Edgar Filing: ALLIED CAPITAL CORP

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As filed with the Securities and Exchange Commission on May 13, 2008

Registration No. 333-150006

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM N-2

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933


		þ Pre-Effective Amendment No. 1
		o Post-Effective Amendment No.

ALLIED CAPITAL CORPORATION

(Exact Name of Registrant as Specified in Charter)

1919 Pennsylvania Avenue, N.W.

Washington, D.C. 20006-3434

(202) 721-6100

(Address and Telephone Number, including Area Code, of Principal Executive Offices)

William L. Walton, Chairman and Chief Executive Officer

Allied Capital Corporation

1919 Pennsylvania Avenue, N.W.

Washington, D.C. 20006-3434

(Name and Address of Agent for Service)

Copies of information to:


Cynthia M. Krus, Esq.
Steven B. Boehm, Esq.
Sutherland Asbill & Brennan LLP
1275 Pennsylvania Avenue, N.W.
Washington, D.C. 20004-2415

Approximate Date of Proposed Public Offering:

From time to time after the effective date of the Registration Statement.

If any securities being registered on this form will be offered on a delayed or continuous basis in reliance on Rule 415 under the Securities Act of 1933, other than securities offered in connection with a dividend reinvestment plan, check the following box. þ

CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933

Proposed Maximum

Amount of

Title of Securities

Amount Being

Offering Price

Aggregate

Registration

Being Registered

Registered⁽¹⁾

Per Share⁽²⁾

Offering Price

Fee⁽³⁾

Common Stock, $0.0001 par value per share

14,747,000 shares

$ 21.25

$ 287,092,190

$ 11,284



(1)	In reliance upon Rule 429 under the Securities Act of 1933, this amount is in addition to the securities previously registered by the Registrant under a registration statement on Form N-2 (File No. 333-141848). All securities unsold under the prospectus contained in such prior Registration Statement (a total of 35,253,000 shares of common stock) are carried forward into this Registration Statement, and the prospectus contained as a part of this Registration Statement shall be deemed to be combined with the prospectus contained in the above-referenced registration statement, which has previously been filed.



(2)	Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(c) under the Securities Act of 1933 on the basis of the average of the high and low sales prices of the common stock on May 12, 2008, as reported on the New York Stock Exchange.



(3)	Of this amount, $8,594 was previously paid. The additional payment of $2,690 relates to the registration of an additional 3,220,000 shares of common stock.

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until this registration statement shall become effective on such date as the Commission, acting pursuant to Section 8(a), may determine.

The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

PROSPECTUS (Subject to Completion)


	, 2008

50,000,000 Shares

Common Stock



	We may offer, from time to time, up to 50,000,000 shares of our common stock in one or more offerings.



	The shares of common stock may be offered directly to one or more purchasers, through agents designated from time to time by us, or to or through underwriters or dealers. The price and terms of any offering, including any applicable fee, commission or discount arrangement between us and any agents or underwriters or among our underwriters, or the basis upon which such amount may be calculated will be described in one or more supplements to this prospectus. See “Plan of Distribution.”


	We are an internally managed closed-end, non-diversified management investment company that has elected to be regulated as a business development company under the Investment Company Act of 1940.

	Our investment objective is to achieve current income and capital gains. We seek to achieve our investment objective by investing in primarily private middle market companies in a variety of industries. No assurances can be given that we will continue to achieve our objective.

	Please read this prospectus and the accompanying prospectus supplement, if any, before investing, and keep it for future reference. The prospectus and the accompanying prospectus supplement contain important information about us that a prospective investor should know before investing in our common stock. We file annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission. This information is available free of charge by contacting us at 1919 Pennsylvania Avenue, N.W., Washington, DC, 20006 or by telephone at (202) 721-6100 or on our website at www.alliedcapital.com. The SEC also maintains a website at www.sec.gov that contains such information.


	Our common stock is traded on the New York Stock Exchange under the symbol “ALD.” As of May 12, 2008, the last reported sale price on the New York Stock Exchange for the common stock was $21.26.


	You should review the information, including the risk of leverage, set forth under “Risk Factors” on page 10 of this prospectus before investing in our common stock.


	Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.


	This prospectus may not be used to consummate sales of shares of common stock unless accompanied by a prospectus supplement.

, 2008

We have not authorized any dealer, salesman or other person to give any information or to make any representation other than those contained in this prospectus or an accompanying prospectus supplement, if any, to this prospectus. You must not rely upon any information or representation not contained in this prospectus or any such supplements as if we had authorized it. This prospectus and any such supplements do not constitute an offer to sell or a solicitation of any offer to buy any security other than the registered securities to which they relate, nor do they constitute an offer to sell or a solicitation of an offer to buy any securities in any jurisdiction to any person to whom it is unlawful to make such an offer or solicitation in such jurisdiction. The information contained in this prospectus and any such supplements is accurate as of the dates on their covers.

TABLE OF CONTENTS


	Page

Prospectus Summary		1
Fees and Expenses		6
Selected Condensed Consolidated Financial Data		7
Where You Can Find Additional Information		9
Risk Factors		10
Use of Proceeds		18
Price Range of Common Stock and Distributions		19
Management’s Discussion and Analysis of Financial Condition and Results of Operations		20
Senior Securities		75
Business		78
Portfolio Companies		94
Determination of Net Asset Value		102
Management		104
Portfolio Management		111
Compensation of Directors and Executive Officers		113
Control Persons and Principal Holders of Securities		132
Certain Relationships and Related Party Transactions		134
Tax Status		135
Certain Government Regulations		140
Stock Trading Plans		144
Dividend Reinvestment Plan		144
Description of Capital Stock		145
Description of Public Notes		150
Plan of Distribution		153
Legal Matters		154
Custodians, Transfer and Dividend Paying Agent and Registrar		154
Brokerage Allocation and Other Practices		154
Independent Registered Public Accounting Firm		155
Index to Consolidated Financial Statements		F-1

ABOUT THIS PROSPECTUS

This prospectus is part of a registration statement that we have filed with the Securities and Exchange Commission using the “shelf” registration process. Under the shelf registration process, which constitutes a delayed offering in reliance on Rule 415 under the Securities Act of 1933, as amended, we may offer, from time to time, up to 50,000,000 shares of our common stock on the terms to be determined at the time of the offering. Shares of our common stock may be offered at prices and on terms described in one or more supplements to this prospectus. This prospectus provides you with a general description of the shares of our common stock that we may offer. Each time we use this prospectus to offer shares of our common stock, we will provide a prospectus supplement that will contain specific information about the terms of that offering. A prospectus supplement may also add, update or change information contained in this prospectus. Please carefully read this prospectus and any such supplements together with the additional information described under “Where You Can Find Additional Information” in the “Prospectus Summary” and “Risk Factors” sections before you make an investment decision.

