                                                                                      |       |           |      |      |        |        |             |   |  |   |      |      | 
|------------------------------------------------------------------------------------- | ----- | --------- | ---- | ---- | ------ | ------ | ----------- | - |  | - | ---- | ---- | 
|                                                                                      |       |           |      |      |        | Amount |            
|                                                                                      |       | Committed |      |      | Amount |        | Available   |  
|                                                                                      |       | Amount    |      |      | Drawn  |        | to be Drawn |  
|($ in millions)                                                                       |       |           |      |      |        |        |             |  
|Revolving line of credit for working capital                                          |       | $         | 4.0  |      |        | $      |            |   |  | $ | 4.0  |     
|Subordinated debt to support warehouse facilities &
    warehousing
    activities(*) |       |           | 18.0 |      |        |        |            |   |  |   | 18.0 |     
|                                                                                      |       |           |      |      |        |        |             |   | 
|                                                                                      | Total |           | $    | 22.0 |        |        | $           |  |  |   | $    | 22.0 | 
|                                                                                      |       |           |      |      |        |        |             |   | 

| | 
| | 
| | 

| |     |                                                                                                                                                                                                                                                                          
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (*) | Callidus has a synthetic credit facility with a third party for
    up to approximately $55 million. We have agreed to
    designate our subordinated debt commitment for Callidus to draw
    upon to provide first loss capital as needed to support this
    facility.



| |     |                                                                                                                                                                                                          
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (2) | Includes $126.6 million in the form of revolving senior
    debt facilities to 32 companies.                                                                                                             
|
| | (3) | Represents our commitment to the Unitranche Fund LLC (see
    discussion below), which we estimate will be funded over a two
    to three year period as investments are made by the Unitranche
    Fund.
|
| | (4) | Includes $81.7 million to 22 private equity and
    venture capital funds, including $4.4 million in
    co-investment commitments to one private equity fund.                                           



Investments in Collateralized Loan Obligations and
Collateralized Debt Obligations (CLO/CDO Assets).


38



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|                                      |       |      |       |       |       |   |       |          |  |  |       |  |  |       |       |       |          |   |      |       |  |  |       |  | 
|------------------------------------- | ----- | ---- | ----- | ----- | ----- | - | ----- | -------- |  |  | ----- |  |  | ----- | ----- | ----- | -------- | - | ---- | ----- |  |  | ----- |  | 
|                                      |       | 2007 |       |       | 2006  |  
|                                      |       |      |       |       |       |  
|                                      |       | Cost |       |       | Value |   |       | Yield(1) |  |  | Cost  |  |  | Value |       |       | Yield(1) |  
|($ in millions)                       |       |      |       |       |       |   |       |          |  |  |       |  |  |       |       |       |          |  
|CLO/CDO bonds                         |       | $    | 90.7  |       |       | $ | 89.9  |          |  |  | 13.3% |  |  | $     | 45.4  |       |          | $ | 45.6 |       |  |  | 12.8% | 
|Preferred shares/income notes of CLOs |       |      | 218.3 |       |       |   | 203.0 |          |  |  | 14.6% |  |  |       | 101.1 |       |          |   | 97.2 |       |  |  | 15.5% | 
|                                      |       |      |       |       |       |   |       |          |  |  |       |  |  |       |       |       |          |  
|                                      | Total |      | $     | 309.0 |       |   | $     | 292.9    |  |  |       |  |  |       | $     | 146.5 |          |   | $    | 142.8 |  |  |       |  | 
|                                      |       |      |       |       |       |   |       |          |  |  |       |  |  |       |       |       |          |  




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









|                 |                                           |      |         |         |      |   |         |         | 
|---------------- | ----------------------------------------- | ---- | ------- | ------- | ---- | - | ------- | ------- | 
|                 |                                           | 2007 |         |         | 2006 |  
|($ in millions)  |                                           |      |         |         |      |  
|Bonds            |                                           | $    | 288.5   |         |      | $ | 245.4   |        
|Syndicated loans |                                           |      | 4,122.7 |         |      |   | 1,769.9 |        
|Cash(1)          |                                           |      | 104.4   |         |      |   | 59.5    |        
|                 |                                           |      |         |         |      |  
|                 | Total underlying collateral
    assets(2) |      | $       | 4,515.6 |      |   | $       | 2,074.8 | 
|                 |                                           |      |         |         |      |  




|    |                                                                                                                                                                                                                                    
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes undrawn liability amounts.                                                                                                                                                                                                
|   
|(2) | At December 31, 2007 and 2006, the total face value of
    defaulted obligations was $18.4 million and
    $9.6 million, respectively, or approximately 0.4% and 0.5%,
    respectively, of the total underlying collateral assets.



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Ciena Capital
LLC.








|                                                                         |                                             |      |     |     |      |   |      |      |  |   |      |      | 
|------------------------------------------------------------------------ | ------------------------------------------- | ---- | --- | --- | ---- | - | ---- | ---- |  | - | ---- | ---- | 
|                                                                         |                                             | 2007 |     |     | 2006 |   |      | 2005 | 
|($ in millions)                                                          |                                             |      |     |     |      |   |      |      | 
|Interest income on subordinated debt and Class A equity
    interests(1) |                                             | $    |    |     |      | $ | 11.9 |      |  | $ | 14.3 |     
|Dividend income on Class B equity
    interests(1)                       |                                             |      |    |     |      |   |     |      |  |   | 14.0 |     
|Fees and other income                                                    |                                             |      | 5.4 |     |      |   | 7.8  |      |  |   | 9.2  |     
|                                                                         |                                             |      |     |     |      |   |      |      | 
|                                                                         | Total interest and related portfolio income |      | $   | 5.4 |      |   | $    | 19.7 |  |   | $    | 37.5 | 
|                                                                         |                                             |      |     |     |      |   |      |      | 






|    |                                                                                                                                                                                                                                                                                                                                               
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Interest and dividend income from Ciena for the years ended
    December 31, 2006 and 2005, included interest and dividend
    income of $5.7 million and $8.9 million, respectively,
    which was paid in kind. The interest and dividends paid in kind
    were paid to us through the issuance of additional debt or
    equity interests.





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41



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Mercury Air Centers, Inc.








|                      |                                             |      |     |     |      |   |     |      |  |   |     |     | 
|--------------------- | ------------------------------------------- | ---- | --- | --- | ---- | - | --- | ---- |  | - | --- | --- | 
|                      |                                             | 2007 |     |     | 2006 |   |     | 2005 | 
|($ in millions)       |                                             |      |     |     |      |   |     |      | 
|Interest income       |                                             | $    | 5.1 |     |      | $ | 9.3 |      |  | $ | 8.8 |    
|Fees and other income |                                             |      | 0.2 |     |      |   | 0.6 |      |  |   | 0.7 |    
|                      |                                             |      |     |     |      |   |     |      | 
|                      | Total interest and related portfolio income |      | $   | 5.3 |      |   | $   | 9.9  |  |   | $   | 9.5 | 
|                      |                                             |      |     |     |      |   |     |      | 



Advantage Sales & Marketing,
Inc.




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Commercial Real Estate Finance




|                                                                       |                           |                                         |       |      |          |  |  |       |  |   |          |      |  |       |  |      |          |   |       |       |  |  |  |      | 
|---------------------------------------------------------------------- | ------------------------- | --------------------------------------- | ----- | ---- | -------- |  |  | ----- |  | - | -------- | ---- |  | ----- |  | ---- | -------- | - | ----- | ----- |  |  |  | ---- | 
|                                                                       |                           | At and for the Years Ended December 31, |      
|                                                                       |                           |                                         |      
|                                                                       |                           | 2007                                    |       |      | 2006     |  |  | 2005  | 
|                                                                       |                           |                                         |       |      |          |  |  |       | 
|                                                                       |                           | Value                                   |       |      | Yield(1) |  |  | Value |  |   | Yield(1) |      |  | Value |  |      | Yield(1) |  
|($ in millions)                                                        |                           |                                         |       |      |          |  |  |       |  |   |          |      |  |       |  |      |          |  
|Portfolio at value:                                                    |                           |                                         |       |      |          |  |  |       |  |   |          |      |  |       |  |      |          |   |       |       |  |  |  |     
|                                                                       | Commercial mortgage loans |                                         |       | 65.4 |          |  |  | 6.8%  |  |   |          | 71.9 |  |       |  | 7.5% |          |   |       | 102.6 |  |  |  | 7.6% | 
|                                                                       | Real estate owned         |                                         |       | 21.3 |          |  |  |       |  |   |          | 19.6 |  |       |  |      |          |   |       | 13.9  |  |  |  |      | 
|                                                                       | Equity interests          |                                         |       | 34.5 |          |  |  |       |  |   |          | 26.7 |  |       |  |      |          |   |       | 10.6  |  |  |  |      | 
|                                                                       |                           |                                         |       |      |          |  |  |       |  |   |          |      |  |       |  |      |          |  
|Total portfolio                                                        |                           | $                                       | 121.2 |      |          |  |  |       |  | $ | 118.2    |      |  |       |  |      |          | $ | 127.1 |       |  |  |  |     
|                                                                       |                           |                                         |       |      |          |  |  |       |  |   |          |      |  |       |  |      |          |  
|Investments funded                                                     |                           | $                                       | 18.0  |      |          |  |  |       |  | $ | 14.4     |      |  |       |  |      |          | $ | 213.5 |       |  |  |  |     
|Change in accrued or reinvested interest                               |                           | $                                       | (0.7  | )    |          |  |  |       |  | $ | 1.0      |      |  |       |  |      |          | $ | (18.0 | )     |  |  |  |     
|Principal collections related to investment repayments or
    sales(2) |                           | $                                       | 23.4  |      |          |  |  |       |  | $ | 39.9     |      |  |       |  |      |          | $ | 799.5 |       |  |  |  |     




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

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|                                     |       |        |       |       |          |   |        |        |   |   |       |       | 
|------------------------------------ | ----- | ------ | ----- | ----- | -------- | - | ------ | ------ | - | - | ----- | ----- | 
|                                     |       | Face   |       |       |          |   | Amount |       
|($ in millions)                      |       | Amount |       |       | Discount |   |        | Funded |  
|For the Year Ended December 31, 2007 |       |        |       |       |          |   |        |        |  
|Commercial mortgage loans            |       | $      | 17.0  |       |          | $ |       |        |   | $ | 17.0  |      
|Equity interests                     |       |        | 1.0   |       |          |   |       |        |   |   | 1.0   |      
|                                     |       |        |       |       |          |   |        |        |  
|                                     | Total |        | $     | 18.0  |          |   | $      |       |   |   | $     | 18.0  | 
|                                     |       |        |       |       |          |   |        |        |  
|For the Year Ended December 31, 2006 |       |        |       |       |          |   |        |        |   |   |       |      
|Commercial mortgage loans            |       | $      | 8.0   |       |          |   |       |        |   |   | 8.0   |      
|Equity interests                     |       |        | 6.4   |       |          |   |       |        |   |   | 6.4   |      
|                                     |       |        |       |       |          |   |        |        |  
|                                     | Total |        | $     | 14.4  |          |   | $      |       |   |   | $     | 14.4  | 
|                                     |       |        |       |       |          |   |        |        |  
|For the Year Ended December 31, 2005 |       |        |       |       |          |   |        |        |   |   |       |      
|CMBS
    bonds(1)                    |       | $      | 211.5 |       |          | $ | (90.5  | )      |   | $ | 121.0 |      
|Commercial mortgage loans            |       |        | 88.5  |       |          |   | (0.8   | )      |   |   | 87.7  |      
|Equity interests                     |       |        | 4.8   |       |          |   |       |        |   |   | 4.8   |      
|                                     |       |        |       |       |          |   |        |        |  
|                                     | Total |        | $     | 304.8 |          |   | $      | (91.3  | ) |   | $     | 213.5 | 
|                                     |       |        |       |       |          |   |        |        |  




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



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






Managed Funds




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Allied Capital Senior Debt Fund, L.P.






Unitranche Fund LLC.




AGILE Fund I, LLC.


45



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PORTFOLIO ASSET QUALITY


Portfolio by Grade.




|                |  |           |         |  |                 |  |       |           |  |   |                 |  |  |  |       |  
|--------------- |  | --------- | ------- |  | --------------- |  | ----- | --------- |  | - | --------------- |  |  |  | ----- | -
|                |  | 2007      |         |  | 2006            | 
|                |  |           |         |  |                 | 
|                |  | Portfolio |         |  | Percentage of   |  |       | Portfolio |  |   | Percentage of   | 
|Grade           |  | at Value  |         |  | Total Portfolio |  |       | at Value  |  |   | Total Portfolio | 
|                |  |           |         |  |                 |  |       |           |  |   |                 | 
|($ in millions) |  |           |         |  |                 |  |       |          
|1               |  | $         | 1,539.6 |  |                 |  | 32.2  | %         |  | $ | 1,307.3         |  |  |  | 29.1  | %
|2               |  |           | 2,915.7 |  |                 |  | 61.0  |           |  |   | 2,672.3         |  |  |  | 59.4  |  
|3               |  |           | 122.5   |  |                 |  | 2.6   |           |  |   | 308.1           |  |  |  | 6.9   |  
|4               |  |           | 157.2   |  |                 |  | 3.3   |           |  |   | 84.2            |  |  |  | 1.9   |  
|5               |  |           | 45.5    |  |                 |  | 0.9   |           |  |   | 124.2           |  |  |  | 2.7   |  
|                |  |           |         |  |                 |  |       |           |  |   |                 | 
|                |  | $         | 4,780.5 |  |                 |  | 100.0 | %         |  | $ | 4,496.1         |  |  |  | 100.0 | %
|                |  |           |         |  |                 |  |       |           |  |   |                 | 



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Loans and Debt Securities on Non-Accrual Status.




|                                                                                    |                                |                               |  |      |       |   |  |      |       |  
|----------------------------------------------------------------------------------- | ------------------------------ | ----------------------------- |  | ---- | ----- | - |  | ---- | ----- | -
|                                                                                    |                                | 2007                          |  |      | 2006  |  
|($ in millions)                                                                     |                                |                               |  |      |       |  
|Loans and debt securities in workout status (classified as
    Grade 4 or
    5)(1) |                                |                               |  |      |       |   |  |     
|                                                                                    | Private finance                |                               |  |      |       |   |  |      |      
|                                                                                    |                                | Companies more than 25% owned |  | $    | 114.1 |   |  | $    | 51.1  |  
|                                                                                    |                                | Companies 5% to 25% owned     |  |      | 11.7  |   |  |      | 4.0   |  
|                                                                                    |                                | Companies less than 5% owned  |  |      | 23.8  |   |  |      | 31.6  |  
|                                                                                    | Commercial real estate finance |                               |  | 12.4 |       |   |  | 12.2 |      
|Loans and debt securities not in workout status                                     |                                |                               |  |      |       |   |  |     
|                                                                                    | Private finance                |                               |  |      |       |   |  |      |      
|                                                                                    |                                | Companies more than 25% owned |  |      | 21.4  |   |  |      | 87.1  |  
|                                                                                    |                                | Companies 5% to 25% owned     |  |      | 13.4  |   |  |      | 7.2   |  
|                                                                                    |                                | Companies less than 5% owned  |  |      | 13.3  |   |  |      | 38.9  |  
|                                                                                    | Commercial real estate finance |                               |  | 1.9  |       |   |  | 6.7  |      
|                                                                                    |                                |                               |  |      |       |  
|                                                                                    |                                | Total                         |  | $    | 212.0 |   |  | $    | 238.8 |  
|                                                                                    |                                |                               |  |      |       |  
|                                                                                    |                                | Percentage of total portfolio |  |      | 4.4   | % |  |      | 5.3   | %




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



Loans and Debt Securities Over 90 Days Delinquent.


|                          |                               |      |       |       |      |   |      |      |  
|------------------------- | ----------------------------- | ---- | ----- | ----- | ---- | - | ---- | ---- | -
|                          |                               | 2007 |       |       | 2006 |  
|                          |                               |      |       |       |      |  
|($ in millions)           |                               |      |       |      
|Private finance           |                               | $    | 139.9 |       |      | $ | 46.5 |     
|Commercial mortgage loans |                               |      | 9.2   |       |      |   | 1.9  |     
|                          |                               |      |       |       |      |  
|                          | Total                         |      | $     | 149.1 |      |   | $    | 48.4 |  
|                          |                               |      |       |       |      |  
|                          | Percentage of total portfolio |      |       | 3.1   | %    |   |      | 1.1  | %

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and


OTHER ASSETS AND OTHER LIABILITIES






48



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RESULTS OF OPERATIONS


Comparison of the Years Ended December 31, 2007, 2006,
and 2005




|                                                     |                                                       |                                             |         |          |         |   |         |          |         |   |        |          |         |      |     |     |         |    |         |          |         |   |         |         |         |   |       |          |          |   |     |     |     |   
|---------------------------------------------------- | ----------------------------------------------------- | ------------------------------------------- | ------- | -------- | ------- | - | ------- | -------- | ------- | - | ------ | -------- | ------- | ---- | --- | --- | ------- | -- | ------- | -------- | ------- | - | ------- | ------- | ------- | - | ----- | -------- | -------- | - | --- | --- | --- | --
|                                                     |                                                       |                                             |         |          |         |   |         | Percent  |         |   |        |          |         |      |     |     | Percent |   
|                                                     |                                                       | 2007                                        |         |          | 2006    |   |         | Change   |         |   | Change |          |         | 2006 |     |     | 2005    |    |         | Change   |         |   | Change  |        
|(in thousands, except per share amounts)             |                                                       |                                             |         |          |         |   |         |          |         |   |        |          |         |      |     |     |         |    |         |          |         |   |         |        
|Interest and Related Portfolio Income                |                                                       |                                             |         |          |         |   |         |          |         |   |        |          |         |      |     |     |         |    |         |          |         |   |         |         |         |   |       |          |          |   |     |    
|                                                     | Interest and dividends                                |                                             | $       | 417,576  |         |   | $       | 386,427  |         |   | $      | 31,149   |         |      |     | 8   | %       |    | $       | 386,427  |         |   | $       | 317,153 |         |   | $     | 69,274   |          |   |     | 22  | %  
|                                                     | Fees and other income                                 |                                             |         | 44,129   |         |   |         | 66,131   |         |   |        | (22,002  | )       |      |     | (33 | )%      |    |         | 66,131   |         |   |         | 56,999  |         |   |       | 9,132    |          |   |     | 16  | %  
|                                                     |                                                       |                                             |         |          |         |   |         |          |         |   |        |          |         |      |     |     |         |    |         |          |         |   |         |        
|                                                     |                                                       | Total interest and related portfolio income |         |          | 461,705 |   |         |          | 452,558 |   |        |          | 9,147   |      |     |     | 2       | %  |         |          | 452,558 |   |         |         | 374,152 |   |       |          | 78,406   |   |     |     | 21  | % 
|                                                     |                                                       |                                             |         |          |         |   |         |          |         |   |        |          |         |      |     |     |         |    |         |          |         |   |         |        
|Expenses                                             |                                                       |                                             |         |          |         |   |         |          |         |   |        |          |         |      |     |     |         |    |         |          |         |   |         |         |         |   |       |          |          |   |     |    
|                                                     | Interest                                              |                                             |         | 132,080  |         |   |         | 100,600  |         |   |        | 31,480   |         |      |     | 31  | %       |    |         | 100,600  |         |   |         | 77,352  |         |   |       | 23,248   |          |   |     | 30  | %  
|                                                     | Employee                                              |                                             |         | 89,155   |         |   |         | 92,902   |         |   |        | (3,747   | )       |      |     | (4  | )%      |    |         | 92,902   |         |   |         | 78,300  |         |   |       | 14,602   |          |   |     | 19  | %  
|                                                     | Employee stock options                                |                                             |         | 35,233   |         |   |         | 15,599   |         |   |        | 19,634   |         |      |     | 126 | %       |    |         | 15,599   |         |   |         |        |         |   |       | 15,599   |          |   |     |    |    
|                                                     | Administrative                                        |                                             |         | 50,580   |         |   |         | 39,005   |         |   |        | 11,575   |         |      |     | 30  | %       |    |         | 39,005   |         |   |         | 69,713  |         |   |       | (30,708  | )        |   |     | (44 | )% 
|                                                     |                                                       |                                             |         |          |         |   |         |          |         |   |        |          |         |      |     |     |         |    |         |          |         |   |         |        
|                                                     |                                                       | Total operating expenses                    |         |          | 307,048 |   |         |          | 248,106 |   |        |          | 58,942  |      |     |     | 24      | %  |         |          | 248,106 |   |         |         | 225,365 |   |       |          | 22,741   |   |     |     | 10  | % 
|                                                     |                                                       |                                             |         |          |         |   |         |          |         |   |        |          |         |      |     |     |         |    |         |          |         |   |         |        
|                                                     |                                                       | Net investment income before income taxes   |         |          | 154,657 |   |         |          | 204,452 |   |        |          | (49,795 | )    |     |     | (24     | )% |         |          | 204,452 |   |         |         | 148,787 |   |       |          | 55,665   |   |     |     | 37  | % 
|                                                     |                                                       | Income tax expense, including excise tax    |         |          | 13,624  |   |         |          | 15,221  |   |        |          | (1,597  | )    |     |     | (10     | )% |         |          | 15,221  |   |         |         | 11,561  |   |       |          | 3,660    |   |     |     | 32  | % 
|                                                     |                                                       |                                             |         |          |         |   |         |          |         |   |        |          |         |      |     |     |         |    |         |          |         |   |         |        
|                                                     |                                                       | Net investment income                       |         |          | 141,033 |   |         |          | 189,231 |   |        |          | (48,198 | )    |     |     | (25     | )% |         |          | 189,231 |   |         |         | 137,226 |   |       |          | 52,005   |   |     |     | 38  | % 
|                                                     |                                                       |                                             |         |          |         |   |         |          |         |   |        |          |         |      |     |     |         |    |         |          |         |   |         |        
|Net Realized and Unrealized Gains (Losses)           |                                                       |                                             |         |          |         |   |         |          |         |   |        |          |         |      |     |     |         |    |         |          |         |   |         |         |         |   |       |          |          |   |     |    
|                                                     | Net realized gains                                    |                                             |         | 268,513  |         |   |         | 533,301  |         |   |        | (264,788 | )       |      |     | (50 | )%      |    |         | 533,301  |         |   |         | 273,496 |         |   |       | 259,805  |          |   |     | 95  | %  
|                                                     | Net change in unrealized appreciation or depreciation |                                             |         | (256,243 | )       |   |         | (477,409 | )       |   |        | 221,166  |         |      |     | *   |         |    |         | (477,409 | )       |   |         | 462,092 |         |   |       | (939,501 | )        |   |     | *   |    
|                                                     |                                                       |                                             |         |          |         |   |         |          |         |   |        |          |         |      |     |     |         |    |         |          |         |   |         |        
|                                                     | Total net gains (losses)                              |                                             |         | 12,270   |         |   |         | 55,892   |         |   |        | (43,622  | )       |      |     | *   |         |    |         | 55,892   |         |   |         | 735,588 |         |   |       | (679,696 | )        |   |     | *   |    
|                                                     |                                                       |                                             |         |          |         |   |         |          |         |   |        |          |         |      |     |     |         |    |         |          |         |   |         |        
|                                                     |                                                       | Net income                                  |         | $        | 153,303 |   |         | $        | 245,123 |   |        | $        | (91,820 | )    |     |     | (37     | )% |         | $        | 245,123 |   |         | $       | 872,814 |   |       | $        | (627,691 | ) |     |     | (72 | )%
|                                                     |                                                       |                                             |         |          |         |   |         |          |         |   |        |          |         |      |     |     |         |    |         |          |         |   |         |        
|Diluted earnings per common share                    |                                                       | $                                           | 0.99    |          |         | $ | 1.68    |          |         | $ | (0.69  | )        |         |      | (41 | )%  |         | $  | 1.68    |          |         | $ | 6.36    |         |         | $ | (4.68 | )        |          |   | (74 | )% 
|                                                     |                                                       |                                             |         |          |         |   |         |          |         |   |        |          |         |      |     |     |         |    |         |          |         |   |         |        
|Weighted average common shares outstanding  diluted |                                                       |                                             | 154,687 |          |         |   | 145,599 |          |         |   | 9,088  |          |         |      | 6   | %   |         |    | 145,599 |          |         |   | 137,274 |         |         |   | 8,325 |          |          |   | 6   | %  






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

49



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Total Interest and Related Portfolio Income.


Interest and Dividends.


|                |                                                              |                              |     |       |       |  |     |       |       |  |      |       |       | 
|--------------- | ------------------------------------------------------------ | ---------------------------- | --- | ----- | ----- |  | --- | ----- | ----- |  | ---- | ----- | ----- | 
|                |                                                              | 2007                         |     |       | 2006  |  |     | 2005  |      
|($ in millions) |                                                              |                              |     |       |       |  |     |       |      
|Interest        |                                                              |                              |     |       |       |  |     |       |       |  |      |      
|                | Private finance loans and debt securities                    |                              | $   | 376.1 |       |  | $   | 348.4 |       |  | $    | 247.8 |      
|                | Preferred shares/income notes of CLOs                        |                              |     | 18.0  |       |  |     | 11.5  |       |  |      | 3.2   |      
|                | CMBS and real estate-related CDO portfolio                   |                              |     |      |       |  |     |      |       |  |      | 29.4  |      
|                | Commercial mortgage loans                                    |                              |     | 6.4   |       |  |     | 8.3   |       |  |      | 7.6   |      
|                | Cash, U.S. Treasury bills, money market and other securities |                              |     | 15.1  |       |  |     | 14.0  |       |  |      | 9.4   |      
|                |                                                              |                              |     |       |       |  |     |       |      
|                |                                                              | Total interest               |     |       | 415.6 |  |     |       | 382.2 |  |      |       | 297.4 | 
|Dividends       |                                                              |                              | 2.0 |       |       |  | 4.2 |       |       |  | 19.8 |      
|                |                                                              |                              |     |       |       |  |     |       |      
|                |                                                              | Total interest and dividends |     | $     | 417.6 |  |     | $     | 386.4 |  |      | $     | 317.2 | 
|                |                                                              |                              |     |       |       |  |     |       |      



|                           |                                           |                                   |   |         |          |  |  |       |      |   |          |         |         |       |  |      |          |   |   |         |         |  |  |      |      |  
|-------------------------- | ----------------------------------------- | --------------------------------- | - | ------- | -------- |  |  | ----- | ---- | - | -------- | ------- | ------- | ----- |  | ---- | -------- | - | - | ------- | ------- |  |  | ---- | ---- | -
|                           |                                           | 2007                              |   |         | 2006     |  |  | 2005  |     
|                           |                                           |                                   |   |         |          |  |  |       |     
|($ in millions)            |                                           | Value                             |   |         | Yield(1) |  |  | Value |      |   | Yield(1) |         |         | Value |  |      | Yield(1) |  
|                           |                                           |                                   |   |         |          |  |  |       |      |   |          |         |         |       |  |      |          |  
|Loans and debt securities: |                                           |                                   |   |         |          |  |  |       |      |   |          |         |         |       |  |      |          |   |   |         |         |  |  |     
|                           | Private finance                           |                                   | $ | 3,414.6 |          |  |  | 12.1  | %    |   | $        | 3,185.2 |         |       |  | 11.9 | %        |   | $ | 2,094.9 |         |  |  | 13.0 | %   
|                           | Commercial mortgage loans                 |                                   |   | 65.4    |          |  |  | 6.8   | %    |   |          | 71.9    |         |       |  | 7.5  | %        |   |   | 102.6   |         |  |  | 7.6  | %   
|                           |                                           |                                   |   |         |          |  |  |       |      |   |          |         |         |       |  |      |          |  
|                           |                                           | Total loans and debt securities   |   |         | 3,480.0  |  |  |       | 12.0 | % |          |         | 3,257.1 |       |  |      | 11.8     | % |   |         | 2,197.5 |  |  |      | 12.8 | %
|Equity securities:         |                                           |                                   |   |         |          |  |  |       |      |   |          |         |         |       |  |      |          |   |   |         |         |  |  |     
|                           | Preferred shares/income notes
    of CLOs |                                   |   | 203.0   |          |  |  | 14.6  | %    |   |          | 97.2    |         |       |  | 15.5 | %        |   |   | 72.3    |         |  |  | 13.7 | %   
|                           |                                           |                                   |   |         |          |  |  |       |      |   |          |         |         |       |  |      |          |  
|                           |                                           | Total interest bearing securities |   | $       | 3,683.0  |  |  |       | 12.1 | % |          | $       | 3,354.3 |       |  |      | 11.9     | % |   | $       | 2,269.8 |  |  |      | 12.8 | %
|                           |                                           |                                   |   |         |          |  |  |       |      |   |          |         |         |       |  |      |          |  






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





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Fees and Other Income.




|                                                                                 |                                    |      |      |      |      |   |      |      |  |   |      |      | 
|-------------------------------------------------------------------------------- | ---------------------------------- | ---- | ---- | ---- | ---- | - | ---- | ---- |  | - | ---- | ---- | 
|                                                                                 |                                    | 2007 |      |      | 2006 |   |      | 2005 | 
|($ in millions)                                                                  |                                    |      |      |      |      |   |      |      | 
|Structuring and diligence                                                        |                                    | $    | 20.7 |      |      | $ | 37.3 |      |  | $ | 24.6 |     
|Management, consulting and other services provided to portfolio
    companies(1) |                                    |      | 9.6  |      |      |   | 11.1 |      |  |   | 14.4 |     
|Commitment, guaranty and other fees from portfolio
    companies(2)              |                                    |      | 9.3  |      |      |   | 8.8  |      |  |   | 9.3  |     
|Fund management
    fees(3)                                                      |                                    |      | 0.5  |      |      |   |     |      |  |   |     |     
|Loan prepayment premiums                                                         |                                    |      | 3.7  |      |      |   | 8.8  |      |  |   | 6.3  |     
|Other income                                                                     |                                    |      | 0.3  |      |      |   | 0.1  |      |  |   | 2.4  |     
|                                                                                 |                                    |      |      |      |      |   |      |      | 
|                                                                                 | Total fees and other
    income(4) |      | $    | 44.1 |      |   | $    | 66.1 |  |   | $    | 57.0 | 
|                                                                                 |                                    |      |      |      |      |   |      |      | 






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | 2006 includes $1.8 million in management fees from
    Advantage prior to its sale on March 29, 2006. See
     Portfolio and Investment Activity above
    for further discussion. 2005 includes $6.5 million in
    management fees from Advantage. 2006 and 2005 included
    management fees from Ciena of $1.7 million and
    $2.9 million, respectively. We did not charge Ciena
    management fees in 2007 or in the fourth quarter of 2006. See
      Private Finance  Ciena Capital
    LLC above.
|   
|(2) | Includes guaranty and other fees from Ciena of
    $5.4 million, $6.1 million, and $6.3 million for
    2007, 2006, and 2005, respectively. See  Private
    Finance  Ciena Capital LLC above.                                                                                                                                                                                                                                                                                                                 
|   
|(3) | See Portfolio and Investment Activity  Managed
    Funds above.                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   
|(4) | Fees and other income related to the CMBS and CDO portfolio were
    $4.1 million for 2005. As noted above, we sold our CMBS and
    CDO portfolio on May 3, 2005.                                                                                                                                                                                                                                                                                                                                                 

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Operating Expenses.


Interest Expense.


|                             |  |      |         |   |      |   |         |      |  |   |         |  
|---------------------------- |  | ---- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                             |  | 2007 |         |   | 2006 |   |         | 2005 | 
|($ in millions)              |  |      |         |   |      |   |         |      | 
|Total outstanding debt       |  | $    | 2,289.5 |   |      | $ | 1,899.1 |      |  | $ | 1,284.8 |  
|Average outstanding debt     |  | $    | 1,924.2 |   |      | $ | 1,491.0 |      |  | $ | 1,087.1 |  
|Weighted average
    cost(1) |  |      | 6.5     | % |      |   | 6.5     | %    |  |   | 6.5     | %




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





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Employee Expense.


|                                     |                               |      |       |      |      |   |      |      |  |   |      |      | 
|------------------------------------ | ----------------------------- | ---- | ----- | ---- | ---- | - | ---- | ---- |  | - | ---- | ---- | 
|                                     |                               | 2007 |       |      | 2006 |   |      | 2005 | 
|($ in millions)                      |                               |      |       |      |      |   |      |      | 
|Salaries and employee benefits       |                               | $    | 83.9  |      |      | $ | 73.8 |      |  | $ | 57.3 |     
|Individual performance award (IPA)   |                               |      | 9.8   |      |      |   | 8.1  |      |  |   | 7.0  |     
|IPA mark to market expense (benefit) |                               |      | (14.0 | )    |      |   | 2.9  |      |  |   | 2.0  |     
|Individual performance bonus (IPB)   |                               |      | 9.5   |      |      |   | 8.1  |      |  |   | 6.9  |     
|Transition compensation,
    net(1)  |                               |      |      |      |      |   |     |      |  |   | 5.1  |     
|                                     |                               |      |       |      |      |   |      |      | 
|                                     | Total employee
    expense(2) |      | $     | 89.2 |      |   | $    | 92.9 |  |   | $    | 78.3 | 
|                                     |                               |      |       |      |      |   |      |      | 
|Number of employees at end of period |                               |      | 177   |      |      |   | 170  |      |  |   | 131  |     




|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Transition compensation for the year ended December 31,
    2005, included $3.1 million of costs under retention
    agreements and $3.1 million of transition services bonuses
    awarded to certain employees in the commercial real estate group
    as a result of the sale of the CMBS and CDO portfolio.
    Transition compensation costs were reduced by $1.1 million
    for salary reimbursements from CWCapital under a transition
    services agreement.
|   
|(2) | Excludes stock options expense. See below.                                                                                                                                                                                                                                                                                                                                                                                                                            











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Stock Options Expense. Share-Based
Payment


|                               |                                                               |                                                            |                                     |      |      |      |  |   |      |      | 
|------------------------------ | ------------------------------------------------------------- | ---------------------------------------------------------- | ----------------------------------- | ---- | ---- | ---- |  | - | ---- | ---- | 
|                               |                                                               | 2007                                                       |                                     |      | 2006 |     
|($ in millions)                |                                                               |                                                            |                                     |      |      |     
|Employee Stock Option Expense: |                                                               |                                                            |                                     |      |      |      |  |  
|                               | Options granted:                                              |                                                            |                                     |      |      |      |  |   |     
|                               |                                                               | Previously awarded, unvested options as of January 1, 2006 |                                     | $    | 10.1 |      |  | $ | 13.2 |     
|                               |                                                               | Options granted on or after January 1, 2006                |                                     |      | 10.7 |      |  |   | 2.4  |     
|                               |                                                               |                                                            |                                     |      |      |     
|                               |                                                               |                                                            | Total options granted               |      |      | 20.8 |  |   |      | 15.6 | 
|                               | Options cancelled in connection with tender offer (see below) |                                                            |                                     | 14.4 |      |      |  |  |     
|                               |                                                               |                                                            |                                     |      |      |     
|                               |                                                               |                                                            | Total employee stock option expense |      | $    | 35.2 |  |   | $    | 15.6 | 
|                               |                                                               |                                                            |                                     |      |      |     

Options Granted.




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Options Cancelled in Connection with Tender Offer.




Administrative Expense.


|                                   |                               |      |      |      |      |   |      |      |  |   |      |      | 
|---------------------------------- | ----------------------------- | ---- | ---- | ---- | ---- | - | ---- | ---- |  | - | ---- | ---- | 
|                                   |                               | 2007 |      |      | 2006 |   |      | 2005 | 
|($ in millions)                    |                               |      |      |      |      |   |      |      | 
|Administrative expenses            |                               | $    | 44.8 |      |      | $ | 34.0 |      |  | $ | 33.3 |     
|Investigation and litigation costs |                               |      | 5.8  |      |      |   | 5.0  |      |  |   | 36.4 |     
|                                   |                               |      |      |      |      |   |      |      | 
|                                   | Total administrative expenses |      | $    | 50.6 |      |   | $    | 39.0 |  |   | $    | 69.7 | 
|                                   |                               |      |      |      |      |   |      |      | 





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Income Tax Expense, Including Excise
Tax.


|                             |                                          |      |      |      |      |   |      |      |  |   |     |      | 
|---------------------------- | ---------------------------------------- | ---- | ---- | ---- | ---- | - | ---- | ---- |  | - | --- | ---- | 
|                             |                                          | 2007 |      |      | 2006 |   |      | 2005 | 
|($ in millions)              |                                          |      |      |      |      |   |      |      | 
|Income tax expense (benefit) |                                          | $    | (2.7 | )    |      | $ | 0.1  |      |  | $ | 5.4 |     
|Excise tax
    expense(1)    |                                          |      | 16.3 |      |      |   | 15.1 |      |  |   | 6.2 |     
|                             |                                          |      |      |      |      |   |      |      | 
|                             | Income tax expense, including excise tax |      | $    | 13.6 |      |   | $    | 15.2 |  |   | $   | 11.6 | 
|                             |                                          |      |      |      |      |   |      |      | 






|    |                                                                                                                                                                                                                
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | While excise tax expense is presented in the Consolidated
    Statement of Operations as a reduction to net investment income,
    excise tax relates to both net investment income and net
    realized gains.





Accounting for Uncertainty in Income Taxes Accounting for
Income Taxes.


Realized Gains and Losses.


|                   |  |      |        |   |      |   |       |      |  |   |       |  
|------------------ |  | ---- | ------ | - | ---- | - | ----- | ---- |  | - | ----- | -
|                   |  | 2007 |        |   | 2006 |   |       | 2005 | 
|($ in millions)    |  |      |        |   |      |   |       |      | 
|Realized gains     |  | $    | 400.5  |   |      | $ | 557.5 |      |  | $ | 343.1 |  
|Realized losses    |  |      | (132.0 | ) |      |   | (24.2 | )    |  |   | (69.6 | )
|                   |  |      |        |   |      |   |       |      | 
|Net realized gains |  | $    | 268.5  |   |      | $ | 533.3 |      |  | $ | 273.5 |  
|                   |  |      |        |   |      |   |       |      | 



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|                                                                                                |                |      |        |        |      |   |        |         |   |   |        |       |  
|----------------------------------------------------------------------------------------------- | -------------- | ---- | ------ | ------ | ---- | - | ------ | ------- | - | - | ------ | ----- | -
|                                                                                                |                | 2007 |        |        | 2006 |   |        | 2005(1) |  
|($ in millions)                                                                                 |                |      |        |        |      |   |        |         |  
|Reversal of previously recorded net unrealized appreciation
    associated with realized gains  |                | $    | (332.6 | )      |      | $ | (501.5 | )       |   | $ | (108.0 | )    
|Reversal of previously recorded net unrealized depreciation
    associated with realized losses |                |      | 139.8  |        |      |   | 22.5   |         |   |   | 68.0   |      
|                                                                                                |                |      |        |        |      |   |        |         |  
|                                                                                                | Total reversal |      | $      | (192.8 | )    |   | $      | (479.0  | ) |   | $      | (40.0 | )
|                                                                                                |                |      |        |        |      |   |        |         |  

| |  | 
| |  | 
| |  | 

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



($ in millions)


|                                  |                              |        |       |       | 
|--------------------------------- | ---------------------------- | ------ | ----- | ----- | 
|2007                              |                             
|                                  |                             
|Portfolio Company                 |                              | Amount |      
|                                  |                              |        |      
|Private Finance:                  |                              |        |       |      
|Mercury Air Centers, Inc.         |                              | $      | 262.4 |      
|HMT, Inc.                         |                              |        | 39.9  |      
|Healthy Pet Corp.                 |                              |        | 36.6  |      
|Palm Coast Data, LLC              |                              |        | 20.0  |      
|Woodstream Corporation            |                              |        | 14.6  |      
|Wear Me Apparel Corporation       |                              |        | 6.1   |      
|Mogas Energy, LLC                 |                              |        | 5.7   |      
|Tradesmen International, Inc.     |                              |        | 3.8   |      
|ForeSite Towers, LLC              |                              |        | 3.8   |      
|Advantage Sales & Marketing, Inc. |                              |        | 3.4   |      
|Geotrace Technologies, Inc.       |                              |        | 1.1   |      
|Other                             |                              |        | 3.0   |      
|                                  |                              |        |      
|                                  | Total private finance        |        |       | 400.4 | 
|                                  |                              |        |      
|Commercial Real Estate:           |                              |        |       |      
|Other                             |                              |        | 0.1   |      
|                                  |                              |        |      
|                                  | Total commercial real estate |        |       | 0.1   | 
|                                  |                              |        |      
|Total realized gains              |                              | $      | 400.5 |      
|                                  |                              |        |      

|                                         |                              |        |       |       | 
|---------------------------------------- | ---------------------------- | ------ | ----- | ----- | 
|2006                                     |                             
|                                         |                             
|Portfolio Company                        |                              | Amount |      
|                                         |                              |        |      
|Private Finance:                         |                              |        |       |      
|Advantage Sales & Marketing,
    Inc.(1) |                              | $      | 434.4 |      
|STS Operating, Inc.                      |                              |        | 94.8  |      
|Oriental Trading Company, Inc.           |                              |        | 8.9   |      
|Advantage Sales & Marketing,
    Inc.(2) |                              |        | 4.8   |      
|United Site Services, Inc.               |                              |        | 3.3   |      
|Component Hardware Group, Inc.           |                              |        | 2.8   |      
|Opinion Research Corporation             |                              |        | 1.9   |      
|Nobel Learning Communities, Inc.         |                              |        | 1.5   |      
|MHF Logistical Solutions, Inc.           |                              |        | 1.2   |      
|The Debt Exchange, Inc.                  |                              |        | 1.1   |      
|Other                                    |                              |        | 1.5   |      
|                                         |                              |        |      
|                                         | Total private finance        |        |       | 556.2 | 
|                                         |                              |        |      
|Commercial Real Estate:                  |                              |        |       |      
|Other                                    |                              |        | 1.3   |      
|                                         |                              |        |      
|                                         | Total commercial real estate |        |       | 1.3   | 
|                                         |                              |        |      
|Total realized gains                     |                              | $      | 557.5 |      
|                                         |                              |        |      

|                                      |                              |        |       |       | 
|------------------------------------- | ---------------------------- | ------ | ----- | ----- | 
|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(3)           |                              |        | 227.7 |      
|Other                                 |                              |        | 9.3   |      
|                                      |                              |        |      
|                                      | Total commercial real estate |        |       | 237.0 | 
|                                      |                              |        |      
|Total realized gains                  |                              | $      | 343.1 |      
|                                      |                              |        |      




|    |                                                                                                         
|--- | --------------------------------------------------------------------------------------------------------
|(1) | Represents the realized gain on our majority equity investment
    only. See Private Finance above.  
|(2) | Represents a realized gain on our minority equity investment
    only. See Private Finance above.    
|(3) | Net of net realized losses from related hedges of
    $0.7 million for the year ended December 31, 2005.

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($ in millions)


|                                      |  |        |       | 
|------------------------------------- |  | ------ | ----- | 
|2007                                  | 
|                                      | 
|Portfolio Company                     |  | Amount |      
|                                      |  |        |      
|Private Finance:                      |  |        |       | 
|Global Communications, LLC            |  | $      | 34.3  | 
|Jakel, Inc.                           |  |        | 24.8  | 
|Startec Global Communications, Inc.   |  |        | 20.2  | 
|Gordian Group, Inc.                   |  |        | 19.3  | 
|Powell Plant Farms, Inc.              |  |        | 11.6  | 
|Universal Environmental Services, LLC |  |        | 8.6   | 
|PresAir, LLC                          |  |        | 6.0   | 
|Legacy Partners Group, LLC            |  |        | 5.8   | 
|Alaris Consulting, LLC                |  |        | 1.0   | 
|Other                                 |  |        | 0.4   | 
|                                      |  |        |      
|Total realized losses                 |  | $      | 132.0 | 
|                                      |  |        |      

|                                        |                              |        |      |      | 
|--------------------------------------- | ---------------------------- | ------ | ---- | ---- | 
|2006                                    |                             
|                                        |                             
|Portfolio Company                       |                              | Amount |     
|                                        |                              |        |     
|Private Finance:                        |                              |        |      |     
|Staffing Partners Holding Company, Inc. |                              | $      | 10.6 |     
|Acme Paging, L.P.                       |                              |        | 4.7  |     
|Cooper Natural Resources, Inc.          |                              |        | 2.2  |     
|Aspen Pet Products, Inc.                |                              |        | 1.6  |     
|Nobel Learning Communities, Inc.        |                              |        | 1.4  |     
|Other                                   |                              |        | 1.6  |     
|                                        |                              |        |     
|                                        | Total private finance        |        |      | 22.1 | 
|                                        |                              |        |     
|Commercial Real Estate:                 |                              |        |      |     
|Other                                   |                              |        | 2.1  |     
|                                        |                              |        |     
|                                        | Total commercial real estate |        |      | 2.1  | 
|                                        |                              |        |     
|Total realized losses                   |                              | $      | 24.2 |     
|                                        |                              |        |     

|                                |                              |        |      |      | 
|------------------------------- | ---------------------------- | ------ | ---- | ---- | 
|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 realized losses           |                              | $      | 69.6 |     
|                                |                              |        |     

Change in Unrealized Appreciation or Depreciation.






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Fair Value Measurements,


Valuation Methodology  Private Finance.