A prospectus supplement may also add to, update or change information contained in this prospectus.

(i)

PROSPECTUS SUMMARY

The following summary contains basic information about this offering. It may not contain all the information that is important to an investor. For a more complete understanding of this offering, we encourage you to read this entire prospectus and the documents that are referred to in this prospectus, together with any accompanying supplements.

In this prospectus or any accompanying prospectus supplement, unless otherwise indicated, “Allied Capital”, “we”, “us” or “our” refer to Allied Capital Corporation and its subsidiaries.

BUSINESS (Page 78)

We are a business development company in the private equity business and we are internally managed. Specifically, we provide long-term debt and equity capital to primarily private middle market companies in a variety of industries. We have participated in the private equity business since we were founded in 1958. Since then through March 31, 2008, we have invested more than $13 billion in thousands of companies nationwide. Our investment objective is to achieve current income and capital gains.

We believe the private equity capital markets are important to the growth of small and middle market companies because such companies often have difficulty accessing the public debt and equity capital markets. We use the term middle market to include companies with annual revenues typically between $50 million and $500 million. We believe that we are well positioned to be a source of capital for such companies.

We primarily invest in the American entrepreneurial economy. At March 31, 2008, our private finance portfolio included investments in 124 companies that generate aggregate annual revenues of over $13 billion and employ more than 98,000 people.

We generally target companies in less cyclical industries with, among other things, management teams with meaningful equity ownership, high returns on invested capital, the ability to generate free cash flow, and well-capitalized balance sheets. As a private equity investor, we spend significant time and effort identifying, structuring, performing due diligence, monitoring, developing, valuing, and ultimately exiting our investments.

Our investment activity is primarily focused on making long-term investments in the debt and equity of primarily private middle market companies. Debt investments may include senior loans, unitranche debt (an investment that combines both senior and subordinated financing, generally in a first lien position), or subordinated debt (with or without equity features). Equity investments may include a minority equity stake in connection with a debt investment or a substantial equity stake in connection with a buyout transaction. In a buyout transaction, we generally invest in senior debt, subordinated debt and equity (preferred and/or voting or non-voting common) where our equity ownership represents a significant portion of the equity, but may or may not represent a controlling interest.

Our investments in the debt and equity of primarily private middle market companies are generally long-term in nature and are privately negotiated, and no readily available market exists for them. This makes our investments highly illiquid and, as result, we cannot readily trade them. When we make an investment, we enter into a long-term arrangement where our ultimate exit from that investment may be three to ten years in the future.

The capital we provide is generally used by portfolio companies to fund buyouts, acquisitions, growth, recapitalizations, note purchases, or other types of financings.

Our investments are typically structured to provide recurring cash flow in the form of interest income to us as the investor. In addition to earning interest income, we may earn income from management,

consulting, diligence, structuring, or other fees. We may also enhance our total return with capital gains realized from investments in equity instruments or from equity features, such as nominal cost warrants.

We provide managerial assistance to our portfolio companies, including, but not limited to, management and consulting services related to corporate finance, marketing, human resources, personnel and board member recruiting, business operations, corporate governance, risk management and other general business matters.

We have also participated in commercial real estate finance over our history. Over the past few years, we have not actively participated in commercial real estate finance as we believed that the market for commercial real estate had become too aggressive and that investment opportunities were not priced appropriately. As a result, our commercial real estate finance portfolio totaled $115.8 million at value, or 2.3% of our total assets, at March 31, 2008. As the capital markets evolve and should commercial real estate investment opportunities improve, we may become more active investors in commercial real estate finance for our own portfolio or through a future managed fund.

In addition to managing our own assets, we manage certain funds that also invest in the debt and equity securities of primarily middle market companies in a variety of industries, which we refer to as Managed Funds. We may invest in the equity of these funds, along with other third parties, from which we may earn a current return and/or future incentive allocation. We may also manage the assets held by these funds, for which we may earn management or other fees for our services.

We are internally managed, led by an experienced management team with our senior officers and managing directors possessing, on average, 22 years of experience. At March 31, 2008, we had 186 employees, who are focused on transaction sourcing, origination and execution, portfolio monitoring, accounting, valuation and other operational and administrative activities. We are headquartered in Washington, DC, with offices in New York, NY, Chicago, IL, and Los Angeles, CA and have centralized investment approval and portfolio management processes.

We have elected to be taxed as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, otherwise referred to as the Code. Assuming that we qualify as a regulated investment company, we generally will not be subject to corporate level income taxation on income we timely distribute to our stockholders as dividends. See “Tax Status.” We pay regular quarterly dividends based upon an estimate of annual taxable income available for distribution to shareholders and the amount of taxable income carried over from the prior year for distribution in the current year. Since 1963, our portfolio has provided sufficient ordinary taxable income and realized net capital gains to sustain or grow our dividends over time.

We are a Maryland corporation and a closed-end, non-diversified management investment company that has elected to be regulated as a business development company under the Investment Company Act of 1940, which we refer to as the 1940 Act.

As a business development company, we are required to meet certain regulatory tests, the most significant relating to our investments and borrowings. A business development company is required to invest at least 70% of its assets in eligible portfolio companies. A business development company must also maintain a coverage ratio of assets to senior securities of at least 200%. See “Certain Government Regulations” and “Risk Factors.”

Our executive offices are located at 1919 Pennsylvania Avenue, N.W., Washington, DC, 20006-3434 and our telephone number is (202) 721-6100. In addition, we have regional offices in New York, Chicago, and Los Angeles.

Our Internet website address is www.alliedcapital.com. Information contained on our website is not incorporated by reference into this prospectus and you should not consider information contained on our website to be part of this prospectus.

Our common stock is traded on the New York Stock Exchange under the symbol “ALD.”

DETERMINATION OF

NET ASSET VALUE (Page 102)

Our portfolio investments are generally recorded at fair value as determined in good faith by our Board of Directors in the absence of readily available public market values.

Pursuant to the requirements of the 1940 Act, we value substantially all of our portfolio investments at fair value as determined in good faith by the Board of Directors on a quarterly basis. Since there is typically no readily available market value for the investments in our portfolio, our Board of Directors determines in good faith the fair value of these portfolio investments in accordance with our valuation policy and the provisions of the 1940 Act and FASB Statement No. 157, Fair Value Measurements (SFAS 157). In the first quarter of 2008, we adopted SFAS 157. The adoption of SFAS 157 did not change our requirement to record our investments at fair value.

There is no single approach for determining fair value in good faith. As a result, determining fair value requires that judgment be applied to the specific facts and circumstances of each portfolio investment while employing a consistently applied valuation process for the types of investments we make. Unlike banks, we are not permitted to provide a general reserve for anticipated loan losses. Instead, we are required to specifically value each individual investment on a quarterly basis. Because of the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of our investments determined in good faith by the Board of Directors may differ significantly from the values that would have been used had a ready market existed for the investments, and the differences could be material. Additionally, changes in the market environment and other events that may occur over the life of our investments may cause the gains or losses ultimately realized on our investments to be different than the values determined at the measurement date.

We adjust the valuation of our portfolio quarterly to reflect the change in the value of each investment in our portfolio. Any changes in value are recorded in our statement of operations as “net change in unrealized appreciation or depreciation.”

PLAN OF DISTRIBUTION (Page 153)

We may offer, from time to time, up to 50,000,000 shares of our common stock, on terms to be determined at the time of the offering.

Shares of our common stock may be offered directly to one or more purchasers, through agents designated from time to time by us, or to or through underwriters or dealers. The price and terms of any offering, including any applicable fee, commission or discount arrangement between us and any agents or underwriters or among our underwriters, or the basis upon which such amount may be calculated will be described in one or more supplements to this prospectus.

We may not sell shares of common stock pursuant to this prospectus without delivering a prospectus supplement describing the method and terms of the offering of such shares.

USE OF PROCEEDS (Page 18)

We intend to use the net proceeds from selling shares of common stock for general corporate purposes, which includes investing in debt or equity securities in primarily privately negotiated transactions, repayment of indebtedness, acquisitions and other general corporate purposes.

Any supplement to this prospectus relating to any offering of common stock will more fully identify the use of the proceeds from such offering.

PRICE RANGE OF COMMON STOCK AND DISTRIBUTIONS (Page 19)

We intend to pay quarterly dividends to holders of our common stock. The amount of our quarterly dividends is determined by our Board of Directors on a quarterly basis.

Shares of business development companies may trade at a market price that is less than the value of the net assets attributable to those shares. Our common stock currently continues to trade in excess of net asset value. The possibility that our shares of common stock will trade at a discount from net asset value or at premiums that are unsustainable over the long term is separate and distinct from the risk that our net asset value will decrease. There can be no assurance, however, that our shares will continue to trade at a premium to our net asset value.

DIVIDEND REINVESTMENT PLAN (Page 144)

We maintain an “opt in” dividend reinvestment plan for our common shareholders. As a result, if our Board of Directors declares a dividend, then our shareholders that have not “opted in” to our dividend reinvestment plan will receive cash dividends. New shareholders must notify our transfer agent in writing if they wish to enroll in the dividend reinvestment plan.

RISK FACTORS (Page 10)

Investment in shares of our common stock involves a number of significant risks relating to our business and our investment objective that you should consider before purchasing shares of our common stock.

Substantially all of our portfolio of investments, which are generally illiquid, are recorded at fair value, as determined in good faith by our Board of Directors. Our portfolio includes securities primarily issued by private companies. These investments may involve a high degree of business and financial risk; they are illiquid, and may not produce current returns or capital gains. If we were forced to immediately liquidate some or all of the investments in the portfolio, the proceeds of such liquidation could be significantly less than the current value of such investments. We may be required to liquidate some or all of our portfolio investments to meet our debt service obligations or in the event we are required to fulfill our obligations under agreements pursuant to which we guarantee the repayment of indebtedness by third parties.

An economic slowdown may affect the ability of a portfolio company to repay our loans or engage in a liquidity event, such as a sale, recapitalization or initial public offering. These conditions could lead to financial losses in our portfolio and a decrease in our revenues, net income and assets. Numerous other factors may affect a borrower’s ability to repay its loan, including the failure to meet its business plan, a downturn in its industry or negative economic conditions.

Our total investment in companies may be significant individually or in the aggregate. As a result, if a significant investment in one or more companies fails to perform as expected, our financial results could be more negatively affected and the magnitude of the loss could be more significant than if we had made smaller investments in more companies.

We may not borrow money unless we maintain asset coverage for indebtedness of at least 200%, which may affect returns to shareholders. We borrow funds to make investments. As a result, we are exposed to the risks of leverage, which may be considered a speculative investment technique. Borrowings, also known as leverage, magnify the potential for gain and loss on amounts invested and therefore increase the risks associated with investing in our securities.

A large number of entities and individuals compete for the same kind of investment opportunities as we do. Increased competition would make it more difficult for us to purchase or originate investments at attractive prices. As a result of this competition, sometimes we may be precluded from making otherwise attractive investments.

Our business of making private equity investments and positioning them for liquidity events also may be affected by current and future market conditions.

To maintain our status as a business development company, we must not acquire any assets other than “qualifying assets” unless, at the time of and after giving effect to such acquisition, at least 70% of our total assets are qualifying assets.