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|                                                          |  |      |      |   |    |  |      |    |  |  |      |   |  |  |      |  
|--------------------------------------------------------- |  | ---- | ---- | - | -- |  | ---- | -- |  |  | ---- | - |  |  | ---- | -
|                                                          |  | 2007 |     
|                                                          |  |      |     
|                                                          |  | Q4   |      |   | Q3 |  |      | Q2 |  |  | Q1   |  
|                                                          |  |      |      |   |    |  |      |    |  |  |      |  
|Number of private finance portfolio companies reviewed    |  |      | 112  |   |    |  | 135  |    |  |  | 92   |   |  |  | 88   |  
|Percentage of private finance portfolio reviewed at value |  |      | 91.1 | % |    |  | 92.1 | %  |  |  | 92.1 | % |  |  | 91.8 | %

|                                                          |  |      |      |   |    |  |      |    |  |  |      |   |  |  |      |  
|--------------------------------------------------------- |  | ---- | ---- | - | -- |  | ---- | -- |  |  | ---- | - |  |  | ---- | -
|                                                          |  | 2006 |     
|                                                          |  |      |     
|                                                          |  | Q4   |      |   | Q3 |  |      | Q2 |  |  | Q1   |  
|                                                          |  |      |      |   |    |  |      |    |  |  |      |  
|Number of private finance portfolio companies reviewed    |  |      | 81   |   |    |  | 105  |    |  |  | 78   |   |  |  | 78   |  
|Percentage of private finance portfolio reviewed at value |  |      | 82.9 | % |    |  | 86.5 | %  |  |  | 89.6 | % |  |  | 87.0 | %

|                                                          |  |      |      |   |    |  |      |    |  |  |      |   |  |  |      |  
|--------------------------------------------------------- |  | ---- | ---- | - | -- |  | ---- | -- |  |  | ---- | - |  |  | ---- | -
|                                                          |  | 2005 |     
|                                                          |  |      |     
|                                                          |  | Q4   |      |   | Q3 |  |      | Q2 |  |  | Q1   |  
|                                                          |  |      |      |   |    |  |      |    |  |  |      |  
|Number of private finance portfolio companies reviewed    |  |      | 80   |   |    |  | 89   |    |  |  | 72   |   |  |  | 36   |  
|Percentage of private finance portfolio reviewed at value |  |      | 92.4 | % |    |  | 89.3 | %  |  |  | 83.0 | % |  |  | 74.5 | %

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Net Change in Unrealized Appreciation or Depreciation.


|                                                                                            |                                                       |         |        |        |         |   |        |         |   |   |        |       | 
|------------------------------------------------------------------------------------------- | ----------------------------------------------------- | ------- | ------ | ------ | ------- | - | ------ | ------- | - | - | ------ | ----- | 
|                                                                                            |                                                       | 2007(1) |        |        | 2006(1) |   |        | 2005(1) |  
|($ in millions)                                                                             |                                                       |         |        |        |         |   |        |         |  
|Net unrealized appreciation
    (depreciation)(2)                                           |                                                       | $       | (63.4  | )      |         | $ | 1.6    |         |   | $ | 502.1  |      
|Reversal of previously recorded unrealized appreciation
    associated with realized gains  |                                                       |         | (332.6 | )      |         |   | (501.5 | )       |   |   | (108.0 | )    
|Reversal of previously recorded unrealized depreciation
    associated with realized losses |                                                       |         | 139.8  |        |         |   | 22.5   |         |   |   | 68.0   |      
|                                                                                            |                                                       |         |        |        |         |   |        |         |  
|                                                                                            | Net change in unrealized appreciation or depreciation |         | $      | (256.2 | )       |   | $      | (477.4  | ) |   | $      | 462.1 | 
|                                                                                            |                                                       |         |        |        |         |   |        |         |  




|    |                                                                                                                                                                                                                                              
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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.                                                                      
|   
|(2) | The sale of certain of our portfolio investments to Goldman
    Sachs that occurred in the first quarter of 2008 provided
    transaction values for 59 portfolio investments that were used
    in the December 31, 2007, valuation process.

Valuation of Ciena Capital LLC.








Per Share Amounts.


OTHER MATTERS


Regulated Investment Company Status.


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DIVIDENDS AND DISTRIBUTIONS






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|                                                                                            |                                        |                |        |       |      |   |        |       |  |   |        |       | 
|------------------------------------------------------------------------------------------- | -------------------------------------- | -------------- | ------ | ----- | ---- | - | ------ | ----- |  | - | ------ | ----- | 
|                                                                                            |                                        | 2007           |        |       | 2006 |   |        | 2005  | 
|($ in millions)                                                                             |                                        |                |        |       |      |   |        |       | 
|                                                                                            |                                        | (ESTIMATED)(1) |        |       |      |   |       
|Taxable
    income(2)                                                                       |                                        | $              | 407.6  |       |      | $ | 601.2  |       |  | $ | 445.0  |      
|Taxable income earned in current year and carried forward for
    distribution in next year |                                        |                | (403.1 | )     |      |   | (402.8 | )     |  |   | (156.5 | )    
|Taxable income earned in prior year and carried forward and
    distributed in current year |                                        |                | 402.8  |       |      |   | 156.5  |       |  |   | 26.0   |      
|                                                                                            |                                        |                |        |       |      |   |        |       | 
|                                                                                            | Total dividends to common shareholders |                | $      | 407.3 |      |   | $      | 354.9 |  |   | $      | 314.5 | 
|                                                                                            |                                        |                |        |       |      |   |        |       | 




|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Our taxable income for 2007 is an estimate and will not be
    finally determined until we file our 2007 tax return in
    September 2008. Therefore, the final taxable income and the
    taxable income earned in 2007 and carried forward for
    distribution in 2008 may be different than the estimate above.
    See Risk Factors under Item 1A and Note 10,
    Dividends and Distributions and Taxes of our Notes
    to Consolidated Financial Statements included in Item 8.
|   
|(2) | See Note 10, Dividends and Distributions and Taxes
    of our Notes to Consolidated Financial Statements included in
    Item 8 for further information on the differences between
    net income for book purposes and taxable income.                                                                                                                                                                                                                                                  







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FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES




|                                                                                                                       |  |      |         |   |      |   |         |  
|---------------------------------------------------------------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|                                                                                                                       |  | 2007 |         |   | 2006 |  
|($ in millions)                                                                                                        |  |      |         |   |      |  
|Liquidity portfolio (including money market and other securities)                                                      |  | $    | 201.2   |   |      | $ | 201.8   |  
|Cash and investments in money market securities (including money
    market and other securities: 2007-$ ; 2006-$0.4) |  | $    | 3.5     |   |      | $ | 2.1     |  
|Total assets                                                                                                           |  | $    | 5,214.6 |   |      | $ | 4,887.5 |  
|Total debt outstanding                                                                                                 |  | $    | 2,289.5 |   |      | $ | 1,899.1 |  
|Total shareholders equity                                                                                             |  | $    | 2,771.8 |   |      | $ | 2,841.2 |  
|Debt to equity ratio                                                                                                   |  |      | 0.83    |   |      |   | 0.67    |  
|Asset coverage
    ratio(1)                                                                                            |  |      | 221     | % |      |   | 250     | %






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



|                                                    |                                                                        |      |         |         |      |   |         |         |  |   |         |         | 
|--------------------------------------------------- | ---------------------------------------------------------------------- | ---- | ------- | ------- | ---- | - | ------- | ------- |  | - | ------- | ------- | 
|                                                    |                                                                        | 2007 |         |         | 2006 |   |         | 2005    | 
|($ in millions)                                     |                                                                        |      |         |         |      |   |         |         | 
|Net cash provided by (used in) operating activities |                                                                        | $    | (112.2  | )       |      | $ | (597.5  | )       |  | $ | 116.0   |        
|Add: portfolio investments funded                   |                                                                        |      | 1,846.0 |         |      |   | 2,257.8 |         |  |   | 1,668.1 |        
|                                                    |                                                                        |      |         |         |      |   |         |         | 
|                                                    | Total cash provided by operating activities before new
    investments |      | $       | 1,733.8 |      |   | $       | 1,660.3 |  |   | $       | 1,784.1 | 
|                                                    |                                                                        |      |         |         |      |   |         |         | 





|                        |       |       |       |       |       |  |     |       |   |   |       |       |  |  |     |     |  
|----------------------- | ----- | ----- | ----- | ----- | ----- |  | --- | ----- | - | - | ----- | ----- |  |  | --- | --- | -
|                        |       | 2007  |       |       | 2006  | 
|                        |       |       |       |       |       | 
|                        |       | Value |       |       | Yield |  |     | Value |   |   | Yield |      
|($ in millions)         |       |       |       |       |       |  |     |       |   |   |       |      
|Money market securities |       | $     | 201.2 |       |       |  | 4.6 | %     |   | $ | 161.2 |       |  |  | 5.3 | %  
|Certificate of Deposit  |       |       |      |       |       |  |    |       |   |   | 40.6  |       |  |  | 5.6 | %  
|                        |       |       |       |       |       |  |     |       |   |   |       |      
|                        | Total |       | $     | 201.2 |       |  |     | 4.6   | % |   | $     | 201.8 |  |  |     | 5.3 | %
|                        |       |       |       |       |       |  |     |       |   |   |       |      







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|                                |                                          |                                    |       |         |             |  |       |          |         |  |          |      |     |             |       |         |          |  |       |         |         |  |     |      |     |     
|------------------------------- | ---------------------------------------- | ---------------------------------- | ----- | ------- | ----------- |  | ----- | -------- | ------- |  | -------- | ---- | --- | ----------- | ----- | ------- | -------- |  | ----- | ------- | ------- |  | --- | ---- | --- | ----
|                                |                                          | 2007                               |       |         | 2006        | 
|                                |                                          |                                    |       |         |             | 
|                                |                                          |                                    |       | Annual  |             |  |       |          | Annual  | 
|                                |                                          | Facility                           |       |         | Amount      |  |       | Interest |         |  | Facility |      |     | Amount      |       |         | Interest | 
|                                |                                          | Amount                             |       |         | Outstanding |  |       | Cost(1)  |         |  | Amount   |      |     | Outstanding |       |         | Cost(1)  | 
|($ in millions)                 |                                          |                                    |       |         |             |  |       |          |         |  |          |      |     |             |       |         |          | 
|Notes payable and debentures:   |                                          |                                    |       |         |             |  |       |          |         |  |          |      |     |             |       |         |          |  |       |         |         |  |     |     
|                                | Privately issued unsecured notes payable |                                    | $     | 1,042.2 |             |  | $     | 1,042.2  |         |  |          | 6.1  | %   |             | $     | 1,041.4 |          |  | $     | 1,041.4 |         |  |     | 6.1  | %  
|                                | Publicly issued unsecured notes payable  |                                    |       | 880.0   |             |  |       | 880.0    |         |  |          | 6.7  | %   |             |       | 650.0   |          |  |       | 650.0   |         |  |     | 6.6  | %  
|                                |                                          |                                    |       |         |             |  |       |          |         |  |          |      |     |             |       |         |          | 
|                                |                                          | Total notes payable and debentures |       |         | 1,922.2     |  |       |          | 1,922.2 |  |          |      | 6.4 | %           |       |         | 1,691.4  |  |       |         | 1,691.4 |  |     |      | 6.3 | %   
|Revolving line of
    credit(2) |                                          |                                    | 922.5 |         |             |  | 367.3 |          |         |  | 5.9      | %(3) |     |             | 922.5 |         |          |  | 207.7 |         |         |  | 6.4 | %(3)
|                                |                                          |                                    |       |         |             |  |       |          |         |  |          |      |     |             |       |         |          | 
|                                |                                          | Total debt                         |       | $       | 2,844.7     |  |       | $        | 2,289.5 |  |          |      | 6.5 | %(4)        |       | $       | 2,613.9  |  |       | $       | 1,899.1 |  |     |      | 6.5 | %(4)
|                                |                                          |                                    |       |         |             |  |       |          |         |  |          |      |     |             |       |         |          | 




|    |                                                                                                                                                                                                                                                                                                                                                                                                           
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The weighted average annual interest cost is computed as the
    (a) annual stated interest on the debt plus the annual
    amortization of commitment fees, other facility fees and the
    amortization of debt financing costs that are recognized into
    interest expense over the contractual life of the respective
    borrowings, divided by (b) debt outstanding on the balance
    sheet date.
|   
|(2) | At December 31, 2007, $496.7 million remained unused and
    available on the revolving line of credit, net of amounts
    committed for standby letters of credit of $58.5 million
    issued under the credit facility.                                                                                                                                                                                 
|   
|(3) | The annual interest cost reflects the interest rate payable for
    borrowings under the revolving line of credit. In addition to
    the current interest rate payable, there were annual costs of
    commitment fees, other facility fees and amortization of debt
    financing costs of $3.7 million and $3.9 million at
    December 31, 2007 and 2006, respectively.                               
|   
|(4) | The annual interest cost for total debt includes the annual cost
    of commitment fees and the amortization of debt financing costs
    on the revolving line of credit and other facility fees
    regardless of the amount outstanding on the facility as of the
    balance sheet date.                                                                                                               

Privately Issued Unsecured Notes Payable.




Publicly Issued Unsecured Notes Payable.


|                      |       |        |       |       |               |  |                |  | 
|--------------------- | ----- | ------ | ----- | ----- | ------------- |  | -------------- |  | 
|                      |       | Amount |       |       | Maturity Date | 
|($ in millions)       |       |        |       |       |               | 
|6.625% Notes due 2011 |       | $      | 400.0 |       |               |  | July 15, 2011  | 
|6.000% Notes due 2012 |       |        | 250.0 |       |               |  | April 1, 2012  | 
|6.875% Notes due 2047 |       |        | 230.0 |       |               |  | April 15, 2047 | 
|                      |       |        |       |       |               | 
|                      | Total |        | $     | 880.0 |               |  |                |  | 
|                      |       |        |       |       |               | 

semi-annually,




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Revolving Line of Credit.




Covenant Compliance.




Contractual Obligations.


|                                |                               |       |         |                      |      |       |       |       |  |   |       |       |  |      |       |       |      |   |       |       |  |   |       |       |  |   |       |       | 
|------------------------------- | ----------------------------- | ----- | ------- | -------------------- | ---- | ----- | ----- | ----- |  | - | ----- | ----- |  | ---- | ----- | ----- | ---- | - | ----- | ----- |  | - | ----- | ----- |  | - | ----- | ----- | 
|                                |                               |       |         | Payments Due By Year |     
|                                |                               |       |         |                      |     
|                                |                               |       |         |                      |      | After |      
|                                |                               | Total |         |                      | 2008 |       |       | 2009  |  |   | 2010  |       |  | 2011 |       |       | 2012 |   |       | 2012  | 
|($ in millions)                 |                               |       |         |                      |      |       |       |       |  |   |       |       |  |      |       |       |      |   |       |       | 
|Unsecured notes payable         |                               | $     | 1,922.2 |                      |      | $     | 153.0 |       |  | $ | 269.7 |       |  | $    | 408.0 |       |      | $ | 472.5 |       |  | $ | 339.0 |       |  | $ | 280.0 |      
|Revolving line of
    credit(1) |                               |       | 367.3   |                      |      |       | 367.3 |       |  |   |      |       |  |      |      |       |      |   |      |       |  |   |      |       |  |   |      |      
|Operating leases                |                               |       | 20.2    |                      |      |       | 4.4   |       |  |   | 4.6   |       |  |      | 4.5   |       |      |   | 1.8   |       |  |   | 1.8   |       |  |   | 3.1   |      
|                                |                               |       |         |                      |      |       |       |       |  |   |       |       |  |      |       |       |      |   |       |       | 
|                                | Total contractual obligations |       | $       | 2,309.7              |      |       | $     | 524.7 |  |   | $     | 274.3 |  |      | $     | 412.5 |      |   | $     | 474.3 |  |   | $     | 340.8 |  |   | $     | 283.1 | 
|                                |                               |       |         |                      |      |       |       |       |  |   |       |       |  |      |       |       |      |   |       |       | 




|    |                                                                                                                                                                                                                         
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | At December 31, 2007, 496.7 million remained unused
    and available on the revolving line of credit, net of amounts
    committed for standby letters of credit of $58.5 million
    issued under the credit facility.

Off-Balance Sheet Arrangements




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|                                 |                          |       |       |                                          |      |       |      |      |  |   |       |       |      |   |   |      |  |   |      |     |  |   |     |     |  |   |     |     | 
|-------------------------------- | ------------------------ | ----- | ----- | ---------------------------------------- | ---- | ----- | ---- | ---- |  | - | ----- | ----- | ---- | - | - | ---- |  | - | ---- | --- |  | - | --- | --- |  | - | --- | --- | 
|                                 |                          |       |       | Amount of Commitment Expiration Per Year |     
|                                 |                          |       |       |                                          |     
|                                 |                          |       |       |                                          |      | After |     
|                                 |                          | Total |       |                                          | 2008 |       |      | 2009 |  |   | 2010  |       | 2011 |   |   | 2012 |  |   | 2012 |    
|($ in millions)                  |                          |       |       |                                          |      |       |      |      |  |   |       |       |      |   |   |      |  |   |      |    
|Guarantees                       |                          | $     | 270.6 |                                          |      | $     | 3.0  |      |  | $ | 261.2 |       |      | $ |  |      |  | $ | 4.4  |     |  | $ | 0.1 |     |  | $ | 1.9 |    
|Standby letters of
    credit(1) |                          |       | 58.5  |                                          |      |       | 58.5 |      |  |   |      |       |      |   |  |      |  |   |     |     |  |   |    |     |  |   |    |    
|                                 |                          |       |       |                                          |      |       |      |      |  |   |       |       |      |   |   |      |  |   |      |     | 
|                                 | Total
    commitments(2) |       | $     | 329.1                                    |      |       | $    | 61.5 |  |   | $     | 261.2 |      |   | $ |     |  |   | $    | 4.4 |  |   | $   | 0.1 |  |   | $   | 1.9 | 
|                                 |                          |       |       |                                          |      |       |      |      |  |   |       |       |      |   |   |      |  |   |      |     | 




|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Standby letters of credit are issued under our revolving line of
    credit that expires in September 2008. Therefore, unless a
    standby letter of credit is set to expire at an earlier date, we
    have assumed that the standby letters of credit will expire
    contemporaneously with the expiration of our line of credit in
    September 2008.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   
|(2) | Our most significant commitments relate to our investment in
    Ciena Capital LLC (Ciena), which commitments totaled
    $276.7 million at December 31, 2007. At December 31,
    2007, the principal components of these guarantees included a
    guarantee of 60% of the outstanding total obligations on
    Cienas revolving line of credit, which matures in March
    2009, for a total guaranteed amount of $258.7 million and
    standby letters of credit issued totaling $18.0 million in
    connection with term securitizations completed by Ciena. In
    January 2008, we increased the guaranteed amount on Cienas
    revolving line of credit from 60% to 100% in connection with an
    amendment completed by Ciena and also issued additional letters
    of credit totaling $42.5 million related to other term
    securitizations completed by Ciena. See
     Private Finance, Ciena Capital LLC above
    for further discussion.



CRITICAL ACCOUNTING POLICIES




Valuation of Portfolio Investments.


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Loans and Debt Securities.






Equity Securities.






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




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


Fee Income.


Federal and State Income Taxes and Excise Tax.




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Recent Accounting Pronouncements. Fair Value
Measurements.





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










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Item 8. Financial Statements and Supplementary
Data.


|                                                                                                            |  |      |     | 
|----------------------------------------------------------------------------------------------------------- |  | ---- | --- | 
|                                                                                                            |  | Page |    
|                                                                                                            |  |      |    
|Managements Report on Internal Control over Financial
    Reporting                                        |  |      | 73  | 
|Reports of Independent Registered Public Accounting Firm                                                    |  |      | 74  | 
|Consolidated Balance Sheet  December 31, 2007
    and 2006                                                 |  |      | 77  | 
|Consolidated Statement of Operations  For the Years
    Ended December 31, 2007, 2006, and 2005            |  |      | 78  | 
|Consolidated Statement of Changes in Net Assets  For
    the Years Ended December 31, 2007, 2006, and 2005 |  |      | 79  | 
|Consolidated Statement of Cash Flows  For the Years
    Ended December 31, 2007, 2006, and 2005            |  |      | 80  | 
|Consolidated Statement of Investments 
    December 31, 2007                                               |  |      | 81  | 
|Consolidated Statement of Investments 
    December 31, 2006                                               |  |      | 92  | 
|Notes to Consolidated Financial Statements                                                                  |  |      | 103 | 

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Managements Report on Internal Control over Financial
Reporting


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


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Report of Independent Registered Public Accounting Firm


The Board of Directors and Shareholders


Allied Capital Corporation:


Internal Control  Integrated
Framework








Internal Control  Integrated
Framework


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Report of Independent Registered Public Accounting Firm


The Board of Directors and Shareholders 
 Allied Capital Corporation:








Share Based Payment.


Internal Control 
Integrated Framework









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ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


CONSOLIDATED BALANCE SHEET


|                                                 |                                                                                                                                                                   |                                                                            |                                                                   |           |           |           |         |           |           |           | 
|------------------------------------------------ | ----------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------- | ----------------------------------------------------------------- | --------- | --------- | --------- | ------- | --------- | --------- | --------- | 
|                                                 |                                                                                                                                                                   | December 31,                                                               |                                                                  
|                                                 |                                                                                                                                                                   |                                                                            |                                                                  
|                                                 |                                                                                                                                                                   | 2007                                                                       |                                                                   |           | 2006      |          
|(in thousands, except per share amounts)         |                                                                                                                                                                   |                                                                            |                                                                   |           |           |          
|ASSETS                                          
|Portfolio at value:                              |                                                                                                                                                                   |                                                                            |                                                                   |           |           |           |         |          
|                                                 | Private finance                                                                                                                                                   |                                                                            |                                                                   |           |           |           |         |           |          
|                                                 |                                                                                                                                                                   | Companies more than 25% owned (cost: 2007-$1,622,094;
    2006-$1,578,822) |                                                                   | $         | 1,279,080 |           |         | $         | 1,490,180 |          
|                                                 |                                                                                                                                                                   | Companies 5% to 25% owned (cost: 2007-$426,908;
    2006-$438,560)         |                                                                   |           | 389,509   |           |         |           | 449,813   |          
|                                                 |                                                                                                                                                                   | Companies less than 5% owned (cost: 2007-$2,994,880;
    2006-$2,479,981)  |                                                                   |           | 2,990,732 |           |         |           | 2,437,908 |          
|                                                 |                                                                                                                                                                   |                                                                            |                                                                   |           |           |          
|                                                 |                                                                                                                                                                   |                                                                            | Total private finance (cost: 2007-$5,043,882; 2006-$4,497,363)    |           |           | 4,659,321 |         |           |           | 4,377,901 | 
|                                                 | Commercial real estate finance (cost: 2007-$96,942;
    2006-$103,546)                                                                                            |                                                                            |                                                                   | 121,200   |           |           |         | 118,183   |          
|                                                 |                                                                                                                                                                   |                                                                            |                                                                   |           |           |          
|                                                 |                                                                                                                                                                   |                                                                            | Total portfolio at value (cost: 2007-$5,140,824; 2006-$4,600,909) |           |           | 4,780,521 |         |           |           | 4,496,084 | 
|Investments in money market and other securities |                                                                                                                                                                   |                                                                            | 201,222                                                           |           |           |           | 202,210 |          
|Accrued interest and dividends receivable        |                                                                                                                                                                   |                                                                            | 71,429                                                            |           |           |           | 64,566  |          
|Other assets                                     |                                                                                                                                                                   |                                                                            | 157,864                                                           |           |           |           | 122,958 |          
|Cash                                             |                                                                                                                                                                   |                                                                            | 3,540                                                             |           |           |           | 1,687   |          
|                                                 |                                                                                                                                                                   |                                                                            |                                                                   |           |           |          
|                                                 |                                                                                                                                                                   |                                                                            | Total assets                                                      |           | $         | 5,214,576 |         |           | $         | 4,887,505 | 
|                                                 |                                                                                                                                                                   |                                                                            |                                                                   |           |           |          
|LIABILITIES AND SHAREHOLDERS EQUITY            
|Liabilities:                                     |                                                                                                                                                                   |                                                                            |                                                                   |           |           |           |         |          
|                                                 | Notes payable and debentures (maturing within one year:
    2007-$153,000; 2006-$)                                                                               |                                                                            | $                                                                 | 1,922,220 |           |           | $       | 1,691,394 |          
|                                                 | Revolving line of credit                                                                                                                                          |                                                                            |                                                                   | 367,250   |           |           |         | 207,750   |          
|                                                 | Accounts payable and other liabilities                                                                                                                            |                                                                            |                                                                   | 153,259   |           |           |         | 147,117   |          
|                                                 |                                                                                                                                                                   |                                                                            |                                                                   |           |           |          
|                                                 |                                                                                                                                                                   |                                                                            | Total liabilities                                                 |           |           | 2,442,729 |         |           |           | 2,046,261 | 
|                                                 |                                                                                                                                                                   |                                                                            |                                                                   |           |           |          
|Commitments and contingencies                    |                                                                                                                                                                   |                                                                            |                                                                   |           |           |           |         |          
|Shareholders equity:                            |                                                                                                                                                                   |                                                                            |                                                                   |           |           |           |         |          
|                                                 | Common stock, $0.0001 par value, 400,000 shares authorized;
    158,002 and 148,575 shares issued and outstanding at
    December 31, 2007 and 2006, respectively |                                                                            |                                                                   | 16        |           |           |         | 15        |          
|                                                 | Additional paid-in capital                                                                                                                                        |                                                                            |                                                                   | 2,657,939 |           |           |         | 2,493,335 |          
|                                                 | Common stock held in deferred compensation trust                                                                                                                  |                                                                            |                                                                   | (39,942   | )         |           |         | (28,335   | )        
|                                                 | Notes receivable from sale of common stock                                                                                                                        |                                                                            |                                                                   | (2,692    | )         |           |         | (2,850    | )        
|                                                 | Net unrealized appreciation (depreciation)                                                                                                                        |                                                                            |                                                                   | (379,327  | )         |           |         | (123,084  | )        
|                                                 | Undistributed earnings                                                                                                                                            |                                                                            |                                                                   | 535,853   |           |           |         | 502,163   |          
|                                                 |                                                                                                                                                                   |                                                                            |                                                                   |           |           |          
|                                                 |                                                                                                                                                                   |                                                                            | Total shareholders equity                                        |           |           | 2,771,847 |         |           |           | 2,841,244 | 
|                                                 |                                                                                                                                                                   |                                                                            |                                                                   |           |           |          
|                                                 |                                                                                                                                                                   |                                                                            | Total liabilities and shareholders equity                        |           | $         | 5,214,576 |         |           | $         | 4,887,505 | 
|                                                 |                                                                                                                                                                   |                                                                            |                                                                   |           |           |          
|Net asset value per common share                 |                                                                                                                                                                   | $                                                                          | 17.54                                                             |           |           | $         | 19.12   |          
|                                                 |                                                                                                                                                                   |                                                                            |                                                                   |           |           |          



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ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


CONSOLIDATED STATEMENT OF OPERATIONS


|                                                     |                                                       |                                  |                                             |          |         |         |         |          |         |         |         |         |         |         | 
|---------------------------------------------------- | ----------------------------------------------------- | -------------------------------- | ------------------------------------------- | -------- | ------- | ------- | ------- | -------- | ------- | ------- | ------- | ------- | ------- | ------- | 
|                                                     |                                                       | For the Years Ended December 31, |                                            
|                                                     |                                                       |                                  |                                            
|                                                     |                                                       | 2007                             |                                             |          | 2006    |         |         | 2005     |        
|(in thousands, except per share amounts)             |                                                       |                                  |                                             |          |         |         |         |          |        
|Interest and Related Portfolio Income:               |                                                       |                                  |                                             |          |         |         |         |          |         |         |         |        
|                                                     | Interest and dividends                                |                                  |                                             |          |         |         |         |          |         |         |         |         |        
|                                                     |                                                       | Companies more than 25% owned    |                                             | $        | 105,634 |         |         | $        | 102,636 |         |         | $       | 122,450 |        
|                                                     |                                                       | Companies 5% to 25% owned        |                                             |          | 41,577  |         |         |          | 39,754  |         |         |         | 21,924  |        
|                                                     |                                                       | Companies less than 5% owned     |                                             |          | 270,365 |         |         |          | 244,037 |         |         |         | 172,779 |        
|                                                     |                                                       |                                  |                                             |          |         |         |         |          |        
|                                                     |                                                       |                                  | Total interest and dividends                |          |         | 417,576 |         |          |         | 386,427 |         |         |         | 317,153 | 
|                                                     | Fees and other income                                 |                                  |                                             |          |         |         |         |          |         |         |         |         |        
|                                                     |                                                       | Companies more than 25% owned    |                                             |          | 18,505  |         |         |          | 29,606  |         |         |         | 27,365  |        
|                                                     |                                                       | Companies 5% to 25% owned        |                                             |          | 810     |         |         |          | 4,447   |         |         |         | 124     |        
|                                                     |                                                       | Companies less than 5% owned     |                                             |          | 24,814  |         |         |          | 32,078  |         |         |         | 29,510  |        
|                                                     |                                                       |                                  |                                             |          |         |         |         |          |        
|                                                     |                                                       |                                  | Total fees and other income                 |          |         | 44,129  |         |          |         | 66,131  |         |         |         | 56,999  | 
|                                                     |                                                       |                                  |                                             |          |         |         |         |          |        
|                                                     |                                                       |                                  | Total interest and related portfolio income |          |         | 461,705 |         |          |         | 452,558 |         |         |         | 374,152 | 
|                                                     |                                                       |                                  |                                             |          |         |         |         |          |        
|Expenses:                                            |                                                       |                                  |                                             |          |         |         |         |          |         |         |         |        
|                                                     | Interest                                              |                                  |                                             | 132,080  |         |         |         | 100,600  |         |         |         | 77,352  |        
|                                                     | Employee                                              |                                  |                                             | 89,155   |         |         |         | 92,902   |         |         |         | 78,300  |        
|                                                     | Employee stock options                                |                                  |                                             | 35,233   |         |         |         | 15,599   |         |         |         |        |        
|                                                     | Administrative                                        |                                  |                                             | 50,580   |         |         |         | 39,005   |         |         |         | 69,713  |        
|                                                     |                                                       |                                  |                                             |          |         |         |         |          |        
|                                                     |                                                       |                                  | Total operating expenses                    |          |         | 307,048 |         |          |         | 248,106 |         |         |         | 225,365 | 
|                                                     |                                                       |                                  |                                             |          |         |         |         |          |        
|Net investment income before income taxes            |                                                       |                                  | 154,657                                     |          |         |         | 204,452 |          |         |         | 148,787 |        
|Income tax expense, including excise tax             |                                                       |                                  | 13,624                                      |          |         |         | 15,221  |          |         |         | 11,561  |        
|                                                     |                                                       |                                  |                                             |          |         |         |         |          |        
|Net investment income                                |                                                       |                                  | 141,033                                     |          |         |         | 189,231 |          |         |         | 137,226 |        
|                                                     |                                                       |                                  |                                             |          |         |         |         |          |        
|Net Realized and Unrealized Gains (Losses):          |                                                       |                                  |                                             |          |         |         |         |          |         |         |         |        
|                                                     | Net realized gains (losses)                           |                                  |                                             |          |         |         |         |          |         |         |         |         |        
|                                                     |                                                       | Companies more than 25% owned    |                                             |          | 226,437 |         |         |          | 513,314 |         |         |         | 33,237  |        
|                                                     |                                                       | Companies 5% to 25% owned        |                                             |          | (10,046 | )       |         |          | 4,467   |         |         |         | 5,285   |        
|                                                     |                                                       | Companies less than 5% owned     |                                             |          | 52,122  |         |         |          | 15,520  |         |         |         | 234,974 |        
|                                                     |                                                       |                                  |                                             |          |         |         |         |          |        
|                                                     |                                                       |                                  | Total net realized gains                    |          |         | 268,513 |         |          |         | 533,301 |         |         |         | 273,496 | 
|                                                     | Net change in unrealized appreciation or depreciation |                                  |                                             | (256,243 | )       |         |         | (477,409 | )       |         |         | 462,092 |        
|                                                     |                                                       |                                  |                                             |          |         |         |         |          |        
|                                                     |                                                       |                                  | Total net gains                             |          |         | 12,270  |         |          |         | 55,892  |         |         |         | 735,588 | 
|                                                     |                                                       |                                  |                                             |          |         |         |         |          |        
|Net increase in net assets resulting from operations |                                                       | $                                | 153,303                                     |          |         | $       | 245,123 |          |         | $       | 872,814 |        
|                                                     |                                                       |                                  |                                             |          |         |         |         |          |        
|Basic earnings per common share                      |                                                       | $                                | 1.00                                        |          |         | $       | 1.72    |          |         | $       | 6.48    |        
|                                                     |                                                       |                                  |                                             |          |         |         |         |          |        
|Diluted earnings per common share                    |                                                       | $                                | 0.99                                        |          |         | $       | 1.68    |          |         | $       | 6.36    |        
|                                                     |                                                       |                                  |                                             |          |         |         |         |          |        
|Weighted average common shares outstanding  basic   |                                                       |                                  | 152,876                                     |          |         |         | 142,405 |          |         |         | 134,700 |        
|                                                     |                                                       |                                  |                                             |          |         |         |         |          |        
|Weighted average common shares outstanding  diluted |                                                       |                                  | 154,687                                     |          |         |         | 145,599 |          |         |         | 137,274 |        
|                                                     |                                                       |                                  |                                             |          |         |         |         |          |        



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ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


CONSOLIDATED STATEMENT OF CHANGES IN NET ASSETS


|                                         |                                                                  |                                                                          |           |          |          |   |           |          |          |   |           |          |          |  
|---------------------------------------- | ---------------------------------------------------------------- | ------------------------------------------------------------------------ | --------- | -------- | -------- | - | --------- | -------- | -------- | - | --------- | -------- | -------- | -
|                                         |                                                                  | For the Years Ended December 31,                                         |          
|                                         |                                                                  |                                                                          |          
|                                         |                                                                  | 2007                                                                     |           |          | 2006     |   |           | 2005     |         
|(in thousands, except per share amounts) |                                                                  |                                                                          |           |          |          |   |           |          |         
|Operations:                              |                                                                  |                                                                          |           |          |          |   |           |          |          |   |           |         
|                                         | Net investment income                                            |                                                                          | $         | 141,033  |          |   | $         | 189,231  |          |   | $         | 137,226  |         
|                                         | Net realized gains                                               |                                                                          |           | 268,513  |          |   |           | 533,301  |          |   |           | 273,496  |         
|                                         | Net change in unrealized appreciation or depreciation            |                                                                          |           | (256,243 | )        |   |           | (477,409 | )        |   |           | 462,092  |         
|                                         |                                                                  |                                                                          |           |          |          |   |           |          |         
|                                         |                                                                  | Net increase in net assets resulting from operations                     |           |          | 153,303  |   |           |          | 245,123  |   |           |          | 872,814  |  
|                                         |                                                                  |                                                                          |           |          |          |   |           |          |         
|Shareholder distributions:               |                                                                  |                                                                          |           |          |          |   |           |          |          |   |           |         
|                                         | Common stock dividends                                           |                                                                          |           | (407,317 | )        |   |           | (354,892 | )        |   |           | (314,509 | )       
|                                         | Preferred stock dividends                                        |                                                                          |           | (10      | )        |   |           | (10      | )        |   |           | (10      | )       
|                                         |                                                                  |                                                                          |           |          |          |   |           |          |         
|                                         |                                                                  | Net decrease in net assets resulting from shareholder
    distributions  |           |          | (407,327 | ) |           |          | (354,902 | ) |           |          | (314,519 | )
|                                         |                                                                  |                                                                          |           |          |          |   |           |          |         
|Capital share transactions:              |                                                                  |                                                                          |           |          |          |   |           |          |          |   |           |         
|                                         | Sale of common stock                                             |                                                                          |           | 171,282  |          |   |           | 295,769  |          |   |           |         |         
|                                         | Issuance of common stock for portfolio investments               |                                                                          |           |         |          |   |           |         |          |   |           | 7,200    |         
|                                         | Issuance of common stock in lieu of cash distributions           |                                                                          |           | 17,095   |          |   |           | 14,996   |          |   |           | 9,257    |         
|                                         | Issuance of common stock upon the exercise of stock options      |                                                                          |           | 14,251   |          |   |           | 11,734   |          |   |           | 66,688   |         
|                                         | Cash portion of option cancellation payment                      |                                                                          |           | (52,833  | )        |   |           |         |          |   |           |         |         
|                                         | Stock option expense                                             |                                                                          |           | 35,810   |          |   |           | 15,835   |          |   |           |         |         
|                                         | Net decrease in notes receivable from sale of common stock       |                                                                          |           | 158      |          |   |           | 1,018    |          |   |           | 1,602    |         
|                                         | Purchase of common stock held in deferred compensation trust     |                                                                          |           | (12,444  | )        |   |           | (9,855   | )        |   |           | (7,968   | )       
|                                         | Distribution of common stock held in deferred compensation trust |                                                                          |           | 837      |          |   |           | 980      |          |   |           | 2,011    |         
|                                         | Other                                                            |                                                                          |           | 10,471   |          |   |           |         |          |   |           | 3,683    |         
|                                         |                                                                  |                                                                          |           |          |          |   |           |          |         
|                                         |                                                                  | Net increase in net assets resulting from capital share
    transactions |           |          | 184,627  |   |           |          | 330,477  |   |           |          | 82,473   |  
|                                         |                                                                  |                                                                          |           |          |          |   |           |          |         
|                                         |                                                                  | Total net increase (decrease) in net assets                              |           |          | (69,397  | ) |           |          | 220,698  |   |           |          | 640,768  |  
|Net assets at beginning of year          |                                                                  |                                                                          | 2,841,244 |          |          |   | 2,620,546 |          |          |   | 1,979,778 |         
|                                         |                                                                  |                                                                          |           |          |          |   |           |          |         
|Net assets at end of year                |                                                                  | $                                                                        | 2,771,847 |          |          | $ | 2,841,244 |          |          | $ | 2,620,546 |         
|                                         |                                                                  |                                                                          |           |          |          |   |           |          |         
|Net asset value per common share         |                                                                  | $                                                                        | 17.54     |          |          | $ | 19.12     |          |          | $ | 19.17     |         
|                                         |                                                                  |                                                                          |           |          |          |   |           |          |         
|Common shares outstanding at end of year |                                                                  |                                                                          | 158,002   |          |          |   | 148,575   |          |          |   | 136,697   |         
|                                         |                                                                  |                                                                          |           |          |          |   |           |          |         



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ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


CONSOLIDATED STATEMENT OF CASH FLOWS


|                                      |                                                               |                                                                                                                   |                                                     |          |            |          |         |          |            |          |         |          |            |          |  
|------------------------------------- | ------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------- | --------------------------------------------------- | -------- | ---------- | -------- | ------- | -------- | ---------- | -------- | ------- | -------- | ---------- | -------- | -
|                                      |                                                               | For the Years Ended December 31,                                                                                  |                                                    
|                                      |                                                               |                                                                                                                   |                                                    
|                                      |                                                               | 2007                                                                                                              |                                                     |          | 2006       |          |         | 2005     |           
|(in thousands)                        |                                                               |                                                                                                                   |                                                     |          |            |          |         |          |           
|Cash flows from operating activities: |                                                               |                                                                                                                   |                                                     |          |            |          |         |          |            |          |         |         
|                                      | Net increase in net assets resulting from operations          |                                                                                                                   | $                                                   | 153,303  |            |          | $       | 245,123  |            |          | $       | 872,814  |           
|                                      | Adjustments:                                                  |                                                                                                                   |                                                     |          |            |          |         |          |            |          |         |          |           
|                                      |                                                               | Portfolio investments                                                                                             |                                                     |          | (1,845,973 | )        |         |          | (2,257,828 | )        |         |          | (1,668,113 | )       
|                                      |                                                               | Principal collections related to investment repayments or sales                                                   |                                                     |          | 1,211,550  |          |         |          | 1,055,347  |          |         |          | 1,503,388  |         
|                                      |                                                               | Change in accrued or reinvested interest and dividends                                                            |                                                     |          | (23,913    | )        |         |          | (8,159     | )        |         |          | (6,594     | )       
|                                      |                                                               | Net collection (amortization) of discounts and fees                                                               |                                                     |          | (4,101     | )        |         |          | 1,713      |          |         |          | (1,564     | )       
|                                      |                                                               | Redemption of (investments in) U.S. Treasury bills                                                                |                                                     |          |           |          |         |          | 100,000    |          |         |          | (100,000   | )       
|                                      |                                                               | Redemption of (investments in) money market securities                                                            |                                                     |          | 988        |          |         |          | (80,243    | )        |         |          | (121,967   | )       
|                                      |                                                               | Stock option expense                                                                                              |                                                     |          | 35,810     |          |         |          | 15,835     |          |         |          |           |         
|                                      |                                                               | Changes in other assets and liabilities                                                                           |                                                     |          | (12,466    | )        |         |          | 36,418     |          |         |          | 33,023     |         
|                                      |                                                               | Depreciation and amortization                                                                                     |                                                     |          | 2,064      |          |         |          | 1,800      |          |         |          | 1,820      |         
|                                      |                                                               | Realized gains from the receipt of notes and other consideration
    from sale of investments, net of collections |                                                     |          | (17,706    | )        |         |          | (209,049   | )        |         |          | (4,293     | )       
|                                      |                                                               | Realized losses                                                                                                   |                                                     |          | 131,997    |          |         |          | 24,169     |          |         |          | 69,565     |         
|                                      |                                                               | Net change in unrealized (appreciation) or depreciation                                                           |                                                     |          | 256,243    |          |         |          | 477,409    |          |         |          | (462,092   | )       
|                                      |                                                               |                                                                                                                   |                                                     |          |            |          |         |          |           
|                                      |                                                               |                                                                                                                   | Net cash provided by (used in) operating activities |          |            | (112,204 | )       |          |            | (597,465 | )       |          |            | 115,987  |  
|                                      |                                                               |                                                                                                                   |                                                     |          |            |          |         |          |           
|Cash flows from financing activities: |                                                               |                                                                                                                   |                                                     |          |            |          |         |          |            |          |         |         
|                                      | Sale of common stock                                          |                                                                                                                   |                                                     | 171,282  |            |          |         | 295,769  |            |          |         |         |           
|                                      | Sale of common stock upon the exercise of stock options       |                                                                                                                   |                                                     | 14,251   |            |          |         | 11,734   |            |          |         | 66,688   |           
|                                      | Collections of notes receivable from sale of common stock     |                                                                                                                   |                                                     | 158      |            |          |         | 1,018    |            |          |         | 1,602    |           
|                                      | Borrowings under notes payable                                |                                                                                                                   |                                                     | 230,000  |            |          |         | 700,000  |            |          |         | 350,000  |           
|                                      | Repayments on notes payable and debentures                    |                                                                                                                   |                                                     |         |            |          |         | (203,500 | )          |          |         | (219,700 | )         
|                                      | Net borrowings under (repayments on) revolving line of credit |                                                                                                                   |                                                     | 159,500  |            |          |         | 116,000  |            |          |         | (20,250  | )         
|                                      | Cash portion of option cancellation payment                   |                                                                                                                   |                                                     | (52,833  | )          |          |         |         |            |          |         |         |           
|                                      | Purchase of common stock held in deferred compensation trust  |                                                                                                                   |                                                     | (12,444  | )          |          |         | (9,855   | )          |          |         | (7,968   | )         
|                                      | Other financing activities                                    |                                                                                                                   |                                                     | 1,798    |            |          |         | (6,795   | )          |          |         | (8,333   | )         
|                                      | Common stock dividends and distributions paid                 |                                                                                                                   |                                                     | (397,645 | )          |          |         | (336,572 | )          |          |         | (303,813 | )         
|                                      | Preferred stock dividends paid                                |                                                                                                                   |                                                     | (10      | )          |          |         | (10      | )          |          |         | (10      | )         
|                                      |                                                               |                                                                                                                   |                                                     |          |            |          |         |          |           
|                                      |                                                               |                                                                                                                   | Net cash provided by (used in) financing activities |          |            | 114,057  |         |          |            | 567,789  |         |          |            | (141,784 | )
|                                      |                                                               |                                                                                                                   |                                                     |          |            |          |         |          |           
|Net increase (decrease) in cash       |                                                               |                                                                                                                   | 1,853                                               |          |            |          | (29,676 | )        |            |          | (25,797 | )       
|Cash at beginning of year             |                                                               |                                                                                                                   | 1,687                                               |          |            |          | 31,363  |          |            |          | 57,160  |         
|                                      |                                                               |                                                                                                                   |                                                     |          |            |          |         |          |           
|Cash at end of year                   |                                                               | $                                                                                                                 | 3,540                                               |          |            | $        | 1,687   |          |            | $        | 31,363  |         
|                                      |                                                               |                                                                                                                   |                                                     |          |            |          |         |          |           