We may not be able to pay dividends and failure to qualify as a regulated investment company for tax purposes could have a material adverse effect on the income available for debt service or distributions to our shareholders, which may have a material adverse effect on our total return to common shareholders, if any.

Although funds managed by us may have a different primary investment objective than we do, the managed funds may invest in the same or similar asset classes that we target. There may be conflicts in the allocation of the investment opportunities between us and the managed funds. We have sold assets to certain managed funds and, as part of our investment strategy, we may offer to sell additional assets to managed funds or we may purchase assets from managed funds. While assets may be sold or purchased at prices that are consistent with those that could be obtained from third parties in the marketplace, there is an inherent conflict of interest in such transactions between us and funds we manage.

Also, we are subject to certain risks associated with valuing our portfolio, changing interest rates, accessing additional capital, fluctuating financial results, operating in a regulated environment, and certain conflicts of interest.

Our common stock price may be volatile due to market factors that may be beyond our control.

CERTAIN ANTI-TAKEOVER PROVISIONS (Page 147)

Our charter and bylaws, as well as certain statutory and regulatory requirements, contain certain provisions that may have the effect of discouraging a third party from making an acquisition proposal for Allied Capital. These anti-takeover provisions may inhibit a change in control in circumstances that could give the holders of our common stock the opportunity to realize a premium over the market price for our common stock.

FEES AND EXPENSES

This table describes the various costs and expenses that an investor in our shares of common stock will bear directly or indirectly.


Shareholder Transaction Expenses
	Sales load (as a percentage of offering price)⁽¹⁾		—%
	Dividend reinvestment plan fees⁽²⁾		None
Annual Expenses (as a percentage of consolidated net assets attributable to common stock)⁽³⁾
	Expenses⁽⁴⁾		6.08%
	Interest payments on borrowed funds⁽⁵⁾		5.68%
	Acquired fund fees and expenses⁽⁶⁾		—%

		Total annual expenses⁽⁷⁾⁽⁸⁾	11.76%

Example

The following example, required by the SEC, demonstrates the projected dollar amount of total cumulative expenses that would be incurred over various periods with respect to a hypothetical investment in us. In calculating the following expense amounts, we assumed we would have no additional leverage and that our operating expenses would remain at the levels set forth in the table above. In the event that shares to which this prospectus relates are sold to or through underwriters, a corresponding prospectus supplement will restate this example to reflect the applicable sales load.


	1 Year		3 Years		5 Years		10 Years

You would pay the following expenses on a $1,000 investment, assuming a 5.0% annual return	$	117	$	345	$	566	$	1,089

Although the example assumes (as required by the SEC) a 5.0% annual return, our performance will vary and may result in a return of greater or less than 5.0%. In addition, while the example assumes reinvestment of all dividends and distributions at net asset value, participants in the dividend reinvestment plan may receive shares of common stock that we issue at or above net asset value or are purchased by the administrator of the dividend reinvestment plan, at the market price in effect at the time, which may be higher than, at, or below net asset value.

The example should not be considered a representation of future expenses, and the actual expenses may be greater or less than those shown.


⁽¹⁾	In the event that the shares of common stock to which this prospectus relates are sold to or through underwriters, a corresponding prospectus supplement will disclose the applicable sales load.

⁽²⁾	The expenses of our dividend reinvestment plan are included in “Operating expenses.” We do not have a stock purchase plan. The participants in the dividend reinvestment plan will bear a pro rata share of brokerage commissions incurred with respect to open market purchases or sales, if any. See “Dividend Reinvestment Plan.”


⁽³⁾	“Consolidated net assets attributable to common stock” equals net assets (i.e., total consolidated assets less total consolidated liabilities), which at March 31, 2008, was $2.8 billion.



⁽⁴⁾	“Expenses” represent our estimated operating expenses for the year ending December 31, 2008, including income tax expense (benefit) including excise tax, excluding interest on indebtedness. This percentage for the year ended December 31, 2007, was 6.80%. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Management” and “Compensation of Executive Officers and Directors.”



⁽⁵⁾	The “Interest payments on borrowed funds” represents our estimated interest expense for the year ending December 31, 2008, including interest related to usage under our revolving line of credit and new debt issuances during the remainder of 2008. We had outstanding borrowings of $2.2 billion at March 31, 2008. See “Risk Factors.” This percentage for the year ended December 31, 2007, was 4.77%.



⁽⁶⁾	See our Consolidated Statement of Investments as of March 31, 2008, on pages F-76 through F-92 for our investments in funds.



⁽⁷⁾	“Total annual expenses” as a percentage of consolidated net assets attributable to common stock are higher than the total annual expenses percentage would be for a company that is not leveraged. We borrow money to leverage our net assets and increase our total assets. The SEC requires that “Total annual expenses” percentage be calculated as a percentage of net assets, rather than the total assets, including assets that have been funded with borrowed monies. If the “Total annual expenses” percentage were calculated instead as a percentage of consolidated total assets, our “Total annual expenses” would be 6.55% of consolidated total assets.


⁽⁸⁾	The holders of shares of our common stock (and not the holders of our debt securities or preferred stock, if any) indirectly bear the cost associated with our annual expenses.

SELECTED CONDENSED CONSOLIDATED FINANCIAL DATA

You should read the condensed consolidated financial information below with the Consolidated Financial Statements and Notes thereto included herein. Financial information at and for the years ended December 31, 2007, 2006, 2005, 2004, and 2003, has been derived from our financial statements that were audited by KPMG LLP. Quarterly financial information is derived from unaudited financial data, but in the opinion of management, reflects all adjustments (consisting only of normal recurring adjustments) which are necessary to present fairly the results for such interim periods. Interim results at and for the three months ended March 31, 2008, are not necessarily indicative of the results that may be expected for the year ending December 31, 2008. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Senior Securities” below for more information.