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CONSOLIDATED STATEMENT OF INVESTMENTS


|                                             |                      |                                                       |                                      |                   |        |        |      |   |        |         |  |   |        |        | 
|-------------------------------------------- | -------------------- | ----------------------------------------------------- | ------------------------------------ | ----------------- | ------ | ------ | ---- | - | ------ | ------- |  | - | ------ | ------ | 
|                                             |                      |                                                       |                                      | December 31, 2007 |       
|Private Finance                              |                      |                                                       |                                      |                   |       
|Portfolio Company                            |                      |                                                       |                                      |                  
|(in thousands, except number of shares)      |                      | Investment(1)(2)                                      |                                      | Principal         |        |        | Cost |   |        | Value   | 
|                                             |                      |                                                       |                                      |                   |        |        |      |   |        |         | 
|Companies More Than 25% Owned                |                      |                                                       |                                      |                   |        |        |      |   |        |         |  |  
|                                            
|Alaris Consulting, LLC                       |                      | Senior Loan (16.5%, Due 12/05 
    12/07)(6)         |                                      | $                 | 27,055 |        |      | $ | 26,987 |         |  | $ |       |       
|                                             | (Business Services)  |                                                       | Equity Interests                     |                   |        |        |      |   |        | 5,189   |  |   |        |       | 
|                                             |                      | Guaranty ($1,100)                                     |                                      |                   |        |        |      |   |        |         |  |   |        |       
|                                            
|AllBridge Financial, LLC                     |                      | Equity Interests                                      |                                      |                   |        |        |      |   | 7,800  |         |  |   | 7,800  |       
|                                             | (Financial Services) |                                                       | Standby Letter of Credit ($30,000)   |                   |        |        |      |   |        |         |  |   |        |        | 
|                                            
|Allied Capital Senior Debt Fund,
    L.P.(5) |                      | Equity Interests (See Note 3)                         |                                      |                   |        |        |      |   | 31,800 |         |  |   | 32,811 |       
|                                             | (Private Debt Fund)  |                                                       |                                      |                   |        |        |      |   |        |         |  |   |        |        | 
|                                            
|Avborne,
    Inc.(7)                         |                      | Preferred Stock (12,500 shares)                       |                                      |                   |        |        |      |   | 611    |         |  |   | 1,633  |       
|                                             | (Business Services)  |                                                       | Common Stock (27,500 shares)         |                   |        |        |      |   |        |        |  |   |        |       | 
|                                            
|Avborne Heavy Maintenance,
    Inc.(7)       |                      | Preferred Stock (1,568 shares)                        |                                      |                   |        |        |      |   | 2,401  |         |  |   | 2,557  |       
|                                             | (Business Services)  |                                                       | Common Stock (2,750 shares)          |                   |        |        |      |   |        |        |  |   |        | 370    | 
|                                             |                      | Guaranty ($2,401)                                     |                                      |                   |        |        |      |   |        |         |  |   |        |       
|                                            
|Aviation Properties Corporation              |                      | Common Stock (100 shares)                             |                                      |                   |        |        |      |   | 65     |         |  |   |       |       
|                                             | (Business Services)  |                                                       | Standby Letters of Credit ($1,000)   |                   |        |        |      |   |        |         |  |   |        |        | 
|                                            
|Border Foods, Inc.                           |                      | Preferred Stock (100,000 shares)                      |                                      |                   |        |        |      |   | 12,721 |         |  |   | 4,648  |       
|                                             | (Consumer Products)  |                                                       | Common Stock (148,838 shares)        |                   |        |        |      |   |        | 3,847   |  |   |        |       | 
|                                            
|Calder Capital Partners,
    LLC(5)          |                      | Senior Loan (9.4%, Due
    5/09)(6)                   |                                      |                   | 2,907  |        |      |   | 2,907  |         |  |   | 3,035  |       
|                                             | (Financial Services) |                                                       | Equity Interests                     |                   |        |        |      |   |        | 2,396   |  |   |        | 3,559  | 
|                                            
|Callidus Capital Corporation                 |                      | Subordinated Debt (18.0%, Due 10/08)                  |                                      |                   | 6,871  |        |      |   | 6,871  |         |  |   | 6,871  |       
|                                             | (Financial Services) |                                                       | Common Stock (100 shares)            |                   |        |        |      |   |        | 2,067   |  |   |        | 44,587 | 
|                                            
|Ciena Capital LLC
    (f/k/a Business Loan   |                      | Class A Equity Interests(25.0%  See
    Note 3)(6)   |                                      |                   | 99,044 |        |      |   | 99,044 |         |  |   | 68,609 |       
|                                             | Express, LLC)        |                                                       | Class B Equity Interests             |                   |        |        |      |   |        | 119,436 |  |   |        |       | 
|                                             | (Financial Services) |                                                       | Class C Equity Interests             |                   |        |        |      |   |        | 109,301 |  |   |        |       | 
|                                             |                      | Guaranty ($258,707  See Note 3)                      |                                      |                   |        |        |      |   |        |         |  |   |        |       
|                                             |                      | Standby Letters of Credit
    ($18,000   See Note 3) |                                      |                   |        |        |      |   |        |         |  |   |        |       
|                                            
|CitiPostal Inc.                              |                      | Senior Loan (8.4%, Due 12/13)                         |                                      |                   | 692    |        |      |   | 679    |         |  |   | 679    |       
|                                             | (Business Services)  |                                                       | Unitranche Debt (12.0%, Due 12/13)   |                   |        | 50,852 |      |   |        | 50,597  |  |   |        | 50,597 | 
|                                             |                      |                                                       | Subordinated Debt (16.0%, Due 12/15) |                   |        | 8,049  |      |   |        | 8,049   |  |   |        | 8,049  | 
|                                             |                      |                                                       | Common Stock (37,024 shares)         |                   |        |        |      |   |        | 12,726  |  |   |        | 12,726 | 
|                                            
|Coverall North America, Inc.                 |                      | Unitranche Debt (12.0%, Due 7/11)                     |                                      |                   | 35,054 |        |      |   | 34,923 |         |  |   | 34,923 |       
|                                             | (Business Services)  |                                                       | Subordinated Debt (15.0%, Due 7/11)  |                   |        | 6,000  |      |   |        | 5,979   |  |   |        | 5,979  | 
|                                             |                      |                                                       | Common Stock (884,880 shares)        |                   |        |        |      |   |        | 16,648  |  |   |        | 27,597 | 
|                                            
|CR Holding, Inc.                             |                      | Subordinated Debt (16.6%, Due 2/13)                   |                                      |                   | 40,956 |        |      |   | 40,812 |         |  |   | 40,812 |       
|                                             | (Consumer Products)  |                                                       | Common Stock (37,200,551 shares)     |                   |        |        |      |   |        | 33,321  |  |   |        | 40,934 | 
|                                            
|Direct Capital Corporation                   |                      | Subordinated Debt (16.0%, Due 3/13)                   |                                      |                   | 39,184 |        |      |   | 39,030 |         |  |   | 39,030 |       
|                                             | (Financial Services) |                                                       | Common Stock (2,097,234 shares)      |                   |        |        |      |   |        | 19,250  |  |   |        | 6,906  | 
|                                            
|Financial Pacific Company                    |                      | Subordinated Debt (17.4%, Due 2/12  8/12)            |                                      |                   | 73,031 |        |      |   | 72,850 |         |  |   | 72,850 |       
|                                             | (Financial Services) |                                                       | Preferred Stock (10,964 shares)      |                   |        |        |      |   |        | 10,276  |  |   |        | 19,330 | 
|                                             |                      |                                                       | Common Stock (14,735 shares)         |                   |        |        |      |   |        | 14,819  |  |   |        | 38,544 | 
|                                            
|ForeSite Towers, LLC                         |                      | Equity Interest                                       |                                      |                   |        |        |      |   |       |         |  |   | 878    |       
|                                             | (Tower Leasing)      |                                                       |                                      |                   |        |        |      |   |        |         |  |   |        |        | 
|                                            

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





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##### Table of Contents



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


CONSOLIDATED STATEMENT OF
INVESTMENTS  (Continued)


|                                        |                       |                                            |                                            |                   |        |        |      |   |        |        |  |   |        |        | 
|--------------------------------------- | --------------------- | ------------------------------------------ | ------------------------------------------ | ----------------- | ------ | ------ | ---- | - | ------ | ------ |  | - | ------ | ------ | 
|                                        |                       |                                            |                                            | December 31, 2007 |       
|Private Finance                         |                       |                                            |                                            |                   |       
|Portfolio Company                       |                       |                                            |                                            |                  
|(in thousands, except number of shares) |                       | Investment(1)(2)                           |                                            | Principal         |        |        | Cost |   |        | Value  | 
|                                        |                       |                                            |                                            |                   |        |        |      |   |        |        | 
|Global Communications, LLC              |                       | Senior Loan (10.0%, Due
    9/02)(6)       |                                            | $                 | 1,822  |        |      | $ | 1,822  |        |  | $ | 1,822  |       
|                                        | (Business Services)   |                                            |                                            |                   |        |        |      |   |        |        |  |   |        |        | 
|                                       
|Hot Stuff Foods, LLC                    |                       | Senior Loan (8.4%, Due 2/11-2/12)          |                                            |                   | 50,940 |        |      |   | 50,752 |        |  |   | 50,752 |       
|                                        | (Consumer Products)   |                                            | Subordinated Debt (12.1%, Due 8/12)        |                   |        | 30,000 |      |   |        | 29,907 |  |   |        | 29,907 | 
|                                        |                       |                                            | Subordinated Debt (15.4%, Due
    2/13)(6) |                   |        | 52,373 |      |   |        | 52,150 |  |   |        | 1,337  | 
|                                        |                       |                                            | Common Stock (1,147,453 shares)            |                   |        |        |      |   |        | 56,187 |  |   |        |       | 
|                                       
|Huddle House, Inc.                      |                       | Subordinated Debt (15.0%, Due 12/12)       |                                            |                   | 59,857 |        |      |   | 59,618 |        |  |   | 59,618 |       
|                                        | (Retail)              |                                            | Common Stock (415,328 shares)              |                   |        |        |      |   |        | 41,533 |  |   |        | 44,154 | 
|                                       
|Impact Innovations Group, LLC           |                       | Equity Interests in Affiliate              |                                            |                   |        |        |      |   |       |        |  |   | 320    |       
|                                        | (Business Services)   |                                            |                                            |                   |        |        |      |   |        |        |  |   |        |        | 
|                                       
|Insight Pharmaceuticals Corporation     |                       | Subordinated Debt (15.0%, Due 9/12)        |                                            |                   | 44,257 |        |      |   | 44,136 |        |  |   | 45,041 |       
|                                        | (Consumer Products)   |                                            | Subordinated Debt (19.0%, Due
    9/12)(6) |                   |        | 16,181 |      |   |        | 16,130 |  |   |        | 16,796 | 
|                                        |                       | Preferred Stock (25,000 shares)            |                                            |                   |        |        |      |   | 25,000 |        |  |   | 1,462  |       
|                                        |                       | Common Stock (620,000 shares)              |                                            |                   |        |        |      |   | 6,325  |        |  |   |       |       
|                                       
|Jakel, Inc.                             |                       | Subordinated Debt (15.5%, Due
    3/08)(6) |                                            |                   | 1,563  |        |      |   | 1,563  |        |  |   | 1,563  |       
|                                        | (Industrial Products) |                                            |                                            |                   |        |        |      |   |        |        |  |   |        |        | 
|                                       
|Legacy Partners Group, Inc.             |                       | Senior Loan (14.0%, Due
    5/09)(6)       |                                            |                   | 3,843  |        |      |   | 3,843  |        |  |   | 3,843  |       
|                                        | (Financial Services)  |                                            | Equity Interests                           |                   |        |        |      |   |        | 4,261  |  |   |        | 1,332  | 
|                                       
|Litterer
    Beteiligungs-GmbH(4)       |                       | Subordinated Debt (8.0%, Due 12/08)        |                                            |                   | 772    |        |      |   | 772    |        |  |   | 772    |       
|                                        | (Business Services)   |                                            | Equity Interest                            |                   |        |        |      |   |        | 1,809  |  |   |        | 700    | 
|                                       
|MVL Group, Inc.                         |                       | Senior Loan (12.0%, Due 6/09  7/09)       |                                            |                   | 30,674 |        |      |   | 30,639 |        |  |   | 30,639 |       
|                                        | (Business Services)   |                                            | Subordinated Debt (14.5%, Due 6/09  7/09) |                   |        | 40,191 |      |   |        | 39,943 |  |   |        | 39,943 | 
|                                        |                       | Common Stock (648,661 shares)              |                                            |                   |        |        |      |   | 643    |        |  |   | 4,949  |       
|                                       
|Old Orchard Brands, LLC                 |                       | Subordinated Debt (18.0%, Due 7/14)        |                                            |                   | 19,632 |        |      |   | 19,544 |        |  |   | 19,544 |       
|                                        | (Consumer Products)   |                                            | Equity Interests                           |                   |        |        |      |   |        | 18,767 |  |   |        | 25,419 | 
|                                       
|Penn Detroit Diesel Allison, LLC        |                       | Subordinated Debt (15.5%, Due 8/13)        |                                            |                   | 39,331 |        |      |   | 39,180 |        |  |   | 39,180 |       
|                                        | (Business Services)   |                                            | Equity Interests                           |                   |        |        |      |   |        | 21,128 |  |   |        | 37,965 | 
|                                       
|Powell Plant Farms, Inc.                |                       | Senior Loan (15.0%, Due
    12/07)(6)      |                                            |                   | 1,350  |        |      |   | 1,350  |        |  |   | 1,534  |       
|                                        | (Consumer Products)   |                                            |                                            |                   |        |        |      |   |        |        |  |   |        |        | 
|                                       

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





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##### Table of Contents



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


CONSOLIDATED STATEMENT OF
INVESTMENTS  (Continued)


|                                        |                                |                                             |                                                     |                   |         |        |           |   |         |         |           |   |         |        | 
|--------------------------------------- | ------------------------------ | ------------------------------------------- | --------------------------------------------------- | ----------------- | ------- | ------ | --------- | - | ------- | ------- | --------- | - | ------- | ------ | 
|                                        |                                |                                             |                                                     | December 31, 2007 |        
|Private Finance                         |                                |                                             |                                                     |                   |        
|Portfolio Company                       |                                |                                             |                                                     |                   |         |       
|(in thousands, except number of shares) |                                | Investment(1)(2)                            |                                                     | Principal         |         |        | Cost      |   |         | Value   |          
|                                        |                                |                                             |                                                     |                   |         |        |           |   |         |         |          
|Service Champ, Inc.                     |                                | Subordinated Debt (15.5%, Due 4/12)         |                                                     | $                 | 28,443  |        |           | $ | 28,351  |         |           | $ | 28,351  |       
|                                        | (Business Services)            |                                             | Common Stock (63,888 shares)                        |                   |         |        |           |   |         | 13,662  |           |   |         | 26,292 | 
|                                       
|Staffing Partners Holding               |                                |                                             |                                                     |                   |         |        |           |   |         |         |           |   |         |       
|                                        | Company, Inc.                  |                                             | Subordinated Debt (13.5%,
    Due 1/07)(6)          |                   |         | 509    |           |   |         | 509     |           |   |         | 223    | 
|                                        | (Business Services)            |                                             |                                                     |                   |         |        |           |   |         |         |           |   |         |        | 
|                                       
|Startec Equity, LLC                     |                                | Equity Interests                            |                                                     |                   |         |        |           |   | 190     |         |           |   | 430     |       
|                                        | (Telecommunications)           |                                             |                                                     |                   |         |        |           |   |         |         |           |   |         |        | 
|                                       
|Sweet Traditions, Inc.                  |                                | Senior Loan (13.0%, Due 9/08 
    8/11)(6) |                                                     |                   | 39,692  |        |           |   | 36,052  |         |           |   | 35,229  |       
|                                        | (Retail)                       |                                             | Preferred Stock (961 shares)                        |                   |         |        |           |   |         | 950     |           |   |         |       | 
|                                        |                                | Common Stock (10,000 shares)                |                                                     |                   |         |        |           |   | 50      |         |           |   |        |       
|                                       
|Triview Investments,
    Inc.(8)        |                                | Senior Loan (10.0%, Due 12/07)              |                                                     |                   | 433     |        |           |   | 433     |         |           |   | 433     |       
|                                        | (Broadcasting & Cable/Business |                                             | Subordinated Debt (12.9%, Due 1/10  6/17)          |                   |         | 43,157 |           |   |         | 42,977  |           |   |         | 42,977 | 
|                                        | Services/Consumer Products)    |                                             | Subordinated Debt (12.5%, Due 11/07  3/08)
    (6) |                   |         | 1,400  |           |   |         | 1,400   |           |   |         | 1,583  | 
|                                        |                                |                                             | Common Stock (202 shares)                           |                   |         |        |           |   |         | 120,638 |           |   |         | 83,453 | 
|                                        |                                | Guaranty ($900)                             |                                                     |                   |         |        |           |   |         |         |           |   |         |       
|                                        |                                | Standby Letter of Credit ($200)             |                                                     |                   |         |        |           |   |         |         |           |   |         |       
|                                       
|Unitranche Fund LLC                     |                                | Subordinated Certificates                   |                                                     |                   |         |        |           |   | 744     |         |           |   | 744     |       
|                                        | (Private Debt Fund)            |                                             | Equity Interests                                    |                   |         |        |           |   |         | 1       |           |   |         | 1      | 
|                                       
|Worldwide Express Operations, LLC       |                                | Subordinated Debt (14.0%, Due 2/14)         |                                                     |                   | 2,845   |        |           |   | 2,670   |         |           |   | 2,670   |       
|                                        | (Business Services)            |                                             | Equity Interests                                    |                   |         |        |           |   |         | 12,900  |           |   |         | 21,516 | 
|                                        |                                |                                             | Warrants                                            |                   |         |        |           |   |         | 163     |           |   |         | 272    | 
|                                       
|Total
    companies more than 25% owned |                                |                                             |                                                     |                   |         | $      | 1,622,094 |   |         | $       | 1,279,080 |  
|                                       
|Companies 5% to 25% Owned               |                                |                                             |                                                     |                  
|                                       
|10thStreet, LLC                         |                                | Subordinated Debt (13.0%, Due 12/14)        |                                                     | $                 | 20,774  |        |           | $ | 20,645  |         |           | $ | 20,645  |       
|                                        | (Business Services)            |                                             | Equity Interests                                    |                   |         |        |           |   |         | 446     |           |   |         | 1,100  | 
|                                       
|Advantage Sales & Marketing, Inc.       |                                | Subordinated Debt (12.0%, Due 3/14)         |                                                     |                   | 155,432 |        |           |   | 154,854 |         |           |   | 154,854 |       
|                                        | (Business Services)            |                                             | Equity Interests                                    |                   |         |        |           |   |         |        |           |   |         | 10,973 | 
|                                       
|Air Medical Group Holdings LLC          |                                | Senior Loan (7.8%, Due 3/11)                |                                                     |                   | 3,030   |        |           |   | 2,980   |         |           |   | 2,980   |       
|                                        | (Healthcare Services)          |                                             | Equity Interests                                    |                   |         |        |           |   |         | 3,470   |           |   |         | 10,800 | 
|                                       
|Alpine ESP Holdings, Inc.               |                                | Preferred Stock (622 shares)                |                                                     |                   |         |        |           |   | 622     |         |           |   | 749     |       
|                                        | (Business Services)            |                                             | Common Stock (13,513 shares)                        |                   |         |        |           |   |         | 14      |           |   |         | 262    | 
|                                       
|Amerex Group, LLC                       |                                | Subordinated Debt (12.0%, Due 1/13)         |                                                     |                   | 8,400   |        |           |   | 8,400   |         |           |   | 8,400   |       
|                                        | (Consumer Products)            |                                             | Equity Interests                                    |                   |         |        |           |   |         | 3,509   |           |   |         | 13,713 | 
|                                       
|BB&T Capital Partners/Windsor           |                                |                                             |                                                     |                   |         |        |           |   |         |         |           |   |         |       
|                                        | Mezzanine Fund, LLC
    (5)    |                                             | Equity Interests                                    |                   |         |        |           |   |         | 11,739  |           |   |         | 11,467 | 
|                                        | (Private Equity Fund)          |                                             |                                                     |                   |         |        |           |   |         |         |           |   |         |        | 
|                                       
|Becker Underwood, Inc.                  |                                | Subordinated Debt (14.5%, Due 8/12)         |                                                     |                   | 24,865  |        |           |   | 24,798  |         |           |   | 24,798  |       
|                                        | (Industrial Products)          |                                             | Common Stock(5,073 shares)                          |                   |         |        |           |   |         | 5,813   |           |   |         | 4,190  | 
|                                       
|BI Incorporated                         |                                | Subordinated Debt (13.5%, Due 2/14)         |                                                     |                   | 30,615  |        |           |   | 30,499  |         |           |   | 30,499  |       
|                                        | (Business Services)            |                                             | Common Stock (40,000 shares)                        |                   |         |        |           |   |         | 4,000   |           |   |         | 7,382  | 
|                                       

|    |  |                                                                                                                                                                                                                                                                                                                                                                                                               
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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. had a cost basis of
    $165.4 million and holds investments in Longview Cable
    & Data, LLC (Broadcasting & Cable) with a value of
    $7.0 million, Triax Holdings, LLC (Consumer Products) with
    a value of $62.0 million, and Crescent Hotels &
    Resorts, LLC and affiliates (Business Services) with a value of
    $59.4 million, for a total value of $128.4 million.





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##### Table of Contents



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


CONSOLIDATED STATEMENT OF
INVESTMENTS  (Continued)


|                                                                          |                       |                                                           |                                            |                   |        |        |         |   |        |        |         |   |        |       | 
|------------------------------------------------------------------------- | --------------------- | --------------------------------------------------------- | ------------------------------------------ | ----------------- | ------ | ------ | ------- | - | ------ | ------ | ------- | - | ------ | ----- | 
|                                                                          |                       |                                                           |                                            | December 31, 2007 |       
|Private Finance                                                           |                       |                                                           |                                            |                   |       
|Portfolio Company                                                         |                       |                                                           |                                            |                  
|(in thousands, except number of shares)                                   |                       | Investment(1)(2)                                          |                                            | Principal         |        |        | Cost    |   |        | Value  |        
|                                                                          |                       |                                                           |                                            |                   |        |        |         |   |        |        |        
|Creative Group, Inc.                                                      |                       | Subordinated Debt (14.0%, Due
    9/13)(6)                |                                            | $                 | 15,000 |        |         | $ | 13,686 |        |         | $ | 6,197  |      
|                                                                          | (Business Services)   |                                                           | Common Stock (20,000 shares)               |                   |        |        |         |   |        |       |         |   |        |      | 
|                                                                          |                       |                                                           | Warrant                                    |                   |        |        |         |   |        | 1,387  |         |   |        |      | 
|                                                                         
|Drew Foam Companies, Inc.                                                 |                       | Preferred Stock (722 shares)                              |                                            |                   |        |        |         |   | 722    |        |         |   | 396    |      
|                                                                          | (Business Services)   |                                                           | Common Stock (7,287 shares)                |                   |        |        |         |   |        | 7      |         |   |        |      | 
|                                                                         
|MedBridge Healthcare, LLC                                                 |                       | Senior Loan (8.0%, Due
    8/09)(6)                       |                                            |                   | 7,164  |        |         |   | 7,164  |        |         |   | 7,164  |      
|                                                                          | (Healthcare Services) |                                                           | Subordinated Debt (10.0%, Due
    8/14)(6) |                   |        | 5,184  |         |   |        | 5,184  |         |   |        | 2,406 | 
|                                                                          |                       | Convertible Subordinated Debt (2.0%,
    Due
    8/14)(6) |                                            |                   | 2,970  |        |         |   | 984    |        |         |   |       |      
|                                                                          |                       | Equity Interests                                          |                                            |                   |        |        |         |   | 1,416  |        |         |   |       |      
|                                                                         
|MHF Logistical Solutions, Inc.                                            |                       | Subordinated Debt (11.5%, Due
    6/12)(6)                |                                            |                   | 33,600 |        |         |   | 33,448 |        |         |   | 9,280  |      
|                                                                          | (Business Services)   |                                                           | Subordinated Debt (18.0%, Due
    6/13)(6) |                   |        | 11,211 |         |   |        | 11,154 |         |   |        |      | 
|                                                                          |                       | Common Stock (20,934
    shares)(12)                      |                                            |                   |        |        |         |   | 20,942 |        |         |   |       |      
|                                                                          |                       | Warrants(12)                                              |                                            |                   |        |        |         |   |       |        |         |   |       |      
|                                                                         
|Multi-Ad Services, Inc.                                                   |                       | Unitranche Debt (11.3%, Due 11/11)                        |                                            |                   | 19,800 |        |         |   | 19,704 |        |         |   | 19,704 |      
|                                                                          | (Business Services)   |                                                           | Equity Interests                           |                   |        |        |         |   |        | 2,000  |         |   |        | 940   | 
|                                                                         
|Progressive International                                                 |                       |                                                           |                                            |                   |        |        |         |   |        |        |         |   |        |      
|                                                                          | Corporation           |                                                           | Subordinated Debt (16.0%, Due 12/09)       |                   |        | 1,557  |         |   |        | 1,545  |         |   |        | 1,545 | 
|                                                                          | (Consumer Products)   |                                                           | Preferred Stock (500 shares)               |                   |        |        |         |   |        | 500    |         |   |        | 1,038 | 
|                                                                          |                       | Common Stock (197 shares)                                 |                                            |                   |        |        |         |   | 13     |        |         |   | 4,900  |      
|                                                                          |                       | Warrants                                                  |                                            |                   |        |        |         |   |       |        |         |   |       |      
|                                                                         
|Regency Healthcare Group, LLC                                             |                       | Unitranche Debt (11.1%, Due 6/12)                         |                                            |                   | 12,000 |        |         |   | 11,941 |        |         |   | 11,941 |      
|                                                                          | (Healthcare Services) |                                                           | Equity Interests                           |                   |        |        |         |   |        | 1,500  |         |   |        | 1,681 | 
|                                                                         
|SGT India Private
    Limited(4)                                          |                       | Common Stock (150,596 shares)                             |                                            |                   |        |        |         |   | 4,098  |        |         |   | 3,075  |      
|                                                                          | (Business Services)   |                                                           |                                            |                   |        |        |         |   |        |        |         |   |        |       | 
|                                                                         
|Soteria Imaging Services, LLC                                             |                       | Subordinated Debt (12.0%, Due 11/10)                      |                                            |                   | 14,500 |        |         |   | 13,744 |        |         |   | 13,744 |      
|                                                                          | (Healthcare Services) |                                                           | Equity Interests                           |                   |        |        |         |   |        | 2,170  |         |   |        | 2,686 | 
|                                                                         
|Universal Environmental Services, LLC                                     |                       | Equity Interests                                          |                                            |                   |        |        |         |   | 1,810  |        |         |   |       |      
|                                                                          | (Business Services)   |                                                           |                                            |                   |        |        |         |   |        |        |         |   |        |       | 
|                                                                         
|Total
    companies 5% to 25% owned                                       |                       |                                                           |                                            |                   |        | $      | 426,908 |   |        | $      | 389,509 |  
|                                                                         
|Companies Less Than 5% Owned                                              |                       |                                                           |                                            |                   |        |        |         |   |        |        |         |   |        |      
|                                                                         
|3SI Security Systems, Inc.                                                |                       | Subordinated Debt (14.5%, Due 8/13)                       |                                            | $                 | 27,937 |        |         | $ | 27,837 |        |         | $ | 27,837 |      
|                                                                          | (Consumer Products)   |                                                           |                                            |                   |        |        |         |   |        |        |         |   |        |       | 
|                                                                         
|AgData, L.P.                                                              |                       | Senior Loan (10.3%, Due 7/12)                             |                                            |                   | 843    |        |         |   | 815    |        |         |   | 815    |      
|                                                                          | (Consumer Services)   |                                                           |                                            |                   |        |        |         |   |        |        |         |   |        |       | 
|                                                                         
|Axium Healthcare Pharmacy, Inc.                                           |                       | Senior Loan (12.5%, Due 12/12)                            |                                            |                   | 2,600  |        |         |   | 2,567  |        |         |   | 2,567  |      
|                                                                          | (Healthcare Services) |                                                           | Unitranche Debt (12.5%, Due 12/12)         |                   |        | 8,500  |         |   |        | 8,463  |         |   |        | 8,463 | 
|                                                                          |                       |                                                           | Common Stock (26,500 shares)               |                   |        |        |         |   |        | 2,650  |         |   |        | 1,097 | 
|                                                                         
|Baird Capital Partners IV Limited
    Partnership(5)(Private Equity Fund) |                       | Limited Partnership Interest                              |                                            |                   |        |        |         |   | 2,234  |        |         |   | 2,114  |      
|                                                                         

|     |  |                                                                                                                                                                                                                                                                
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1)  |  | Interest rates represent the weighted average annual stated
    interest rate on loans and debt securities, which are presented
    by nature of indebtedness for a single issuer. The maturity
    dates represent the earliest and the latest maturity dates.
|(2)  |  | Common stock, preferred stock, warrants, options, and equity
    interests are generally non-income producing and restricted.                                                                                                                                  
|(3)  |  | Public company.                                                                                                                                                                                                                                                
|(4)  |  | Non-U.S. company or principal place of business outside the
    U.S.                                                                                                                                                                                           
|(5)  |  | Non-registered investment company.                                                                                                                                                                                                                             
|(6)  |  | Loan or debt security is on non-accrual status and therefore is
    considered non-income producing.                                                                                                                                                           
|(12) |  | 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.                                                     





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##### Table of Contents



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


CONSOLIDATED STATEMENT OF
INVESTMENTS  (Continued)


|                                               |                                |                                            |                                          |                   |        |        |      |   |        |        |  |   |        |        | 
|---------------------------------------------- | ------------------------------ | ------------------------------------------ | ---------------------------------------- | ----------------- | ------ | ------ | ---- | - | ------ | ------ |  | - | ------ | ------ | 
|                                               |                                |                                            |                                          | December 31, 2007 |       
|Private Finance                                |                                |                                            |                                          |                   |       
|Portfolio Company                              |                                |                                            |                                          |                  
|(in thousands, except number of shares)        |                                | Investment(1)(2)                           |                                          | Principal         |        |        | Cost |   |        | Value  | 
|                                               |                                |                                            |                                          |                   |        |        |      |   |        |        | 
|BenefitMall, Inc.                              |                                | Subordinated Debt (14.9%, Due 10/13-10/14) |                                          | $                 | 82,167 |        |      | $ | 81,930 |        |  | $ | 81,930 |       
|                                               | (Business Services)            |                                            | Common Stock (45,528,000
    shares)(12) |                   |        |        |      |   |        | 45,528 |  |   |        | 82,404 | 
|                                               |                                |                                            | Warrants(12)                             |                   |        |        |      |   |        |       |  |   |        |       | 
|                                               |                                |                                            | Standby Letters of Credit ($3,961)       |                   |        |        |      |   |        |        |  |   |        |        | 
|                                              
|Broadcast Electronics, Inc.                    |                                | Senior Loan (9.0%, Due
    7/12)(6)        |                                          |                   | 4,913  |        |      |   | 4,884  |        |  |   | 3,273  |       
|                                               | (Business Services)            |                                            |                                          |                   |        |        |      |   |        |        |  |   |        |        | 
|                                              
|Bushnell, Inc.                                 |                                | Subordinated Debt (11.3%, Due 2/14)        |                                          |                   | 41,325 |        |      |   | 39,821 |        |  |   | 39,821 |       
|                                               | (Consumer Products)            |                                            |                                          |                   |        |        |      |   |        |        |  |   |        |        | 
|                                              
|Callidus Debt Partners                         |                                |                                            |                                          |                   |        |        |      |   |        |        |  |   |        |       
|                                               | CDO Fund I,
    Ltd.(4)(10)    |                                            | Class C Notes (12.9%, Due 12/13)         |                   |        | 18,800 |      |   |        | 18,929 |  |   |        | 18,988 | 
|                                               | (CDO/CLO)                      |                                            | Class D Notes (17.0%, Due 12/13)         |                   |        | 9,400  |      |   |        | 9,465  |  |   |        | 9,494  | 
|                                              
|Callidus Debt Partners                         |                                |                                            |                                          |                   |        |        |      |   |        |        |  |   |        |       
|                                               | CLO Fund III, Ltd.
    (4)(10) |                                            | Preferred Shares (23,600,000 shares,     |                   |        |        |      |   |        |        |  |   |        |        | 
|                                               | (CDO/CLO)                      |                                            | 12.9%)(11)                               |                   |        |        |      |   |        | 21,783 |  |   |        | 19,999 | 
|                                              
|Callidus Debt Partners                         |                                |                                            |                                          |                   |        |        |      |   |        |        |  |   |        |       
|                                               | CLO Fund IV,
    Ltd.(4)(10)   |                                            | Income Notes
    (14.8%)(11)             |                   |        |        |      |   |        | 12,298 |  |   |        | 11,290 | 
|                                               | (CDO/CLO)                      |                                            |                                          |                   |        |        |      |   |        |        |  |   |        |        | 
|                                              
|Callidus Debt Partners                         |                                |                                            |                                          |                   |        |        |      |   |        |        |  |   |        |       
|                                               | CLO Fund V, Ltd.
    (4)(10)   |                                            | Income Notes
    (20.3%)(11)             |                   |        |        |      |   |        | 13,977 |  |   |        | 14,658 | 
|                                               | (CDO/CLO)                      |                                            |                                          |                   |        |        |      |   |        |        |  |   |        |        | 
|                                              
|Callidus Debt Partners                         |                                |                                            |                                          |                   |        |        |      |   |        |        |  |   |        |       
|                                               | CLO Fund VI,
    Ltd.(4)(10)   |                                            | Class D Notes (11.3%) Due 10/21)         |                   |        | 5,000  |      |   |        | 4,329  |  |   |        | 4,329  | 
|                                               | (CDO/CLO)                      |                                            | Income Notes
    (19.3%)(11)             |                   |        |        |      |   |        | 26,985 |  |   |        | 26,985 | 
|                                              
|Callidus Debt Partners
    (4)(10)             |                                |                                            |                                          |                   |        |        |      |   |        |        |  |   |        |       
|                                               | CLO Fund VII, Ltd.             |                                            | Income Notes
    (16.6%)(11)             |                   |        |        |      |   |        | 22,113 |  |   |        | 22,113 | 
|                                               | (CDO/CLO)                      |                                            |                                          |                   |        |        |      |   |        |        |  |   |        |        | 
|                                              
|Callidus MAPS CLO Fund I
    LLC(10)           |                                | Class E Notes (10.4%, Due 12/17)           |                                          |                   | 17,000 |        |      |   | 17,000 |        |  |   | 16,119 |       
|                                               | (CDO/CLO)                      |                                            | Income Notes
    (5.6%)(11)              |                   |        |        |      |   |        | 49,252 |  |   |        | 36,085 | 
|                                              
|Callidus MAPS CLO Fund II,
    Ltd.(4)(10)     |                                | Income Notes
    (14.7%)(11)               |                                          |                   |        |        |      |   | 18,753 |        |  |   | 18,753 |       
|                                               | (CDO/CLO)                      |                                            |                                          |                   |        |        |      |   |        |        |  |   |        |        | 
|                                              
|Camden Partners Strategic Fund II,
    L.P.(5) |                                | Limited Partnership Interest               |                                          |                   |        |        |      |   | 997    |        |  |   | 1,350  |       
|                                               | (Private Equity Fund)          |                                            |                                          |                   |        |        |      |   |        |        |  |   |        |        | 
|                                              
|Carlisle Wide Plank Floors, Inc.               |                                | Senior Loan (9.8%, Due 6/11)               |                                          |                   | 500    |        |      |   | 497    |        |  |   | 497    |       
|                                               | (Consumer Products)            |                                            | Unitranche Debt (10.0%, Due 6/11)        |                   |        | 3,161  |      |   |        | 3,129  |  |   |        | 3,129  | 
|                                               |                                | Preferred Stock (400,000 Shares)           |                                          |                   |        |        |      |   | 400    |        |  |   | 507    |       
|                                              
|Catterton Partners V,
    L.P.(5)              |                                | Limited Partnership Interest               |                                          |                   |        |        |      |   | 3,624  |        |  |   | 2,952  |       
|                                               | (Private Equity Fund)          |                                            |                                          |                   |        |        |      |   |        |        |  |   |        |        | 
|                                              
|Catterton Partners VI,
    L.P.(5)             |                                | Limited Partnership Interest               |                                          |                   |        |        |      |   | 2,259  |        |  |   | 2,103  |       
|                                               | (Private Equity Fund)          |                                            |                                          |                   |        |        |      |   |        |        |  |   |        |        | 
|                                              
|Centre Capital Investors IV,
    L.P.(5)       |                                | Limited Partnership Interest               |                                          |                   |        |        |      |   | 2,215  |        |  |   | 2,276  |       
|                                               | (Private Equity Fund)          |                                            |                                          |                   |        |        |      |   |        |        |  |   |        |        | 
|                                              
|Centre Capital Investors V,
    L.P.(5)        |                                | Limited Partnership Interest               |                                          |                   |        |        |      |   | 628    |        |  |   | 628    |       
|                                               | (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.                                                                                                                                                           
|(10) |  | The fund is managed by Callidus Capital, a portfolio company of
    Allied Capital.                                                                                                                                                                            
|(11) |  | Represents the effective interest yield earned on the cost basis
    of these preferred equity investments and income notes. The
    yield is included in interest income from companies less than 5%
    owned in the consolidated statement of operations.   
|(12) |  | Common stock is non-voting. In addition to non-voting stock
    ownership, the Company has an option to acquire a majority of
    the voting securities of the portfolio company at fair market
    value.                                                     





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##### Table of Contents



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


CONSOLIDATED STATEMENT OF
INVESTMENTS  (Continued)


|                                        |                              |                                          |                                            |                   |         |        |      |   |         |        |  |   |         |        | 
|--------------------------------------- | ---------------------------- | ---------------------------------------- | ------------------------------------------ | ----------------- | ------- | ------ | ---- | - | ------- | ------ |  | - | ------- | ------ | 
|                                        |                              |                                          |                                            | December 31, 2007 |        
|Private Finance                         |                              |                                          |                                            |                   |        
|Portfolio Company                       |                              |                                          |                                            |                  
|(in thousands, except number of shares) |                              | Investment(1)(2)                         |                                            | Principal         |         |        | Cost |   |         | Value  | 
|                                        |                              |                                          |                                            |                   |         |        |      |   |         |        | 
|CK Franchising, Inc.                    |                              | Senior Loan (8.7%, Due 7/12)             |                                            | $                 | 9,000   |        |      | $ | 8,911   |        |  | $ | 8,911   |       
|                                        | (Consumer Services)          |                                          | Subordinated Debt (12.3%, Due 7/12  7/17) |                   |         | 21,000 |      |   |         | 20,908 |  |   |         | 20,908 | 
|                                        |                              |                                          | Preferred Stock (1,486,004 shares)         |                   |         |        |      |   |         | 1,486  |  |   |         | 1,586  | 
|                                        |                              |                                          | Common Stock (8,793,408 shares)            |                   |         |        |      |   |         | 8,793  |  |   |         | 8,654  | 
|                                       
|Commercial Credit Group, Inc.           |                              | Subordinated Debt (14.8%, Due 2/11)      |                                            |                   | 12,000  |        |      |   | 12,023  |        |  |   | 12,023  |       
|                                        | (Financial Services)         |                                          | Preferred Stock (74,978 shares)            |                   |         |        |      |   |         | 18,018 |  |   |         | 19,421 | 
|                                        |                              |                                          | Warrants                                   |                   |         |        |      |   |         |       |  |   |         |       | 
|                                       
|Community Education Centers, Inc.       |                              | Subordinated Debt (13.5%, Due 11/13)     |                                            |                   | 35,011  |        |      |   | 34,936  |        |  |   | 34,936  |       
|                                        | (Education Services)         |                                          |                                            |                   |         |        |      |   |         |        |  |   |         |        | 
|                                       
|Component Hardware Group, Inc.          |                              | Subordinated Debt (13.5%, Due 1/13)      |                                            |                   | 18,432  |        |      |   | 18,363  |        |  |   | 18,363  |       
|                                        | (Industrial Products)        |                                          |                                            |                   |         |        |      |   |         |        |  |   |         |        | 
|                                       
|Cook Inlet Alternative Risk, LLC        |                              | Unitranche Debt (10.8%, Due 4/13)        |                                            |                   | 95,000  |        |      |   | 94,530  |        |  |   | 94,530  |       
|                                        | (Business Services)          |                                          | Equity Interests                           |                   |         |        |      |   |         | 640    |  |   |         | 1,696  | 
|                                       
|Cortec Group Fund IV,
    L.P.(5)       |                              | Limited Partnership Interest             |                                            |                   |         |        |      |   | 3,383   |        |  |   | 2,922   |       
|                                        | (Private Equity)             |                                          |                                            |                   |         |        |      |   |         |        |  |   |         |        | 
|                                       
|Diversified Mercury                     |                              |                                          |                                            |                   |         |        |      |   |         |        |  |   |         |       
|Communications, LLC                     |                              | Senior Loan (8.5%, Due 3/13)             |                                            |                   | 233     |        |      |   | 217     |        |  |   | 217     |       
|                                        | (Business Services)          |                                          |                                            |                   |         |        |      |   |         |        |  |   |         |        | 
|                                       
|Digital VideoStream, LLC                |                              | Unitranche Debt (11.0%, Due 2/12)        |                                            |                   | 17,213  |        |      |   | 17,128  |        |  |   | 17,128  |       
|                                        | (Business Services)          |                                          | Convertible Subordinated Debt              |                   |         |        |      |   |         |        |  |   |         |        | 
|                                        |                              |                                          | (10.0%, Due 2/16)                          |                   |         | 4,118  |      |   |         | 4,103  |  |   |         | 5,397  | 
|                                       
|DirectBuy Holdings, Inc.                |                              | Subordinated Debt (14.5%, Due 5/13)      |                                            |                   | 75,000  |        |      |   | 74,631  |        |  |   | 74,631  |       
|                                        | (Financial Services)         |                                          | Equity Interests                           |                   |         |        |      |   |         | 8,000  |  |   |         | 8,000  | 
|                                       
|Distant Lands Trading Co.               |                              | Senior Loan (10.3%, Due 11/11)           |                                            |                   | 10,000  |        |      |   | 9,966   |        |  |   | 9,966   |       
|                                        | (Consumer Products)          |                                          | Unitranche Debt (11.0%, Due 11/11)         |                   |         | 42,375 |      |   |         | 42,226 |  |   |         | 42,226 | 
|                                        |                              |                                          | Common Stock (4,000 shares)                |                   |         |        |      |   |         | 4,000  |  |   |         | 2,645  | 
|                                       
|Driven Brands, Inc.                     |                              | Senior Loan (8.7%, Due 6/11)             |                                            |                   | 37,070  |        |      |   | 36,951  |        |  |   | 36,951  |       
|                                        | d/b/a Meineke and Econo Lube |                                          | Subordinated Debt (12.1%, Due 6/12  6/13) |                   |         | 83,000 |      |   |         | 82,754 |  |   |         | 82,754 | 
|                                        | (Consumer Services)          |                                          | Common Stock (11,675,331
    shares)(12)   |                   |         |        |      |   |         | 29,455 |  |   |         | 15,977 | 
|                                        |                              |                                          | Warrants(12)                               |                   |         |        |      |   |         |       |  |   |         |       | 
|                                       
|Dryden XVIII Leveraged                  |                              |                                          |                                            |                   |         |        |      |   |         |        |  |   |         |       
|                                        | Loan 2007
    Limited(4)     |                                          | Subordinated Debt (9.7%, Due 10/19)        |                   |         | 9,000  |      |   |         | 7,406  |  |   |         | 7,406  | 
|                                        | (CDO/CLO)                    |                                          | Income Notes
    (14.2%)(11)               |                   |         |        |      |   |         | 21,940 |  |   |         | 21,940 | 
|                                       
|Dynamic India Fund IV
    (4)(5)        |                              | Equity Interests                         |                                            |                   |         |        |      |   | 6,050   |        |  |   | 6,215   |       
|                                        | (Private Equity Fund)        |                                          |                                            |                   |         |        |      |   |         |        |  |   |         |        | 
|                                       
|EarthColor, Inc.                        |                              | Subordinated Debt (15.0%, Due 11/13)     |                                            |                   | 127,000 |        |      |   | 126,463 |        |  |   | 126,463 |       
|                                        | (Business Services)          |                                          | Common Stock
    (73,540 shares)(12)       |                   |         |        |      |   |         | 73,540 |  |   |         | 62,675 | 
|                                        |                              | Warrants(12)                             |                                            |                   |         |        |      |   |        |        |  |   |        |       
|                                       
|eCentury Capital Partners,
    L.P.(5)  |                              | Limited Partnership Interest             |                                            |                   |         |        |      |   | 6,899   |        |  |   | 2,176   |       
|                                        | (Private Equity Fund)        |                                          |                                            |                   |         |        |      |   |         |        |  |   |         |        | 
|                                       
|eInstruction Corporation                |                              | Subordinated Debt (13.5%, Due 7/14-1/15) |                                            |                   | 47,000  |        |      |   | 46,765  |        |  |   | 46,765  |       
|                                        | (Education Services)         |                                          | Common Stock (2,406 shares)                |                   |         |        |      |   |         | 2,500  |  |   |         | 2,500  | 
|                                       

| |      |  |  |                                                                                                                                                                                                                                                                
| | ---- |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (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.                                                                                                                                                           
| | (11) |  |  | Represents the effective interest yield earned on the cost basis
    of these preferred equity investments and income notes. The
    yield is included in interest income from companies less than 5%
    owned in the consolidated statement of operations.   
| | (12) |  |  | Common stock is non-voting. In addition to non-voting stock
    ownership, the Company has an option to acquire a majority of
    the voting securities of the portfolio company at fair market
    value.                                                     