			At and for the Three
			Months Ended
			March 31,						At and for the Year Ended December 31,

(in thousands,			2008			2007			2007			2006			2005		2004			2003
except per share data)
			(unaudited)
Operating Data:
Interest and related portfolio income:
	Interest and dividends		$	134,660		$	101,983		$	417,576		$	386,427		$	317,153	$	319,642		$	290,719
	Fees and other income			10,284			5,969			44,129			66,131			56,999		47,448			38,510

		Total interest and related portfolio income		144,944			107,952			461,705			452,558			374,152		367,090			329,229

Expenses:
	Interest			37,560			30,288			132,080			100,600			77,352		75,650			77,233
	Employee			22,652			21,928			89,155			92,902			78,300		53,739			36,945
	Employee stock options⁽¹⁾			4,195			3,661			35,233			15,599			—		—			—
	Administrative			9,019			13,224			50,580			39,005			69,713		34,686			22,387

		Total operating expenses		73,426			69,101			307,048			248,106			225,365		164,075			136,565

Net investment income before income taxes				71,518			38,851			154,657			204,452			148,787		203,015			192,664
	Income tax expense (benefit), including excise tax			1,969			(649	)		13,624			15,221			11,561		2,057			(2,466	)

Net investment income				69,549			39,500			141,033			189,231			137,226		200,958			195,130

Net realized and unrealized gains (losses):
	Net realized gains			3,143			27,666			268,513			533,301			273,496		117,240			75,347
	Net change in unrealized appreciation or depreciation			(113,404	)		65,920			(256,243	)		(477,409	)		462,092		(68,712	)		(78,466	)

		Total net gains (losses)		(110,261	)		93,586			12,270			55,892			735,588		48,528			(3,119	)

Net increase (decrease) in net assets resulting from operations			$	(40,712	)	$	133,086		$	153,303		$	245,123		$	872,814	$	249,486		$	192,011

Per Share:
Diluted earnings (loss) per common share			$	(0.25	)	$	0.87		$	0.99		$	1.68		$	6.36	$	1.88		$	1.62
Net investment income plus net realized gains per share⁽²⁾			$	0.45		$	0.44		$	2.65		$	4.96		$	2.99	$	2.40		$	2.28
Dividends per common share⁽²⁾			$	0.65		$	0.63		$	2.64		$	2.47		$	2.33	$	2.30		$	2.28
Weighted average common shares outstanding – diluted				161,507			152,827			154,687			145,599			137,274		132,458			118,351


	At and for the
	Three Months
	Ended March 31,			At and for the Year Ended December 31,

(in thousands,	2008			2007			2006			2005			2004			2003
except per share data)
	(unaudited)
Balance Sheet Data:
Portfolio at value	$	4,635,633		$	4,780,521		$	4,496,084		$	3,606,355		$	3,013,411		$	2,584,599
Total assets		5,082,242			5,214,576			4,887,505			4,025,880			3,260,998			3,019,870
Total debt outstanding⁽³⁾		2,191,563			2,289,470			1,899,144			1,284,790			1,176,568			954,200
Undistributed (distributions in excess of) earnings		500,464			535,853			502,163			112,252			12,084			(13,401	)
Shareholders’ equity		2,828,418			2,771,847			2,841,244			2,620,546			1,979,778			1,914,577
Shareholders’ equity per common share (net asset value)⁽⁴⁾	$	16.99		$	17.54		$	19.12		$	19.17		$	14.87		$	14.94
Common shares outstanding at end of period		166,472			158,002			148,575			136,697			133,099			128,118
Asset coverage ratio⁽⁵⁾		229	%		221	%		250	%		309	%		280	%		322	%
Debt to equity ratio		0.77			0.83			0.67			0.49			0.59			0.50
Other Data:
Investments funded	$	275,130		$	1,845,973		$	2,437,828		$	1,675,773		$	1,524,523		$	931,450
Principal collections related to investment repayments or sales		264,777			1,211,550			1,055,347			1,503,388			909,189			788,328
Realized gains		32,740			400,510			557,470			343,061			267,702			94,305
Realized losses		(29,597	)		(131,997	)		(24,169	)		(69,565	)		(150,462	)		(18,958	)


	2008			2007									2006

(in thousands,	Qtr 1			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		$144,944			$117,709		$118,368			$117,676		$107,952		$117,708		$113,383		$110,456		$111,011
Net investment income		69,549			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		(40,712	)		27,527		(96,468	)		89,158		133,086		33,921		77,886		33,729		99,587
Diluted earnings (loss) per common share		$(0.25	)		$0.18		$(0.63	)		$0.57		$0.87		$0.23		$0.53		$0.24		$0.70
Dividends declared per common share ⁽⁶⁾		0.65			0.72		0.65			0.64		0.63		0.67		0.61		0.60		0.59
Net asset value per common share⁽⁴⁾		16.99			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 “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 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Dividends and Distributions” below.
⁽³⁾	See “Senior Securities” and “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⁾	As a business development company, we are generally required to maintain a minimum ratio of 200% of total assets to total borrowings.
⁽⁶⁾	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.

WHERE YOU CAN FIND

ADDITIONAL INFORMATION

We have filed with the SEC a registration statement on Form N-2 together with all amendments and related exhibits under the Securities Act of 1933. The registration statement contains additional information about us and the securities being offered by this prospectus.

We file annual, quarterly and current reports, proxy statements and other information with the SEC under the Securities Exchange Act of 1934. You can inspect any materials we file with the SEC, without charge, at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the Public Reference Room. The information we file with the SEC is available free of charge by contacting us at 1919 Pennsylvania Avenue, N.W., Washington, DC, 20006-3434, or by telephone at (202) 721-6100 or on our website at www.alliedcapital.com. The SEC also maintains a website that contains reports, proxy statements and other information regarding registrants, including us, that file such information electronically with the SEC. The address of the SEC’s website is www.sec.gov. Information contained on our website or on the SEC’s website about us is not incorporated into this prospectus and you should not consider information contained on our website or on the SEC’s website to be part of this prospectus.