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##### Table of Contents



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


CONSOLIDATED STATEMENT OF
INVESTMENTS  (Continued)


|                                        |                       |                                            |                                                |                   |        |        |      |   |        |        |  |   |        |        | 
|--------------------------------------- | --------------------- | ------------------------------------------ | ---------------------------------------------- | ----------------- | ------ | ------ | ---- | - | ------ | ------ |  | - | ------ | ------ | 
|                                        |                       |                                            |                                                | December 31, 2007 |       
|Private Finance                         |                       |                                            |                                                |                   |       
|Portfolio Company                       |                       |                                            |                                                |                  
|(in thousands, except number of shares) |                       | Investment(1)(2)                           |                                                | Principal         |        |        | Cost |   |        | Value  | 
|                                        |                       |                                            |                                                |                   |        |        |      |   |        |        | 
|Farleys & Sathers Candy Company, Inc.  |                       | Subordinated Debt (13.7%, Due 3/11)        |                                                | $                 | 18,000 |        |      | $ | 17,932 |        |  | $ | 17,932 |       
|                                        | (Consumer Products)   |                                            |                                                |                   |        |        |      |   |        |        |  |   |        |        | 
|                                       
|FCP-BHI Holdings, LLC                   |                       | Subordinated Debt (12.8%, Due 9/13)        |                                                |                   | 24,000 |        |      |   | 23,887 |        |  |   | 23,887 |       
|                                        | d/b/a Bojangles      |                                            | Equity Interests                               |                   |        |        |      |   |        | 1,000  |  |   |        | 998    | 
|                                        | (Consumer Products)   |                                            |                                                |                   |        |        |      |   |        |        |  |   |        |        | 
|                                       
|Fidus Mezzanine Capital,
    L.P.(5)    |                       | Limited Partnership Interest               |                                                |                   |        |        |      |   | 6,357  |        |  |   | 6,357  |       
|                                        | (Private Equity Fund) |                                            |                                                |                   |        |        |      |   |        |        |  |   |        |        | 
|                                       
|Frozen Specialties, Inc.                |                       | Warrants                                   |                                                |                   |        |        |      |   | 435    |        |  |   | 229    |       
|                                        | (Consumer Products)   |                                            |                                                |                   |        |        |      |   |        |        |  |   |        |        | 
|                                       
|Garden Ridge Corporation
    (Retail)   |                       | Subordinated Debt (7.0%, Due
    5/12)(6)  |                                                |                   | 20,500 |        |      |   | 20,500 |        |  |   | 20,500 |       
|                                       
|Geotrace Technologies, Inc.             |                       | Subordinated Debt (10.0%, Due 6/09)        |                                                |                   | 6,772  |        |      |   | 6,616  |        |  |   | 6,616  |       
|                                        | (Energy Services)     |                                            | Warrants                                       |                   |        |        |      |   |        | 2,350  |  |   |        | 2,993  | 
|                                       
|Gilchrist & Soames, Inc.                |                       | Senior Loan (9.0%, Due 10/13)              |                                                |                   | 20,000 |        |      |   | 19,954 |        |  |   | 19,954 |       
|                                        | (Consumer Products)   |                                            | Subordinated Debt (13.4%, Due 10/13)           |                   |        | 25,800 |      |   |        | 25,676 |  |   |        | 25,676 | 
|                                       
|Grotech Partners, VI,
    L.P.(5)       |                       | Limited Partnership Interest               |                                                |                   |        |        |      |   | 8,808  |        |  |   | 8,252  |       
|                                        | (Private Equity Fund) |                                            |                                                |                   |        |        |      |   |        |        |  |   |        |        | 
|                                       
|Havco Wood Products LLC                 |                       | Senior Loan (9.7%, Due 8/11)               |                                                |                   | 600    |        |      |   | 585    |        |  |   | 585    |       
|                                        | (Industrial Products) |                                            | Unitranche Debt (11.5%, Due 8/11)              |                   |        | 5,100  |      |   |        | 4,248  |  |   |        | 4,248  | 
|                                        |                       |                                            | Equity Interests                               |                   |        |        |      |   |        | 1,055  |  |   |        | 3,192  | 
|                                       
|Haven Eldercare of New England, LLC     |                       | Subordinated Debt (12.0%, Due
    8/09)(6) |                                                |                   | 1,927  |        |      |   | 1,927  |        |  |   |       |       
|                                        | (Healthcare Services) |                                            |                                                |                   |        |        |      |   |        |        |  |   |        |        | 
|                                       
|Higginbotham Insurance Agency, Inc.     |                       | Senior Loan (7.7%, Due 8/12)               |                                                |                   | 15,033 |        |      |   | 14,942 |        |  |   | 14,942 |       
|                                        | (Business Services)   |                                            | Subordinated Debt (13.5%,
    Due 8/13  8/14) |                   |        | 46,356 |      |   |        | 46,136 |  |   |        | 46,136 | 
|                                        |                       |                                            | Common Stock
    (23,926 shares)(12)           |                   |        |        |      |   |        | 23,926 |  |   |        | 23,868 | 
|                                        |                       |                                            | Warrant(12)                                    |                   |        |        |      |   |        |       |  |   |        |       | 
|                                       
|The Hillman Companies,
    Inc.(3)      |                       | Subordinated Debt (10.0%, Due 9/11)        |                                                |                   | 44,580 |        |      |   | 44,458 |        |  |   | 44,458 |       
|                                        | (Consumer Products)   |                                            |                                                |                   |        |        |      |   |        |        |  |   |        |        | 
|                                       
|The Homax Group, Inc.                   |                       | Senior Loan (8.7%, Due 10/12)              |                                                |                   | 10,969 |        |      |   | 10,969 |        |  |   | 10,969 |       
|                                        | (Consumer Products)   |                                            | Subordinated Debt (12.0%, Due 4/14)            |                   |        | 14,000 |      |   |        | 13,244 |  |   |        | 13,244 | 
|                                        |                       |                                            | Preferred Stock (89 shares)                    |                   |        |        |      |   |        | 89     |  |   |        | 13     | 
|                                        |                       |                                            | Common Stock (28 shares)                       |                   |        |        |      |   |        | 6      |  |   |        |       | 
|                                        |                       |                                            | Warrants                                       |                   |        |        |      |   |        | 1,106  |  |   |        | 194    | 
|                                       
|Ideal Snacks Corporation                |                       | Senior Loan (9.0%, Due 6/10)               |                                                |                   | 288    |        |      |   | 288    |        |  |   | 288    |       
|                                        | (Consumer Products)   |                                            |                                                |                   |        |        |      |   |        |        |  |   |        |        | 
|                                       
|Integrity Interactive Corporation       |                       | Unitranche Debt (10.5%, Due 2/12)          |                                                |                   | 12,193 |        |      |   | 12,095 |        |  |   | 12,095 |       
|                                        | (Business Services)   |                                            |                                                |                   |        |        |      |   |        |        |  |   |        |        | 
|                                       
|International Fiber Corporation         |                       | Subordinated Debt (14.0%, Due 6/12)        |                                                |                   | 24,572 |        |      |   | 24,476 |        |  |   | 24,476 |       
|                                        | (Industrial Products) |                                            | Preferred Stock (25,000 shares)                |                   |        |        |      |   |        | 2,500  |  |   |        | 2,194  | 
|                                       

| |      |  |  |                                                                                                                                                                                                                                                                
| | ---- |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1)  |  |  | Interest rates represent the weighted average annual stated
    interest rate on loans and debt securities, which are presented
    by nature of indebtedness for a single issuer. The maturity
    dates represent the earliest and the latest maturity dates.
| | (2)  |  |  | Common stock, preferred stock, warrants, options, and equity
    interests are generally non-income producing and restricted.                                                                                                                                  
| | (3)  |  |  | Public company.                                                                                                                                                                                                                                                
| | (4)  |  |  | Non-U.S. company or principal place of business outside the
    U.S.                                                                                                                                                                                           
| | (5)  |  |  | Non-registered investment company.                                                                                                                                                                                                                             
| | (6)  |  |  | Loan or debt security is on non-accrual status and therefore is
    considered non-income producing.                                                                                                                                                           
| | (12) |  |  | 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.                                                     





87



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##### Table of Contents



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


CONSOLIDATED STATEMENT OF
INVESTMENTS  (Continued)


|                                                       |                       |                                            |                                                 |                   |        |        |      |   |        |        |  |   |        |         | 
|------------------------------------------------------ | --------------------- | ------------------------------------------ | ----------------------------------------------- | ----------------- | ------ | ------ | ---- | - | ------ | ------ |  | - | ------ | ------- | 
|                                                       |                       |                                            |                                                 | December 31, 2007 |       
|Private Finance                                        |                       |                                            |                                                 |                   |       
|Portfolio Company                                      |                       |                                            |                                                 |                  
|(in thousands, except number of shares)                |                       | Investment(1)(2)                           |                                                 | Principal         |        |        | Cost |   |        | Value  | 
|                                                       |                       |                                            |                                                 |                   |        |        |      |   |        |        | 
|Jones Stephens Corporation                             |                       | Senior Loan (8.8%, Due 9/12)               |                                                 | $                 | 5,537  |        |      | $ | 5,525  |        |  | $ | 5,525  |        
|                                                       | (Consumer Products)   |                                            |                                                 |                   |        |        |      |   |        |        |  |   |        |         | 
|                                                      
|Knightsbridge CLO 2007-1
    Limited(4)                |                       | Subordinated Debt (14.1%, Due 1/22)        |                                                 |                   | 22,000 |        |      |   | 22,000 |        |  |   | 22,000 |        
|                                                       | (CDO/CLO)             |                                            | Income Notes
    (15.2%)(11)                    |                   |        |        |      |   |        | 31,211 |  |   |        | 31,211  | 
|                                                      
|Kodiak Fund
    LP(5)                                  |                       | Equity Interests                           |                                                 |                   |        |        |      |   | 9,423  |        |  |   | 2,853  |        
|                                                       | (Private Equity Fund) |                                            |                                                 |                   |        |        |      |   |        |        |  |   |        |         | 
|                                                      
|Line-X, Inc.                                           |                       | Senior Loan (12.0%, Due 8/11)              |                                                 |                   | 900    |        |      |   | 885    |        |  |   | 885    |        
|                                                       | (Consumer Products)   |                                            | Unitranche Debt (12.0% Due 8/11)                |                   |        | 48,198 |      |   |        | 48,039 |  |   |        | 42,784  | 
|                                                       |                       |                                            | Standby Letter of Credit ($1,500)               |                   |        |        |      |   |        |        |  |   |        |         | 
|                                                      
|MedAssets,
    Inc.(3)                                 |                       | Common Stock (224,817 shares)              |                                                 |                   |        |        |      |   | 2,049  |        |  |   | 6,652  |        
|                                                       | (Business Services)   |                                            |                                                 |                   |        |        |      |   |        |        |  |   |        |         | 
|                                                      
|Mid-Atlantic Venture Fund IV, L.P.
    (5)             |                       | Limited Partnership Interest               |                                                 |                   |        |        |      |   | 6,975  |        |  |   | 1,791  |        
|                                                       | (Private Equity Fund) |                                            |                                                 |                   |        |        |      |   |        |        |  |   |        |         | 
|                                                      
|Milestone AV Technologies, Inc.
    (f/k/a CSAV, Inc.) |                       | Subordinated Debt (11.3%, Due 6/13)        |                                                 |                   | 37,500 |        |      |   | 37,500 |        |  |   | 36,750 |        
|                                                       | (Business Services)   |                                            |                                                 |                   |        |        |      |   |        |        |  |   |        |         | 
|                                                      
|NetShape Technologies, Inc.                            |                       | Senior Loan (8.6%, Due 2/13)               |                                                 |                   | 5,802  |        |      |   | 5,773  |        |  |   | 5,773  |        
|                                                       | (Industrial Products) |                                            |                                                 |                   |        |        |      |   |        |        |  |   |        |         | 
|                                                      
|Network Hardware Resale, Inc.                          |                       | Unitranche Debt (10.5%, Due 12/11)         |                                                 |                   | 20,512 |        |      |   | 20,614 |        |  |   | 20,614 |        
|                                                       | (Business Services)   |                                            | Convertible Subordinated Debt (9.8%, Due 12/15) |                   |        | 13,242 |      |   |        | 13,302 |  |   |        | 15,586  | 
|                                                      
|Norwesco, Inc.                                         |                       | Subordinated Debt (12.7%, Due 1/12  7/12) |                                                 |                   | 82,924 |        |      |   | 82,674 |        |  |   | 82,674 |        
|                                                       | (Industrial Products) |                                            | Common Stock (559,603
    shares)(12)           |                   |        |        |      |   |        | 38,313 |  |   |        | 117,831 | 
|                                                       |                       | Warrants(12)                               |                                                 |                   |        |        |      |   |       |        |  |   |       |        
|                                                      
|Novak Biddle Venture Partners III,
    L.P.(5)         |                       | Limited Partnership Interest               |                                                 |                   |        |        |      |   | 1,910  |        |  |   | 1,256  |        
|                                                       | (Private Equity Fund) |                                            |                                                 |                   |        |        |      |   |        |        |  |   |        |         | 
|                                                      
|Oahu Waste Services, Inc.                              |                       | Stock Appreciation Rights                  |                                                 |                   |        |        |      |   | 239    |        |  |   | 998    |        
|                                                       | (Business Services)   |                                            |                                                 |                   |        |        |      |   |        |        |  |   |        |         | 
|                                                      
|Odyssey Investment Partners Fund III,
    LP(5)        |                       | Limited Partnership Interest               |                                                 |                   |        |        |      |   | 2,276  |        |  |   | 2,567  |        
|                                                       | (Private Equity Fund) |                                            |                                                 |                   |        |        |      |   |        |        |  |   |        |         | 
|                                                      
|Pangaea CLO 2007-1
    Ltd.(4)                         |                       | Subordinated Debt (10.2%, Due 10/21)       |                                                 |                   | 15,000 |        |      |   | 11,570 |        |  |   | 11,570 |        
|                                                       | (CDO/CLO)             |                                            |                                                 |                   |        |        |      |   |        |        |  |   |        |         | 
|                                                      
|Passport Health                                        |                       |                                            |                                                 |                   |        |        |      |   |        |        |  |   |        |        
|                                                       | Communications, Inc.  |                                            | Preferred Stock (651,381 shares)                |                   |        |        |      |   |        | 2,000  |  |   |        | 2,433   | 
|                                                       | (Healthcare Services) |                                            | Common Stock (19,680 shares)                    |                   |        |        |      |   |        | 48     |  |   |        | 7       | 
|                                                      
|PC Helps Support, LLC                                  |                       | Senior Loan (8.9%, Due 12/13)              |                                                 |                   | 20,000 |        |      |   | 20,000 |        |  |   | 20,000 |        
|                                                       | (Business Services)   |                                            | Subordinated Debt (13.3%, Due 12/13)            |                   |        | 30,895 |      |   |        | 30,743 |  |   |        | 30,743  | 
|                                                      
|Pendum, Inc.                                           |                       | Subordinated Debt (17.0%, Due
    1/11)(6) |                                                 |                   | 34,028 |        |      |   | 34,028 |        |  |   |       |        
|                                                       | (Business Services)   |                                            | Preferred Stock (82,715 shares)                 |                   |        |        |      |   |        |       |  |   |        |        | 
|                                                       |                       |                                            | Warrants                                        |                   |        |        |      |   |        |       |  |   |        |        | 
|                                                      
|Performant Financial Corporation                       |                       | Common Stock (478,816 shares)              |                                                 |                   |        |        |      |   | 734    |        |  |   |       |        
|                                                       | (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.                                                                                                                                                           
| | (11) |  |  | Represents the effective interest yield earned on the cost basis
    of these preferred equity investments and income notes. The
    yield is included in interest income from companies less than 5%
    owned in the consolidated statement of operations.   
| | (12) |  |  | Common stock is non-voting. In addition to non-voting stock
    ownership, the Company has an option to acquire a majority of
    the voting securities of the portfolio company at fair market
    value.                                                     





88



---



##### Table of Contents



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


CONSOLIDATED STATEMENT OF
INVESTMENTS  (Continued)


|                                        |                       |                                      |                                      |                   |        |        |      |   |        |        |  |   |        |        | 
|--------------------------------------- | --------------------- | ------------------------------------ | ------------------------------------ | ----------------- | ------ | ------ | ---- | - | ------ | ------ |  | - | ------ | ------ | 
|                                        |                       |                                      |                                      | December 31, 2007 |       
|Private Finance                         |                       |                                      |                                      |                   |       
|Portfolio Company                       |                       |                                      |                                      |                  
|(in thousands, except number of shares) |                       | Investment(1)(2)                     |                                      | Principal         |        |        | Cost |   |        | Value  | 
|                                        |                       |                                      |                                      |                   |        |        |      |   |        |        | 
|PharMEDium Healthcare Corporation       |                       | Senior Loan (8.6%, Due 10/13)        |                                      | $                 | 19,577 |        |      | $ | 19,577 |        |  | $ | 19,577 |       
|                                        | (Healthcare Services) |                                      |                                      |                   |        |        |      |   |        |        |  |   |        |        | 
|                                       
|Postle Aluminum Company, LLC            |                       | Unitranche Debt (11.0%, Due 10/12)   |                                      |                   | 61,500 |        |      |   | 61,252 |        |  |   | 61,252 |       
|                                        | (Industrial Products) |                                      | Equity Interests                     |                   |        |        |      |   |        | 2,500  |  |   |        | 3,092  | 
|                                       
|Pro Mach, Inc.                          |                       | Subordinated Debt (13.0%, Due 6/12)  |                                      |                   | 14,562 |        |      |   | 14,506 |        |  |   | 14,506 |       
|                                        | (Industrial Products) |                                      | Equity Interests                     |                   |        |        |      |   |        | 1,500  |  |   |        | 1,596  | 
|                                       
|Promo Works, LLC                        |                       | Unitranche Debt (10.3%, Due 12/11)   |                                      |                   | 26,215 |        |      |   | 26,006 |        |  |   | 26,006 |       
|                                        | (Business Services)   |                                      | Guaranty ($600)                      |                   |        |        |      |   |        |        |  |   |        |        | 
|                                       
|Reed Group, Ltd.                        |                       | Senior Loan (8.7%, Due 12/13)        |                                      |                   | 21,000 |        |      |   | 20,970 |        |  |   | 20,970 |       
|                                        | (Healthcare Services) |                                      | Subordinated Debt (13.8%, Due 12/13) |                   |        | 18,000 |      |   |        | 17,910 |  |   |        | 17,910 | 
|                                        |                       | Equity Interests                     |                                      |                   |        |        |      |   | 1,800  |        |  |   | 1,800  |       
|                                       
|S.B. Restaurant Company                 |                       | Unitranche Debt (9.8%, Due 4/11)     |                                      |                   | 34,001 |        |      |   | 33,733 |        |  |   | 33,733 |       
|                                        | (Retail)              |                                      | Preferred Stock (54,125 shares)      |                   |        |        |      |   |        | 135    |  |   |        | 135    | 
|                                        |                       | Warrants                             |                                      |                   |        |        |      |   | 619    |        |  |   | 2,095  |       
|                                        |                       | Standby Letters of Credit ($2,540)   |                                      |                   |        |        |      |   |        |        |  |   |        |       
|                                       
|SBBUT, LLC                              |                       | Equity Interests                     |                                      |                   |        |        |      |   |       |        |  |   |       |       
|                                        | (Consumer Products)   |                                      |                                      |                   |        |        |      |   |        |        |  |   |        |        | 
|                                       
|Service Center Metals, LLC              |                       | Subordinated Debt (15.5%, Due 9/11)  |                                      |                   | 5,000  |        |      |   | 4,981  |        |  |   | 4,981  |       
|                                        | (Industrial Products) |                                      | Equity Interests                     |                   |        |        |      |   |        | 313    |  |   |        | 343    | 
|                                       
|Snow Phipps Group,
    L.P.(5)          |                       | Limited Partnership Interest         |                                      |                   |        |        |      |   | 2,288  |        |  |   | 2,288  |       
|                                        | (Private Equity Fund) |                                      |                                      |                   |        |        |      |   |        |        |  |   |        |        | 
|                                       
|SPP Mezzanine Funding,
    L.P.(5)      |                       | Limited Partnership Interest         |                                      |                   |        |        |      |   | 2,268  |        |  |   | 1,942  |       
|                                        | (Private Equity Fund) |                                      |                                      |                   |        |        |      |   |        |        |  |   |        |        | 
|                                       
|SPP Mezzanine Funding II,
    L.P.(5)   |                       | Limited Partnership Interest         |                                      |                   |        |        |      |   | 4,077  |        |  |   | 3,731  |       
|                                        | (Private Equity Fund) |                                      |                                      |                   |        |        |      |   |        |        |  |   |        |        | 
|                                       
|Stag-Parkway, Inc.                      |                       | Unitranche Debt (10.8%, Due 7/12)    |                                      |                   | 51,000 |        |      |   | 50,810 |        |  |   | 50,810 |       
|                                        | (Business Services)   |                                      |                                      |                   |        |        |      |   |        |        |  |   |        |        | 
|                                       
|STS Operating, Inc.                     |                       | Subordinated Debt (11.0%, Due 1/13)  |                                      |                   | 30,386 |        |      |   | 30,273 |        |  |   | 30,273 |       
|                                        | (Industrial Products) |                                      |                                      |                   |        |        |      |   |        |        |  |   |        |        | 
|                                       
|Summit Energy Services, Inc.            |                       | Senior Loan (8.5%, Due 8/13)         |                                      |                   | 24,239 |        |      |   | 24,239 |        |  |   | 23,512 |       
|                                        | (Business Services)   |                                      | Subordinated Debt (11.6%, Due 8/13)  |                   |        | 35,765 |      |   |        | 35,596 |  |   |        | 35,596 | 
|                                        |                       | Common Stock (89,406 shares)         |                                      |                   |        |        |      |   | 2,000  |        |  |   | 1,995  |       
|                                       
|Tappan Wire and Cable Inc.              |                       | Unitranche Debt (15.0%, Due 8/14)    |                                      |                   | 24,100 |        |      |   | 23,975 |        |  |   | 23,975 |       
|                                        | (Business Services)   |                                      | Common Stock
    (15,000 shares)(12) |                   |        |        |      |   |        | 2,250  |  |   |        | 5,810  | 
|                                        |                       |                                      | Warrant(12)                          |                   |        |        |      |   |        |       |  |   |        |       | 
|                                       
|The Step2 Company, LLC                  |                       | Unitranche Debt (11.0%, Due 4/12)    |                                      |                   | 96,041 |        |      |   | 95,693 |        |  |   | 95,693 |       
|                                        | (Consumer Products)   |                                      | Equity Interests                     |                   |        |        |      |   |        | 2,483  |  |   |        | 2,987  | 
|                                       
|Tradesmen International, Inc.           |                       | Subordinated Debt (12.0%, Due 12/12) |                                      |                   | 49,124 |        |      |   | 48,431 |        |  |   | 48,431 |       
|                                        | (Business Services)   |                                      |                                      |                   |        |        |      |   |        |        |  |   |        |        | 
|                                       
|TransAmerican Auto Parts, LLC           |                       | Subordinated Debt (14.0%, Due 11/12) |                                      |                   | 24,076 |        |      |   | 23,907 |        |  |   | 23,907 |       
|                                        | (Consumer Products)   |                                      | Equity Interests                     |                   |        |        |      |   |        | 1,198  |  |   |        | 1,014  | 
|                                       
|Trover Solutions, Inc.                  |                       | Subordinated Debt (12.0%, Due 11/12) |                                      |                   | 60,000 |        |      |   | 59,740 |        |  |   | 59,740 |       
|                                        | (Business Services)   |                                      |                                      |                   |        |        |      |   |        |        |  |   |        |        | 
|                                       
|Universal Air Filter Company            |                       | Subordinated Debt (12.0%, Due 11/12) |                                      |                   | 14,750 |        |      |   | 14,688 |        |  |   | 14,688 |       
|                                        | (Industrial Products) |                                      |                                      |                   |        |        |      |   |        |        |  |   |        |        | 
|                                       

| |      |  |  |                                                                                                                                                                                                                                                                
| | ---- |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1)  |  |  | Interest rates represent the weighted average annual stated
    interest rate on loans and debt securities, which are presented
    by nature of indebtedness for a single issuer. The maturity
    dates represent the earliest and the latest maturity dates.
| | (2)  |  |  | Common stock, preferred stock, warrants, options, and equity
    interests are generally non-income producing and restricted.                                                                                                                                  
| | (3)  |  |  | Public company.                                                                                                                                                                                                                                                
| | (4)  |  |  | Non-U.S. company or principal place of business outside the
    U.S.                                                                                                                                                                                           
| | (5)  |  |  | Non-registered investment company.                                                                                                                                                                                                                             
| | (6)  |  |  | Loan or debt security is on non-accrual status and therefore is
    considered non-income producing.                                                                                                                                                           
| | (12) |  |  | Common stock is non-voting. In addition to non-voting stock
    ownership, the Company has an option to acquire a majority of
    the voting securities of the portfolio company at fair market
    value.                                                     





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ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


CONSOLIDATED STATEMENT OF
INVESTMENTS  (Continued)


|                                                      |                       |                                     |                                           |                   |         |        |           |   |         |        |           |   |         |        |  | 
|----------------------------------------------------- | --------------------- | ----------------------------------- | ----------------------------------------- | ----------------- | ------- | ------ | --------- | - | ------- | ------ | --------- | - | ------- | ------ |  | 
|                                                      |                       |                                     |                                           | December 31, 2007 |        
|Private Finance                                       |                       |                                     |                                           |                   |        
|Portfolio Company                                     |                       |                                     |                                           |                  
|(in thousands, except number of shares)               |                       | Investment(1)(2)                    |                                           | Principal         |         |        | Cost      |   |         | Value  |          
|                                                      |                       |                                     |                                           |                   |         |        |           |   |         |        |          
|Updata Venture Partners II,
    L.P.(5)               |                       | Limited Partnership Interest        |                                           |                   |         |        |           | $ | 4,465   |        |           | $ | 4,306   |       
|                                                      | (Private Equity Fund) |                                     |                                           |                   |         |        |           |   |         |        |           |   |         |        | 
|                                                     
|Venturehouse-Cibernet Investors, LLC                  |                       | Equity Interest                     |                                           |                   |         |        |           |   |        |        |           |   | 54      |       
|                                                      | (Business Services)   |                                     |                                           |                   |         |        |           |   |         |        |           |   |         |        | 
|                                                     
|Venturehouse Group,
    LLC(5)                        |                       | Equity Interest                     |                                           |                   |         |        |           |   |        |        |           |   | 613     |       
|                                                      | (Private Equity Fund) |                                     |                                           |                   |         |        |           |   |         |        |           |   |         |        | 
|                                                     
|VICORP Restaurants, Inc.                              |                       | Warrants                            |                                           |                   |         |        |           |   | 33      |        |           |   |        |       
|                                                      | (Retail)              |                                     |                                           |                   |         |        |           |   |         |        |           |   |         |        | 
|                                                     
|Walker Investment Fund II,
    LLLP(5)                |                       | Limited Partnership Interest        |                                           |                   |         |        |           |   | 1,330   |        |           |   |        |       
|                                                      | (Private Equity Fund) |                                     |                                           |                   |         |        |           |   |         |        |           |   |         |        | 
|                                                     
|WMA Equity Corporation and Affiliates                 |                       | Subordinated Debt (13.6%, Due 4/13) |                                           | $                 | 125,000 |        |           |   | 124,010 |        |           |   | 124,010 |       
|                                                      | d/b/a Wear Me Apparel |                                     | Subordinated Debt (9.0%, Due
    4/14)(6) |                   |         | 13,033 |           |   |         | 13,033 |           |   |         | 13,302 | 
|                                                      | (Consumer Products)   |                                     | Common Stock (100 shares)                 |                   |         |        |           |   |         | 46,046 |           |   |         | 13,726 | 
|                                                     
|Webster Capital II,
    L.P.(5)                       |                       | Limited Partnership Interest        |                                           |                   |         |        |           |   | 897     |        |           |   | 897     |       
|                                                      | (Private Equity Fund) |                                     |                                           |                   |         |        |           |   |         |        |           |   |         |        | 
|                                                     
|Woodstream Corporation                                |                       | Subordinated Debt (12.0%, Due 2/15) |                                           |                   | 90,000  |        |           |   | 89,574  |        |           |   | 89,574  |       
|                                                      | (Consumer Products)   |                                     | Common Stock (7,500 shares)               |                   |         |        |           |   |         | 7,500  |           |   |         | 7,482  | 
|                                                     
|York Insurance Services Group, Inc.                   |                       | Subordinated Debt (14.5%, Due 1/14) |                                           |                   | 45,141  |        |           |   | 44,966  |        |           |   | 44,966  |       
|                                                      | (Business Services)   |                                     | Common Stock (15,000 shares)              |                   |         |        |           |   |         | 1,500  |           |   |         | 1,995  | 
|                                                     
|Other companies                                       |                       | Other debt investments              |                                           |                   | 159     |        |           |   | 57      |        |           |   | 62      |       
|                                                      |                       | Other equity investments            |                                           |                   |         |        |           |   | 8       |        |           |   |        |       
|                                                     
|                                                      |                       |                                     |                                           |                   |         |        |           |   |         |        |           |   |         |        |  | 
|Total
    companies less than 5% owned                |                       |                                     |                                           |                   |         | $      | 2,994,880 |   |         | $      | 2,990,732 |  
|                                                     
|Total
    private finance (156 portfolio investments) |                       |                                     |                                           |                   |         | $      | 5,043,882 |   |         | $      | 4,659,321 |  
|                                                     

| |     |  |  |                                                                                                                                                                                                                                                                
| | --- |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) |  |  | Interest rates represent the weighted average annual stated
    interest rate on loans and debt securities, which are presented
    by nature of indebtedness for a single issuer. The maturity
    dates represent the earliest and the latest maturity dates.
| | (2) |  |  | Common stock, preferred stock, warrants, options, and equity
    interests are generally non-income producing and restricted.                                                                                                                                  
| | (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.                                                                                                                                                           





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ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


CONSOLIDATED STATEMENT OF
INVESTMENTS  (Continued)


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




|                                                            |                                   |                                         |               |  |           |                   |        |      |       |   |           |   |        |   |           |   |         | 
|----------------------------------------------------------- | --------------------------------- | --------------------------------------- | ------------- |  | --------- | ----------------- | ------ | ---- | ----- | - | --------- | - | ------ | - | --------- | - | ------- | 
|                                                            |                                   |                                         |               |  |           | December 31, 2007 |       
|                                                            |                                   | Interest                                |               |  | Number of |                   |        |      |      
|                                                            |                                   | Rate Ranges                             |               |  | Loans     |                   |        | Cost |       |   | Value     |  
|                                                            |                                   |                                         |               |  |           |                   |        |      |       |   |           |  
|Commercial Mortgage Loans                                   |                                   |                                         |               |  |           |                   |        |      |       |   |           |   |        |   |           |  
|                                                            |                                   |                                         | Up to 6.99%   |  |           |                   | 3      |      |       | $ | 20,361    |   |        | $ | 19,842    |  
|                                                            |                                   |                                         | 7.00%8.99%   |  |           |                   | 8      |      |       |   | 22,768    |   |        |   | 22,768    |  
|                                                            |                                   |                                         | 9.00%10.99%  |  |           |                   | 3      |      |       |   | 8,372     |   |        |   | 8,372     |  
|                                                            |                                   |                                         | 11.00%12.99% |  |           |                   | 1      |      |       |   | 10,456    |   |        |   | 10,456    |  
|                                                            |                                   | 15.00% and above                        |               |  | 2         |                   |        |      | 3,970 |   |           |   | 3,970  |  
|                                                           
|                                                            |                                   | Total commercial mortgage
    loans(13) |               |  |           |                   |        |      | 17    |   |           | $ | 65,927 |   |           | $ | 65,408  | 
|                                                           
|Real Estate Owned                                           |                                   |                                         |               |  |           |                   |        |      |       | $ | 15,272    |   |        | $ | 21,253    |  
|                                                           
|Equity
    Interests(2) 
    Companies more than 25% owned |                                   |                                         |               |  |           | $                 | 15,743 |      |       | $ | 34,539    |  
|                                                            | Guarantees ($6,871)               |                                         |               |  |           |                   |        |      |       |   |           |   |        |   |           |   |        
|                                                            | Standby Letter of Credit ($1,295) |                                         |               |  |           |                   |        |      |       |   |           |   |        |   |           |   |        
|                                                           
|                                                            |                                   | Total commercial real estate finance    |               |  |           |                   |        |      |       |   |           | $ | 96,942 |   |           | $ | 121,200 | 
|                                                           
|Total portfolio                                             |                                   |                                         |               |  |           |                   |        |      |       | $ | 5,140,824 |   |        | $ | 4,780,521 |  
|                                                           

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

|                                                     |                                                        |                           |  |      |      |  |   |         |         |  |   |         |         | 
|---------------------------------------------------- | ------------------------------------------------------ | ------------------------- |  | ---- | ---- |  | - | ------- | ------- |  | - | ------- | ------- | 
|                                                     |                                                        | Yield                     |  |      | Cost |  |   | Value   |        
|                                                     |                                                        |                           |  |      |      |  |   |         |        
|Liquidity
    Portfolio(14)                          |                                                        |                           |  |      |      |  |   |         |         |  |   |        
|                                                     | American Beacon Money Market Select FD Fund            |                           |  | 4.5% |      |  | $ | 126,910 |         |  | $ | 126,910 |        
|                                                     | American Beacon Money Market Fund                      |                           |  | 4.8% |      |  |   | 40,163  |         |  |   | 40,163  |        
|                                                     | SEI Daily Income Tr Prime Obligation Money Market Fund |                           |  | 4.9% |      |  |   | 34,143  |         |  |   | 34,143  |        
|                                                    
|                                                     |                                                        | Total liquidity portfolio |  |      |      |  |   | $       | 201,216 |  |   | $       | 201,216 | 
|                                                    
|Other Investments in Money Market
    Securities(14) |                                                        |                           |  |      |      |  |   |         |         |  |   |        
|                                                     | Columbia Treasury Reserves Money Market Fund           |                           |  | 4.6% |      |  | $ | 6       |         |  | $ | 6       |        
|                                                    

|                                                                                                                                                                                                                                                                                                 |  |  |  |  |  |  |  |  |  |  |  | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  |  |  |  |  |  |  |  |  |  |  | 
|(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.                                                                                                                                                                                                                                                
|(13)       Commercial
    mortgage loans totaling $14.3 million at value were on
    non-accrual status and therefore were considered non-income
    producing.                                                                                                                                 
|(14)       Included
    in investments in money market and other securities on the
    accompanying Consolidated Balance Sheet.                                                                                                                                                                 





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ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


CONSOLIDATED STATEMENT OF INVESTMENTS


|                                        |                      |                                                       |                                                    |                   |        |        |      |   |        |         |  |   |        |        | 
|--------------------------------------- | -------------------- | ----------------------------------------------------- | -------------------------------------------------- | ----------------- | ------ | ------ | ---- | - | ------ | ------- |  | - | ------ | ------ | 
|                                        |                      |                                                       |                                                    | December 31, 2006 |       
|Private Finance                         |                      |                                                       |                                                    |                   |       
|Portfolio Company                       |                      |                                                       |                                                    |                  
|(in thousands, except number of shares) |                      | Investment(1)(2)                                      |                                                    | Principal         |        |        | Cost |   |        | Value   | 
|                                        |                      |                                                       |                                                    |                   |        |        |      |   |        |         | 
|Companies More Than 25% Owned           |                      |                                                       |                                                    |                   |        |        |      |   |        |         |  |  
|                                       
|Alaris Consulting, LLC                  |                      | Senior Loan (16.5%, Due 12/05 
    12/07)(6)         |                                                    | $                 | 27,055 |        |      | $ | 26,987 |         |  | $ |       |       
|                                        | (Business Services)  |                                                       | Equity Interests                                   |                   |        |        |      |   |        | 5,305   |  |   |        |       | 
|                                        |                      | Guaranty ($1,100)                                     |                                                    |                   |        |        |      |   |        |         |  |   |        |       
|                                       
|Avborne,
    Inc.(7)                    |                      | Preferred Stock (12,500 shares)                       |                                                    |                   |        |        |      |   | 610    |         |  |   | 918    |       
|                                        | (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)                                     |                                                    |                   |        |        |      |   |        |         |  |   |        |       
|                                       
|Border Foods, Inc.                      |                      | Preferred Stock (100,000 shares)                      |                                                    |                   |        |        |      |   | 12,721 |         |  |   |       |       
|                                        | (Consumer Products)  |                                                       | Common Stock (148,838 shares)                      |                   |        |        |      |   |        | 3,848   |  |   |        |       | 
|                                       
|Calder Capital Partners,
    LLC(5)     |                      | Senior Loan (8.0%, Due
    5/09)(6)                   |                                                    |                   | 975    |        |      |   | 975    |         |  |   | 975    |       
|                                        | (Financial Services) |                                                       | Equity Interests                                   |                   |        |        |      |   |        | 2,076   |  |   |        | 2,076  | 
|                                       
|Callidus Capital Corporation            |                      | Subordinated Debt (18.0%, Due 10/08)                  |                                                    |                   | 5,762  |        |      |   | 5,762  |         |  |   | 5,762  |       
|                                        | (Financial Services) |                                                       | Common Stock (100 shares)                          |                   |        |        |      |   |        | 2,058   |  |   |        | 22,550 | 
|                                       
|Ciena Capital LLC (f/k/a Business       |                      | Class A Equity
    Interests(25.0%)(6)                |                                                    |                   | 66,622 |        |      |   | 66,622 |         |  |   | 66,622 |       
|                                        | Loan Express, LLC)   |                                                       | Class B Equity Interests                           |                   |        |        |      |   |        | 119,436 |  |   |        | 79,139 | 
|                                        | (Financial Services) |                                                       | Class C Equity Interests                           |                   |        |        |      |   |        | 109,301 |  |   |        | 64,976 | 
|                                        |                      | Guaranty ($189,706  See Note 3)                      |                                                    |                   |        |        |      |   |        |         |  |   |        |       
|                                        |                      | Standby Letters of Credit
    ($25,000   See Note 3) |                                                    |                   |        |        |      |   |        |         |  |   |        |       
|                                       
|Coverall North America, Inc.            |                      | Unitranche Debt (12.0%, Due 7/11)                     |                                                    |                   | 36,500 |        |      |   | 36,333 |         |  |   | 36,333 |       
|                                        | (Business Services)  |                                                       | Subordinated Debt (15.0%, Due 7/11)                |                   |        | 6,000  |      |   |        | 5,972   |  |   |        | 5,972  | 
|                                        |                      |                                                       | Common Stock (884,880 shares)                      |                   |        |        |      |   |        | 16,649  |  |   |        | 19,619 | 
|                                       
|CR Brands, Inc.                         |                      | Subordinated Debt (16.6%, Due 2/13)                   |                                                    |                   | 39,573 |        |      |   | 39,401 |         |  |   | 39,401 |       
|                                        | (Consumer Products)  |                                                       | Common Stock (37,200,551 shares)                   |                   |        |        |      |   |        | 33,321  |  |   |        | 25,738 | 
|                                       
|Financial Pacific Company               |                      | Subordinated Debt (17.4%, Due 2/12  8/12)            |                                                    |                   | 71,589 |        |      |   | 71,362 |         |  |   | 71,362 |       
|                                        | (Financial Services) |                                                       | Preferred Stock (10,964 shares)                    |                   |        |        |      |   |        | 10,276  |  |   |        | 15,942 | 
|                                        |                      |                                                       | Common Stock (14,735 shares)                       |                   |        |        |      |   |        | 14,819  |  |   |        | 65,186 | 
|                                       
|ForeSite Towers, LLC                    |                      | Equity Interests                                      |                                                    |                   |        |        |      |   | 7,620  |         |  |   | 12,290 |       
|                                        | (Tower Leasing)      |                                                       |                                                    |                   |        |        |      |   |        |         |  |   |        |        | 
|                                       
|Global Communications, LLC              |                      | Senior Loan (10.7%, Due 9/02 
    11/07)(6)          |                                                    |                   | 15,957 |        |      |   | 15,957 |         |  |   | 15,957 |       
|                                        | (Business Services)  |                                                       | Subordinated Debt (17.0%, Due
    12/03  9/05)(6) |                   |        | 11,339 |      |   |        | 11,336  |  |   |        | 11,237 | 
|                                        |                      | Preferred Equity Interest                             |                                                    |                   |        |        |      |   | 14,067 |         |  |   |       |       
|                                        |                      | Options                                               |                                                    |                   |        |        |      |   | 1,639  |         |  |   |       |       
|                                       
|Gordian Group, Inc.                     |                      | Senior Loan (10.0%, Due 6/06 
    12/08)(6)          |                                                    |                   | 11,792 |        |      |   | 11,803 |         |  |   |       |       
|                                        | (Business Services)  |                                                       | Common Stock (1,000 shares)                        |                   |        |        |      |   |        | 6,762   |  |   |        |       | 
|                                       

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





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ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


CONSOLIDATED STATEMENT OF
INVESTMENTS  (Continued)


|                                        |                       |                                            |                                            |                   |        |        |      |   |        |        |  |   |        |         | 
|--------------------------------------- | --------------------- | ------------------------------------------ | ------------------------------------------ | ----------------- | ------ | ------ | ---- | - | ------ | ------ |  | - | ------ | ------- | 
|                                        |                       |                                            |                                            | December 31, 2006 |       
|Private Finance                         |                       |                                            |                                            |                   |       
|Portfolio Company                       |                       |                                            |                                            |                  
|(in thousands, except number of shares) |                       | Investment(1)(2)                           |                                            | Principal         |        |        | Cost |   |        | Value  | 
|                                        |                       |                                            |                                            |                   |        |        |      |   |        |        | 
|Healthy Pet Corp.                       |                       | Senior Loan (9.9%, Due 8/10)               |                                            | $                 | 27,038 |        |      | $ | 27,038 |        |  | $ | 27,038 |        
|                                        | (Consumer Services)   |                                            | Subordinated Debt (15.0%, Due 8/10)        |                   |        | 43,720 |      |   |        | 43,579 |  |   |        | 43,579  | 
|                                        |                       |                                            | Common Stock (30,142 shares)               |                   |        |        |      |   |        | 30,142 |  |   |        | 28,921  | 
|                                       
|HMT, Inc.                               |                       | Preferred Stock (554,052 shares)           |                                            |                   |        |        |      |   | 2,637  |        |  |   | 2,637  |        
|                                        | (Energy Services)     |                                            | Common Stock (300,000 shares)              |                   |        |        |      |   |        | 3,000  |  |   |        | 8,664   | 
|                                        |                       | Warrants                                   |                                            |                   |        |        |      |   | 1,155  |        |  |   | 3,336  |        
|                                       
|Huddle House, Inc.                      |                       | Senior Loan (8.9%, Due 12/11)              |                                            |                   | 19,950 |        |      |   | 19,950 |        |  |   | 19,950 |        
|                                        | (Retail)              |                                            | Subordinated Debt (15.0%, Due 12/12)       |                   |        | 58,484 |      |   |        | 58,196 |  |   |        | 58,196  | 
|                                        |                       | Common Stock (415,328 shares)              |                                            |                   |        |        |      |   | 41,662 |        |  |   | 41,662 |        
|                                       
|Impact Innovations Group, LLC           |                       | Equity Interests in Affiliate              |                                            |                   |        |        |      |   |       |        |  |   | 873    |        
|                                        | (Business Services)   |                                            |                                            |                   |        |        |      |   |        |        |  |   |        |         | 
|                                       
|Insight Pharmaceuticals Corporation     |                       | Subordinated Debt (16.1%, Due 9/12)        |                                            |                   | 60,049 |        |      |   | 59,850 |        |  |   | 59,850 |        
|                                        | (Consumer Products)   |                                            | Preferred Stock (25,000 shares)            |                   |        |        |      |   |        | 25,000 |  |   |        | 7,845   | 
|                                        |                       | Common Stock (620,000 shares)              |                                            |                   |        |        |      |   | 6,325  |        |  |   |       |        
|                                       
|Jakel, Inc.                             |                       | Subordinated Debt (15.5%, Due
    3/08)(6) |                                            |                   | 15,192 |        |      |   | 15,192 |        |  |   | 6,655  |        
|                                        | (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  |        |  |   | 4,843  |        
|                                        | (Financial Services)  |                                            | Subordinated Debt (18.0%, Due
    5/09)(6) |                   |        | 2,952  |      |   |        | 2,952  |  |   |        |        | 
|                                        |                       | Equity Interests                           |                                            |                   |        |        |      |   | 4,248  |        |  |   |       |        
|                                       
|Litterer
    Beteiligungs-GmbH(4)       |                       | Subordinated Debt (8.0%, Due 3/07)         |                                            |                   | 692    |        |      |   | 692    |        |  |   | 692    |        
|                                        | (Business Services)   |                                            | Equity Interest                            |                   |        |        |      |   |        | 1,809  |  |   |        | 1,199   | 
|                                       
|Mercury Air Centers, Inc.               |                       | Subordinated Debt (16.0%, Due 4/09        |                                            |                   |        |        |      |   |        |        |  |   |        |        
|                                        | (Business Services)   |                                            | 11/12)                                     |                   |        | 49,358 |      |   |        | 49,217 |  |   |        | 49,217  | 
|                                        |                       |                                            | Common Stock (57,970 shares)               |                   |        |        |      |   |        | 35,053 |  |   |        | 195,019 | 
|                                        |                       |                                            | Standby Letters of Credit ($1,581)         |                   |        |        |      |   |        |        |  |   |        |         | 
|                                       
|MVL Group, Inc.                         |                       | Senior Loan (12.0%, Due 6/09  7/09)       |                                            |                   | 27,299 |        |      |   | 27,245 |        |  |   | 27,245 |        
|                                        | (Business Services)   |                                            | Subordinated Debt (14.5%, Due 6/09)        |                   |        | 35,846 |      |   |        | 35,478 |  |   |        | 35,478  | 
|                                        |                       | Common Stock (648,661 shares)              |                                            |                   |        |        |      |   | 643    |        |  |   |       |        
|                                       
|Penn Detroit Diesel Allison, LLC        |                       | Subordinated Debt (15.5%, Due 8/13)        |                                            |                   | 38,173 |        |      |   | 37,994 |        |  |   | 37,994 |        
|                                        | (Business Services)   |                                            | Equity Interests                           |                   |        |        |      |   |        | 21,128 |  |   |        | 25,949  | 
|                                       
|Powell Plant Farms, Inc.                |                       | Senior Loan (15.0%, Due
    12/07)(6)      |                                            |                   | 35,040 |        |      |   | 26,192 |        |  |   | 26,192 |        
|                                        | (Consumer Products)   |                                            | Subordinated Debt (20.0%, Due
    6/03)(6) |                   |        | 19,291 |      |   |        | 19,223 |  |   |        | 962     | 
|                                        |                       |                                            | Preferred Stock (1,483 shares)             |                   |        |        |      |   |        |       |  |   |        |        | 
|                                        |                       |                                            | Warrants                                   |                   |        |        |      |   |        |       |  |   |        |        | 
|                                       
|Service Champ, Inc.                     |                       | Subordinated Debt (15.5%, Due 4/12)        |                                            |                   | 27,733 |        |      |   | 27,619 |        |  |   | 27,619 |        
|                                        | (Business Services)   |                                            | Common Stock (63,888 shares)               |                   |        |        |      |   |        | 13,662 |  |   |        | 16,786  | 
|                                       

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





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ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


CONSOLIDATED STATEMENT OF
INVESTMENTS  (Continued)


|                                        |                                |                                      |                                                   |                   |         |        |           |   |         |        |           |   |         |        | 
|--------------------------------------- | ------------------------------ | ------------------------------------ | ------------------------------------------------- | ----------------- | ------- | ------ | --------- | - | ------- | ------ | --------- | - | ------- | ------ | 
|                                        |                                |                                      |                                                   | December 31, 2006 |        
|Private Finance                         |                                |                                      |                                                   |                   |        
|Portfolio Company                       |                                |                                      |                                                   |                   |         |       
|(in thousands, except number of shares) |                                | Investment(1)(2)                     |                                                   | Principal         |         |        | Cost      |   |         | Value  |          
|                                        |                                |                                      |                                                   |                   |         |        |           |   |         |        |          
|Staffing Partners Holding               |                                |                                      |                                                   |                   |         |        |           |   |         |        |           |   |         |       
|                                        | Company, Inc.                  |                                      | Subordinated Debt (13.5%,
    Due 1/07)(6)        |                   | $       | 540    |           |   | $       | 540    |           |   | $       | 486    | 
|                                        | (Business Services)            |                                      |                                                   |                   |         |        |           |   |         |        |           |   |         |        | 
|                                       
|Startec Global Communications           |                                |                                      |                                                   |                   |         |        |           |   |         |        |           |   |         |       
|                                        | Corporation                    |                                      | Senior Loan (10.0%, Due 5/07  5/09)              |                   |         | 15,965 |           |   |         | 15,965 |           |   |         | 15,965 | 
|                                        | (Telecommunications)           |                                      | Common Stock (19,180,000 shares)                  |                   |         |        |           |   |         | 37,256 |           |   |         | 11,232 | 
|                                       
|Sweet Traditions, LLC                   |                                | Senior Loan (9.0%, Due 8/11)         |                                                   |                   | 39,022  |        |           |   | 35,172  |        |           |   | 35,172  |       
|                                        | (Retail)                       |                                      | Equity Interests                                  |                   |         |        |           |   |         | 450    |           |   |         | 450    | 
|                                        |                                |                                      | Standby Letter of Credit ($120)                   |                   |         |        |           |   |         |        |           |   |         |        | 
|                                       
|Triview Investments,
    Inc.(8)        |                                | Senior Loan (9.6%, Due 6/07  12/07) |                                                   |                   | 14,758  |        |           |   | 14,747  |        |           |   | 14,747  |       
|                                        | (Broadcasting & Cable/Business |                                      | Subordinated Debt (16.0%, Due 9/11  7/12)        |                   |         | 56,288 |           |   |         | 56,008 |           |   |         | 56,008 | 
|                                        | Services/Consumer Products)    |                                      | Subordinated Debt (7.9%, Due 11/07 
    7/08)(6) |                   |         | 4,327  |           |   |         | 4,327  |           |   |         | 4,342  | 
|                                        |                                |                                      | Common Stock (202 shares)                         |                   |         |        |           |   |         | 98,604 |           |   |         | 31,322 | 
|                                        |                                | Guaranty ($800)                      |                                                   |                   |         |        |           |   |         |        |           |   |         |       
|                                        |                                | Standby Letter of Credit ($200)      |                                                   |                   |         |        |           |   |         |        |           |   |         |       
|                                       
|Total
    companies more than 25% owned |                                |                                      |                                                   |                   |         | $      | 1,578,822 |   |         | $      | 1,490,180 |  
|                                       
|Companies 5% to 25% Owned               |                                |                                      |                                                   |                  
|                                       
|Advantage Sales & Marketing, Inc.       |                                | Subordinated Debt (12.0%, Due 3/14)  |                                                   | $                 | 152,320 |        |           | $ | 151,648 |        |           | $ | 151,648 |       
|                                        | (Business Services)            |                                      | Equity Interests                                  |                   |         |        |           |   |         |       |           |   |         | 11,000 | 
|                                       
|Air Medical Group Holdings LLC          |                                | Senior Loan (9.9%, Due 3/11)         |                                                   |                   | 1,828   |        |           |   | 1,763   |        |           |   | 1,763   |       
|                                        | (Healthcare Services)          |                                      | Subordinated Debt (14.0%, Due 11/12)              |                   |         | 35,180 |           |   |         | 35,128 |           |   |         | 35,128 | 
|                                        |                                | Equity Interests                     |                                                   |                   |         |        |           |   | 3,470   |        |           |   | 5,950   |       
|                                       
|Alpine ESP Holdings, Inc.               |                                | Preferred Stock (622 shares)         |                                                   |                   |         |        |           |   | 622     |        |           |   | 602     |       
|                                        | (Business Services)            |                                      | Common Stock (13,513 shares)                      |                   |         |        |           |   |         | 14     |           |   |         |       | 
|                                       
|Amerex Group, LLC                       |                                | Subordinated Debt (12.0%, Due 1/13)  |                                                   |                   | 8,400   |        |           |   | 8,400   |        |           |   | 8,400   |       
|                                        | (Consumer Products)            |                                      | Equity Interests                                  |                   |         |        |           |   |         | 3,546  |           |   |         | 13,823 | 
|                                       
|BB&T Capital Partners/Windsor           |                                |                                      |                                                   |                   |         |        |           |   |         |        |           |   |         |       
|                                        | Mezzanine Fund, LLC
    (5)    |                                      | Equity Interests                                  |                   |         |        |           |   |         | 5,873  |           |   |         | 5,554  | 
|                                        | (Private Equity Fund)          |                                      |                                                   |                   |         |        |           |   |         |        |           |   |         |        | 
|                                       
|Becker Underwood, Inc.                  |                                | Subordinated Debt (14.5%, Due 8/12)  |                                                   |                   | 24,244  |        |           |   | 24,163  |        |           |   | 24,163  |       
|                                        | (Industrial Products)          |                                      | Common Stock (5,073 shares)                       |                   |         |        |           |   |         | 5,813  |           |   |         | 3,700  | 
|                                       
|BI Incorporated                         |                                | Subordinated Debt (13.5%, Due 2/14)  |                                                   |                   | 30,269  |        |           |   | 30,135  |        |           |   | 30,135  |       
|                                        | (Business Services)            |                                      | Common Stock (40,000 shares)                      |                   |         |        |           |   |         | 4,000  |           |   |         | 4,100  | 
|                                        |                                |                                      |                                                   |                   |         |        |           |   |         |        |           |   |         |       
|                                       

|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                         
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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.                                                                                                                                                                                                                                                                                                                    
|(8) |  | Triview Investments, Inc. holds investments in Longview Cable
    & Data, LLC (Broadcasting & Cable) with a cost of
    $67.3 million and a value of $7.5 million, Triax
    Holdings, LLC (Consumer Products) with a cost of
    $98.9 million and a value of $91.5 million, and
    Crescent Hotels & Resorts, LLC and affiliates (Business
    Services) with a cost of $7.5 million and a value of
    $7.3 million.





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ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


CONSOLIDATED STATEMENT OF
INVESTMENTS  (Continued)


|                                                                          |                       |                                                           |                                            |                   |        |        |         |   |        |        |         |   |        |        | 
|------------------------------------------------------------------------- | --------------------- | --------------------------------------------------------- | ------------------------------------------ | ----------------- | ------ | ------ | ------- | - | ------ | ------ | ------- | - | ------ | ------ | 
|                                                                          |                       |                                                           |                                            | December 31, 2006 |       
|Private Finance                                                           |                       |                                                           |                                            |                   |       
|Portfolio Company                                                         |                       |                                                           |                                            |                  
|(in thousands, except number of shares)                                   |                       | Investment(1)(2)                                          |                                            | Principal         |        |        | Cost    |   |        | Value  |        
|                                                                          |                       |                                                           |                                            |                   |        |        |         |   |        |        |        
|CitiPostal, Inc. and Affiliates                                           |                       | Senior Loan (11.1%, Due 8/13-11/14)                       |                                            | $                 | 20,670 |        |         | $ | 20,569 |        |         | $ | 20,569 |       
|                                                                          | (Business Services)   |                                                           | Equity Interests                           |                   |        |        |         |   |        | 4,447  |         |   |        | 4,700  | 
|                                                                         
|Creative Group, Inc.                                                      |                       | Subordinated Debt (12.0%, Due 9/13)                       |                                            |                   | 15,000 |        |         |   | 13,656 |        |         |   | 13,656 |       
|                                                                          | (Business Services)   |                                                           | Warrant                                    |                   |        |        |         |   |        | 1,387  |         |   |        | 1,387  | 
|                                                                         
|Drew Foam Companies, Inc.                                                 |                       | Preferred Stock (722 shares)                              |                                            |                   |        |        |         |   | 722    |        |         |   | 722    |       
|                                                                          | (Business Services)   |                                                           | Common Stock (7,287 shares)                |                   |        |        |         |   |        | 7      |         |   |        | 7      | 
|                                                                         
|MedBridge Healthcare, LLC                                                 |                       | Senior Loan (6.0%, Due
    8/09)(6)                       |                                            |                   | 7,164  |        |         |   | 7,164  |        |         |   | 7,164  |       
|                                                                          | (Healthcare Services) |                                                           | Subordinated Debt (10.0%, Due
    8/14)(6) |                   |        | 5,184  |         |   |        | 5,184  |         |   |        | 1,813  | 
|                                                                          |                       | Convertible Subordinated Debt (2.0%,
    Due
    8/14)(6) |                                            |                   | 2,970  |        |         |   | 984    |        |         |   |       |       
|                                                                          |                       | Equity Interests                                          |                                            |                   |        |        |         |   | 1,306  |        |         |   |       |       
|                                                                         
|Multi-Ad Services, Inc.                                                   |                       | Unitranche Debt (11.3%, Due 11/11)                        |                                            |                   | 20,000 |        |         |   | 19,879 |        |         |   | 19,879 |       
|                                                                          | (Business Services)   |                                                           | Equity Interests                           |                   |        |        |         |   |        | 2,000  |         |   |        | 2,000  | 
|                                                                         
|Nexcel Synthetics, LLC                                                    |                       | Subordinated Debt (14.5%, Due 6/09)                       |                                            |                   | 10,998 |        |         |   | 10,978 |        |         |   | 10,978 |       
|                                                                          | (Consumer Products)   |                                                           | Equity Interests                           |                   |        |        |         |   |        | 1,755  |         |   |        | 1,486  | 
|                                                                         
|PresAir LLC                                                               |                       | Senior Loan (7.5%, Due
    12/10)(6)                      |                                            |                   | 5,810  |        |         |   | 5,492  |        |         |   | 2,206  |       
|                                                                          | (Industrial Products) |                                                           | Equity Interests                           |                   |        |        |         |   |        | 1,336  |         |   |        |       | 
|                                                                         
|Progressive International                                                 |                       |                                                           |                                            |                   |        |        |         |   |        |        |         |   |        |       
|                                                                          | Corporation           |                                                           | Subordinated Debt (16.0%, Due 12/09)       |                   |        | 7,553  |         |   |        | 7,533  |         |   |        | 7,533  | 
|                                                                          | (Consumer Products)   |                                                           | Preferred Stock (500 shares)               |                   |        |        |         |   |        | 500    |         |   |        | 1,024  | 
|                                                                          |                       | Common Stock (197 shares)                                 |                                            |                   |        |        |         |   | 13     |        |         |   | 2,300  |       
|                                                                          |                       | Warrants                                                  |                                            |                   |        |        |         |   |       |        |         |   |       |       
|                                                                         
|Regency Healthcare Group, LLC                                             |                       | Senior Loan (11.1%, Due 6/12)                             |                                            |                   | 1,250  |        |         |   | 1,232  |        |         |   | 1,232  |       
|                                                                          | (Healthcare Services) |                                                           | Unitranche Debt (11.1%, Due 6/12)          |                   |        | 20,000 |         |   |        | 19,908 |         |   |        | 19,908 | 
|                                                                          |                       |                                                           | Equity Interests                           |                   |        |        |         |   |        | 1,500  |         |   |        | 1,616  | 
|                                                                         
|SGT India Private
    Limited(4)                                          |                       | Common Stock (109,524 shares)                             |                                            |                   |        |        |         |   | 3,944  |        |         |   | 3,346  |       
|                                                                          | (Business Services)   |                                                           |                                            |                   |        |        |         |   |        |        |         |   |        |        | 
|                                                                         
|Soteria Imaging Services, LLC                                             |                       | Subordinated Debt (11.6%, Due 11/10)                      |                                            |                   | 18,500 |        |         |   | 17,569 |        |         |   | 17,569 |       
|                                                                          | (Healthcare Services) |                                                           | Equity Interests                           |                   |        |        |         |   |        | 2,163  |         |   |        | 2,541  | 
|                                                                         
|Universal Environmental Services, LLC                                     |                       | Unitranche Debt (14.5%, Due 2/09)                         |                                            |                   | 10,989 |        |         |   | 10,962 |        |         |   | 10,211 |       
|                                                                          | (Business Services)   |                                                           | Equity Interests                           |                   |        |        |         |   |        | 1,795  |         |   |        |       | 
|                                                                         
|Total
    companies 5% to 25% owned                                       |                       |                                                           |                                            |                   |        | $      | 438,560 |   |        | $      | 449,813 |  
|                                                                         
|Companies Less Than 5% Owned                                              |                       |                                                           |                                            |                   |        |        |         |   |        |        |         |   |        |       
|                                                                         
|3SI Security Systems, Inc.                                                |                       | Subordinated Debt (14.5%, Due 8/13)                       |                                            | $                 | 26,857 |        |         | $ | 26,740 |        |         | $ | 26,740 |       
|                                                                          | (Consumer Products)   |                                                           |                                            |                   |        |        |         |   |        |        |         |   |        |        | 
|                                                                         
|AgData, L.P.                                                              |                       | Unitranche Debt (10.3%, Due 7/12)                         |                                            |                   | 11,330 |        |         |   | 11,269 |        |         |   | 11,269 |       
|                                                                          | (Consumer Services)   |                                                           |                                            |                   |        |        |         |   |        |        |         |   |        |        | 
|                                                                         
|Anthony, Inc.                                                             |                       | Subordinated Debt (13.3%, Due 8/11                       |                                            |                   |        |        |         |   |        |        |         |   |        |       
|                                                                          | (Industrial Products) |                                                           | 9/12)                                      |                   |        | 14,818 |         |   |        | 14,768 |         |   |        | 14,768 | 
|                                                                         
|Axium Healthcare Pharmacy, Inc.                                           |                       | Senior Loan (12.0%, Due 12/12)                            |                                            |                   | 200    |        |         |   | 161    |        |         |   | 161    |       
|                                                                          | (Healthcare Services) |                                                           | Unitranche Debt (12.0%, Due 12/12)         |                   |        | 9,000  |         |   |        | 8,956  |         |   |        | 8,956  | 
|                                                                          |                       |                                                           | Common Stock (26,500 shares)               |                   |        |        |         |   |        | 2,650  |         |   |        | 2,650  | 
|                                                                         
|Baird Capital Partners IV Limited
    Partnership(5)(Private Equity Fund) |                       | Limited Partnership Interest                              |                                            |                   |        |        |         |   | 876    |        |         |   | 876    |       
|                                                                         

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





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##### Table of Contents



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


CONSOLIDATED STATEMENT OF
INVESTMENTS  (Continued)


|                                         |                                       |                                            |                                                      |                   |         |        |      |   |         |        |  |   |         |        | 
|---------------------------------------- | ------------------------------------- | ------------------------------------------ | ---------------------------------------------------- | ----------------- | ------- | ------ | ---- | - | ------- | ------ |  | - | ------- | ------ | 
|                                         |                                       |                                            |                                                      | December 31, 2006 |        
|Private Finance                          |                                       |                                            |                                                      |                   |        
|Portfolio Company                        |                                       |                                            |                                                      |                  
|(in thousands, except number of shares)  |                                       | Investment(1)(2)                           |                                                      | Principal         |         |        | Cost |   |         | Value  | 
|                                         |                                       |                                            |                                                      |                   |         |        |      |   |         |        | 
|Bantek West, Inc.                        |                                       | Subordinated Debt (11.6%, Due
    1/11)(6) |                                                      | $                 | 30,000  |        |      | $ | 30,000  |        |  | $ | 21,463  |       
|                                         | (Business Services)                   |                                            |                                                      |                   |         |        |      |   |         |        |  |   |         |        | 
|                                        
|Benchmark Medical, Inc.                  |                                       | Warrants                                   |                                                      |                   |         |        |      |   | 18      |        |  |   |        |       
|                                         | (Healthcare Services)                 |                                            |                                                      |                   |         |        |      |   |         |        |  |   |         |        | 
|                                        
|BenefitMall, Inc.                        |                                       | Unitranche Debt (13.3%, Due 8/12)          |                                                      |                   | 110,030 |        |      |   | 109,648 |        |  |   | 109,648 |       
|                                         | (Business Services)                   |                                            | Common Stock (45,528,000
    shares)(11)             |                   |         |        |      |   |         | 45,528 |  |   |         | 43,578 | 
|                                         |                                       |                                            | Warrants(11)                                         |                   |         |        |      |   |         |       |  |   |         |       | 
|                                         |                                       |                                            | Standby Letters of Credit ($9,981)                   |                   |         |        |      |   |         |        |  |   |         |        | 
|                                        
|Breeze-Eastern
    Corporation(3)        |                                       | Senior Loan (10.1%, Due 5/11)              |                                                      |                   | 10,000  |        |      |   | 10,000  |        |  |   | 10,000  |       
|                                         | (Industrial Products)                 |                                            |                                                      |                   |         |        |      |   |         |        |  |   |         |        | 
|                                        
|Broadcast Electronics, Inc.              |                                       | Senior Loan (9.1%, Due 7/12)               |                                                      |                   | 4,963   |        |      |   | 4,930   |        |  |   | 4,930   |       
|                                         | (Business Services)                   |                                            |                                                      |                   |         |        |      |   |         |        |  |   |         |        | 
|                                        
|C&K Market, Inc.                         |                                       | Subordinated Debt (14.0%, Due 12/08)       |                                                      |                   | 27,819  |        |      |   | 27,738  |        |  |   | 27,738  |       
|                                         | (Retail)                              |                                            |                                                      |                   |         |        |      |   |         |        |  |   |         |        | 
|                                        
|Callidus Debt Partners                   |                                       |                                            |                                                      |                   |         |        |      |   |         |        |  |   |         |       
|                                         | CDO Fund I, Ltd.
    (4)(9)           |                                            | Class C Notes (12.9%, Due 12/13)                     |                   |         | 18,800 |      |   |         | 18,951 |  |   |         | 18,951 | 
|                                         | (CDO/CLO)                             |                                            | Class D Notes (17.0%, Due 12/13)                     |                   |         | 9,400  |      |   |         | 9,476  |  |   |         | 9,476  | 
|                                        
|Callidus Debt Partners                   |                                       |                                            |                                                      |                   |         |        |      |   |         |        |  |   |         |       
|                                         | CLO Fund III,
    Ltd.(4)(9)(CDO/CLO) |                                            | Preferred Shares (23,600,000 shares, 12.7%)
    (12) |                   |         |        |      |   |         | 23,285 |  |   |         | 23,010 | 
|                                        
|Callidus Debt Partners                   |                                       |                                            |                                                      |                   |         |        |      |   |         |        |  |   |         |       
|                                         | CLO Fund IV, Ltd.
    (4)(9)          |                                            | Income Notes
    (13.8%)(12)                         |                   |         |        |      |   |         | 12,986 |  |   |         | 12,986 | 
|                                         | (CDO/CLO)                             |                                            |                                                      |                   |         |        |      |   |         |        |  |   |         |        | 
|                                        
|Callidus Debt Partners                   |                                       |                                            |                                                      |                   |         |        |      |   |         |        |  |   |         |       
|                                         | CLO Fund V,
    Ltd.(4)(9)            |                                            | Income Notes
    (15.8%)(12)                         |                   |         |        |      |   |         | 13,769 |  |   |         | 13,769 | 
|                                         | (CDO/CLO)                             |                                            |                                                      |                   |         |        |      |   |         |        |  |   |         |        | 
|                                        
|Callidus MAPS CLO Fund I
    LLC(9)      |                                       | Class E Notes (10.9%, Due 12/17)           |                                                      |                   | 17,000  |        |      |   | 17,000  |        |  |   | 17,155  |       
|                                         | (CDO/CLO)                             |                                            | Income Notes
    (15.9%)(12)                         |                   |         |        |      |   |         | 50,960 |  |   |         | 47,421 | 
|                                        
|Camden Partners Strategic Fund II,       |                                       |                                            |                                                      |                   |         |        |      |   |         |        |  |   |         |       
|                                         | L.P.(5)                               |                                            | Limited Partnership Interest                         |                   |         |        |      |   |         | 2,141  |  |   |         | 2,873  | 
|                                         | (Private Equity Fund)                 |                                            |                                                      |                   |         |        |      |   |         |        |  |   |         |        | 
|                                        
|Carlisle Wide Plank Floors, Inc.         |                                       | Unitranche Debt (10.5%, Due 6/11)          |                                                      |                   | 14,000  |        |      |   | 13,900  |        |  |   | 13,900  |       
|                                         | (Consumer Products)                   |                                            | Preferred Stock (400,000 Shares)                     |                   |         |        |      |   |         | 400    |  |   |         | 400    | 
|                                        
|Catterton Partners V,
    L.P.(5)        |                                       | Limited Partnership Interest               |                                                      |                   |         |        |      |   | 3,306   |        |  |   | 3,412   |       
|                                         | (Private Equity Fund)                 |                                            |                                                      |                   |         |        |      |   |         |        |  |   |         |        | 
|                                        
|Catterton Partners VI,
    L.P.(5)       |                                       | Limited Partnership Interest               |                                                      |                   |         |        |      |   | 531     |        |  |   | 531     |       
|                                         | (Private Equity Fund)                 |                                            |                                                      |                   |         |        |      |   |         |        |  |   |         |        | 
|                                        
|Centre Capital Investors IV,
    L.P.(5) |                                       | Limited Partnership Interest               |                                                      |                   |         |        |      |   | 1,991   |        |  |   | 1,889   |       
|                                         | (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.                                                                                                                                                           
|(9)  |  | The fund is managed by Callidus Capital, a portfolio company of
    Allied Capital.                                                                                                                                                                            
|(11) |  | Common stock is non-voting. In addition to non-voting stock
    ownership, the Company has an option to acquire a majority of
    the voting securities of the portfolio company at fair market
    value.                                                     
|(12) |  | Represents the effective yield earned on these preferred equity
    investments. The yield is included in interest income from
    companies less than 5% owned in the consolidated statement of
    operations.                                               





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##### Table of Contents



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


CONSOLIDATED STATEMENT OF
INVESTMENTS  (Continued)


|                                          |                              |                                      |                                                     |                   |        |         |      |   |        |         |  |   |        |         | 
|----------------------------------------- | ---------------------------- | ------------------------------------ | --------------------------------------------------- | ----------------- | ------ | ------- | ---- | - | ------ | ------- |  | - | ------ | ------- | 
|                                          |                              |                                      |                                                     | December 31, 2006 |       
|Private Finance                           |                              |                                      |                                                     |                   |       
|Portfolio Company                         |                              |                                      |                                                     |                  
|(in thousands, except number of shares)   |                              | Investment(1)(2)                     |                                                     | Principal         |        |         | Cost |   |        | Value   | 
|                                          |                              |                                      |                                                     |                   |        |         |      |   |        |         | 
|Commercial Credit Group, Inc.             |                              | Subordinated Debt (14.8%, Due 2/11)  |                                                     | $                 | 5,000  |         |      | $ | 4,959  |         |  | $ | 4,959  |        
|                                          | (Financial Services)         |                                      | Preferred Stock (32,500 shares)                     |                   |        |         |      |   |        | 3,900   |  |   |        | 3,900   | 
|                                          |                              |                                      | Warrants                                            |                   |        |         |      |   |        |        |  |   |        |        | 
|                                         
|Community Education Centers, Inc.         |                              | Subordinated Debt (16.0%, Due 12/10) |                                                     |                   | 34,158 |         |      |   | 34,067 |         |  |   | 34,067 |        
|                                          | (Education Services)         |                                      |                                                     |                   |        |         |      |   |        |         |  |   |        |         | 
|                                         
|Compass Group Diversified                 |                              |                                      |                                                     |                   |        |         |      |   |        |         |  |   |        |        
|                                          | Holdings
    LLC(3)          |                                      | Senior Loan (8.4%, Due 11/11)                       |                   |        | 8,500   |      |   |        | 8,375   |  |   |        | 8,375   | 
|                                          | (Financial Services)         |                                      |                                                     |                   |        |         |      |   |        |         |  |   |        |         | 
|                                         
|Component Hardware Group, Inc.            |                              | Subordinated Debt (13.5%, Due 1/13)  |                                                     |                   | 18,158 |         |      |   | 18,075 |         |  |   | 18,075 |        
|                                          | (Industrial Products)        |                                      |                                                     |                   |        |         |      |   |        |         |  |   |        |         | 
|                                         
|Cook Inlet Alternative Risk, LLC          |                              | Unitranche Debt (10.0%, Due 4/12)    |                                                     |                   | 67,500 |         |      |   | 67,146 |         |  |   | 67,146 |        
|                                          | (Business Services)          |                                      | Equity Interests                                    |                   |        |         |      |   |        | 2,000   |  |   |        | 2,300   | 
|                                         
|Cortec Group Fund IV,
    L.P.(5)         |                              | Limited Partnership Interest         |                                                     |                   |        |         |      |   | 1,137  |         |  |   | 1,137  |        
|                                          | (Private Equity)             |                                      |                                                     |                   |        |         |      |   |        |         |  |   |        |         | 
|                                         
|CSAV, Inc.                                |                              | Subordinated Debt (11.9%, Due 6/13)  |                                                     |                   | 37,500 |         |      |   | 37,500 |         |  |   | 37,500 |        
|                                          | (Business Services)          |                                      |                                                     |                   |        |         |      |   |        |         |  |   |        |         | 
|                                         
|DCWV Acquisition Corporation              |                              | Senior Loan (8.9%, Due 7/12)         |                                                     |                   | 2,074  |         |      |   | 2,060  |         |  |   | 2,060  |        
|                                          | (Consumer Products)          |                                      | Unitranche Debt (11.0%, Due 7/12)                   |                   |        | 16,788  |      |   |        | 16,694  |  |   |        | 16,694  | 
|                                         
|Deluxe Entertainment Services Group, Inc. |                              | Subordinated Debt (13.6%, Due 7/11)  |                                                     |                   | 30,000 |         |      |   | 30,000 |         |  |   | 30,000 |        
|                                          | (Business Services)          |                                      |                                                     |                   |        |         |      |   |        |         |  |   |        |         | 
|                                         
|Distant Lands Trading Co.                 |                              | Senior Loan (10.6%, Due 11/11)       |                                                     |                   | 2,700  |         |      |   | 2,656  |         |  |   | 2,656  |        
|                                          | (Consumer Products)          |                                      | Unitranche Debt (11.0%, Due 11/11)                  |                   |        | 54,375  |      |   |        | 54,130  |  |   |        | 54,130  | 
|                                          |                              |                                      | Common Stock (4,000 shares)                         |                   |        |         |      |   |        | 4,000   |  |   |        | 2,975   | 
|                                         
|Drilltec Patents & Technologies           |                              |                                      |                                                     |                   |        |         |      |   |        |         |  |   |        |        
|                                          | Company, Inc.                |                                      | Subordinated Debt (18.0%, Due 8/06)                 |                   |        | 4,119   |      |   |        | 4,119   |  |   |        | 4,119   | 
|                                          | (Energy Services)            |                                      | Subordinated Debt (16.5%, Due
    8/06)(6)          |                   |        | 10,994  |      |   |        | 10,918  |  |   |        | 9,121   | 
|                                         
|Driven Brands, Inc.                       |                              | Senior Loan (8.9%, Due 6/11)         |                                                     |                   | 37,070 |         |      |   | 36,918 |         |  |   | 36,918 |        
|                                          | d/b/a Meineke and Econo Lube |                                      | Subordinated Debt (12.1%, Due 6/12  6/13)          |                   |        | 83,000  |      |   |        | 82,684  |  |   |        | 82,684  | 
|                                          | (Consumer Services)          |                                      | Common Stock (11,675,331
    shares)(11)            |                   |        |         |      |   |        | 29,455  |  |   |        | 19,702  | 
|                                          |                              |                                      | Warrants(11)                                        |                   |        |         |      |   |        |        |  |   |        |        | 
|                                         
|Digital VideoStream, LLC                  |                              | Unitranche Debt (11.0%, Due 2/12)    |                                                     |                   | 19,127 |         |      |   | 19,021 |         |  |   | 19,021 |        
|                                          | (Business Services)          |                                      | Convertible Subordinated Debt
    (10.0%, Due 2/16) |                   |        | 3,730   |      |   |        | 3,714   |  |   |        | 3,714   | 
|                                         
|Dynamic India Fund
    IV(4)(5)           |                              | Equity Interests                     |                                                     |                   |        |         |      |   | 3,850  |         |  |   | 3,850  |        
|                                          | (Private Equity Fund)        |                                      |                                                     |                   |        |         |      |   |        |         |  |   |        |         | 
|                                         
|EarthColor, Inc.                          |                              | Senior Loan (7.4%, Due 11/11)        |                                                     |                   | 35,000 |         |      |   | 35,000 |         |  |   | 35,000 |        
|                                          | (Business Services)          |                                      | Subordinated Debt (15.0%, Due 11/13)                |                   |        | 107,000 |      |   |        | 106,478 |  |   |        | 106,478 | 
|                                          |                              | Common Stock
    (53,540 shares)(11) |                                                     |                   |        |         |      |   | 53,540 |         |  |   | 53,540 |        
|                                          |                              | Warrants(11)                         |                                                     |                   |        |         |      |   |       |         |  |   |       |        
|                                         
|eCentury Capital Partners,
    L.P.(5)    |                              | Limited Partnership Interest         |                                                     |                   |        |         |      |   | 6,274  |         |  |   | 2,090  |        
|                                          | (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.                                                     





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##### Table of Contents



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


CONSOLIDATED STATEMENT OF
INVESTMENTS  (Continued)


|                                             |                        |                                           |                                            |                   |        |        |      |   |        |        |  |   |        |        | 
|-------------------------------------------- | ---------------------- | ----------------------------------------- | ------------------------------------------ | ----------------- | ------ | ------ | ---- | - | ------ | ------ |  | - | ------ | ------ | 
|                                             |                        |                                           |                                            | December 31, 2006 |       
|Private Finance                              |                        |                                           |                                            |                   |       
|Portfolio Company                            |                        |                                           |                                            |                  
|(in thousands, except number of shares)      |                        | Investment(1)(2)                          |                                            | Principal         |        |        | Cost |   |        | Value  | 
|                                             |                        |                                           |                                            |                   |        |        |      |   |        |        | 
|Elexis Beta
    GmbH(4)                      |                        | Options                                   |                                            |                   |        |        |      | $ | 426    |        |  | $ | 50     |       
|                                             | (Industrial Products)  |                                           |                                            |                   |        |        |      |   |        |        |  |   |        |        | 
|                                            
|Farleys & Sathers Candy Company, Inc.       |                        | Subordinated Debt (11.4%, Due 3/11)       |                                            | $                 | 20,000 |        |      |   | 19,931 |        |  |   | 19,931 |       
|                                             | (Consumer Products)    |                                           |                                            |                   |        |        |      |   |        |        |  |   |        |        | 
|                                            
|Frozen Specialties, Inc.                     |                        | Warrants                                  |                                            |                   |        |        |      |   | 435    |        |  |   | 320    |       
|                                             | (Consumer Products)    |                                           |                                            |                   |        |        |      |   |        |        |  |   |        |        | 
|                                            
|Garden Ridge Corporation
    (Retail)        |                        | Subordinated Debt (7.0%, Due
    5/12)(6) |                                            |                   | 22,500 |        |      |   | 22,500 |        |  |   | 22,500 |       
|                                            
|Geotrace Technologies, Inc.                  |                        | Subordinated Debt (10.0%, Due 6/09)       |                                            |                   | 23,945 |        |      |   | 22,481 |        |  |   | 22,481 |       
|                                             | (Energy Services)      |                                           | Warrants                                   |                   |        |        |      |   |        | 2,350  |  |   |        | 1,900  | 
|                                            
|Ginsey Industries, Inc.                      |                        | Subordinated Debt (12.5%, Due 3/07)       |                                            |                   | 2,743  |        |      |   | 2,743  |        |  |   | 2,743  |       
|                                             | (Consumer Products)    |                                           |                                            |                   |        |        |      |   |        |        |  |   |        |        | 
|                                            
|Grant Broadcasting Systems II                |                        | Subordinated Debt (5.0%, Due 6/11)        |                                            |                   | 3,005  |        |      |   | 3,005  |        |  |   | 3,005  |       
|                                             | (Broadcasting & Cable) |                                           |                                            |                   |        |        |      |   |        |        |  |   |        |        | 
|                                            
|Grotech Partners, VI,
    L.P.(5)            |                        | Limited Partnership Interest              |                                            |                   |        |        |      |   | 8,223  |        |  |   | 6,088  |       
|                                             | (Private Equity Fund)  |                                           |                                            |                   |        |        |      |   |        |        |  |   |        |        | 
|                                            
|Havco Wood Products LLC                      |                        | Unitranche Debt (11.1%, Due 8/11)         |                                            |                   | 19,654 |        |      |   | 18,615 |        |  |   | 18,615 |       
|                                             | (Industrial Products)  |                                           | Equity Interests                           |                   |        |        |      |   |        | 1,049  |  |   |        | 3,000  | 
|                                            
|Haven Eldercare of New England, LLC
    (10) |                        | Subordinated Debt (12.0%, Due 8/09)       |                                            |                   | 2,827  |        |      |   | 2,827  |        |  |   | 2,827  |       
|                                             | (Healthcare Services)  |                                           |                                            |                   |        |        |      |   |        |        |  |   |        |        | 
|                                            
|Haven Healthcare Management,
    LLC(10)     |                        | Subordinated Debt (18.0%, Due 4/07)       |                                            |                   | 140    |        |      |   | 140    |        |  |   | 140    |       
|                                             | (Healthcare Services)  |                                           |                                            |                   |        |        |      |   |        |        |  |   |        |        | 
|                                            
|HealthASPex Services Inc.                    |                        | Senior Loan (4.0%, Due 7/08)              |                                            |                   | 500    |        |      |   | 500    |        |  |   | 500    |       
|                                             | (Business Services)    |                                           |                                            |                   |        |        |      |   |        |        |  |   |        |        | 
|                                            
|The Hillman Companies,
    Inc.(3)           |                        | Subordinated Debt (10.0%, Due 9/11)       |                                            |                   | 44,580 |        |      |   | 44,427 |        |  |   | 44,427 |       
|                                             | (Consumer Products)    |                                           |                                            |                   |        |        |      |   |        |        |  |   |        |        | 
|                                            
|The Homax Group, Inc.                        |                        | Senior Loan (9.2%, Due 10/12)             |                                            |                   | 12,485 |        |      |   | 12,485 |        |  |   | 12,485 |       
|                                             | (Consumer Products)    |                                           | Subordinated Debt (12.0%, Due 4/14)        |                   |        | 14,000 |      |   |        | 13,171 |  |   |        | 13,171 | 
|                                             |                        |                                           | Preferred Stock (89 shares)                |                   |        |        |      |   |        | 89     |  |   |        | 89     | 
|                                             |                        |                                           | Common Stock (28 shares)                   |                   |        |        |      |   |        | 6      |  |   |        | 6      | 
|                                             |                        |                                           | Warrants                                   |                   |        |        |      |   |        | 1,106  |  |   |        | 1,106  | 
|                                            
|Hot Stuff Foods, LLC                         |                        | Senior Loan (8.9%, Due 2/11-2/12)         |                                            |                   | 48,580 |        |      |   | 48,351 |        |  |   | 48,351 |       
|                                             | (Consumer Products)    |                                           | Subordinated Debt (13.7%, Due 8/12  2/13) |                   |        | 60,606 |      |   |        | 60,353 |  |   |        | 60,353 | 
|                                             |                        |                                           | Subordinated Debt (16.0%, Due
    2/13)(6) |                   |        | 20,841 |      |   |        | 20,749 |  |   |        | 8,460  | 
|                                             |                        |                                           | Common Stock
    (1,122,452 shares)(11)    |                   |        |        |      |   |        | 56,186 |  |   |        |       | 
|                                             |                        |                                           | Warrants(11)                               |                   |        |        |      |   |        |       |  |   |        |       | 
|                                            
|Ideal Snacks Corporation                     |                        | Senior Loan (9.0%, Due 6/10)              |                                            |                   | 5,850  |        |      |   | 5,815  |        |  |   | 5,815  |       
|                                             | (Consumer Products)    |                                           |                                            |                   |        |        |      |   |        |        |  |   |        |        | 
|                                            
|Integrity Interactive Corporation            |                        | Unitranche Debt (10.5%, Due 2/12)         |                                            |                   | 29,500 |        |      |   | 29,314 |        |  |   | 29,314 |       
|                                             | (Business Services)    |                                           |                                            |                   |        |        |      |   |        |        |  |   |        |        | 
|                                            
|International Fiber Corporation              |                        | Subordinated Debt (14.0%, Due 6/12)       |                                            |                   | 21,986 |        |      |   | 21,914 |        |  |   | 21,914 |       
|                                             | (Industrial Products)  |                                           | Preferred Stock (25,000 shares)            |                   |        |        |      |   |        | 2,500  |  |   |        | 2,200  | 
|                                            

| |      |  |  |                                                                                                                                                                                                                                                                
| | ---- |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (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.                                                                                                                                                           
| | (10) |  |  | Haven Eldercare of New England, LLC and Haven Healthcare
    Management, LLC are affiliated companies.                                                                                                                                                         
| | (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.                                                     





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##### Table of Contents



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


CONSOLIDATED STATEMENT OF
INVESTMENTS  (Continued)


|                                               |                       |                                            |                                                 |                   |        |        |      |   |        |        |  |   |        |        | 
|---------------------------------------------- | --------------------- | ------------------------------------------ | ----------------------------------------------- | ----------------- | ------ | ------ | ---- | - | ------ | ------ |  | - | ------ | ------ | 
|                                               |                       |                                            |                                                 | December 31, 2006 |       
|Private Finance                                |                       |                                            |                                                 |                   |       
|Portfolio Company                              |                       |                                            |                                                 |                  
|(in thousands, except number of shares)        |                       | Investment(1)(2)                           |                                                 | Principal         |        |        | Cost |   |        | Value  | 
|                                               |                       |                                            |                                                 |                   |        |        |      |   |        |        | 
|Kodiak Fund
    LP(5)                          |                       | Equity Interests                           |                                                 |                   |        |        |      | $ | 4,700  |        |  | $ | 4,656  |       
|                                               | (Private Equity Fund) |                                            |                                                 |                   |        |        |      |   |        |        |  |   |        |        | 
|                                              
|Line-X, Inc.                                   |                       | Senior Loan (9.1%, Due 8/11)               |                                                 | $                 | 2,000  |        |      |   | 1,981  |        |  |   | 1,981  |       
|                                               | (Consumer Products)   |                                            | Unitranche Debt (10.0% Due 8/11)                |                   |        | 48,509 |      |   |        | 48,306 |  |   |        | 48,306 | 
|                                               |                       |                                            | Standby Letter of Credit ($1,500)               |                   |        |        |      |   |        |        |  |   |        |        | 
|                                              
|MedAssets, Inc.                                |                       | Preferred Stock (227,865 shares)           |                                                 |                   |        |        |      |   | 2,049  |        |  |   | 3,623  |       
|                                               | (Business Services)   |                                            | Common Stock (50,000 shares)                    |                   |        |        |      |   |        |       |  |   |        | 250    | 
|                                              
|MHF Logistical Solutions, Inc.                 |                       | Subordinated Debt (11.5%, Due 6/12)        |                                                 |                   | 33,600 |        |      |   | 33,448 |        |  |   | 33,448 |       
|                                               | (Business Services)   |                                            | Subordinated Debt (18.0%, Due
    6/13)(6)      |                   |        | 11,211 |      |   |        | 11,155 |  |   |        | 8,719  | 
|                                               |                       |                                            | Common Stock (20,934
    shares)(11)            |                   |        |        |      |   |        | 20,942 |  |   |        |       | 
|                                               |                       |                                            | Warrants(11)                                    |                   |        |        |      |   |        |       |  |   |        |       | 
|                                              
|Mid-Atlantic Venture Fund IV,
    L.P.(5)      |                       | Limited Partnership Interest               |                                                 |                   |        |        |      |   | 6,974  |        |  |   | 3,221  |       
|                                               | (Private Equity Fund) |                                            |                                                 |                   |        |        |      |   |        |        |  |   |        |        | 
|                                              
|Mogas Energy, LLC                              |                       | Subordinated Debt (9.5%, Due 3/12  4/12)  |                                                 |                   | 16,336 |        |      |   | 15,100 |        |  |   | 16,318 |       
|                                               | (Energy Services)     |                                            | Warrants                                        |                   |        |        |      |   |        | 1,774  |  |   |        | 6,250  | 
|                                              
|Network Hardware Resale, Inc.                  |                       | Unitranche Debt (10.5%, Due 12/11)         |                                                 |                   | 37,154 |        |      |   | 37,357 |        |  |   | 37,357 |       
|                                               | (Business Services)   |                                            | Convertible Subordinated Debt (9.8%, Due 12/15) |                   |        | 12,000 |      |   |        | 12,068 |  |   |        | 12,559 | 
|                                              
|Norwesco, Inc.                                 |                       | Subordinated Debt (12.6%, Due 1/12  7/12) |                                                 |                   | 82,486 |        |      |   | 82,172 |        |  |   | 82,172 |       
|                                               | (Industrial Products) |                                            | Common Stock (559,603
    shares)(11)           |                   |        |        |      |   |        | 38,313 |  |   |        | 83,329 | 
|                                               |                       | Warrants(11)                               |                                                 |                   |        |        |      |   |       |        |  |   |       |       
|                                              
|Novak Biddle Venture Partners III,
    L.P.(5) |                       | Limited Partnership Interest               |                                                 |                   |        |        |      |   | 1,834  |        |  |   | 1,947  |       
|                                               | (Private Equity Fund) |                                            |                                                 |                   |        |        |      |   |        |        |  |   |        |        | 
|                                              
|Oahu Waste Services, Inc.                      |                       | Stock Appreciation Rights                  |                                                 |                   |        |        |      |   | 239    |        |  |   | 800    |       
|                                               | (Business Services)   |                                            |                                                 |                   |        |        |      |   |        |        |  |   |        |        | 
|                                              
|Odyssey Investment Partners Fund III,          |                       |                                            |                                                 |                   |        |        |      |   |        |        |  |   |        |       
|                                               | LP(5)                 |                                            | Limited Partnership Interest                    |                   |        |        |      |   |        | 1,883  |  |   |        | 1,744  | 
|                                               | (Private Equity Fund) |                                            |                                                 |                   |        |        |      |   |        |        |  |   |        |        | 
|                                              
|Palm Coast Data, LLC                           |                       | Senior Loan (8.9%, Due 8/10)               |                                                 |                   | 15,306 |        |      |   | 15,243 |        |  |   | 15,243 |       
|                                               | (Business Services)   |                                            | Subordinated Debt (15.5%, Due 8/12  8/15)      |                   |        | 30,396 |      |   |        | 30,277 |  |   |        | 30,277 | 
|                                               |                       |                                            | Common Stock (21,743
    shares)(11)            |                   |        |        |      |   |        | 21,743 |  |   |        | 41,707 | 
|                                               |                       |                                            | Warrants(11)                                    |                   |        |        |      |   |        |       |  |   |        |       | 
|                                              
|Passport Health                                |                       |                                            |                                                 |                   |        |        |      |   |        |        |  |   |        |       
|                                               | Communications, Inc.  |                                            | Subordinated Debt (14.0%, Due 4/12)             |                   |        | 10,145 |      |   |        | 10,101 |  |   |        | 10,101 | 
|                                               | (Healthcare Services) |                                            | Preferred Stock (651,381 shares)                |                   |        |        |      |   |        | 2,000  |  |   |        | 2,189  | 
|                                              
|Performant Financial Corporation               |                       | Common Stock (478,816 shares)              |                                                 |                   |        |        |      |   | 734    |        |  |   |       |       
|                                               | (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.                                                                                                                                                           
| | (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.                                                     