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. We generally acquire our investments directly from the issuer in privately negotiated transactions. The majority of the investments in our portfolio are subject to certain restrictions on resale or otherwise have no established trading market. We typically exit our investments when the portfolio company has a liquidity event such as a sale, recapitalization, or initial public offering of the company. The illiquidity of our investments may adversely affect our ability to dispose of debt and equity securities at times when we may need to or when it may be otherwise advantageous for us to liquidate such investments. In addition, if we were forced to immediately liquidate some or all of the investments in the portfolio, the proceeds of such liquidation could be significantly less than the current value of such investments.

Investing in private companies involves a high degree of risk. Our portfolio primarily consists of long-term loans to and investments in middle market private companies. Investments in private businesses involve a high degree of business and financial risk, which can result in substantial losses for us in those investments and accordingly should be considered speculative. There is generally no publicly available information about the companies in which we invest, and we rely significantly on the diligence of our employees and agents to obtain information in connection with our investment decisions. If we are unable to identify all material information about these companies, among other factors, we may fail to receive the expected return on our investment or lose some or all of the money invested in these companies. In addition, these businesses may have shorter operating histories, narrower product lines, smaller market shares and less experienced management than their competition and may be more vulnerable to customer preferences, market conditions, loss of key personnel, or economic downturns, which may adversely affect the return on, or the recovery of, our investment in such businesses. As an investor, we are subject to the risk that a portfolio company may make a business decision that does not serve our interest, which could decrease the value of our investment. Deterioration in a portfolio company’s financial condition and prospects may be accompanied by deterioration in the collateral for a loan, if any.

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. At March 31, 2008, portfolio investments recorded at fair value were 91% of our total assets. Pursuant to the requirements of the 1940 Act, we value substantially all of our investments at fair value as determined in good faith by our Board of Directors on a quarterly basis. Since there is typically no market quotation in an active market for the investments in our portfolio, our Board of Directors determines in good faith the fair value of these investments pursuant to a valuation policy and a consistently applied valuation process.

There is no single approach for determining fair value in good faith. As a result, determining fair value requires that judgment be applied to the specific facts and circumstances of each portfolio investment while employing a consistently applied valuation process for the types of investments we make. In determining fair value in good faith, we generally obtain financial and other information from portfolio companies, which may represent unaudited, projected or proforma financial information. Unlike banks, we are not permitted to provide a general reserve for anticipated loan losses; we are instead required by the 1940 Act to specifically value each individual investment on a quarterly basis. We will record unrealized depreciation on investments when we determine that the fair value of a security is less than its cost basis, and unrealized appreciation when we determine that the fair value of a security is greater than its cost basis. Without a market quotation in an active market and because of the inherent uncertainty of valuation, the fair value of our investments determined in good faith by the Board of Directors may differ significantly from the values that would have been used had a ready market existed for the investments, and the differences could be material. Our net asset value could be affected if our determination of the fair value of our investments is materially different than the value that we ultimately realize.

We adjust quarterly the valuation of our portfolio to reflect the Board of Directors’ determination of the fair value of each investment in our portfolio. Any changes in fair value are recorded in our statement of operations as net change in unrealized appreciation or depreciation.

Beginning in the quarter ended March 31, 2008, we adopted the provisions of Statement No. 157, Fair Value Measurements, on a prospective basis. Adoption of this statement did not have a material effect on our consolidated financial statements for the first quarter of 2008. However, the impact on our consolidated financial statements in the periods subsequent to the period of adoption cannot be determined at this time as it will be influenced by the estimates of fair value for those periods, the number and amount of investments we originate, acquire or exit and the effect of any additional guidance or any changes in the interpretation of this statement. See Note 2, “Summary of Significant Accounting Policies” from our Notes to the Consolidated Financial Statements.

Economic recessions or downturns could impair our portfolio companies and harm our operating results. Many of the companies in which we have made or will make investments may be susceptible to economic slowdowns or recessions. An economic slowdown may affect the ability of a company to repay our loans or engage in a liquidity event such as a sale, recapitalization, or initial public offering. Our nonperforming assets are likely to increase and the value of our portfolio is likely to decrease during these periods. Adverse economic conditions also may decrease the value of any collateral securing some of our loans. These conditions could lead to financial losses in our portfolio and a decrease in our revenues, net income, and assets.

Our business of making private equity investments and positioning them for liquidity events also may be affected by current and future market conditions. The absence of an active senior lending environment or a slowdown in middle market merger and acquisition activity may slow the amount of private equity investment activity generally. As a result, the pace of our investment activity may slow. In addition, significant changes in the capital markets could have a negative effect on the valuations of our investments, and on the potential for liquidity events involving such investments. This could affect the timing of exit events in our portfolio, reduce the level of net realized gains from exit events in a given year, and could negatively affect the amount of gains or losses upon exit.

Our borrowers may default on their payments, which may have a negative effect on our financial performance. We make long-term loans and invest in equity securities primarily in private middle market companies, which may involve a higher degree of repayment risk. We primarily invest in companies that may have limited financial resources, may be highly leveraged and may be unable to obtain financing from traditional sources. Numerous factors may affect a borrower’s ability to repay its loan, including the failure to meet its business plan, a downturn in its industry, or negative economic conditions. A portfolio company’s failure to satisfy financial or operating covenants imposed by us or other lenders could lead to defaults and, potentially, termination of its loans or foreclosure on its secured assets, which could trigger cross defaults under other agreements and jeopardize our portfolio company’s ability to meet its obligations under the loans or debt securities that we hold. In addition, our portfolio companies may have, or may be permitted to incur, other debt that ranks senior to or equally with our securities. This means that payments on such senior-ranking securities may have to be made before we receive any payments on our subordinated loans or debt securities. Deterioration in a borrower’s financial condition and prospects may be accompanied by deterioration in any related collateral and may have a negative effect on our financial results.

Our private finance investments may not produce current returns or capital gains. Our private finance portfolio includes loans and debt securities that require the payment of interest currently and equity securities such as conversion rights, warrants, or options, minority equity co-investments, or more significant equity investments in the case of buyout transactions. Our private finance debt investments are generally structured to generate interest income from the time they are made and our equity investments may also produce a realized gain. We cannot be sure that our portfolio will generate a current return or capital gains.

Our financial results could be negatively affected if a significant portfolio investment fails to perform as expected. Our total investment in companies may be significant individually or in the aggregate. As a result, if a significant investment in one or more companies fails to perform as expected, our financial results could be more negatively affected and the magnitude of the loss could be more significant than if we had made smaller investments in more companies.

At March 31, 2008, our investment in Ciena Capital LLC (Ciena) totaled $327.8 million at cost and $29.3 million at value, after the effect of unrealized depreciation of $298.5 million. In addition, we have an unconditional guarantee of 100% of the total obligations under Ciena’s revolving credit facility that totaled $384.8 million at March 31, 2008. The guarantee can be called by the lenders in event of default. In addition, we have issued performance guarantees in connection with two non-recourse warehouse facilities. Ciena focuses on loan products that provide financing to commercial real estate owners and operators. Ciena relies on the asset-backed securitization market to finance its loan origination activity. That financing source continues to be unreliable in the current capital markets, and as a result, Ciena has substantially curtailed loan origination activity. Ciena continues to reposition its business; however, there is an inherent risk in repositioning the business and we continue to work with Ciena on restructuring. Our financial results could be negatively affected if Ciena defaults on its revolving line of credit or is not able to reposition its business.

Ciena is a participant in the SBA’s 7(a) Guaranteed Loan Program and its wholly-owned subsidiary is licensed by the SBA as a Small Business Lending Company (SBLC). The Office of the Inspector General of the SBA (OIG) and the United States Secret Service are conducting ongoing investigations of allegedly fraudulently obtained SBA-guaranteed loans issued by Ciena. As an SBA lender, Ciena is also subject to other SBA and OIG audits, investigations, and reviews. In addition, the Office of the Inspector General of the U.S. Department of Agriculture is conducting an investigation of Ciena’s lending practices under the Business and Industry Loan program. The OIG and the U.S. Department of Justice are also conducting a civil investigation of Ciena’s lending practices in various jurisdictions. These investigations, audits, and reviews are ongoing. These investigations, audits, and reviews have had and may continue to have a material adverse impact on Ciena and, as a result, could negatively affect our financial results. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Private Finance, Ciena Capital LLC, and — Valuation of Ciena Capital LLC”.

We borrow money, which magnifies the potential for gain or loss on amounts invested and may increase the risk of investing in us. Borrowings, also known as leverage, magnify the potential for gain or loss on amounts invested and, therefore, increase the risks associated with investing in our securities. We borrow from and issue senior debt securities to banks, insurance companies, and other lenders or investors. Holders of these senior securities have fixed dollar claims on our consolidated assets that are superior to the claims of our common shareholders. If the value of our consolidated assets increases, then leveraging would cause the net asset value attributable to our common stock to increase more sharply than it would have had we not leveraged. Conversely, if the value of our consolidated assets decreases, leveraging would cause net asset value to decline more sharply than it otherwise would have had we not leveraged. Similarly, any increase in our consolidated income in excess of consolidated interest payable on the borrowed funds would cause our net income to increase more than it would without the leverage, while any decrease in our consolidated income would cause net income to decline more sharply than it would have had we not borrowed. Such a decline could negatively affect our ability to make common stock dividend payments. Leverage is generally considered a speculative investment technique. We and, indirectly, our stockholders will bear the cost associated with our leverage activity. Our revolving line of credit and notes payable contain financial and operating covenants that could restrict our business activities, including our ability to declare dividends if we default under certain provisions. Breach of any of those covenants could cause a default under those instruments. Such a default, if not cured or waived, could have a material adverse effect on us.

At March 31, 2008, we had $2.2 billion of outstanding indebtedness bearing a weighted average annual interest cost of 6.2% and a debt to equity ratio of 0.77 to 1.00. We may incur additional debt in the future. If our portfolio of investments fails to produce adequate returns, we may be unable to make interest or principal payments on our indebtedness when they are due. In order for us to cover annual interest

payments on indebtedness, we must achieve annual returns on our assets of at least 2.7% as of March 31, 2008, which returns were achieved.

Illustration. The following table illustrates the effect of leverage on returns from an investment in our common stock assuming various annual returns, net of expenses. The calculations in the table below are hypothetical and actual returns may be higher or lower than those appearing below. The calculation assumes (i) $5,082.2 million in total assets, (ii) an average cost of funds of 6.2%, (iii) $2,191.6 million in debt outstanding and (iv) $2,828.4 million of shareholders’ equity.

Assumed Return on Our Portfolio

(net of expenses)


	-20%		-10%		-5%		0%		5%		10%		20%

Corresponding return to shareholder		-40.74%		-22.77%		-13.79%		-4.80%		4.18%		13.16%		31.13%

We may not borrow money unless we maintain asset coverage for indebtedness of at least 200%, which may affect returns to shareholders. Under the 1940 Act and the covenants applicable to our public debt, we must maintain asset coverage for total borrowings of at least 200%. Our ability to achieve our investment objective may depend in part on our continued ability to maintain a leveraged capital structure by borrowing from banks, insurance companies or other lenders or investors on favorable terms. There can be no assurance that we will be able to maintain such leverage. If asset coverage declines to less than 200%, we may be required to sell a portion of our investments when it is disadvantageous to do so. As of March 31, 2008, our asset coverage for senior indebtedness was 229%.

Changes in interest rates may affect our cost of capital and net investment income. Because we borrow money to make investments, our net investment income is dependent upon the difference between the rate at which we borrow funds and the rate at which we invest these funds. As a result, there can be no assurance that a significant change in market interest rates will not have a material adverse effect on our net investment income. In periods of rising interest rates, our cost of funds would increase, which would reduce our net investment income. We use a combination of long-term and short-term borrowings and equity capital to finance our investing activities. We utilize our revolving line of credit as a means to bridge to long-term financing. Our long-term fixed-rate investments are financed primarily with long-term fixed-rate debt and equity. We may use interest rate risk management techniques in an effort to limit our exposure to interest rate fluctuations. Such techniques may include various interest rate hedging activities to the extent permitted by the 1940 Act. We have analyzed the potential impact of changes in interest rates on interest income net of interest expense.