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ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


CONSOLIDATED STATEMENT OF
INVESTMENTS  (Continued)


|                                        |                       |                                      |                                 |                   |        |  |      |   |        |       |  |   |        |       | 
|--------------------------------------- | --------------------- | ------------------------------------ | ------------------------------- | ----------------- | ------ |  | ---- | - | ------ | ----- |  | - | ------ | ----- | 
|                                        |                       |                                      |                                 | December 31, 2006 |       
|Private Finance                         |                       |                                      |                                 |                   |       
|Portfolio Company                       |                       |                                      |                                 |                  
|(in thousands, except number of shares) |                       | Investment(1)(2)                     |                                 | Principal         |        |  | Cost |   |        | Value | 
|                                        |                       |                                      |                                 |                   |        |  |      |   |        |       | 
|Postle Aluminum Company, LLC            |                       | Unitranche Debt (11.0%, Due 10/12)   |                                 | $                 | 57,500 |  |      | $ | 57,189 |       |  | $ | 57,189 |      
|                                        | (Industrial Products) |                                      | Equity Interests                |                   |        |  |      |   |        | 2,500 |  |   |        | 2,500 | 
|                                       
|Pro Mach, Inc.                          |                       | Subordinated Debt (12.5%, Due 6/12)  |                                 |                   | 14,471 |  |      |   | 14,402 |       |  |   | 14,402 |      
|                                        | (Industrial Products) |                                      | Equity Interests                |                   |        |  |      |   |        | 1,500 |  |   |        | 2,200 | 
|                                       
|Promo Works, LLC                        |                       | Unitranche Debt (10.3%, Due 12/11)   |                                 |                   | 31,000 |  |      |   | 30,727 |       |  |   | 30,727 |      
|                                        | (Business Services)   |                                      | Guaranty ($1,200)               |                   |        |  |      |   |        |       |  |   |        |       | 
|                                       
|S.B. Restaurant Company                 |                       | Unitranche Debt (9.8%, Due 4/11)     |                                 |                   | 41,501 |  |      |   | 41,094 |       |  |   | 41,094 |      
|                                        | (Retail)              |                                      | Preferred Stock (54,125 shares) |                   |        |  |      |   |        | 135   |  |   |        | 135   | 
|                                        |                       | Warrants                             |                                 |                   |        |  |      |   | 619    |       |  |   | 1,200  |      
|                                        |                       | Standby Letters of Credit ($2,611)   |                                 |                   |        |  |      |   |        |       |  |   |        |      
|                                       
|SBBUT, LLC                              |                       | Equity Interests                     |                                 |                   |        |  |      |   |       |       |  |   |       |      
|                                        | (Consumer Products)   |                                      |                                 |                   |        |  |      |   |        |       |  |   |        |       | 
|                                       
|Service Center Metals, LLC              |                       | Subordinated Debt (15.5%, Due 9/11)  |                                 |                   | 5,000  |  |      |   | 4,976  |       |  |   | 4,976  |      
|                                        | (Industrial Products) |                                      | Equity Interests                |                   |        |  |      |   |        | 312   |  |   |        | 318   | 
|                                       
|Soff-Cut Holdings, Inc.                 |                       | Preferred Stock (300 shares)         |                                 |                   |        |  |      |   | 300    |       |  |   | 300    |      
|                                        | (Industrial Products) |                                      | Common Stock (2,000 shares)     |                   |        |  |      |   |        | 200   |  |   |        | 180   | 
|                                       
|SPP Mezzanine Funding,
    L.P.(5)      |                       | Limited Partnership Interest         |                                 |                   |        |  |      |   | 2,551  |       |  |   | 2,825  |      
|                                        | (Private Equity Fund) |                                      |                                 |                   |        |  |      |   |        |       |  |   |        |       | 
|                                       
|SPP Mezzanine Funding II,
    L.P.(5)   |                       | Limited Partnership Interest         |                                 |                   |        |  |      |   | 326    |       |  |   | 326    |      
|                                        | (Private Equity Fund) |                                      |                                 |                   |        |  |      |   |        |       |  |   |        |       | 
|                                       
|Stag-Parkway, Inc.                      |                       | Unitranche Debt (10.8%, Due 7/12)    |                                 |                   | 63,000 |  |      |   | 62,711 |       |  |   | 62,711 |      
|                                        | (Business Services)   |                                      |                                 |                   |        |  |      |   |        |       |  |   |        |       | 
|                                       
|STS Operating, Inc.                     |                       | Subordinated Debt (15.0%, Due 1/13)  |                                 |                   | 30,156 |  |      |   | 30,021 |       |  |   | 30,021 |      
|                                        | (Industrial Products) |                                      |                                 |                   |        |  |      |   |        |       |  |   |        |       | 
|                                       
|The Step2 Company, LLC                  |                       | Unitranche Debt (10.5%, Due 4/12)    |                                 |                   | 67,898 |  |      |   | 67,457 |       |  |   | 67,457 |      
|                                        | (Consumer Products)   |                                      | Equity Interests                |                   |        |  |      |   |        | 2,000 |  |   |        | 1,763 | 
|                                       
|Tradesmen International, Inc.           |                       | Subordinated Debt (12.0%, Due 12/09) |                                 |                   | 15,000 |  |      |   | 14,468 |       |  |   | 14,468 |      
|                                        | (Business Services)   |                                      | Warrants                        |                   |        |  |      |   |        | 710   |  |   |        | 3,300 | 
|                                       
|TransAmerican Auto Parts, LLC           |                       | Subordinated Debt (14.0%, Due 11/12) |                                 |                   | 12,947 |  |      |   | 12,892 |       |  |   | 12,892 |      
|                                        | (Consumer Products)   |                                      | Equity Interests                |                   |        |  |      |   |        | 1,190 |  |   |        | 747   | 
|                                       
|Universal Air Filter Company            |                       | Unitranche Debt (11.0%, Due 11/11)   |                                 |                   | 19,117 |  |      |   | 19,026 |       |  |   | 19,026 |      
|                                        | (Industrial Products) |                                      |                                 |                   |        |  |      |   |        |       |  |   |        |       | 
|                                       
|Updata Venture Partners II,
    L.P.(5) |                       | Limited Partnership Interest         |                                 |                   |        |  |      |   | 5,477  |       |  |   | 5,158  |      
|                                        | (Private Equity Fund) |                                      |                                 |                   |        |  |      |   |        |       |  |   |        |       | 
|                                       
|Venturehouse-Cibernet Investors, LLC    |                       | Equity Interest                      |                                 |                   |        |  |      |   | 42     |       |  |   | 42     |      
|                                        | (Business Services)   |                                      |                                 |                   |        |  |      |   |        |       |  |   |        |       | 
|                                       
|Venturehouse Group,
    LLC(5)          |                       | Equity Interest                      |                                 |                   |        |  |      |   | 598    |       |  |   | 365    |      
|                                        | (Private Equity Fund) |                                      |                                 |                   |        |  |      |   |        |       |  |   |        |       | 
|                                       
|VICORP Restaurants, Inc.                |                       | Warrants                             |                                 |                   |        |  |      |   | 33     |       |  |   |       |      
|                                        | (Retail)              |                                      |                                 |                   |        |  |      |   |        |       |  |   |        |       | 
|                                       

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





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ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


CONSOLIDATED STATEMENT OF
INVESTMENTS  (Continued)


|                                                      |                       |                                             |                              |                   |        |   |           |   |        |       |           |   |        |       | 
|----------------------------------------------------- | --------------------- | ------------------------------------------- | ---------------------------- | ----------------- | ------ | - | --------- | - | ------ | ----- | --------- | - | ------ | ----- | 
|                                                      |                       |                                             |                              | December 31, 2006 |       
|Private Finance                                       |                       |                                             |                              |                   |       
|Portfolio Company                                     |                       |                                             |                              |                  
|(in thousands, except number of shares)               |                       | Investment(1)(2)                            |                              | Principal         |        |   | Cost      |   |        | Value |          
|                                                      |                       |                                             |                              |                   |        |   |           |   |        |       |          
|Walker Investment Fund II,
    LLLP(5)                |                       | Limited Partnership Interest                |                              |                   |        |   |           | $ | 1,329  |       |           | $ | 458    |      
|                                                      | (Private Equity Fund) |                                             |                              |                   |        |   |           |   |        |       |           |   |        |       | 
|                                                     
|Wear Me Apparel Corporation                           |                       | Subordinated Debt (15.0%, Due 12/10)        |                              | $                 | 40,000 |   |           |   | 39,407 |       |           |   | 39,407 |      
|                                                      | (Consumer Products)   |                                             | Warrants                     |                   |        |   |           |   |        | 1,219 |           |   |        | 5,120 | 
|                                                     
|Wilton Industries, Inc.                               |                       | Subordinated Debt (16.0%, Due 6/08)         |                              |                   | 2,400  |   |           |   | 2,400  |       |           |   | 2,400  |      
|                                                      | (Consumer Products)   |                                             |                              |                   |        |   |           |   |        |       |           |   |        |       | 
|                                                     
|Woodstream Corporation                                |                       | Subordinated Debt (13.5%, Due 11/12  5/13) |                              |                   | 53,114 |   |           |   | 52,989 |       |           |   | 52,989 |      
|                                                      | (Consumer Products)   |                                             | Common Stock (180 shares)    |                   |        |   |           |   |        | 673   |           |   |        | 3,885 | 
|                                                      |                       |                                             | Warrants                     |                   |        |   |           |   |        |      |           |   |        | 2,815 | 
|                                                     
|York Insurance Services Group, Inc.                   |                       | Subordinated Debt (14.5%, Due 1/14)         |                              |                   | 44,249 |   |           |   | 44,045 |       |           |   | 44,045 |      
|                                                      | (Business Services)   |                                             | Common Stock (15,000 shares) |                   |        |   |           |   |        | 1,500 |           |   |        | 1,500 | 
|                                                     
|Other companies                                       |                       | Other debt
    investments(6)               |                              |                   | 223    |   |           |   | 223    |       |           |   | 218    |      
|                                                      |                       | Other equity investments                    |                              |                   |        |   |           |   | 8      |       |           |   |       |      
|                                                     
|Total
    companies less than 5% owned                |                       |                                             |                              |                   |        | $ | 2,479,981 |   |        | $     | 2,437,908 |  
|                                                     
|Total
    private finance (145 portfolio investments) |                       |                                             |                              |                   |        | $ | 4,497,363 |   |        | $     | 4,377,901 |  
|                                                     

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





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ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


CONSOLIDATED STATEMENT OF
INVESTMENTS  (Continued)


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

|                                                                                      |                                         |                  |              |  |           |                   |        |      |       |   |           |         |       |   |           |         | 
|------------------------------------------------------------------------------------- | --------------------------------------- | ---------------- | ------------ |  | --------- | ----------------- | ------ | ---- | ----- | - | --------- | ------- | ----- | - | --------- | ------- | 
|                                                                                      |                                         |                  |              |  |           | December 31, 2006 |       
|                                                                                      |                                         | Interest         |              |  | Number of |                   |        |      |      
|                                                                                      |                                         | Rate Ranges      |              |  | Loans     |                   |        | Cost |       |   | Value     |        
|                                                                                      |                                         |                  |              |  |           |                   |        |      |       |   |           |        
|Commercial Mortgage Loans                                                             |                                         |                  |              |  |           |                   |        |      |       |   |           |         |       |   |           |        
|                                                                                      |                                         |                  | Up to 6.99%  |  |           |                   | 3      |      |       | $ | 20,470    |         |       | $ | 19,692    |        
|                                                                                      |                                         |                  | 7.00%8.99%  |  |           |                   | 9      |      |       |   | 24,092    |         |       |   | 24,073    |        
|                                                                                      |                                         |                  | 9.00%10.99% |  |           |                   | 4      |      |       |   | 24,117    |         |       |   | 24,117    |        
|                                                                                      |                                         | 15.00% and above |              |  | 2         |                   |        |      | 3,970 |   |           |         | 3,970 |  
|                                                                                     
|                                                                                      | Total commercial mortgage
    loans(13) |                  |              |  |           |                   |        | 18   |       |   | $         | 72,649  |       |   | $         | 71,852  | 
|                                                                                     
|Real Estate Owned                                                                     |                                         |                  |              |  |           |                   |        |      |       | $ | 15,708    |         |       | $ | 19,660    |        
|                                                                                     
|Equity
    Interests(2) 
    Companies more than 25% owned
    (Guarantees  $6,871) |                                         |                  |              |  |           | $                 | 15,189 |      |       | $ | 26,671    |        
|                                                                                     
|                                                                                      | Total commercial real estate finance    |                  |              |  |           |                   |        |      |       |   | $         | 103,546 |       |   | $         | 118,183 | 
|                                                                                     
|Total portfolio                                                                       |                                         |                  |              |  |           |                   |        |      |       | $ | 4,600,909 |         |       | $ | 4,496,084 |        
|                                                                                     

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

|                                                     |                                                        |                           |  |      |      |  |   |        |         |  |   |        |         | 
|---------------------------------------------------- | ------------------------------------------------------ | ------------------------- |  | ---- | ---- |  | - | ------ | ------- |  | - | ------ | ------- | 
|                                                     |                                                        | Yield                     |  |      | Cost |  |   | Value  |        
|                                                     |                                                        |                           |  |      |      |  |   |        |        
|Liquidity
    Portfolio(14)                          |                                                        |                           |  |      |      |  |   |        |         |  |   |       
|                                                     | American Beacon Money Market Select FD Fund            |                           |  | 5.3% |      |  | $ | 85,672 |         |  | $ | 85,672 |        
|                                                     | Certificate of Deposit (Due March 2007)                |                           |  | 5.6% |      |  |   | 40,565 |         |  |   | 40,565 |        
|                                                     | American Beacon Money Market Fund                      |                           |  | 5.2% |      |  |   | 40,384 |         |  |   | 40,384 |        
|                                                     | SEI Daily Income Tr Prime Obligation Money Market Fund |                           |  | 5.2% |      |  |   | 34,671 |         |  |   | 34,671 |        
|                                                     | Blackrock Liquidity Funds                              |                           |  | 5.2% |      |  |   | 476    |         |  |   | 476    |        
|                                                    
|                                                     |                                                        | Total liquidity portfolio |  |      |      |  |   | $      | 201,768 |  |   | $      | 201,768 | 
|                                                    
|Other Investments in Money Market
    Securities(14) |                                                        |                           |  |      |      |  |   |        |         |  |   |       
|                                                     | Columbia Treasury Reserves Money Market Fund           |                           |  | 5.2% |      |  | $ | 441    |         |  | $ | 441    |        
|                                                     | Columbia Money Market Reserves                         |                           |  | 5.2% |      |  | $ | 1      |         |  | $ | 1      |        
|                                                    

|                                                                                                                                                                                                                                                                                                 |  |  |  |  |  |  |  |  |  |  |  | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  |  |  |  |  |  |  |  |  |  |  | 
|(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.                                                                                                                                                                                                                                                
|(13)       Commercial
    mortgage loans totaling $18.9 million at value were on
    non-accrual status and therefore were considered non-income
    producing.                                                                                                                                 
|(14)       Included
    in investments in money market and other securities on the
    accompanying Consolidated Balance Sheet.                                                                                                                                                                 





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ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note 1. Organization






S-X,




Note 2. Summary of Significant Accounting Policies


Basis of Presentation










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



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ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




Note 2. Summary of Significant Accounting Policies,
continued






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







104



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ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


Note 2. Summary of Significant Accounting Policies,
continued






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







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






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ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




Note 2. Summary of Significant Accounting Policies,
continued




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





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





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

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




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





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





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

Share-Based Payment


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ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




Note 2. Summary of Significant Accounting Policies,
continued




|                                          |                  |                                                                    |                       |   |      |      |  |   |      |      | 
|----------------------------------------- | ---------------- | ------------------------------------------------------------------ | --------------------- | - | ---- | ---- |  | - | ---- | ---- | 
|                                          |                  | 2007                                                               |                       |   | 2006 |     
|($ in millions, except per share amounts) |                  |                                                                    |                       |   |      |     
|Employee Stock Option Expense:            |                  |                                                                    |                       |   |      |      |  |  
|                                          | Options granted: |                                                                    |                       |   |      |      |  |   |     
|                                          |                  | Previously awarded, unvested options as of January 1, 2006         |                       | $ | 10.1 |      |  | $ | 13.2 |     
|                                          |                  | Options granted on or after January 1, 2006                        |                       |   | 10.7 |      |  |   | 2.4  |     
|                                          |                  |                                                                    |                       |   |      |     
|                                          |                  |                                                                    | Total options granted |   |      | 20.8 |  |   |      | 15.6 | 
|                                          |                  | Options cancelled in connection with tender offer (see
    Note 9) |                       |   | 14.4 |      |  |   |     |     
|                                          |                  |                                                                    |                       |   |      |     
|                                          |                  | Total employee stock option expense                                |                       | $ | 35.2 |      |  | $ | 15.6 |     
|                                          |                  |                                                                    |                       |   |      |     
|                                          |                  | Per basic share                                                    |                       | $ | 0.23 |      |  | $ | 0.11 |     
|                                          |                  | Per diluted share                                                  |                       | $ | 0.23 |      |  | $ | 0.11 |     



Accounting for Stock Issued to
Employees


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ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




Note 2. Summary of Significant Accounting Policies,
continued


Accounting for Stock-Based Compensation


|                                                                                                                                        |             |      |       |      | 
|--------------------------------------------------------------------------------------------------------------------------------------- | ----------- | ---- | ----- | ---- | 
|                                                                                                                                        |             | 2005 |      
|($ in millions, except per share amounts)                                                                                               |             |      |      
|Net increase in net assets resulting from operations as reported                                                                        |             | $    | 872.8 |     
|Less total stock-based compensation expense determined under
    fair value based method for all awards, net of related tax
    effects |             |      | (12.7 | )   
|                                                                                                                                        |             |      |      
|Pro forma net increase in net assets resulting from operations                                                                          |             |      | 860.1 |     
|Less preferred stock dividends                                                                                                          |             |      |      |     
|                                                                                                                                        |             |      |      
|Pro forma net income available to common shareholders                                                                                   |             | $    | 860.1 |     
|                                                                                                                                        |             |      |      
|Basic earnings per common share:                                                                                                        |             |      |       |     
|                                                                                                                                        | As reported |      | $     | 6.48 | 
|                                                                                                                                        | Pro forma   |      | $     | 6.39 | 
|Diluted earnings per common share:                                                                                                      |             |      |       |     
|                                                                                                                                        | As reported |      | $     | 6.36 | 
|                                                                                                                                        | Pro forma   |      | $     | 6.27 | 

Options Granted.


|                                       |  |      |      |   |      |   |      |      |  |   |      |  
|-------------------------------------- |  | ---- | ---- | - | ---- | - | ---- | ---- |  | - | ---- | -
|                                       |  | 2007 |      |   | 2006 |   |      | 2005 | 
|                                       |  |      |      |   |      |   |      |      | 
|Expected term (in years)               |  |      | 5.0  |   |      |   | 5.0  |      |  |   | 5.0  |  
|Risk-free interest rate                |  |      | 4.6  | % |      |   | 4.8  | %    |  |   | 4.1  | %
|Expected volatility                    |  |      | 26.4 | % |      |   | 29.1 | %    |  |   | 35.1 | %
|Dividend yield                         |  |      | 8.9  | % |      |   | 9.0  | %    |  |   | 9.0  | %
|Weighted average fair value per option |  | $    | 2.96 |   |      | $ | 3.47 |      |  | $ | 3.94 |  





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ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




Note 2. Summary of Significant Accounting Policies,
continued




Options Cancelled in Connection with Tender
Offer.




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







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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

Accounting for Uncertainty in Income Taxes Accounting for
Income Taxes.


Fair Value Measurements.


The
Fair Value Option for Financial Assets and Financial
Liabilities  Including an Amendment of FASB Statement
No. 115.


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ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


Note 2. Summary of Significant Accounting Policies,
continued




Note 3. Portfolio




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



|                           |                                              |                                         |   |         |         |  |  |          |         |  |      |      |      |       |   |         |          |  |   |         |         |  |  |      |      |  
|-------------------------- | -------------------------------------------- | --------------------------------------- | - | ------- | ------- |  |  | -------- | ------- |  | ---- | ---- | ---- | ----- | - | ------- | -------- |  | - | ------- | ------- |  |  | ---- | ---- | -
|                           |                                              | 2007                                    |   |         | 2006    | 
|                           |                                              |                                         |   |         |         | 
|                           |                                              | Cost                                    |   |         | Value   |  |  | Yield(1) |         |  | Cost |      |      | Value |   |         | Yield(1) | 
|($ in millions)            |                                              |                                         |   |         |         |  |  |          |         |  |      |      |      |       |   |         |          | 
|Loans and debt securities: |                                              |                                         |   |         |         |  |  |          |         |  |      |      |      |       |   |         |          |  |   |         |         |  |  |     
|                           | Senior loans                                 |                                         | $ | 374.1   |         |  |  | 344.3    |         |  |      | 7.7  | %    |       | $ | 450.0   |          |  | $ | 405.2   |         |  |  | 8.4  | %   
|                           | Unitranche
    debt(2)                       |                                         |   | 659.2   |         |  |  | 653.9    |         |  |      | 11.5 | %    |       |   | 800.0   |          |  |   | 799.2   |         |  |  | 11.2 | %   
|                           | Subordinated debt                            |                                         |   | 2,576.4 |         |  |  | 2,416.4  |         |  |      | 12.8 | %    |       |   | 2,038.3 |          |  |   | 1,980.8 |         |  |  | 12.9 | %   
|                           |                                              |                                         |   |         |         |  |  |          |         |  |      |      |      |       |   |         |          | 
|                           |                                              | Total loans and debt securities
    (3) |   |         | 3,609.7 |  |  |          | 3,414.6 |  |      |      | 12.1 | %     |   |         | 3,288.3  |  |   |         | 3,185.2 |  |  |      | 11.9 | %
|Equity securities:         |                                              |                                         |   |         |         |  |  |          |         |  |      |      |      |       |   |         |          |  |   |         |         |  |  |     
|                           | Preferred shares/income notes of
    CLOs(4) |                                         |   | 218.3   |         |  |  | 203.0    |         |  |      | 14.6 | %    |       |   | 101.1   |          |  |   | 97.2    |         |  |  | 15.5 | %   
|                           | Other equity securities                      |                                         |   | 1,215.9 |         |  |  | 1,041.7  |         |  |      |      |      |       |   | 1,108.0 |          |  |   | 1,095.5 |         |  |  |      |     
|                           |                                              |                                         |   |         |         |  |  |          |         |  |      |      |      |       |   |         |          | 
|                           |                                              | Total equity securities                 |   |         | 1,434.2 |  |  |          | 1,244.7 |  |      |      |      |       |   |         | 1,209.1  |  |   |         | 1,192.7 |  |  |      |      |  
|                           |                                              |                                         |   |         |         |  |  |          |         |  |      |      |      |       |   |         |          | 
|                           |                                              | Total                                   |   | $       | 5,043.9 |  |  | $        | 4,659.3 |  |      |      |      |       |   | $       | 4,497.4  |  |   | $       | 4,377.9 |  |  |      |      |  
|                           |                                              |                                         |   |         |         |  |  |          |         |  |      |      |      |       |   |         |          | 




|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The weighted average yield on loans and debt securities is
    computed as the (a) annual stated interest on accruing
    loans and debt securities plus the annual amortization of loan
    origination fees, original issue discount, and market discount
    on accruing loans and debt securities less the annual
    amortization of loan origination costs, divided by
    (b) total loans and debt securities at value. At
    December 31, 2007 and 2006, the cost and value of
    subordinated debt included the Class A equity interests in
    Ciena Capital LLC, which were placed on non-accrual status
    during the fourth quarter of 2006.

The weighted average yield on the preferred shares/income notes
of CLOs is calculated as the (a) effective interest yield
on the preferred shares/income notes of CLOs, divided by
(b) total preferred shares/income notes of CLOs at value.
The weighted average yields are computed as of the balance sheet
date. The yield on the CLO assets represents the yield used for
recording interest income. The market yield used in the
valuation of the CLO assets may be different than the interest
yields.




|    |                                                                                                                                                                                                                                                                                                                                                                                                                                  
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | Unitranche debt is generally in a first lien position.                                                                                                                                                                                                                                                                                                                                                                           
|   
|(3) | The total principal balance outstanding on loans and debt
    securities was $3,639.6 million and $3,322.3 million
    at December 31, 2007 and 2006, respectively. The difference
    between principal and cost is represented by unamortized loan
    origination fees and costs, original issue discounts, and market
    discounts totaling $29.9 million and $34.0 million at
    December 31, 2007 and 2006, respectively.
|   
|(4) | Investments in the preferred shares/income notes of CLOs earn a
    current return that is included in interest income in the
    accompanying consolidated statement of operations.                                                                                                                                                                                                                                             





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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




Note 3. Portfolio, continued








Ciena Capital LLC.




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ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




Note 3. Portfolio, continued






|                                                                         |                                             |      |     |     |      |   |      |      |  |   |      |      | 
|------------------------------------------------------------------------ | ------------------------------------------- | ---- | --- | --- | ---- | - | ---- | ---- |  | - | ---- | ---- | 
|                                                                         |                                             | 2007 |     |     | 2006 |   |      | 2005 | 
|($ in millions)                                                          |                                             |      |     |     |      |   |      |      | 
|Interest income on subordinated debt and Class A equity
    interests(1) |                                             | $    |    |     |      | $ | 11.9 |      |  | $ | 14.3 |     
|Dividend income on Class B equity
    interests(1)                       |                                             |      |    |     |      |   |     |      |  |   | 14.0 |     
|Fees and other income                                                    |                                             |      | 5.4 |     |      |   | 7.8  |      |  |   | 9.2  |     
|                                                                         |                                             |      |     |     |      |   |      |      | 
|                                                                         | Total interest and related portfolio income |      | $   | 5.4 |      |   | $    | 19.7 |  |   | $    | 37.5 | 
|                                                                         |                                             |      |     |     |      |   |      |      | 






|    |                                                                                                                                                                                                                                                                                                                                                        
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Interest and dividend income from Ciena for the years ended
    December 31, 2006 and 2005, included interest and dividend
    income of $5.7 million and $8.9 million, respectively,
    which was paid in kind. The interest and dividends paid in kind
    were paid to the Company through the issuance of additional debt
    or equity interests.





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ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


Note 3. Portfolio, continued






2:06-CR-20662






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ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


Note 3. Portfolio, continued








built-in 10-year 10-year


Mercury Air Centers, Inc.






115



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ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


Note 3. Portfolio, continued




|                      |                                             |      |     |     |      |   |     |      |  |   |     |     | 
|--------------------- | ------------------------------------------- | ---- | --- | --- | ---- | - | --- | ---- |  | - | --- | --- | 
|                      |                                             | 2007 |     |     | 2006 |   |     | 2005 | 
|($ in millions)       |                                             |      |     |     |      |   |     |      | 
|Interest income       |                                             | $    | 5.1 |     |      | $ | 9.3 |      |  | $ | 8.8 |    
|Fees and other income |                                             |      | 0.2 |     |      |   | 0.6 |      |  |   | 0.7 |    
|                      |                                             |      |     |     |      |   |     |      | 
|                      | Total interest and related portfolio income |      | $   | 5.3 |      |   | $   | 9.9  |  |   | $   | 9.5 | 
|                      |                                             |      |     |     |      |   |     |      | 



Advantage Sales and Marketing, Inc.












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ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


Note 3. Portfolio, continued


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


|                                          |                                     |       |      |       |       |   |      |          |       |  |       |       |  |       |      |       |          |   |      |      |       |  |       |       |  | 
|----------------------------------------- | ----------------------------------- | ----- | ---- | ----- | ----- | - | ---- | -------- | ----- |  | ----- | ----- |  | ----- | ---- | ----- | -------- | - | ---- | ---- | ----- |  | ----- | ----- |  | 
|                                          |                                     | 2007  |      |       | 2006  |  
|                                          |                                     |       |      |       |       |  
|                                          |                                     | Cost  |      |       | Value |   |      | Yield(1) |       |  | Cost  |       |  | Value |      |       | Yield(1) |  
|($ in millions)                           |                                     |       |      |       |       |   |      |          |       |  |       |       |  |       |      |       |          |  
|Bonds(2):                                 |                                     |       |      |       |       |   |      |          |       |  |       |       |  |       |      |       |          |   |      |      |       |  |       |      
|Callidus Debt Partners CDO Fund I, Ltd.   |                                     | $     | 28.4 |       |       | $ | 28.5 |          |       |  | 14.0% |       |  | $     | 28.4 |       |          | $ | 28.4 |      |       |  | 14.0% |      
|Callidus Debt Partners CLO Fund VI, Ltd.  |                                     |       | 4.3  |       |       |   | 4.3  |          |       |  | 13.4% |       |  |       |     |       |          |   |     |      |       |  |       |      
|Callidus MAPS CLO Fund I LLC              |                                     |       | 17.0 |       |       |   | 16.1 |          |       |  | 11.0% |       |  |       | 17.0 |       |          |   | 17.2 |      |       |  | 10.8% |      
|Dryden XVIII Leveraged Loan 2007 Limited  |                                     |       | 7.4  |       |       |   | 7.4  |          |       |  | 12.7% |       |  |       |     |       |          |   |     |      |       |  |       |      
|Knightsbridge CLO 2007-1 Limited          |                                     |       | 22.0 |       |       |   | 22.0 |          |       |  | 14.1% |       |  |       |     |       |          |   |     |      |       |  |       |      
|Pangaea CLO 2007-1 Ltd.                   |                                     |       | 11.6 |       |       |   | 11.6 |          |       |  | 13.9% |       |  |       |     |       |          |   |     |      |       |  |       |      
|                                          |                                     |       |      |       |       |   |      |          |       |  |       |       |  |       |      |       |          |  
|                                          | Total bonds                         |       |      | 90.7  |       |   |      | 89.9     |       |  |       | 13.3% |  |       |      | 45.4  |          |   |      | 45.6 |       |  |       | 12.8% | 
|Preferred Shares/ Income
    Notes(3):    |                                     |       |      |       |       |   |      |          |       |  |       |       |  |       |      |       |          |   |      |      |       |  |       |      
|Callidus Debt Partners CLO Fund III, Ltd. |                                     |       | 21.8 |       |       |   | 20.0 |          |       |  | 14.1% |       |  |       | 23.3 |       |          |   | 23.0 |      |       |  | 12.8% |      
|Callidus Debt Partners CLO Fund IV, Ltd.  |                                     |       | 12.3 |       |       |   | 11.3 |          |       |  | 16.1% |       |  |       | 13.0 |       |          |   | 13.0 |      |       |  | 13.8% |      
|Callidus Debt Partners CLO Fund V, Ltd.   |                                     |       | 14.0 |       |       |   | 14.7 |          |       |  | 19.3% |       |  |       | 13.8 |       |          |   | 13.8 |      |       |  | 15.8% |      
|Callidus Debt Partners CLO Fund VI, Ltd.  |                                     |       | 27.0 |       |       |   | 27.0 |          |       |  | 19.3% |       |  |       |     |       |          |   |     |      |       |  |       |      
|Callidus Debt Partners CLO Fund VII, Ltd. |                                     |       | 22.1 |       |       |   | 22.1 |          |       |  | 16.6% |       |  |       |     |       |          |   |     |      |       |  |       |      
|Callidus MAPS CLO Fund I LLC              |                                     |       | 49.3 |       |       |   | 36.1 |          |       |  | 7.6%  |       |  |       | 51.0 |       |          |   | 47.4 |      |       |  | 17.1% |      
|Callidus MAPS CLO Fund II, Ltd.           |                                     |       | 18.7 |       |       |   | 18.7 |          |       |  | 14.7% |       |  |       |     |       |          |   |     |      |       |  |       |      
|Dryden XVIII Leveraged Loan 2007 Limited  |                                     |       | 21.9 |       |       |   | 21.9 |          |       |  | 14.2% |       |  |       |     |       |          |   |     |      |       |  |       |      
|Knightsbridge CLO 2007-1 Limited          |                                     |       | 31.2 |       |       |   | 31.2 |          |       |  | 15.2% |       |  |       |     |       |          |   |     |      |       |  |       |      
|                                          |                                     |       |      |       |       |   |      |          |       |  |       |       |  |       |      |       |          |  
|                                          | Total preferred shares/income notes |       |      | 218.3 |       |   |      | 203.0    |       |  |       | 14.6% |  |       |      | 101.1 |          |   |      | 97.2 |       |  |       | 15.5% | 
|                                          |                                     |       |      |       |       |   |      |          |       |  |       |       |  |       |      |       |          |  
|                                          |                                     | Total |      | $     | 309.0 |   |      | $        | 292.9 |  |       |       |  |       |      | $     | 146.5    |   |      | $    | 142.8 |  |       |       |  | 
|                                          |                                     |       |      |       |       |   |      |          |       |  |       |       |  |       |      |       |          |  




|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The weighted average yield is calculated as the (a) annual
    stated interest or the effective interest yield on the accruing
    bonds or the effective interest yield on the preferred
    shares/income notes, divided by (b) CLO and CDO assets at
    value. The market yield used in the valuation of the CLO and CDO
    assets may be different than the interest yields shown above.
    The yield on these debt and equity securities is included in
    interest income in the accompanying consolidated statement of
    operations.
|   
|(2) | These securities are included in private finance subordinated
    debt.                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   
|(3) | These securities are included in private finance equity
    securities.                                                                                                                                                                                                                                                                                                                                                                                                                                                                          





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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




Note 3. Portfolio, continued






|                 |                                           |      |         |         |      |   |         |         | 
|---------------- | ----------------------------------------- | ---- | ------- | ------- | ---- | - | ------- | ------- | 
|                 |                                           | 2007 |         |         | 2006 |  
|($ in millions)  |                                           |      |         |         |      |  
|Bonds            |                                           | $    | 288.5   |         |      | $ | 245.4   |        
|Syndicated loans |                                           |      | 4,122.7 |         |      |   | 1,769.9 |        
|Cash(1)          |                                           |      | 104.4   |         |      |   | 59.5    |        
|                 |                                           |      |         |         |      |  
|                 | Total underlying collateral
    assets(2) |      | $       | 4,515.6 |      |   | $       | 2,074.8 | 
|                 |                                           |      |         |         |      |  




|    |                                                                                                                                                                                                                                   
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes undrawn liability amounts.                                                                                                                                                                                               
|   
|(2) | At December 31, 2007 and 2006, the total face value of
    defaulted obligations was $18.4 million and
    $9.6 million, respectively, or approximately 0.4% and 0.5%
    respectively, of the total underlying collateral assets.

Loans and Debt Securities on Non-Accrual Status.


|                                                |                               |       |   |       |       |  |   |      |       | 
|----------------------------------------------- | ----------------------------- | ----- | - | ----- | ----- |  | - | ---- | ----- | 
|                                                |                               | 2007  |   |       | 2006  | 
|($ in millions)                                 |                               |       |   |       |       | 
|Loans and debt securities in workout status     |                               |       |   |       |       |  |   |     
|                                                | Companies more than 25% owned |       | $ | 114.1 |       |  | $ | 51.1 |      
|                                                | Companies 5% to 25% owned     |       |   | 11.7  |       |  |   | 4.0  |      
|                                                | Companies less than 5% owned  |       |   | 23.8  |       |  |   | 31.6 |      
|Loans and debt securities not in workout status |                               |       |   |       |       |  |   |     
|                                                | Companies more than 25% owned |       |   | 21.4  |       |  |   | 87.1 |      
|                                                | Companies 5% to 25% owned     |       |   | 13.4  |       |  |   | 7.2  |      
|                                                | Companies less than 5% owned  |       |   | 13.3  |       |  |   | 38.9 |      
|                                                |                               |       |   |       |       | 
|                                                |                               | Total |   | $     | 197.7 |  |   | $    | 219.9 | 
|                                                |                               |       |   |       |       | 

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ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




Note 3. Portfolio, continued


Industry and Geographic Compositions.


|                         |       |      |    |     |      |  |    |     |  
|------------------------ | ----- | ---- | -- | --- | ---- |  | -- | --- | -
|                         |       | 2007 |    |     | 2006 | 
|                         |       |      |    |     |      | 
|Industry                 |       |      |    |     |      |  |    |    
|Business services        |       |      | 37 | %   |      |  | 39 | %  
|Consumer products        |       |      | 25 |     |      |  | 20 |    
|Industrial products      |       |      | 10 |     |      |  | 9  |    
|Financial services       |       |      | 7  |     |      |  | 9  |    
|CLO/CDO(1)               |       |      | 6  |     |      |  | 3  |    
|Retail                   |       |      | 4  |     |      |  | 6  |    
|Consumer services        |       |      | 4  |     |      |  | 6  |    
|Healthcare services      |       |      | 3  |     |      |  | 3  |    
|Other                    |       |      | 4  |     |      |  | 5  |    
|                         |       |      |    |     |      | 
|                         | Total |      |    | 100 | %    |  |    | 100 | %
|                         |       |      |    |     |      | 
|Geographic
    Region(2) |       |      |    |     |      |  |    |    
|Mid-Atlantic             |       |      | 36 | %   |      |  | 31 | %  
|Midwest                  |       |      | 32 |     |      |  | 30 |    
|Southeast                |       |      | 17 |     |      |  | 18 |    
|West                     |       |      | 14 |     |      |  | 17 |    
|Northeast                |       |      | 1  |     |      |  | 4  |    
|                         |       |      |    |     |      | 
|                         | Total |      |    | 100 | %    |  |    | 100 | %
|                         |       |      |    |     |      | 




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



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



|                          |       |      |      |      |       |   |      |          |  |  |      |  |  |       |      |       |          |   |      |       |  |  |      |  | 
|------------------------- | ----- | ---- | ---- | ---- | ----- | - | ---- | -------- |  |  | ---- |  |  | ----- | ---- | ----- | -------- | - | ---- | ----- |  |  | ---- |  | 
|                          |       | 2007 |      |      | 2006  |  
|                          |       |      |      |      |       |  
|                          |       | Cost |      |      | Value |   |      | Yield(1) |  |  | Cost |  |  | Value |      |       | Yield(1) |  
|($ in millions)           |       |      |      |      |       |   |      |          |  |  |      |  |  |       |      |       |          |  
|Commercial mortgage loans |       | $    | 65.9 |      |       | $ | 65.4 |          |  |  | 6.8% |  |  | $     | 72.6 |       |          | $ | 71.9 |       |  |  | 7.5% | 
|Real estate owned         |       |      | 15.3 |      |       |   | 21.3 |          |  |  |      |  |  |       | 15.7 |       |          |   | 19.6 |       |  |  |      | 
|Equity interests          |       |      | 15.7 |      |       |   | 34.5 |          |  |  |      |  |  |       | 15.2 |       |          |   | 26.7 |       |  |  |      | 
|                          |       |      |      |      |       |   |      |          |  |  |      |  |  |       |      |       |          |  
|                          | Total |      | $    | 96.9 |       |   | $    | 121.2    |  |  |      |  |  |       | $    | 103.5 |          |   | $    | 118.2 |  |  |      |  | 
|                          |       |      |      |      |       |   |      |          |  |  |      |  |  |       |      |       |          |  




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

Commercial Mortgage Loans and Equity Interests.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




Note 3. Portfolio, continued








|                  |       |      |    |     |      |  |    |     |  
|----------------- | ----- | ---- | -- | --- | ---- |  | -- | --- | -
|                  |       | 2007 |    |     | 2006 | 
|                  |       |      |    |     |      | 
|Property Type     |       |      |    |     |      |  |    |    
|Hospitality       |       |      | 44 | %   |      |  | 45 | %  
|Office            |       |      | 21 |     |      |  | 20 |    
|Retail            |       |      | 18 |     |      |  | 19 |    
|Recreation        |       |      | 15 |     |      |  | 1  |    
|Housing           |       |      |   |     |      |  | 13 |    
|Other             |       |      | 2  |     |      |  | 2  |    
|                  |       |      |    |     |      | 
|                  | Total |      |    | 100 | %    |  |    | 100 | %
|                  |       |      |    |     |      | 
|Geographic Region |       |      |    |     |      |  |    |    
|Southeast         |       |      | 37 | %   |      |  | 36 | %  
|Midwest           |       |      | 31 |     |      |  | 21 |    
|West              |       |      | 20 |     |      |  | 21 |    
|Northeast         |       |      | 8  |     |      |  | 8  |    
|Mid-Atlantic      |       |      | 4  |     |      |  | 14 |    
|                  |       |      |    |     |      | 
|                  | Total |      |    | 100 | %    |  |    | 100 | %
|                  |       |      |    |     |      | 

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




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


Note 3. Portfolio, continued




Managed Funds




Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities


Allied Capital Senior Debt Fund, L.P.






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ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


Note 3. Portfolio, continued




Unitranche Fund LLC.


AGILE Fund I, LLC.








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ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


Note 4. Debt




|                                |                                          |                                    |       |         |         |  |       |          |         |  |          |      |      |        |       |         |          |  |       |         |         |  |     |      |      |  
|------------------------------- | ---------------------------------------- | ---------------------------------- | ----- | ------- | ------- |  | ----- | -------- | ------- |  | -------- | ---- | ---- | ------ | ----- | ------- | -------- |  | ----- | ------- | ------- |  | --- | ---- | ---- | -
|                                |                                          | 2007                               |       |         | 2006    | 
|                                |                                          |                                    |       |         |         | 
|                                |                                          |                                    |       | Annual  |         |  |       |          | Annual  | 
|                                |                                          | Facility                           |       |         | Amount  |  |       | Interest |         |  | Facility |      |      | Amount |       |         | Interest | 
|                                |                                          | Amount                             |       |         | Drawn   |  |       | Cost(1)  |         |  | Amount   |      |      | Drawn  |       |         | Cost(1)  | 
|($ in millions)                 |                                          |                                    |       |         |         |  |       |          |         |  |          |      |      |        |       |         |          | 
|Notes payable and debentures:   |                                          |                                    |       |         |         |  |       |          |         |  |          |      |      |        |       |         |          |  |       |         |         |  |     |     
|                                | Privately issued unsecured notes payable |                                    | $     | 1,042.2 |         |  | $     | 1,042.2  |         |  |          | 6.1  | %    |        | $     | 1,041.4 |          |  | $     | 1,041.4 |         |  |     | 6.1  | %   
|                                | Publicly issued unsecured notes payable  |                                    |       | 880.0   |         |  |       | 880.0    |         |  |          | 6.7  | %    |        |       | 650.0   |          |  |       | 650.0   |         |  |     | 6.6  | %   
|                                |                                          |                                    |       |         |         |  |       |          |         |  |          |      |      |        |       |         |          | 
|                                |                                          | Total notes payable and debentures |       |         | 1,922.2 |  |       |          | 1,922.2 |  |          |      | 6.4  | %      |       |         | 1,691.4  |  |       |         | 1,691.4 |  |     |      | 6.3  | %
|Revolving line of
    credit(4) |                                          |                                    | 922.5 |         |         |  | 367.3 |          |         |  | 5.9      | %(2) |      |        | 922.5 |         |          |  | 207.7 |         |         |  | 6.4 | %(2)
|                                |                                          |                                    |       |         |         |  |       |          |         |  |          |      |      |        |       |         |          | 
|                                | Total debt                               |                                    | $     | 2,844.7 |         |  | $     | 2,289.5  |         |  |          | 6.5  | %(3) |        | $     | 2,613.9 |          |  | $     | 1,899.1 |         |  |     | 6.5  | %(3)
|                                |                                          |                                    |       |         |         |  |       |          |         |  |          |      |      |        |       |         |          | 




|    |                                                                                                                                                                                                                                                                                                                                                                                                   
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The weighted average annual interest cost is computed as the (a)
    annual stated interest on the debt plus the annual amortization
    of commitment fees, other facility fees and amortization of debt
    financing costs that are recognized into interest expense over
    the contractual life of the respective borrowings, divided by
    (b) debt outstanding on the balance sheet date.
|   
|(2) | The annual interest cost reflects the interest rate payable for
    borrowings under the revolving line of credit. In addition to
    the current interest payable, there were annual costs of
    commitment fees, other facility fees and amortization of debt
    financing costs of $3.7 million and $3.9 million at
    December 31, 2007 and 2006, respectively.                            
|   
|(3) | The annual interest cost for total debt includes the annual cost
    of commitment fees, other facility fees and amortization of debt
    financing costs on the revolving line of credit regardless of
    the amount outstanding on the facility as of the balance sheet
    date.                                                                                                              
|   
|(4) | At December 31, 2007, $496.7 million remained unused and
    available on the revolving line of credit, net of amounts
    committed for standby letters of credit of $58.5 million
    issued under the credit facility.                                                                                                                                                                         

Notes Payable and Debentures


Privately Issued Unsecured Notes Payable.








Publicly Issued Unsecured Notes Payable.


|                      |       |        |       |       |               |  |                |  | 
|--------------------- | ----- | ------ | ----- | ----- | ------------- |  | -------------- |  | 
|                      |       | Amount |       |       | Maturity Date | 
|($ in millions)       |       |        |       |       |               | 
|6.625% Notes due 2011 |       | $      | 400.0 |       |               |  | July 15, 2011  | 
|6.000% Notes due 2012 |       |        | 250.0 |       |               |  | April 1, 2012  | 
|6.875% Notes due 2047 |       |        | 230.0 |       |               |  | April 15, 2047 | 
|                      |       |        |       |       |               | 
|                      | Total |        | $     | 880.0 |               |  |                |  | 
|                      |       |        |       |       |               | 

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ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




Note 4. Debt, continued








Scheduled Maturities.


|           |       |                 |       |         | 
|---------- | ----- | --------------- | ----- | ------- | 
|Year       |       | Amount Maturing |      
|           |       |                 |      
|           |       | ($ in millions) |      
|2008       |       | $               | 153.0 |        
|2009       |       |                 | 269.7 |        
|2010       |       |                 | 408.0 |        
|2011       |       |                 | 472.5 |        
|2012       |       |                 | 339.0 |        
|Thereafter |       |                 | 280.0 |        
|           |       |                 |      
|          
|           | Total |                 | $     | 1,922.2 | 
|           |       |                 |      



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









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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




Note 4. Debt, continued






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





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





Note 5. Guarantees and Commitments




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




Note 5. Guarantees and Commitments, continued




|                                 |          |       |       |       |      |   |      |      |  |   |       |       |      |   |   |      |  |   |            |     |  |   |     |     |  |   |     |     | 
|-------------------------------- | -------- | ----- | ----- | ----- | ---- | - | ---- | ---- |  | - | ----- | ----- | ---- | - | - | ---- |  | - | ---------- | --- |  | - | --- | --- |  | - | --- | --- | 
|                                 |          | Total |       |       | 2008 |   |      | 2009 |  |   | 2010  |       | 2011 |   |   | 2012 |  |   | After 2012 |    
|(in millions)                    |          |       |       |       |      |   |      |      |  |   |       |       |      |   |   |      |  |   |            |    
|Guarantees                       |          | $     | 270.6 |       |      | $ | 3.0  |      |  | $ | 261.2 |       |      | $ |  |      |  | $ | 4.4        |     |  | $ | 0.1 |     |  | $ | 1.9 |    
|Standby letters of
    credit(1) |          |       | 58.5  |       |      |   | 58.5 |      |  |   |      |       |      |   |  |      |  |   |           |     |  |   |    |     |  |   |    |    
|                                 |          |       |       |       |      |   |      |      |  |   |       |       |      |   |   |      |  |   |            |     | 
|                                 | Total(2) |       | $     | 329.1 |      |   | $    | 61.5 |  |   | $     | 261.2 |      |   | $ |     |  |   | $          | 4.4 |  |   | $   | 0.1 |  |   | $   | 1.9 | 
|                                 |          |       |       |       |      |   |      |      |  |   |       |       |      |   |   |      |  |   |            |     | 




|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Standby letters of credit are issued under the Companys
    revolving line of credit that expires in September 2008.
    Therefore, unless a standby letter of credit is set to expire at
    an earlier date, it is assumed that the standby letters of
    credit will expire contemporaneously with the expiration of the
    Companys line of credit in September 2008.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|(2) | The Companys most significant commitments relate to its
    investment in Ciena Capital LLC (Ciena), which commitments
    totaled $276.7 million at December 31, 2007. At
    December 31, 2007, the Company guaranteed 60% of the
    outstanding total obligations on Cienas revolving line of
    credit, which matures in March 2009, for a total guaranteed
    amount of $258.7 million and had standby letters of credit
    issued totaling $18.0 million in connection with term
    securitizations completed by Ciena. In January 2008, the Company
    increased the guaranteed amount on Cienas revolving line
    of credit from 60% to 100% in connection with an amendment
    completed by Ciena and also issued additional letters of credit
    totaling $42.5 million related to other term
    securitizations completed by Ciena. See Note 3.





Note 6. Shareholders Equity




|                                        |              |      |       |       |      |   |       |         |  |   |   |   | 
|--------------------------------------- | ------------ | ---- | ----- | ----- | ---- | - | ----- | ------- |  | - | - | - | 
|                                        |              | 2007 |       |       | 2006 |   |       | 2005(1)
|(in millions)                           |              |      |       |       |      |   |       |        
|Number of common shares                 |              |      | 6.6   |       |      |   | 10.9  |         |  |   |  |  
|                                        |              |      |       |       |      |   |       |         | 
|Gross proceeds                          |              | $    | 177.7 |       |      | $ | 310.2 |         |  | $ |  |  
|Less costs, including underwriting fees |              |      | (6.4  | )     |      |   | (14.4 | )       |  |   |  |  
|                                        |              |      |       |       |      |   |       |         | 
|                                        | Net proceeds |      | $     | 171.3 |      |   | $     | 295.8   |  |   | $ |  | 
|                                        |              |      |       |       |      |   |       |         | 




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







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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




Note 6. Shareholders Equity, continued




|                                        |  |      |       |  |      |   |       |      |  |   |       | 
|--------------------------------------- |  | ---- | ----- |  | ---- | - | ----- | ---- |  | - | ----- | 
|                                        |  | 2007 |       |  | 2006 |   |       | 2005 | 
|(in millions, except per share amounts) |  |      |       |  |      |   |       |      | 
|Shares issued                           |  |      | 0.6   |  |      |   | 0.5   |      |  |   | 0.3   | 
|Average price per share                 |  | $    | 27.40 |  |      | $ | 30.58 |      |  | $ | 28.00 | 

Note 7. Earnings Per Common Share




|                                                         |  |      |       |  |      |   |       |      |  |   |       | 
|-------------------------------------------------------- |  | ---- | ----- |  | ---- | - | ----- | ---- |  | - | ----- | 
|                                                         |  | 2007 |       |  | 2006 |   |       | 2005 | 
|(in millions, except per share amounts)                  |  |      |       |  |      |   |       |      | 
|Net increase in net assets resulting from operations     |  | $    | 153.3 |  |      | $ | 245.1 |      |  | $ | 872.8 | 
|Weighted average common shares outstanding  basic       |  |      | 152.9 |  |      |   | 142.4 |      |  |   | 134.7 | 
|Dilutive options outstanding                             |  |      | 1.8   |  |      |   | 3.2   |      |  |   | 2.6   | 
|                                                         |  |      |       |  |      |   |       |      | 
|Weighted average common shares
    outstanding  diluted |  |      | 154.7 |  |      |   | 145.6 |      |  |   | 137.3 | 
|                                                         |  |      |       |  |      |   |       |      | 
|Basic earnings per common share                          |  | $    | 1.00  |  |      | $ | 1.72  |      |  | $ | 6.48  | 
|                                                         |  |      |       |  |      |   |       |      | 
|Diluted earnings per common share                        |  | $    | 0.99  |  |      | $ | 1.68  |      |  | $ | 6.36  | 
|                                                         |  |      |       |  |      |   |       |      | 

Note 8. Employee Compensation Plans


401(k) Plan.




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




Note 8. Employee Compensation Plans, continued


Deferred Compensation Plans.














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ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




Note 8. Employee Compensation Plans, continued






|                                     |                             |      |       |      |      |   |     |      |  |   |     |     | 
|------------------------------------ | --------------------------- | ---- | ----- | ---- | ---- | - | --- | ---- |  | - | --- | --- | 
|                                     |                             | 2007 |       |      | 2006 |   |     | 2005 | 
|($ in millions)                      |                             |      |       |      |      |   |     |      | 
|IPA contributions                    |                             | $    | 9.8   |      |      | $ | 8.1 |      |  | $ | 7.0 |    
|IPA mark to market expense (benefit) |                             |      | (14.0 | )    |      |   | 2.9 |      |  |   | 2.0 |    
|                                     |                             |      |       |      |      |   |     |      | 
|                                     | Total IPA expense (benefit) |      | $     | (4.2 | )    |   | $   | 11.0 |  |   | $   | 9.0 | 
|                                     |                             |      |       |      |      |   |     |      | 



Termination of Deferred Compensation Plans.




Note 9. Stock Option Plan








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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




Note 9. Stock Option Plan, continued








|                                                                       |  |        |       |           |       |   |             |              |  |                     |                      |  |  |   |     | 
|---------------------------------------------------------------------- |  | ------ | ----- | --------- | ----- | - | ----------- | ------------ |  | ------------------- | -------------------- |  |  | - | --- | 
|                                                                       |  |        |       | Weighted  |       |   | Weighted    |              |  |                    
|                                                                       |  |        |       | Average   |       |   | Average     |              |  |                    
|                                                                       |  |        |       | Exercise  |       |   | Contractual |              |  | Aggregate Intrinsic |                     
|                                                                       |  |        |       | Price Per |       |   | Remaining   |              |  | Value at            |                     
|                                                                       |  | Shares |       |           | Share |   |             | Term (Years) |  |                     | December 31, 2007(1) | 
|(in millions, except per share amounts)                                |  |        |       |           |       |   |             |              |  |                     |                      | 
|Options outstanding at January 1, 2005                                 |  |        | 20.4  |           |       | $ | 23.55       |              |  |                     |                      |  |  |   |     | 
|Granted                                                                |  |        | 6.8   |           |       | $ | 27.37       |              |  |                     |                      |  |  |   |     | 
|Exercised                                                              |  |        | (3.0  | )         |       | $ | 22.32       |              |  |                     |                      |  |  |   |     | 
|Forfeited                                                              |  |        | (1.9  | )         |       | $ | 27.83       |              |  |                     |                      |  |  |   |     | 
|                                                                       |  |        |       |           |       |   |             |              |  |                     |                      | 
|Options outstanding at December 31, 2005                               |  |        | 22.3  |           |       | $ | 24.52       |              |  |                     |                      |  |  |   |     | 
|Granted                                                                |  |        | 1.8   |           |       | $ | 29.88       |              |  |                     |                      |  |  |   |     | 
|Exercised                                                              |  |        | (0.5  | )         |       | $ | 22.99       |              |  |                     |                      |  |  |   |     | 
|Forfeited                                                              |  |        | (0.4  | )         |       | $ | 27.67       |              |  |                     |                      |  |  |   |     | 
|                                                                       |  |        |       |           |       |   |             |              |  |                     |                      | 
|Options outstanding at December 31, 2006                               |  |        | 23.2  |           |       | $ | 24.92       |              |  |                     |                      |  |  |   |     | 
|                                                                       |  |        |       |           |       |   |             |              |  |                     |                      | 
|Granted                                                                |  |        | 6.7   |           |       | $ | 29.52       |              |  |                     |                      |  |  |   |     | 
|Exercised                                                              |  |        | (0.6  | )         |       | $ | 25.25       |              |  |                     |                      |  |  |   |     | 
|Cancelled in tender
    offer(2)                                       |  |        | (10.3 | )         |       | $ | 21.50       |              |  |                     |                      |  |  |   |     | 
|Forfeited                                                              |  |        | (0.5  | )         |       | $ | 28.96       |              |  |                     |                      |  |  |   |     | 
|                                                                       |  |        |       |           |       |   |             |              |  |                     |                      | 
|Options outstanding at December 31, 2007                               |  |        | 18.5  |           |       | $ | 28.36       |              |  |                     | 6.58                 |  |  | $ | 0.2 | 
|                                                                       |  |        |       |           |       |   |             |              |  |                     |                      | 
|Exercisable at December 31,
    2007(3)                                |  |        | 11.7  |           |       | $ | 27.99       |              |  |                     | 6.54                 |  |  | $ | 0.2 | 
|                                                                       |  |        |       |           |       |   |             |              |  |                     |                      | 
|Exercisable and expected to be exercisable at December 31,
    2007(4) |  |        | 17.9  |           |       | $ | 28.34       |              |  |                     | 6.58                 |  |  | $ | 0.2 | 
|                                                                       |  |        |       |           |       |   |             |              |  |                     |                      | 




|    |                                                                                                                                                             
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Represents the difference between the market value of the
    options at December 31, 2007, and the cost for the option
    holders to exercise the options.
|(2) | See description of the tender offer above.                                                                                                                  
|(3) | Represents vested options.                                                                                                                                  
|(4) | The amount of options expected to be exercisable at
    December 31, 2007, is calculated based on an estimate of
    expected forfeitures.                  

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




Note 9. Stock Option Plan, continued






|                                                  |  |             |      |          |                  |  |          |          |  |   |             |          |  |          |      |  |  |   |       | 
|------------------------------------------------- |  | ----------- | ---- | -------- | ---------------- |  | -------- | -------- |  | - | ----------- | -------- |  | -------- | ---- |  |  | - | ----- | 
|                                                  |  | 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 millions, except per share amounts and years) |  |             |     
|$16.81  $26.80                                   |  |             | 1.9  |          |                  |  | 6.02     |          |  | $ | 24.05       |          |  |          | 1.8  |  |  | $ | 24.02 | 
|$27.00  $27.38                                   |  |             | 0.1  |          |                  |  | 6.56     |          |  | $ | 27.13       |          |  |          | 0.1  |  |  | $ | 27.10 | 
|$27.51                                            |  |             | 4.8  |          |                  |  | 7.59     |          |  | $ | 27.51       |          |  |          | 3.1  |  |  | $ | 27.51 | 
|$28.15  $29.23                                   |  |             | 4.2  |          |                  |  | 6.34     |          |  | $ | 28.94       |          |  |          | 3.9  |  |  | $ | 28.97 | 
|$29.58                                            |  |             | 6.3  |          |                  |  | 6.36     |          |  | $ | 29.58       |          |  |          | 2.1  |  |  | $ | 29.58 | 
|$30.00  $30.52                                   |  |             | 1.2  |          |                  |  | 5.43     |          |  | $ | 30.13       |          |  |          | 0.7  |  |  | $ | 30.08 | 
|                                                  |  |             |      |          |                  |  |          |          |  |   |             |          |  |          |     
|                                                  |  |             | 18.5 |          |                  |  | 6.58     |          |  | $ | 28.36       |          |  |          | 11.7 |  |  | $ | 27.99 | 
|                                                  |  |             |      |          |                  |  |          |          |  |   |             |          |  |          |     



Notes Receivable from the
Sale of Common Stock




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ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


Note 10. Dividends and Distributions and Taxes




|                                        |                                            |        |       |       |           |   |      |        |  |   |           |       |  |        |      |      |           |   |      |       |  |   |      |      | 
|--------------------------------------- | ------------------------------------------ | ------ | ----- | ----- | --------- | - | ---- | ------ |  | - | --------- | ----- |  | ------ | ---- | ---- | --------- | - | ---- | ----- |  | - | ---- | ---- | 
|                                        |                                            | 2007   |       |       | 2006      |   |      | 2005   | 
|                                        |                                            |        |       |       |           |   |      |        | 
|                                        |                                            | Total  |       |       | Total Per |   |      | Total  |  |   | Total Per |       |  | Total  |      |      | Total Per |  
|                                        |                                            | Amount |       |       | Share     |   |      | Amount |  |   | Share     |       |  | Amount |      |      | Share     |  
|                                        |                                            |        |       |       |           |   |      |        |  |   |           |       |  |        |      |      |           |  
|(in millions, except per share amounts) |                                            |        |       |       |           |   |      |        |  |   |           |      
|First quarter                           |                                            | $      | 95.8  |       |           | $ | 0.63 |        |  | $ | 82.5      |       |  | $      | 0.59 |      |           | $ | 76.1 |       |  | $ | 0.57 |     
|Second quarter                          |                                            |        | 97.6  |       |           |   | 0.64 |        |  |   | 84.1      |       |  |        | 0.60 |      |           |   | 76.2 |       |  |   | 0.57 |     
|Third quarter                           |                                            |        | 100.3 |       |           |   | 0.65 |        |  |   | 88.8      |       |  |        | 0.61 |      |           |   | 78.8 |       |  |   | 0.58 |     
|Fourth quarter                          |                                            |        | 102.6 |       |           |   | 0.65 |        |  |   | 92.0      |       |  |        | 0.62 |      |           |   | 79.3 |       |  |   | 0.58 |     
|Extra dividend                          |                                            |        | 11.0  |       |           |   | 0.07 |        |  |   | 7.5       |       |  |        | 0.05 |      |           |   | 4.1  |       |  |   | 0.03 |     
|                                        |                                            |        |       |       |           |   |      |        |  |   |           |       |  |        |      |      |           |  
|                                        | Total distributions to common shareholders |        | $     | 407.3 |           |   | $    | 2.64   |  |   | $         | 354.9 |  |        | $    | 2.47 |           |   | $    | 314.5 |  |   | $    | 2.33 | 
|                                        |                                            |        |       |       |           |   |      |        |  |   |           |       |  |        |      |      |           |  



|                                        |                                                |        |       |       |           |   |      |        |  |   |           |       |  |        |      |      |           |   |       |       |  |   |      |      | 
|--------------------------------------- | ---------------------------------------------- | ------ | ----- | ----- | --------- | - | ---- | ------ |  | - | --------- | ----- |  | ------ | ---- | ---- | --------- | - | ----- | ----- |  | - | ---- | ---- | 
|                                        |                                                | 2007   |       |       | 2006      |   |      | 2005   | 
|                                        |                                                |        |       |       |           |   |      |        | 
|                                        |                                                | Total  |       |       | Total Per |   |      | Total  |  |   | Total Per |       |  | Total  |      |      | Total Per |  
|                                        |                                                | Amount |       |       | Share     |   |      | Amount |  |   | Share     |       |  | Amount |      |      | Share     |  
|                                        |                                                |        |       |       |           |   |      |        |  |   |           |       |  |        |      |      |           |  
|(in millions, except per share amounts) |                                                |        |       |       |           |   |      |        |  |   |           |      
|Ordinary
    income(1)(2)               |                                                | $      | 126.7 |       |           | $ | 0.82 |        |  | $ | 177.4     |       |  | $      | 1.23 |      |           | $ | 157.3 |       |  | $ | 1.17 |     
|Long-term capital gains                 |                                                |        | 280.6 |       |           |   | 1.82 |        |  |   | 177.5     |       |  |        | 1.24 |      |           |   | 157.2 |       |  |   | 1.16 |     
|                                        |                                                |        |       |       |           |   |      |        |  |   |           |       |  |        |      |      |           |  
|                                        | Total distributions
    to common shareholders |        | $     | 407.3 |           |   | $    | 2.64   |  |   | $         | 354.9 |  |        | $    | 2.47 |           |   | $     | 314.5 |  |   | $    | 2.33 | 
|                                        |                                                |        |       |       |           |   |      |        |  |   |           |       |  |        |      |      |           |  




|    |                                                                                                                                                                                                                                                         
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | For the years ended December 31, 2007, 2006, and 2005,
    ordinary income included dividend income of approximately zero,
    $0.04 per share, and $0.03 per share, respectively,
    that qualified to be taxed at the 15% maximum capital gains rate.
|   
|(2) | For certain eligible corporate shareholders, the dividend
    received deduction for 2007, 2006, and 2005, was zero,
    $0.042 per share, and $0.034 per share, respectively.                                                                          



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ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




Note 10. Dividends and Distributions and Taxes,
continued




|                                                                             |                                                                            |                |       |       |       |   |       |        |       |   |       |        |       | 
|---------------------------------------------------------------------------- | -------------------------------------------------------------------------- | -------------- | ----- | ----- | ----- | - | ----- | ------ | ----- | - | ----- | ------ | ----- | 
|                                                                             |                                                                            | 2007           |       |       | 2006  |   |       | 2005   |      
|                                                                             |                                                                            |                |       |       |       |   |       |        |      
|($ in millions)                                                              |                                                                            | (ESTIMATED)(1) |       |       |       |   |      
|Financial statement net increase in net assets resulting from
    operations |                                                                            | $              | 153.3 |       |       | $ | 245.1 |        |       | $ | 872.8 |       
|Adjustments:                                                                 |                                                                            |                |       |       |       |   |       |        |       |   |       |       
|                                                                             | Net change in unrealized appreciation or depreciation                      |                |       | 256.2 |       |   |       | 477.4  |       |   |       | (462.1 | )    
|                                                                             | Amortization of discounts and fees                                         |                |       | 0.7   |       |   |       | (1.7   | )     |   |       | 4.7    |      
|                                                                             | Interest- and dividend-related items                                       |                |       | 6.0   |       |   |       | 11.9   |       |   |       | 5.5    |      
|                                                                             | Employee compensation-related items                                        |                |       | 0.2   |       |   |       | 23.1   |       |   |       | 3.0    |      
|                                                                             | Nondeductible excise tax                                                   |                |       | 16.3  |       |   |       | 15.4   |       |   |       | 6.2    |      
|                                                                             | Realized gains recognized (deferred) through installment
    treatment(2)  |                |       | (12.7 | )     |   |       | (182.3 | )     |   |       | (5.9   | )    
|                                                                             | Other realized gain or loss related items                                  |                |       | (7.2  | )     |   |       | 15.0   |       |   |       | 18.6   |      
|                                                                             | Net income (loss) from partnerships and limited liability
    companies(3) |                |       | (6.6  | )     |   |       | (4.7   | )     |   |       | 18.0   |      
|                                                                             | Net loss from consolidated SBIC subsidiary                                 |                |       |      |       |   |       |       |       |   |       | (8.4   | )    
|                                                                             | Net (income) loss from consolidated taxable subsidiary, net of
    tax     |                |       | 1.4   |       |   |       | 3.9    |       |   |       | (5.0   | )    
|                                                                             | Other                                                                      |                |       |      |       |   |       | (1.9   | )     |   |       | (2.4   | )    
|                                                                             |                                                                            |                |       |       |       |   |       |        |      
|                                                                             |                                                                            | Taxable income |       | $     | 407.6 |   |       | $      | 601.2 |   |       | $      | 445.0 | 
|                                                                             |                                                                            |                |       |       |       |   |       |        |      




|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The Companys taxable income for 2007 is an estimate and
    will not be finally determined until the Company files its 2007
    tax return in September 2008. Therefore, the final taxable
    income may be different than this estimate.                                                                                                                                                                                                                                                                                                                                                                                                
|   
|(2) | 2006 includes the deferral of long-term capital gains through
    installment treatment related to the Companys sale of its
    control equity investment in Advantage and certain other
    portfolio companies.                                                                                                                                                                                                                                                                                                                                                                                                                         
|   
|(3) | Includes taxable income (loss) passed through to the Company
    from Ciena Capital LLC (Ciena) in excess of interest and related
    portfolio income from Ciena included in the financial statements
    totaling ($12.0) million, $3.7 million, and
    $15.4 million for the years ended December 31, 2007,
    2006, and 2005, respectively. See Note 3 for additional
    related disclosure. In the fourth quarter of 2007, Ciena made an
    election to be taxed prospectively as a C corporation; therefore
    Cienas taxable income or losses will no longer be passed
    through to the Company subsequent to this election.



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ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




Note 10. Dividends and Distributions and Taxes,
continued




|                                                                                                   |                                            |                |        |       |      |   |        |       |  |   |        |       | 
|-------------------------------------------------------------------------------------------------- | ------------------------------------------ | -------------- | ------ | ----- | ---- | - | ------ | ----- |  | - | ------ | ----- | 
|                                                                                                   |                                            | 2007           |        |       | 2006 |   |        | 2005  | 
|                                                                                                   |                                            |                |        |       |      |   |        |       | 
|($ in millions)                                                                                    |                                            | (ESTIMATED)(1) |        |       |      |   |       
|Taxable income                                                                                     |                                            | $              | 407.6  |       |      | $ | 601.2  |       |  | $ | 445.0  |      
|Taxable income earned in current year and carried forward for
    distribution in next
    year(2) |                                            |                | (403.1 | )     |      |   | (402.8 | )     |  |   | (156.5 | )    
|Taxable income earned in prior year and carried forward and
    distributed in current year        |                                            |                | 402.8  |       |      |   | 156.5  |       |  |   | 26.0   |      
|                                                                                                   |                                            |                |        |       |      |   |        |       | 
|                                                                                                   | Total distributions to common shareholders |                | $      | 407.3 |      |   | $      | 354.9 |  |   | $      | 314.5 | 
|                                                                                                   |                                            |                |        |       |      |   |        |       | 




|    |                                                                                                                                                                                                                                                                                                                                   
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The Companys taxable income for 2007 is an estimate and
    will not be finally determined until the Company files its 2007
    tax return in September 2008. Therefore, the final taxable
    income and the taxable income earned in 2007 and carried forward
    for distribution in 2008 may be different than this estimate.
|   
|(2) | Estimated taxable income for 2007 includes undistributed income
    of $403.1 million that is being carried over for
    distribution in 2008, which represents approximately
    $50.0 million of ordinary income and approximately
    $353.1 million of net long-term capital gains.                                           









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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






|                  |            |      |      |     |      |   |      |     | 
|----------------- | ---------- | ---- | ---- | --- | ---- | - | ---- | --- | 
|                  |            | 2007 |      |     | 2006 |  
|($ in millions)   |            |      |      |     |      |  
|Cash              |            | $    | 4.6  |     |      | $ | 2.3  |    
|Less escrows held |            |      | (1.1 | )   |      |   | (0.6 | )  
|                  |            |      |      |     |      |  
|                  | Total cash |      | $    | 3.5 |      |   | $    | 1.7 | 
|                  |            |      |      |     |      |  

Note 12. Supplemental Disclosure of Cash Flow
Information








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ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




Note 12. Supplemental Disclosure of Cash Flow
Information, continued




Note 13. Financial Highlights


|                                                                                          |                                                                  |                                                      |         |       |      |   |         |       |      |   |         |      |      | 
|----------------------------------------------------------------------------------------- | ---------------------------------------------------------------- | ---------------------------------------------------- | ------- | ----- | ---- | - | ------- | ----- | ---- | - | ------- | ---- | ---- | 
|                                                                                          |                                                                  | At and for the Years                                 |        
|                                                                                          |                                                                  | Ended December 31,                                   |        
|                                                                                          |                                                                  |                                                      |        
|                                                                                          |                                                                  | 2007                                                 |         |       | 2006 |   |         | 2005  |     
|                                                                                          |                                                                  |                                                      |         |       |      |   |         |       |     
|Per Common Share Data                                                                     |                                                                  |                                                      |         |       |      |   |         |       |      |   |         |     
|Net asset value, beginning of year                                                        |                                                                  | $                                                    | 19.12   |       |      | $ | 19.17   |       |      | $ | 14.87   |     
|                                                                                          |                                                                  |                                                      |         |       |      |   |         |       |     
|                                                                                          | Net investment
    income(1)                                     |                                                      |         | 0.91  |      |   |         | 1.30  |      |   |         | 1.00 |     
|                                                                                          | Net realized
    gains(1)(2)                                     |                                                      |         | 1.74  |      |   |         | 3.66  |      |   |         | 1.99 |     
|                                                                                          |                                                                  |                                                      |         |       |      |   |         |       |     
|                                                                                          |                                                                  | Net investment income plus net realized
    gains(1) |         |       | 2.65 |   |         |       | 4.96 |   |         |      | 2.99 | 
|                                                                                          | Net change in unrealized appreciation or depreciation
    (1)(2) |                                                      |         | (1.66 | )    |   |         | (3.28 | )    |   |         | 3.37 |     
|                                                                                          |                                                                  |                                                      |         |       |      |   |         |       |     
|Net increase in net assets resulting from
    operations(1)                               |                                                                  |                                                      | 0.99    |       |      |   | 1.68    |       |      |   | 6.36    |     
|                                                                                          |                                                                  |                                                      |         |       |      |   |         |       |     
|Decrease in net assets from shareholder distributions                                     |                                                                  |                                                      | (2.64   | )     |      |   | (2.47   | )     |      |   | (2.33   | )   
|Net increase in net assets from capital share transactions
    (1)(3)                     |                                                                  |                                                      | 0.41    |       |      |   | 0.74    |       |      |   | 0.27    |     
|Decrease in net assets from cash portion of the option
    cancellation
    payment(1)(4) |                                                                  |                                                      | (0.34   | )     |      |   |        |       |      |   |        |     
|                                                                                          |                                                                  |                                                      |         |       |      |   |         |       |     
|Net asset value, end of year                                                              |                                                                  | $                                                    | 17.54   |       |      | $ | 19.12   |       |      | $ | 19.17   |     
|                                                                                          |                                                                  |                                                      |         |       |      |   |         |       |     
|Market value, end of year                                                                 |                                                                  | $                                                    | 21.50   |       |      | $ | 32.68   |       |      | $ | 29.37   |     
|Total
    return(5)                                                                       |                                                                  |                                                      | (27.6   | )%    |      |   | 20.6    | %     |      |   | 23.5    | %   
|Ratios and Supplemental Data($ and shares in millions, except per share amounts)          |                                                                  |                                                      |         |       |      |   |         |       |      |   |         |     
|Ending net assets                                                                         |                                                                  | $                                                    | 2,771.8 |       |      | $ | 2,841.2 |       |      | $ | 2,620.5 |     
|Common shares outstanding at end of year                                                  |                                                                  |                                                      | 158.0   |       |      |   | 148.6   |       |      |   | 136.7   |     
|Diluted weighted average common shares outstanding                                        |                                                                  |                                                      | 154.7   |       |      |   | 145.6   |       |      |   | 137.3   |     
|Employee, employee stock option and administrative
    expenses/average net assets        |                                                                  |                                                      | 6.10    | %     |      |   | 5.38    | %     |      |   | 6.56    | %   
|Total operating expenses/average net assets                                               |                                                                  |                                                      | 10.70   | %     |      |   | 9.05    | %     |      |   | 9.99    | %   
|Net investment income/average net assets                                                  |                                                                  |                                                      | 4.91    | %     |      |   | 6.90    | %     |      |   | 6.08    | %   
|Net increase in net assets resulting from operations/ average
    net assets              |                                                                  |                                                      | 5.34    | %     |      |   | 8.94    | %     |      |   | 38.68   | %   
|Portfolio turnover rate                                                                   |                                                                  |                                                      | 26.84   | %     |      |   | 27.05   | %     |      |   | 47.72   | %   
|Average debt outstanding                                                                  |                                                                  | $                                                    | 1,924.2 |       |      | $ | 1,491.0 |       |      | $ | 1,087.1 |     
|Average debt per
    share(1)                                                             |                                                                  | $                                                    | 12.44   |       |      | $ | 10.24   |       |      | $ | 7.92    |     




|    |                                                                                                                                
|--- | -------------------------------------------------------------------------------------------------------------------------------
|(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) | Excludes capital share transactions related to the cash portion
    of the option cancellation payment.                        
|   
|(4) | See Notes 2 and 9 to the consolidated financial statements above
    for further discussion.                                   
|   
|(5) | Total return assumes the reinvestment of all dividends paid for
    the years presented.                                       

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ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


Note 14. Selected Quarterly Data (Unaudited)


|                                                                |  |        |       |  |        |   |       |        |  |   |        |   |  |   |       | 
|--------------------------------------------------------------- |  | ------ | ----- |  | ------ | - | ----- | ------ |  | - | ------ | - |  | - | ----- | 
|                                                                |  | 2007   |      
|                                                                |  |        |      
|                                                                |  | Qtr. 1 |       |  | Qtr. 2 |   |       | Qtr. 3 |  |   | Qtr. 4 |  
|($ in millions, except per share amounts)                       |  |        |       |  |        |   |       |        |  |   |        |  
|Total interest and related portfolio income                     |  | $      | 108.0 |  |        | $ | 117.7 |        |  | $ | 118.4  |   |  | $ | 117.7 | 
|Net investment income                                           |  | $      | 39.5  |  |        | $ | 25.2  |        |  | $ | 18.3   |   |  | $ | 58.0  | 
|Net increase (decrease) in net assets resulting from operations |  | $      | 133.1 |  |        | $ | 89.2  |        |  | $ | (96.5  | ) |  | $ | 27.5  | 
|Basic earnings (loss) per common share                          |  | $      | 0.89  |  |        | $ | 0.59  |        |  | $ | (0.63  | ) |  | $ | 0.18  | 
|Diluted earnings (loss) per common share                        |  | $      | 0.87  |  |        | $ | 0.57  |        |  | $ | (0.62  | ) |  | $ | 0.18  | 

|                                                     |  |        |       |  |        |   |       |        |  |   |        |  |  |   |       | 
|---------------------------------------------------- |  | ------ | ----- |  | ------ | - | ----- | ------ |  | - | ------ |  |  | - | ----- | 
|                                                     |  | 2006   |      
|                                                     |  |        |      
|                                                     |  | Qtr. 1 |       |  | Qtr. 2 |   |       | Qtr. 3 |  |   | Qtr. 4 | 
|                                                     |  |        |       |  |        |   |       |        |  |   |        | 
|Total interest and related portfolio income          |  | $      | 111.0 |  |        | $ | 110.5 |        |  | $ | 113.4  |  |  | $ | 117.7 | 
|Net investment income                                |  | $      | 41.3  |  |        | $ | 50.2  |        |  | $ | 48.7   |  |  | $ | 49.1  | 
|Net increase in net assets resulting from operations |  | $      | 99.6  |  |        | $ | 33.7  |        |  | $ | 77.9   |  |  | $ | 33.9  | 
|Basic earnings per common share                      |  | $      | 0.72  |  |        | $ | 0.24  |        |  | $ | 0.54   |  |  | $ | 0.23  | 
|Diluted earnings per common share                    |  | $      | 0.70  |  |        | $ | 0.24  |        |  | $ | 0.53   |  |  | $ | 0.23  | 

Note 15. Litigation








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ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




Note 15. Litigation, continued




001060-07,


10b-5






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##### Table of Contents






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, Executive Officers and
Corporate Governance.






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##### Table of Contents










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,
and Director Independence.







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, 2007 and 2006                                                    
|
| | Consolidated Statement of Operations  For the Years
    Ended December 31, 2007, 2006, and 2005           
|
| | Consolidated Statement of Changes in Net Assets  For
    the Years Ended December 31, 2007, 2006, and 2005

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| |                                                                                                 
| | ------------------------------------------------------------------------------------------------
| | Consolidated Statement of Cash Flows  For the Years
    Ended December 31, 2007, 2006, and 2005
|
| | Consolidated Statement of Investments  December 31,
    2007                                   
|
| | Consolidated Statement of Investments 
    December 31, 2006                                   
|
| | 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.2 filed with Allied Capitals
    Post-Effective Amendment No. 1 to registration statement on
    Form N-2 (File No. 333-141847) filed on June 1,
    2007).                                                                                                                      
|        | 3 | .2          |  | Amended and Restated Bylaws. (Incorporated by reference to
    Exhibit 3.1. filed with Allied Capitals Form 8-K
    on July 30, 2007).                                                                                                                                                                                                                           
|        | 4 | .1          |  | Specimen Certificate of Allied Capitals Common Stock, par
    value $0.0001 per share. (Incorporated by reference to
    Exhibit d. filed with Allied Capitals registration
    statement on Form N-2 (File No. 333-51899) filed on
    May 6, 1998).                                                                                                           
|        | 4 | .3          |  | Form of Note under the Indenture relating to the issuance of
    debt securities. (Contained in Exhibit 4.4).
    (Incorporated by reference to Exhibit d.1 filed with Allied
    Capitals registration statement on Form N-2/ A (File
    No. 333-133755) filed on June 21, 2006).                                                                              
|        | 4 | .4          |  | Indenture by and between Allied Capital Corporation and The Bank
    of New York, dated June 16, 2006. (Incorporated by
    reference to Exhibit d.2 filed with Allied Capitals
    registration statement on Form N-2/ A (File
    No. 333-133755) filed on June 21, 2006).                                                                                     
|        | 4 | .5          |  | Statement of Eligibility of Trustee on Form T-1.
    (Incorporated by reference to Exhibit d.3 filed with
    Allied Capitals registration statement on Form N-2
    (File No. 333-133755) filed on May 3, 2006).                                                                                                                                                
|        | 4 | .6          |  | Form of First Supplemental Indenture by and between Allied
    Capital Corporation and the Bank of New York, dated as of
    July 25, 2006.(Incorporated by reference to
    Exhibit d.4 filed with Allied Capitals Post-Effective
    Amendment No. 1 to the registration statement on
    Form N-2/A (File No. 333-133755) filed on July 25,
    2006).        
|        | 4 | .7          |  | Form of 6.625% Note due 2011. (Incorporated by reference to
    Exhibit d.5 filed with Allied Capitals Post-Effective
    Amendment No. 1 to the registration statement on
    Form N-2/A (File No. 333-133755) filed on July 25,
    2006).                                                                                                                     
|        | 4 | .8          |  | Form of Second Supplemental Indenture by and between Allied
    Capital Corporation and The Bank of New York, dated as of
    December 8, 2006. (Incorporated by reference to
    Exhibit d.6 filed with Allied Capitals Post-Effective
    Amendment No. 2 to the registration statement on
    Form N-2/A (File No. 333-133755) filed on
    December 8, 2006).
|        | 4 | .9          |  | Form of 6.000% Notes due 2012. (Incorporated by reference to
    Exhibit d.7 filed with Allied Capitals Post-Effective
    Amendment No. 2 to the registration statement on
    Form N-2/A (File No. 333-133755) filed on
    December 8, 2006).                                                                                                                 

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|        |    |             |  |                                                                                                                                                                                                                                                                                                                                                              |  | 
|------- | -- | ----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | 
|Exhibit |    |             |  |                                                                                                                                                                                                                                                                                                                                                              | 
|Number  |    |             |  |                                                                                                                                                                                                                                                                                                                                                              | 
|        |    |             |  |                                                                                                                                                                                                                                                                                                                                                              | 
|        |    | Description
|        |    |            
|        | 4  | .10         |  | Form of Third Supplemental Indenture by and between Allied
    Capital Corporation and The Bank of New York, dated as of
    March 28, 2007.(Incorporated by reference to
    Exhibit d.8 filed with Allied Capitals Post-Effective
    Amendment No. 3 to the registration statement on
    Form N-2/A (File No. 333-133755) filed on
    March 28, 2007).
|        | 4  | .11         |  | Form of 6.875% Notes due 2047. (Incorporated by
    reference to Exhibit d.9 filed with Allied Capitals
    Post-Effective Amendment No. 3 to the registration
    statement on Form N-2/A (File No. 333-133755) filed on
    March 28, 2007).                                                                                                             
|        | 4  | .11(a)      |  | Form of 6.875% Notes due 2047. (Incorporated by
    reference to Exhibit d.9(a) filed with Allied
    Capitals Post-Effective Amendment No. 4 to the
    registration statement on Form N-2/A (File
    No. 333-133755) filed on April 2, 2007).                                                                                                           
|        | 10 | .1          |  | Dividend Reinvestment Plan, as amended. (Incorporated by
    reference to Exhibit e. filed with Allied Capitals
    registration statement on Form N-2 (File
    No. 333-87862) filed on May 8, 2002).                                                                                                                                                     
|        | 10 | .2          |  | Credit Agreement, dated September 30, 2005.
    (Incorporated by reference to Exhibit 10.1 filed with
    Allied Capitals Form 8-K on October 3, 2005).                                                                                                                                                                                                    
|        | 10 | .2(a)       |  | First Amendment to Credit Agreement, dated November 4,
    2005. (Incorporated by reference to Exhibit 10.2(a)
    filed with Allied Capitals Form 10-Q for the period
    ended September 30, 2005).                                                                                                                                                      
|        | 10 | .2(b)       |  | Second Amendment to Credit Agreement, dated May 11,
    2006.(Incorporated by reference to Exhibit 10.1 filed
    with Allied Capitals Form 8-K filed on May 12,
    2006).                                                                                                                                                                                
|        | 10 | .2(c)       |  | Third Amendment to Credit Agreement, dated May 19, 2006.
    (Incorporated by reference to Exhibit 10.1 filed with
    Allied Capitals Form 8-K filed on May 23,
    2006).                                                                                                                                                                                
|        | 10 | .3          |  | Note Agreement, dated October 13, 2005. (Incorporated by
    reference to Exhibit 10.1 filed with Allied Capitals
    Form 8-K on October 14, 2005).                                                                                                                                                                                                       
|        | 10 | .4          |  | Note Agreement, dated May 1, 2006. (Incorporated by
    reference to Exhibit 10.1 filed with Allied Capitals
    Form 8-K on May 1, 2006).                                                                                                                                                                                                                 
|        | 10 | .15         |  | Second Amended and Restated Control Investor Guaranty, dated as
    of January 30, 2008, between Allied Capital and CitiBank,
    N.A., as Administrative Agent. (Incorporated by reference to
    Exhibit 10.1 filed with Allied Capitals Form 8-K
    filed on February 5, 2008).                                                                        
|        | 10 | .17         |  | The 2005 Allied Capital Corporation Non-Qualified Deferred
    Compensation Plan II. (Incorporated by reference to
    Exhibit 10.2 filed with Allied Capitals Form 8-K
    filed on December 21, 2005).                                                                                                                                                   
|        | 10 | .17(a)      |  | Amendment to The 2005 Allied Capital Corporation Non-Qualified
    Deferred Compensation Plan II, dated January 20, 2006.
    (Incorporated by reference to Exhibit 10.17(a) filed
    with Allied Capitals Form 10-K for the year ended
    December 31, 2005).                                                                                           
|        | 10 | .17(b)      |  | Amendment to The 2005 Allied Capital Corporation Non-Qualified
    Deferred Compensation Plan II, dated December 14, 2007.
    (Incorporated by reference to Exhibit 10.2 filed with
    Allied Capitals Form 8-K filed on December 19,
    2007).                                                                                                         
|        | 10 | .18         |  | The 2005 Allied Capital Corporation Non-Qualified Deferred
    Compensation Plan. (Incorporated by reference to
    Exhibit 10.1 filed with Allied Capitals Form 8-K
    filed on December 21, 2005).                                                                                                                                                      
|        | 10 | .18(a)      |  | Amendment to The 2005 Allied Capital Corporation Non-Qualified
    Deferred Compensation Plan, dated January 20, 2006.
    (Incorporated by reference to Exhibit 10.18(a) filed
    with Allied Capitals Form 10-K for the year ended
    December 31, 2005).                                                                                              
|        | 10 | .18(b)      |  | Amendment to The 2005 Allied Capital Corporation Non-Qualified
    Deferred Compensation Plan, dated December 14, 2007.
    (Incorporated by reference to Exhibit 10.1 filed with
    Allied Capitals Form 8-K filed on December 19,
    2007).                                                                                                            

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|        |    |             |  |                                                                                                                                                                                                                                                                              |  | 
|------- | -- | ----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | 
|Exhibit |    |             |  |                                                                                                                                                                                                                                                                              | 
|Number  |    |             |  |                                                                                                                                                                                                                                                                              | 
|        |    |             |  |                                                                                                                                                                                                                                                                              | 
|        |    | Description
|        |    |            
|        | 10 | .19         |  | Amended Stock Option Plan. (Incorporated by reference to
    Appendix B of Allied Capitals definitive proxy
    statement for Allied Capitals 2007 Annual Meeting of
    Stockholders filed on April 3, 2007).                                                            
|        | 10 | .20(a)      |  | Allied Capital Corporation 401(k) Plan, dated September 1,
    1999. (Incorporated by reference to Exhibit 4.4 filed
    with Allied Capitals registration statement on
    Form S-8 (File No. 333-88681) filed on October 8,
    1999).                                   
|        | 10 | .20(b)      |  | Amendment to Allied Capital Corporation 401(k) Plan, dated
    April 15, 2004. (Incorporated by reference to
    Exhibit 10.20(b) filed with Allied Capitals
    Form 10-Q for the period ended June 30, 2004).                                                            
|        | 10 | .20(c)      |  | Amendment to Allied Capital Corporation 401(k) plan, dated
    November 1, 2005. (Incorporated by reference to Exhibit
    10.20(c) filed with Allied Capitals Form 10-Q for the
    quarter ended September 30, 2005).                                                    
|        | 10 | .20(d)      |  | Amendment to Allied Capital Corporation 401(k) plan, dated
    April 21, 2006. (Incorporated by reference to
    Exhibit i.4(c) filed with Allied Capitals
    Form N-2 (File No. 333-133755) filed on May 3,
    2006).                                                   
|        | 10 | .20(e)      |  | Amendment to Allied Capital Corporation 401(k) plan, adopted
    December 18, 2006. (Incorporated by reference to
    Exhibit 10.20(e) filed with Allied Capitals
    Form 10-K for the year ended December 31, 2006).                                                     
|        | 10 | .20(f)      |  | Amendment to Allied Capital Corporation 401(k) plan, dated
    June 21, 2007. (Incorporated by reference to Exhibit
    10.20(f) filed with Allied Capitals Form 10-Q for the
    quarter ended June 30, 2007).                                                            
|        | 10 | .20(g)      |  | Amendment to Allied Capital Corporation 401(k) plan, dated
    June 21, 2007. (Incorporated by reference to Exhibit
    10.20(g) filed with Allied Capitals Form 10-Q for the
    quarter ended June 30, 2007).                                                            
|        | 10 | .20(h)      |  | Amendment to Allied Capital Corporation 401(k) plan, dated
    September 14, 2007, with an effective date of
    January 1, 2008.(Incorporated by reference to
    Exhibit 10.20(h) filed with Allied Capitals
    Form 10-Q for the quarter ended September 30,
    2007).
|        | 10 | .21         |  | Employment Agreement, dated January 1, 2004, between Allied
    Capital and William L. Walton. (Incorporated by
    reference to Exhibit 10.21 filed with Allied Capitals
    Form 10-K for the year ended December 31, 2003).                                             
|        | 10 | .21(a)      |  | Amendment to Employment Agreement, dated March 29, 2007,
    between Allied Capital and William L. Walton.
    (Incorporated by reference to Exhibit 10.1 filed with
    Allied Capitals Form 8-K filed on April 3,
    2007).                                             
|        | 10 | .22         |  | Employment Agreement, dated January 1, 2004, between Allied
    Capital and Joan M. Sweeney. (Incorporated by reference
    to Exhibit 10.22 filed with Allied Capitals
    Form 10-K for the year ended December 31, 2003).                                               
|        | 10 | .22(a)      |  | Amendment to Employment Agreement, dated March 29, 2007,
    between Allied Capital and Joan M. Sweeney. (Incorporated by
    reference to Exhibit 10.2 filed with Allied Capitals
    Form 8-K filed on April 3, 2007).                                                   
|        | 10 | .23         |  | Employment Agreement, dated January 1, 2004, between Allied
    Capital and Penelope F. Roll. (Incorporated by reference to
    Exhibit 10.23 filed with Allied Capitals
    Form 10-K for the year ended December 31, 2006).                                              
|        | 10 | .23(a)      |  | Amendment to Employment Agreement, dated March 29, 2007,
    between Allied Capital and Penelope F. Roll. (Incorporated by
    reference to Exhibit 10.3 filed with Allied Capitals
    Form 8-K filed on April 3, 2007).                                                  
|        | 10 | .25         |  | Form of Custody Agreement with Riggs Bank N.A., which was
    assumed by PNC Bank through merger. (Incorporated by
    reference to Exhibit j.1 filed with Allied Capitals
    registration statement on Form N-2 (File
    No. 333-51899) filed on May 6, 1998).          
|        | 10 | .26         |  | Custodian Agreement with Chevy Chase Trust. (Incorporated by
    reference to Exhibit 10.26 filed with Allied Capitals
    Form 10-K for the year ended December 31, 2005).                                                                                                

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|        |    |             |  |                                                                                                                                                                                                                                       |  |         
|------- | -- | ----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------
|Exhibit |    |             |  |                                                                                                                                                                                                                                       | 
|Number  |    |             |  |                                                                                                                                                                                                                                       | 
|        |    |             |  |                                                                                                                                                                                                                                       | 
|        |    | Description
|        |    |            
|        | 10 | .27         |  | Custodian Agreement with Bank of America. (Incorporated by
    reference to Exhibit 10.27 filed with Allied Capitals
    Form 10-K for the year ended December 31, 2005).                                                           
|        | 10 | .28         |  | Code of Ethics. (Incorporated by reference to
    Exhibit 10.28 filed with Allied Capitals
    Form 10-K for the year ended December 31, 2006).                                                                                     
|        | 10 | .29         |  | Custodian Agreement with Union Bank of California.
    (Incorporated by reference to Exhibit 10.29 filed with
    Allied Capitals Form 10-Q for the quarter ended
    June 30, 2006).                                               
|        | 10 | .30         |  | Custodian Agreement with M&T Bank. (Incorporated by
    reference to Exhibit 10.30 filed with Allied Capitals
    Form 10-Q for the quarter ended June 30, 2006).                                                                   
|        | 10 | .31         |  | Note Agreement, dated as of May 14, 2003. (Incorporated
    by reference to Exhibit 10.31 filed with Allied
    Capitals Form 10-Q for the quarter ended
    March 31, 2003).                                                       
|        | 10 | .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 Capital REIT, Inc.                                                                                                                                                                                                             |  | Maryland
|        |    |             |  | Allied Capital Holdings, LLC                                                                                                                                                                                                          |  | Delaware
|        |    |             |  | Allied Investment 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.

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##### Table of Contents






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) |  | February 29, 2008
|                                            
|/s/ Ann Torre BatesAnn
    Torre Bates       |  | Director                                                               |  | February 29, 2008
|                                            
|/s/ Brooks H. BrowneBrooks
    H. Browne     |  | Director                                                               |  | February 29, 2008
|                                            
|/s/ John D. FirestoneJohn
    D. Firestone   |  | Director                                                               |  | February 29, 2008
|                                            
|/s/ Anthony T. GarciaAnthony
    T. Garcia   |  | Director                                                               |  | February 29, 2008
|                                            
|/s/ Edwin L. HarperEdwin
    L. Harper       |  | Director                                                               |  | February 29, 2008
|                                            
|/s/ Lawrence I. HebertLawrence
    I. Hebert |  | Director                                                               |  | February 29, 2008
|                                            
|/s/ John I. LeahyJohn
    I. Leahy           |  | Director                                                               |  | February 29, 2008
|                                            
|/s/ Robert E. LongRobert
    E. Long         |  | Director                                                               |  | February 29, 2008
|                                            
|/s/ Alex J. PollockAlex
    J. Pollock       |  | Director                                                               |  | February 29, 2008
|                                            
|/s/ Marc F. RacicotMarc
    F. Racicot       |  | Director                                                               |  | February 29, 2008
|                                            
|/s/ Guy T. Steuart IIGuy
    T. Steuart II   |  | Director                                                               |  | February 29, 2008

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##### Table of Contents



|                                               |  |                                                                          |  |                  
|---------------------------------------------- |  | ------------------------------------------------------------------------ |  | -----------------
|                                               |  | Title                                                                    |  |                  
|Signature                                      |  | (Capacity)                                                               |  | Date             
|                                               |  |                                                                          |  |                  
|/s/ Joan M. SweeneyJoan
    M. Sweeney         |  | Director                                                                 |  | February 29, 2008
|                                              
|/s/ Laura W. van RoijenLaura
    W. van Roijen |  | Director                                                                 |  | February 29, 2008
|                                              
|/s/ Penni F. RollPenni
    F. Roll             |  | Chief Financial Officer (Principal Financial and Accounting
    Officer) |  | February 29, 2008

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##### Table of Contents



EXHIBIT INDEX


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

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##### Table of Contents



Schedule 12-14


ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


SCHEDULE OF INVESTMENTS IN AND ADVANCES TO AFFILIATES


|                                      |                                        |                    |                          |                       |        |              |  |       |    |              |  |               |        |        |  |   |        |        |  |   |         |         |   |   |        |        | 
|------------------------------------- | -------------------------------------- | ------------------ | ------------------------ | --------------------- | ------ | ------------ |  | ----- | -- | ------------ |  | ------------- | ------ | ------ |  | - | ------ | ------ |  | - | ------- | ------- | - | - | ------ | ------ | 
|                                      |                                        |                    |                          | Amount of Interest or |        |              |  |       |    |              |  |              
|                                      |                                        |                    |                          | Dividends             |        |              |  |       |    |              |  |              
|PRIVATE FINANCE                       |                                        |                    |                          |                       |        | December 31, |  |       |    |              |  | December 31, 
|Portfolio Company                     |                                        |                    |                          | Credited              |        |              |  | 2006  |    | Gross        |  | Gross         |        | 2007  
|(in thousands)                        |                                        | Investment(1)      |                          | to Income(6)          |        | Other(2)     |  | Value |    | Additions(3) |  | Reductions(4) |        | Value 
|                                     
|Companies More Than 25% Owned        
|                                     
|Alaris Consulting, LLC                |                                        | Senior
    Loan(5) |                          |                       |        |              |  |       |    |              |  | $             |       |        |  | $ | 572    |        |  | $ | (572    | )       |   | $ |       |       
|                                      | (Business Services)                    |                    | Equity Interests         |                       |        |              |  |       |    |              |  |               |        |       |  |   |        | 1,025  |  |   |         | (1,025  | ) |   |        |       | 
|                                     
|AllBridge Financial, LLC              |                                        | Equity Interests   |                          |                       |        |              |  |       |    |              |  |               |       |        |  |   | 7,800  |        |  |   |        |         |   |   | 7,800  |       
|                                      | (Financial Services)                   |                    |                          |                       |        |              |  |       |    |              |  |               |        |        |  |   |        |        |  |   |         |         |   |   |        |        | 
|                                     
|Allied Capital Senior Debt Fund, L.P. |                                        | Equity Interests   |                          |                       |        |              |  |       |    |              |  |               |       |        |  |   | 32,811 |        |  |   |        |         |   |   | 32,811 |       
|                                      | (Private Debt Fund)                    |                    |                          |                       |        |              |  |       |    |              |  |               |        |        |  |   |        |        |  |   |         |         |   |   |        |        | 
|                                     
|Avborne, Inc.                         |                                        | Preferred Stock    |                          |                       |        |              |  |       |    |              |  |               | 918    |        |  |   | 715    |        |  |   |        |         |   |   | 1,633  |       
|                                      | (Business Services)                    |                    | Common Stock             |                       |        |              |  |       |    |              |  |               |        |       |  |   |        |       |  |   |         |        |   |   |        |       | 
|                                     
|Avborne Heavy Maintenance,  Inc.      |                                        | Preferred Stock    |                          |                       |        |              |  |       |    |              |  |               |       |        |  |   | 2,557  |        |  |   |        |         |   |   | 2,557  |       
|                                      | (Business Services)                    |                    | Common Stock             |                       |        |              |  |       |    |              |  |               |        |       |  |   |        | 370    |  |   |         |        |   |   |        | 370    | 
|                                     
|Aviation Properties Corporation       |                                        | Common Stock       |                          |                       |        |              |  |       |    |              |  |               |       |        |  |   | 65     |        |  |   | (65     | )       |   |   |       |       
|                                      | (Business Services)                    |                    |                          |                       |        |              |  |       |    |              |  |               |        |        |  |   |        |        |  |   |         |         |   |   |        |        | 
|                                     
|Border Foods, Inc.                    |                                        | Preferred Stock    |                          |                       |        |              |  |       |    |              |  |               |       |        |  |   | 4,648  |        |  |   |        |         |   |   | 4,648  |       
|                                      | (Consumer Products)                    |                    | Common Stock             |                       |        |              |  |       |    |              |  |               |        |       |  |   |        |       |  |   |         |        |   |   |        |       | 
|                                     
|Calder Capital Partners, LLC          |                                        | Senior
    Loan(5) |                          |                       |        |              |  | $     | 46 |              |  |               | 975    |        |  |   | 2,189  |        |  |   | (129    | )       |   |   | 3,035  |       
|                                      | (Financial Services)                   |                    | Equity Interests         |                       |        |              |  |       |    |              |  |               |        | 2,076  |  |   |        | 1,483  |  |   |         |        |   |   |        | 3,559  | 
|                                     
|Callidus Capital Corporation          |                                        | Senior Loan        |                          | $                     | 42     |              |  |       |    |              |  |               |       |        |  |   | 2,100  |        |  |   | (2,100  | )       |   |   |       |       
|                                      | (Financial Services)                   |                    | Subordinated Debt        |                       |        | 1,159        |  |       |    |              |  |               |        | 5,762  |  |   |        | 1,109  |  |   |         |        |   |   |        | 6,871  | 
|                                      |                                        | Common Stock       |                          |                       |        |              |  |       |    |              |  |               | 22,550 |        |  |   | 22,037 |        |  |   |        |         |   |   | 44,587 |       
|                                     
|Ciena Capital LLC                     |                                        | Class A Equity     |                          |                       |        |              |  |       |    |              |  |               |        |        |  |   |        |        |  |   |         |         |   |   |        |       
|                                      | (f/k/a Business Loan                   |                    | Interests(5)             |                       |        |              |  |       |    |              |  |               |        | 66,622 |  |   |        | 32,422 |  |   |         | (30,435 | ) |   |        | 68,609 | 
|                                      | Express, LLC)
    (Financial Services) |                    | Class B Equity Interests |                       |        |              |  |       |    |              |  |               |        | 79,139 |  |   |        |       |  |   |         | (79,139 | ) |   |        |       | 
|                                      |                                        |                    | Class C Equity Interests |                       |        |              |  |       |    |              |  |               |        | 64,976 |  |   |        |       |  |   |         | (64,976 | ) |   |        |       | 
|                                     
|CitiPostal
    Inc.(9)                |                                        | Senior Loan        |                          |                       | 2      |              |  |       |    |              |  |               |        |        |  |   | 679    |        |  |   |        |         |   |   | 679    |       
|                                      | (Business Services)                    |                    | Unitranche Debt          |                       |        | 187          |  |       |    |              |  |               |        |        |  |   |        | 50,597 |  |   |         |        |   |   |        | 50,597 | 
|                                      |                                        | Subordinated Debt  |                          |                       | 39     |              |  |       |    |              |  |               |        |        |  |   | 8,049  |        |  |   |        |         |   |   | 8,049  |       
|                                      |                                        | Common Stock       |                          |                       |        |              |  |       |    |              |  |               |        |        |  |   | 12,726 |        |  |   |        |         |   |   | 12,726 |       
|                                     
|Coverall North America, Inc.          |                                        | Unitranche Debt    |                          |                       | 4,324  |              |  |       |    |              |  |               | 36,333 |        |  |   | 36     |        |  |   | (1,446  | )       |   |   | 34,923 |       
|                                      | (Business Services)                    |                    | Subordinated Debt        |                       |        | 919          |  |       |    |              |  |               |        | 5,972  |  |   |        | 7      |  |   |         |        |   |   |        | 5,979  | 
|                                      |                                        | Common Stock       |                          |                       |        |              |  |       |    |              |  |               | 19,619 |        |  |   | 7,978  |        |  |   |        |         |   |   | 27,597 |       
|                                     
|CR Holding, Inc.                      |                                        | Subordinated Debt  |                          |                       | 6,838  |              |  |       |    |              |  |               | 39,401 |        |  |   | 1,411  |        |  |   |        |         |   |   | 40,812 |       
|                                      | (Consumer Products)                    |                    | Common Stock             |                       |        |              |  |       |    |              |  |               |        | 25,738 |  |   |        | 15,196 |  |   |         |        |   |   |        | 40,934 | 
|                                     
|Direct Capital Corporation            |                                        | Subordinated Debt  |                          |                       | 5,027  |              |  |       |    |              |  |               |       |        |  |   | 39,030 |        |  |   |        |         |   |   | 39,030 |       
|                                      | (Financial Services)                   |                    | Common Stock             |                       |        |              |  |       |    |              |  |               |        |       |  |   |        | 19,250 |  |   |         | (12,344 | ) |   |        | 6,906  | 
|                                     
|Financial Pacific Company             |                                        | Subordinated Debt  |                          |                       | 12,663 |              |  |       |    |              |  |               | 71,362 |        |  |   | 1,488  |        |  |   |        |         |   |   | 72,850 |       
|                                      | (Financial Services)                   |                    | Preferred Stock          |                       |        |              |  |       |    |              |  |               |        | 15,942 |  |   |        | 3,388  |  |   |         |        |   |   |        | 19,330 | 
|                                      |                                        | Common Stock       |                          |                       |        |              |  |       |    |              |  |               | 65,186 |        |  |   |       |        |  |   | (26,642 | )       |   |   | 38,544 |       
|                                     
|ForeSite Towers, LLC                  |                                        | Equity Interest    |                          |                       | 1,269  |              |  |       |    |              |  |               | 12,290 |        |  |   |       |        |  |   | (11,412 | )       |   |   | 878    |       
|                                      | (Tower Leasing)                        |                    |                          |                       |        |              |  |       |    |              |  |               |        |        |  |   |        |        |  |   |         |         |   |   |        |        | 
|                                     
|Global Communications, LLC            |                                        | Senior
    Loan(5) |                          |                       |        |              |  |       |    |              |  |               | 15,957 |        |  |   |       |        |  |   | (14,135 | )       |   |   | 1,822  |       
|                                      | (Business Services)                    |                    | Subordinated Debt        |                       |        | 3            |  |       |    |              |  |               |        | 11,237 |  |   |        | 99     |  |   |         | (11,336 | ) |   |        |       | 
|                                      |                                        | Preferred Equity   |                          |                       |        |              |  |       |    |              |  |               |        |        |  |   |        |        |  |   |         |         |   |   |        |       
|                                      |                                        | Interest           |                          |                       |        |              |  |       |    |              |  |               |       |        |  |   | 14,067 |        |  |   | (14,067 | )       |   |   |       |       
|                                      |                                        | Options            |                          |                       |        |              |  |       |    |              |  |               |       |        |  |   | 1,639  |        |  |   | (1,639  | )       |   |   |       |       
|                                     
|Gordian Group, Inc.                   |                                        | Senior Loan        |                          |                       | (11    | )            |  |       |    |              |  |               |       |        |  |   | 11,794 |        |  |   | (11,794 | )       |   |   |       |       
|                                      | (Business Services)                    |                    | Common Stock             |                       |        |              |  |       |    |              |  |               |        |       |  |   |        | 6,942  |  |   |         | (6,942  | ) |   |        |       | 
|                                     
|Healthy Pet Corp.                     |                                        | Senior Loan        |                          |                       | 1,309  |              |  |       |    |              |  |               | 27,038 |        |  |   | 6,350  |        |  |   | (33,388 | )       |   |   |       |       
|                                      | (Consumer Services)                    |                    | Subordinated Debt        |                       |        | 2,893        |  |       |    |              |  |               |        | 43,579 |  |   |        | 580    |  |   |         | (44,159 | ) |   |        |       | 
|                                      |                                        | Common Stock       |                          |                       |        |              |  |       |    |              |  |               | 28,921 |        |  |   | 1,221  |        |  |   | (30,142 | )       |   |   |       |       
|                                     
|HMT, Inc.                             |                                        | Preferred Stock    |                          |                       |        |              |  |       |    |              |  |               | 2,637  |        |  |   |       |        |  |   | (2,637  | )       |   |   |       |       
|                                      | (Energy Services)                      |                    | Common Stock             |                       |        |              |  |       |    |              |  |               |        | 8,664  |  |   |        |       |  |   |         | (8,664  | ) |   |        |       | 
|                                      |                                        | Warrants           |                          |                       |        |              |  |       |    |              |  |               | 3,336  |        |  |   |       |        |  |   | (3,336  | )       |   |   |       |       
|                                     





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|                                    |                        |                           |                           |                       |       |              |  |       |  |              |           |               |        |         |  |   |        |        |  |   |         |          |           |   |        |        | 
|----------------------------------- | ---------------------- | ------------------------- | ------------------------- | --------------------- | ----- | ------------ |  | ----- |  | ------------ | --------- | ------------- | ------ | ------- |  | - | ------ | ------ |  | - | ------- | -------- | --------- | - | ------ | ------ | 
|                                    |                        |                           |                           | Amount of Interest or |       |              |  |       |  |              |           |              
|                                    |                        |                           |                           | Dividends             |       |              |  |       |  |              |           |              
|PRIVATE FINANCE                     |                        |                           |                           |                       |       | December 31, |  |       |  |              |           | December 31, 
|Portfolio Company                   |                        |                           |                           | Credited              |       |              |  | 2006  |  | Gross        |           | Gross         |        | 2007   
|(in thousands)                      |                        | Investment(1)             |                           | to Income(6)          |       | Other(2)     |  | Value |  | Additions(3) |           | Reductions(4) |        | Value  
|                                   
|Hot Stuff Foods,
    LLC(7)         |                        | Senior Loan               |                           | $                     | 4,191 |              |  |       |  |              |           | $             |       |         |  | $ | 51,192 |        |  | $ | (440    | )        |           | $ | 50,752 |       
|                                    | (Consumer Products)    |                           | Subordinated Debt         |                       |       | 6,543        |  |       |  |              |           |               |        |        |  |   |        | 29,907 |  |   |         |         |           |   |        | 29,907 | 
|                                    |                        |                           | Subordinated Debt
    (5) |                       |       |              |  |       |  |              |           |               |        |        |  |   |        | 31,402 |  |   |         | (30,065  | )         |   |        | 1,337  | 
|                                    |                        |                           | Common Stock              |                       |       |              |  |       |  |              |           |               |        |        |  |   |        | 8,461  |  |   |         | (8,461   | )         |   |        |       | 
|                                   
|Huddle House, Inc.                  |                        | Senior Loan               |                           |                       | 426   |              |  |       |  |              |           |               | 19,950 |         |  |   |       |        |  |   | (19,950 | )        |           |   |       |       
|                                    | (Retail)               |                           | Subordinated Debt         |                       |       | 9,032        |  |       |  |              |           |               |        | 58,196  |  |   |        | 1,600  |  |   |         | (178     | )         |   |        | 59,618 | 
|                                    |                        | Common Stock              |                           |                       |       |              |  |       |  |              |           |               | 41,662 |         |  |   | 2,621  |        |  |   | (129    | )        |           |   | 44,154 |       
|                                   
|Impact Innovations Group, LLC       |                        | Equity Interests in       |                           |                       |       |              |  |       |  |              |           |               |        |         |  |   |        |        |  |   |         |          |           |   |        |       
|                                    | (Business Services)    |                           | Affiliate                 |                       |       |              |  |       |  |              |           |               |        | 873     |  |   |        |       |  |   |         | (553     | )         |   |        | 320    | 
|                                   
|Insight Pharmaceuticals             |                        | Subordinated Debt         |                           |                       | 5,905 |              |  |       |  |              |           |               | 43,884 |         |  |   | 1,157  |        |  |   |        |          |           |   | 45,041 |       
|                                    | Corporation            |                           | Subordinated Debt
    (5) |                       |       |              |  |       |  |              |           |               |        | 15,966  |  |   |        | 830    |  |   |         |         |           |   |        | 16,796 | 
|                                    | (Consumer Products)    |                           | Preferred Stock           |                       |       |              |  |       |  |              |           |               |        | 7,845   |  |   |        |       |  |   |         | (6,383   | )         |   |        | 1,462  | 
|                                    |                        | Common Stock              |                           |                       |       |              |  |       |  |              |           |               |       |         |  |   |       |        |  |   |        |          |           |   |       |       
|                                   
|Jakel, Inc.                         |                        | Subordinated Debt
    (5) |                           |                       | (11   | )            |  |       |  |              |           |               | 6,655  |         |  |   | 9,025  |        |  |   | (14,117 | )        |           |   | 1,563  |       
|                                    | (Industrial Products)  |                           | Preferred Stock           |                       |       |              |  |       |  |              |           |               |        |        |  |   |        | 9,347  |  |   |         | (9,347   | )         |   |        |       | 
|                                    |                        | Common Stock              |                           |                       |       |              |  |       |  |              |           |               |       |         |  |   | 6,460  |        |  |   | (6,460  | )        |           |   |       |       
|                                   
|Legacy Partners Group, Inc.         |                        | Senior Loan
    (5)       |                           |                       |       |              |  |       |  |              |           |               | 4,843  |         |  |   | 2,804  |        |  |   | (3,804  | )        |           |   | 3,843  |       
|                                    | (Financial Services)   |                           | Subordinated Debt         |                       |       |              |  |       |  |              |           |               |        |        |  |   |        |       |  |   |         |         |           |   |        |       | 
|                                    |                        |                           | Equity Interests          |                       |       |              |  |       |  |              |           |               |        |        |  |   |        | 1,332  |  |   |         |         |           |   |        | 1,332  | 
|                                   
|Litterer Beteiligungs-GmbH          |                        | Subordinated Debt         |                           |                       | 42    |              |  |       |  |              |           |               | 692    |         |  |   | 80     |        |  |   |        |          |           |   | 772    |       
|                                    | (Business Services)    |                           | Equity Interest           |                       |       |              |  |       |  |              |           |               |        | 1,199   |  |   |        |       |  |   |         | (499     | )         |   |        | 700    | 
|                                   
|Mercury Air Centers, Inc.           |                        | Subordinated Debt         |                           |                       | 5,054 |              |  |       |  |              |           |               | 49,217 |         |  |   | 1,654  |        |  |   | (50,871 | )        |           |   |       |       
|                                    | (Business Services)    |                           | Common Stock              |                       |       |              |  |       |  |              |           |               |        | 195,019 |  |   |        |       |  |   |         | (195,019 | )         |   |        |       | 
|                                   
|MVL Group, Inc.                     |                        | Senior Loan               |                           |                       | 3,677 |              |  |       |  |              |           |               | 27,245 |         |  |   | 3,394  |        |  |   |        |          |           |   | 30,639 |       
|                                    | (Business Services)    |                           | Subordinated Debt         |                       |       | 5,931        |  |       |  |              |           |               |        | 35,478  |  |   |        | 4,465  |  |   |         |         |           |   |        | 39,943 | 
|                                    |                        | Common Stock              |                           |                       |       |              |  |       |  |              |           |               |       |         |  |   | 4,949  |        |  |   |        |          |           |   | 4,949  |       
|                                   
|Old Orchard Brands, LLC             |                        | Senior Loan               |                           |                       | 347   |              |  |       |  |              |           |               |       |         |  |   | 23,500 |        |  |   | (23,500 | )        |           |   |       |       
|                                    | (Consumer Products)    |                           | Subordinated Debt         |                       |       | 2,404        |  |       |  |              |           |               |        |        |  |   |        | 19,544 |  |   |         |         |           |   |        | 19,544 | 
|                                    |                        | Equity Interests          |                           |                       |       |              |  |       |  |              |           |               |       |         |  |   | 25,419 |        |  |   |        |          |           |   | 25,419 |       
|                                   
|Penn Detroit Diesel Allison, LLC    |                        | Subordinated Debt         |                           |                       | 6,056 |              |  |       |  |              |           |               | 37,994 |         |  |   | 1,186  |        |  |   |        |          |           |   | 39,180 |       
|                                    | (Business Services)    |                           | Equity Interests          |                       |       |              |  |       |  |              |           |               |        | 25,949  |  |   |        | 12,016 |  |   |         |         |           |   |        | 37,965 | 
|                                   
|Powell Plant Farms, Inc.            |                        | Senior
    Loan(5)        |                           |                       |       |              |  |       |  |              |           |               | 26,192 |         |  |   | 4,134  |        |  |   | (28,792 | )        |           |   | 1,534  |       
|                                    | (Consumer Products)    |                           | Subordinated Debt         |                       |       |              |  |       |  |              |           |               |        | 962     |  |   |        | 18,261 |  |   |         | (19,223  | )         |   |        |       | 
|                                    |                        | Preferred Stock           |                           |                       |       |              |  |       |  |              |           |               |       |         |  |   |       |        |  |   |        |          |           |   |       |       
|                                    |                        | Warrants                  |                           |                       |       |              |  |       |  |              |           |               |       |         |  |   |       |        |  |   |        |          |           |   |       |       
|                                   
|Service Champ, Inc.                 |                        | Subordinated Debt         |                           |                       | 4,450 |              |  |       |  |              |           |               | 27,619 |         |  |   | 732    |        |  |   |        |          |           |   | 28,351 |       
|                                    | (Business Services)    |                           | Common Stock              |                       |       |              |  |       |  |              |           |               |        | 16,786  |  |   |        | 9,506  |  |   |         |         |           |   |        | 26,292 | 
|                                   
|Staffing Partners Holding           |                        |                           |                           |                       |       |              |  |       |  |              |           |               |        |         |  |   |        |        |  |   |         |          |           |   |        |       
|                                    | Company, Inc.          |                           | Subordinated Debt
    (5) |                       |       |              |  |       |  |              |           |               |        | 486     |  |   |        |       |  |   |         | (263     | )         |   |        | 223    | 
|                                    | (Business Services)    |                           |                           |                       |       |              |  |       |  |              |           |               |        |         |  |   |        |        |  |   |         |          |           |   |        |        | 
|                                   
|Startec Global Communications       |                        |                           |                           |                       |       |              |  |       |  |              |           |               |        |         |  |   |        |        |  |   |         |          |           |   |        |       
|                                    | Corporation            |                           | Senior Loan               |                       |       | 723          |  |       |  |              |           |               |        | 15,965  |  |   |        |       |  |   |         | (15,965  | )         |   |        |       | 
|                                    | (Telecommunications)   |                           | Common Stock              |                       |       |              |  |       |  |              |           |               |        | 11,232  |  |   |        | 26,023 |  |   |         | (37,255  | )         |   |        |       | 
|                                   
|Startec Equity, LLC                 |                        | Equity Interests          |                           |                       |       |              |  |       |  |              |           |               |       |         |  |   | 469    |        |  |   | (39     | )        |           |   | 430    |       
|                                    | (Telecommunications)   |                           |                           |                       |       |              |  |       |  |              |           |               |        |         |  |   |        |        |  |   |         |          |           |   |        |        | 
|                                   
|Sweet Traditions, Inc.              |                        | Senior
    Loan(5)        |                           |                       | 1,088 |              |  |       |  |              |           |               | 35,172 |         |  |   | 1,181  |        |  |   | (1,124  | )        |           |   | 35,229 |       
|                                    | (Retail)               |                           | Preferred Stock           |                       |       |              |  |       |  |              |           |               |        | 400     |  |   |        | 550    |  |   |         | (950     | )         |   |        |       | 
|                                    |                        |                           | Common Stock              |                       |       |              |  |       |  |              |           |               |        | 50      |  |   |        |       |  |   |         | (50      | )         |   |        |       | 
|                                   
|Triview Investments, Inc.           |                        | Senior Loan               |                           |                       | 977   |              |  |       |  |              |           |               | 14,747 |         |  |   | 11     |        |  |   | (14,325 | )        |           |   | 433    |       
|                                    | (Broadcasting & Cable/ |                           | Subordinated Debt         |                       |       | 11,338       |  |       |  |              |           |               |        | 56,008  |  |   |        | 32,425 |  |   |         | (45,456  | )         |   |        | 42,977 | 
|                                    | Business Services/     |                           | Subordinated Debt
    (5) |                       |       | 592          |  |       |  |              |           |               |        | 4,342   |  |   |        | 841    |  |   |         | (3,600   | )         |   |        | 1,583  | 
|                                    | Consumer Products)     |                           | Common Stock              |                       |       | 37           |  |       |  |              |           |               |        | 31,322  |  |   |        | 53,975 |  |   |         | (1,844   | )         |   |        | 83,453 | 
|                                   
|Unitranche Fund LLC                 |                        | Subordinated Certificates |                           |                       | 3     |              |  |       |  |              |           |               |        |         |  |   | 744    |        |  |   |        |          |           |   | 744    |       
|                                    | (Private Debt Fund)    |                           | Equity Interests          |                       |       |              |  |       |  |              |           |               |        |         |  |   |        | 1      |  |   |         |         |           |   |        | 1      | 
|                                   
|Worldwide Express Operations, LLC   |                        | Subordinated Debt         |                           |                       | 166   |              |  |       |  |              |           |               |       |         |  |   | 2,846  |        |  |   | (176    | )        |           |   | 2,670  |       
|                                    | (Business Services)    |                           | Equity Interests          |                       |       |              |  |       |  |              |           |               |        |        |  |   |        | 21,516 |  |   |         |         |           |   |        | 21,516 | 
|                                    |                        |                           | Warrants                  |                       |       |              |  |       |  |              |           |               |        |        |  |   |        | 272    |  |   |         |         |           |   |        | 272    | 
|                                   
|Total companies more than 25% owned |                        | $                         | 105,634                   |                       |       |              |  |       |  | $            | 1,490,180 |               |        |         |  |   |        |        |  |   |         | $        | 1,279,080 |  
|                                   





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|                                       |                       |                           |                           |                       |       |              |  |       |  |              |         |               |        |         |  |   |        |       |  |   |         |         |         |   |        |         | 
|-------------------------------------- | --------------------- | ------------------------- | ------------------------- | --------------------- | ----- | ------------ |  | ----- |  | ------------ | ------- | ------------- | ------ | ------- |  | - | ------ | ----- |  | - | ------- | ------- | ------- | - | ------ | ------- | 
|                                       |                       |                           |                           | Amount of Interest or |       |              |  |       |  |              |         |              
|                                       |                       |                           |                           | Dividends             |       |              |  |       |  |              |         |              
|PRIVATE FINANCE                        |                       |                           |                           |                       |       | December 31, |  |       |  |              |         | December 31, 
|Portfolio Company                      |                       |                           |                           | Credited              |       |              |  | 2006  |  | Gross        |         | Gross         |        | 2007   
|(in thousands)                         |                       | Investment(1)             |                           | to Income(6)          |       | Other(2)     |  | Value |  | Additions(3) |         | Reductions(4) |        | Value  
|                                      
|Companies 5% to 25% Owned              |                       |                           |                           |                       |       |              |  |       |  |              |         |               |        |         |  |   |        |       |  |   |         |         |         |   |        |        
|                                      
|10th Street, LLC                       |                       | Subordinated Debt         |                           | $                     | 457   |              |  |       |  |              |         | $             | 2,289  |         |  | $ | 20,647 |       |  | $ | (2,291  | )       |         | $ | 20,645 |        
|                                       | (Business Services)   |                           | Equity Interests          |                       |       |              |  |       |  |              |         |               |        | 2,250   |  |   |        | 679   |  |   |         | (1,829  | )       |   |        | 1,100   | 
|                                      
|Advantage Sales &                      |                       |                           |                           |                       |       |              |  |       |  |              |         |               |        |         |  |   |        |       |  |   |         |         |         |   |        |        
|                                       | Marketing, Inc.       |                           | Subordinated Debt         |                       |       | 18,768       |  |       |  |              |         |               |        | 151,648 |  |   |        | 3,206 |  |   |         |        |         |   |        | 154,854 | 
|                                       | (Business Services)   |                           | Equity Interests          |                       |       |              |  |       |  |              |         |               |        | 11,000  |  |   |        |      |  |   |         | (27     | )       |   |        | 10,973  | 
|                                      
|Air Medical Group Holdings LLC         |                       | Senior Loan               |                           |                       | 219   |              |  |       |  |              |         |               | 1,763  |         |  |   | 7,367  |       |  |   | (6,150  | )       |         |   | 2,980  |        
|                                       | (Healthcare Services) |                           | Subordinated Debt         |                       |       | 1,931        |  |       |  |              |         |               |        | 35,128  |  |   |        | 318   |  |   |         | (35,446 | )       |   |        |        | 
|                                       |                       |                           | Equity Interests          |                       |       |              |  |       |  |              |         |               |        | 5,950   |  |   |        | 4,850 |  |   |         |        |         |   |        | 10,800  | 
|                                      
|Alpine ESP Holdings, Inc.              |                       | Preferred Stock           |                           |                       |       |              |  |       |  |              |         |               | 602    |         |  |   | 147    |       |  |   |        |         |         |   | 749    |        
|                                       | (Business Services)   |                           | Common Stock              |                       |       |              |  |       |  |              |         |               |        |        |  |   |        | 262   |  |   |         |        |         |   |        | 262     | 
|                                      
|Amerex Group, LLC                      |                       | Subordinated Debt         |                           |                       | 1,022 |              |  |       |  |              |         |               | 8,400  |         |  |   |       |       |  |   |        |         |         |   | 8,400  |        
|                                       | (Consumer Products)   |                           | Equity Interests          |                       |       |              |  |       |  |              |         |               |        | 13,823  |  |   |        |      |  |   |         | (110    | )       |   |        | 13,713  | 
|                                      
|BB&T Capital                           |                       |                           |                           |                       |       |              |  |       |  |              |         |               |        |         |  |   |        |       |  |   |         |         |         |   |        |        
|                                       | Partners/Windsor      |                           |                           |                       |       |              |  |       |  |              |         |               |        |         |  |   |        |       |  |   |         |         |         |   |        |         | 
|                                       | Mezzanine Fund, LLC   |                           | Equity Interests          |                       |       |              |  |       |  |              |         |               |        | 5,554   |  |   |        | 5,913 |  |   |         |        |         |   |        | 11,467  | 
|                                       | (Private Equity Fund) |                           |                           |                       |       |              |  |       |  |              |         |               |        |         |  |   |        |       |  |   |         |         |         |   |        |         | 
|                                      
|Becker Underwood, Inc.                 |                       | Subordinated Debt         |                           |                       | 3,636 |              |  |       |  |              |         |               | 24,163 |         |  |   | 635    |       |  |   |        |         |         |   | 24,798 |        
|                                       | (Industrial Products) |                           | Common Stock              |                       |       |              |  |       |  |              |         |               |        | 3,700   |  |   |        | 490   |  |   |         |        |         |   |        | 4,190   | 
|                                      
|BI Incorporated                        |                       | Subordinated Debt         |                           |                       | 4,197 |              |  |       |  |              |         |               | 30,135 |         |  |   | 364    |       |  |   |        |         |         |   | 30,499 |        
|                                       | (Business Services)   |                           | Common Stock              |                       |       |              |  |       |  |              |         |               |        | 4,100   |  |   |        | 3,282 |  |   |         |        |         |   |        | 7,382   | 
|                                      
|CitiPostal, Inc. and
    Affiliates(9) |                       | Senior Loan               |                           |                       | 2,012 |              |  |       |  |              |         |               | 18,280 |         |  |   | 2,894  |       |  |   | (21,174 | )       |         |   |       |        
|                                       | (Business Services)   |                           | Equity Interests          |                       |       | 105          |  |       |  |              |         |               |        | 2,450   |  |   |        | 183   |  |   |         | (2,633  | )       |   |        |        | 
|                                      
|Creative Group, Inc.                   |                       | Subordinated Debt
    (5) |                           |                       | 480   |              |  |       |  |              |         |               | 13,656 |         |  |   | 30     |       |  |   | (7,489  | )       |         |   | 6,197  |        
|                                       | (Business Services)   |                           | Common Stock              |                       |       |              |  |       |  |              |         |               |        |        |  |   |        |      |  |   |         |        |         |   |        |        | 
|                                       |                       | Warrant                   |                           |                       |       |              |  |       |  |              |         |               | 1,387  |         |  |   |       |       |  |   | (1,387  | )       |         |   |       |        
|                                      
|Drew Foam Companies, Inc.              |                       | Preferred Stock           |                           |                       |       |              |  |       |  |              |         |               | 722    |         |  |   |       |       |  |   | (326    | )       |         |   | 396    |        
|                                       | (Business Services)   |                           | Common Stock              |                       |       |              |  |       |  |              |         |               |        | 7       |  |   |        |      |  |   |         | (7      | )       |   |        |        | 
|                                      
|MedBridge Healthcare, LLC              |                       | Senior
    Loan(5)        |                           |                       |       |              |  |       |  |              |         |               | 7,164  |         |  |   |       |       |  |   |        |         |         |   | 7,164  |        
|                                       | (Healthcare Services) |                           | Subordinated Debt
    (5) |                       |       |              |  |       |  |              |         |               |        | 1,813   |  |   |        | 593   |  |   |         |        |         |   |        | 2,406   | 
|                                       |                       | Convertible               |                           |                       |       |              |  |       |  |              |         |               |        |         |  |   |        |       |  |   |         |         |         |   |        |        
|                                       |                       | Subordinated Debt
    (5) |                           |                       |       |              |  |       |  |              |         |               |       |         |  |   |       |       |  |   |        |         |         |   |       |        
|                                       |                       | Equity Interests          |                           |                       |       |              |  |       |  |              |         |               |       |         |  |   | 110    |       |  |   | (110    | )       |         |   |       |        
|                                      
|MHF Logistical Solutions,
    Inc(8)   |                       | Subordinated Debt
    (5) |                           |                       |       |              |  |       |  |              |         |               |       |         |  |   | 27,518 |       |  |   | (18,238 | )       |         |   | 9,280  |        
|                                       | (Business Services)   |                           | Subordinated Debt
    (5) |                       |       |              |  |       |  |              |         |               |        |        |  |   |        |      |  |   |         |        |         |   |        |        | 
|                                       |                       | Common Stock              |                           |                       |       |              |  |       |  |              |         |               |       |         |  |   |       |       |  |   |        |         |         |   |       |        
|                                       |                       | Warrants                  |                           |                       |       |              |  |       |  |              |         |               |       |         |  |   |       |       |  |   |        |         |         |   |       |        
|                                      
|Multi-Ad Services, Inc.                |                       | Unitranche Debt           |                           |                       | 2,292 |              |  |       |  |              |         |               | 19,879 |         |  |   | 25     |       |  |   | (200    | )       |         |   | 19,704 |        
|                                       | (Business Services)   |                           | Equity Interests          |                       |       |              |  |       |  |              |         |               |        | 2,000   |  |   |        |      |  |   |         | (1,060  | )       |   |        | 940     | 
|                                      
|Nexcel Synthetics, LLC                 |                       | Subordinated Debt         |                           |                       | 611   |              |  |       |  |              |         |               | 10,978 |         |  |   | 199    |       |  |   | (11,177 | )       |         |   |       |        
|                                       | (Consumer Products)   |                           | Equity Interests          |                       |       |              |  |       |  |              |         |               |        | 1,486   |  |   |        | 269   |  |   |         | (1,755  | )       |   |        |        | 
|                                      
|PresAir LLC                            |                       | Senior Loan               |                           |                       | 28    |              |  |       |  |              |         |               | 2,206  |         |  |   | 3,315  |       |  |   | (5,521  | )       |         |   |       |        
|                                       | (Industrial Products) |                           | Equity Interests          |                       |       |              |  |       |  |              |         |               |        |        |  |   |        | 1,341 |  |   |         | (1,341  | )       |   |        |        | 
|                                      
|Progressive International              |                       |                           |                           |                       |       |              |  |       |  |              |         |               |        |         |  |   |        |       |  |   |         |         |         |   |        |        
|                                       | Corporation           |                           | Subordinated Debt         |                       |       | 995          |  |       |  |              |         |               |        | 7,533   |  |   |        | 151   |  |   |         | (6,139  | )       |   |        | 1,545   | 
|                                       | (Consumer Products)   |                           | Preferred Stock           |                       |       |              |  |       |  |              |         |               |        | 1,024   |  |   |        | 14    |  |   |         |        |         |   |        | 1,038   | 
|                                       |                       | Common Stock              |                           |                       |       |              |  |       |  |              |         |               | 2,300  |         |  |   | 2,600  |       |  |   |        |         |         |   | 4,900  |        
|                                       |                       | Warrants                  |                           |                       |       |              |  |       |  |              |         |               |       |         |  |   |       |       |  |   |        |         |         |   |       |        
|                                      
|Regency Healthcare Group, LLC          |                       | Senior Loan               |                           |                       | 96    |              |  |       |  |              |         |               | 1,232  |         |  |   | 18     |       |  |   | (1,250  | )       |         |   |       |        
|                                       | (Healthcare Services) |                           | Unitranche Debt           |                       |       | 1,791        |  |       |  |              |         |               |        | 19,908  |  |   |        | 47    |  |   |         | (8,014  | )       |   |        | 11,941  | 
|                                       |                       |                           | Equity Interests          |                       |       |              |  |       |  |              |         |               |        | 1,616   |  |   |        | 65    |  |   |         |        |         |   |        | 1,681   | 
|                                      
|SGT India Private Limited              |                       | Common Stock              |                           |                       |       |              |  |       |  |              |         |               | 3,346  |         |  |   | 155    |       |  |   | (426    | )       |         |   | 3,075  |        
|                                       | (Business Services)   |                           |                           |                       |       |              |  |       |  |              |         |               |        |         |  |   |        |       |  |   |         |         |         |   |        |         | 
|                                      
|Soteria Imaging Services, LLC          |                       | Subordinated Debt         |                           |                       | 2,122 |              |  |       |  |              |         |               | 17,569 |         |  |   | 1,175  |       |  |   | (5,000  | )       |         |   | 13,744 |        
|                                       | (Healthcare Services) |                           | Equity Interests          |                       |       |              |  |       |  |              |         |               |        | 2,541   |  |   |        | 145   |  |   |         |        |         |   |        | 2,686   | 
|                                      
|Universal Environmental                |                       |                           |                           |                       |       |              |  |       |  |              |         |               |        |         |  |   |        |       |  |   |         |         |         |   |        |        
|                                       | Services, LLC         |                           | Unitranche Debt           |                       |       | 815          |  |       |  |              |         |               |        | 10,211  |  |   |        | 777   |  |   |         | (10,988 | )       |   |        |        | 
|                                       | (Business Services)   |                           | Equity Interests          |                       |       |              |  |       |  |              |         |               |        |        |  |   |        | 15    |  |   |         | (15     | )       |   |        |        | 
|                                      
|Total companies 5% to 25% owned        |                       | $                         | 41,577                    |                       |       |              |  |       |  | $            | 449,813 |               |        |         |  |   |        |       |  |   |         | $       | 389,509 |  
|                                      





|    |                                                                                                                                                                                                                                                                                                                                             
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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,
    2007.
|   
|(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.                                                                               

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##### Table of Contents





|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(3) | Gross additions include increases in the cost basis of
    investments resulting from new portfolio investments,
    paid-in-kind interest
    or dividends, the amortization of discounts and closing fees,
    the exchange of one or more existing securities for one or more
    new securities and the movement of an existing portfolio company
    into this category from a different category. Gross additions
    also include net increases in unrealized appreciation or net
    decreases in unrealized depreciation.
|   
|(4) | Gross reductions include decreases in the cost basis of
    investments resulting from principal collections related to
    investment repayments or sales, the exchange of one or more
    existing securities for one or more new securities and the
    movement of an existing portfolio company out of this category
    into a different category. Gross reductions also include net
    increases in unrealized depreciation or net decreases in
    unrealized appreciation.                                              
|   
|(5) | Loan or debt security is on non-accrual status at
    December 31, 2007, and is therefore considered non-income
    producing. Loans or debt securities on non-accrual status at the
    end of the period may or may not have been on non-accrual status
    for the full period.                                                                                                                                                                                                                                                
|   
|(6) | Represents the total amount of interest or dividends credited to
    income for the portion of the year an investment was included in
    the companies more than 25% owned or companies 5% to 25% owned
    categories, respectively.                                                                                                                                                                                                                                                                                            
|   
|(7) | In the first quarter of 2007, the Company exercised its option
    to acquire a majority of the voting securities of Hot Stuff
    Foods, LLC (Hot Stuff) at fair market value. Therefore, Hot
    Stuff was reclassified to companies more than 25% owned in the
    first quarter of 2007. At December 31, 2006, the
    Companys investment in Hot Stuff was included in the
    companies less than 5% owned category.                                                                                                       
|   
|(8) | In the second quarter of 2007, the Company obtained a seat on
    the board of directors of MHF Logistical Solutions, Inc. (MHF).
    Therefore, MHF was reclassified to companies 5% to 25% owned in
    the second quarter of 2007. At December 31, 2006, the
    Companys investment in MHF was included in the companies
    less than 5% owned category.                                                                                                                                                                    
|   
|(9) | In December 2007, the Company acquired the majority ownership of
    CitiPostal Inc.                                                                                                                                                                                                                                                                                                                                                                                                                                              

151