Assuming that the balance sheet as of March 31, 2008, were to remain constant and no actions were taken to alter the existing interest rate sensitivity, a hypothetical immediate 1% change in interest rates would have affected net income by approximately 1% over a one year horizon. Although management believes that this measure is indicative of our sensitivity to interest rate changes, it does not adjust for potential changes in credit quality, size and composition of the assets on the balance sheet and other business developments that could affect net increase in net assets resulting from operations, or net income. Accordingly, no assurances can be given that actual results would not differ materially from the potential outcome simulated by this estimate.

We will continue to need additional capital to grow because we must distribute our income. We will continue to need capital to fund growth in our investments. Historically, we have borrowed from financial institutions or other investors and have issued debt and equity securities to grow our portfolio. A reduction in the availability of new debt or equity capital could limit our ability to grow. We must distribute at least 90% of our investment company taxable ordinary income (as defined in the Code), which excludes realized net long-term capital gains, to our shareholders to maintain our eligibility for the tax benefits available to regulated investment companies. As a result, such earnings will not be available to

fund investment originations. In addition, as a business development company, we (i) are generally required to maintain a ratio of at least 200% of total assets to total borrowings, which may restrict our ability to borrow in certain circumstances and (ii) may only issue new equity capital at a price, net of discounts and commissions, above our net asset value unless we have received shareholder approval. We intend to continue to borrow from financial institutions or other investors and issue additional debt and equity securities. If we fail to obtain funds from such sources or from other sources to fund our investments, it could limit our ability to grow, which could have a material adverse effect on the value of our debt securities or common stock.

Loss of regulated investment company tax treatment would substantially reduce net assets and income available for debt service and dividends. We have operated so as to qualify as a regulated investment company under Subchapter M of the Code. If we meet source of income, asset diversification, and distribution requirements, we generally will not be subject to corporate-level income taxation on income we timely distribute to our stockholders as dividends. We would cease to qualify for such tax treatment if we were unable to comply with these requirements. In addition, we may have difficulty meeting the requirement to make distributions to our stockholders because in certain cases we may recognize income before or without receiving cash representing such income. If we fail to qualify as a regulated investment company, we will have to pay corporate-level taxes on all of our income whether or not we distribute it, which would substantially reduce the amount of income available for debt service and distributions to our stockholders. Even if we qualify as a regulated investment company, we generally will be subject to a corporate-level income tax on the income we do not distribute. If we do not distribute at least 98% of our annual taxable income in the year earned, we generally will be required to pay an excise tax on amounts carried over and distributed to shareholders in the next year equal to 4% of the amount by which 98% of our annual taxable income exceeds the distributions from such income for the current year.

There is a risk that our common stockholders may not receive dividends or distributions. We intend to make distributions on a quarterly basis to our stockholders. We may not be able to achieve operating results that will allow us to make distributions at a specific level or to increase the amount of these distributions from time to time. In addition, due to the asset coverage test applicable to us as a business development company, we may be limited in our ability to make distributions. Also, certain of our credit facilities limit our ability to declare dividends if we default under certain provisions. If we do not distribute a certain percentage of our income annually, we will suffer adverse tax consequences, including possible loss of the tax benefits available to us as a regulated investment company. In addition, in accordance with U.S. generally accepted accounting principles and tax regulations, we include in income certain amounts that we have not yet received in cash, such as contractual payment-in-kind interest, which represents contractual interest added to the loan balance that becomes due at the end of the loan term, or the accrual of original issue discount. The increases in loan balances as a result of contractual payment-in-kind arrangements are included in income in advance of receiving cash payment and are separately included in the change in accrued or reinvested interest and dividends in our consolidated statement of cash flows. Since we may recognize income before or without receiving cash representing such income, we may have difficulty meeting the requirement to distribute at least 90% of our investment company taxable income to obtain tax benefits as a regulated investment company.

We operate in a competitive market for investment opportunities. We compete for investments with a large number of private equity funds and mezzanine funds, other business development companies, investment banks, other equity and non-equity based investment funds, and other sources of financing, including specialty finance companies and traditional financial services companies such as commercial banks. Some of our competitors may have greater resources than we do. Increased competition would make it more difficult for us to purchase or originate investments at attractive prices. As a result of this competition, sometimes we may be precluded from making otherwise attractive investments.

There are potential conflicts of interest between us and the funds managed by us. Certain of our officers serve or may serve in an investment management capacity to funds managed by us. As a result, investment professionals may allocate such time and attention as is deemed appropriate and necessary to

carry out the operations of the managed funds. In this respect, they may experience diversions of their attention from us and potential conflicts of interest between their work for us and their work for the managed funds in the event that the interests of the managed funds run counter to our interests.

Although managed funds may have a different primary investment objective than we do, the managed funds may, from time to time, invest in the same or similar asset classes that we target. These investments may be made at the direction of the same individuals acting in their capacity on behalf of us and the managed funds. As a result, there may be conflicts in the allocation of investment opportunities between us and the managed funds. In the future, we may not be given the opportunity to participate in investments made by investment funds managed by us or one of our affiliates. See “Management’s Discussion and Analysis and Results of Operations — Managed Funds.”

We have sold assets to certain managed funds and, as part of our investment strategy, we may offer to sell additional assets to managed funds or we may purchase assets from managed funds. While assets may be sold or purchased at prices that are consistent with those that could be obtained from third parties in the marketplace, there is an inherent conflict of interest in such transactions between us and funds we manage.

Our business depends on our key personnel. We depend on the continued services of our executive officers and other key management personnel. If we were to lose any of these officers or other management personnel, such a loss could result in inefficiencies in our operations and lost business opportunities, which could have a negative effect on our business.

Changes in the law or regulations that govern us could have a material impact on us or our operations. We are regulated by the SEC. In addition, changes in the laws or regulations that govern business development companies, regulated investment companies, asset managers, and real estate investment trusts may significantly affect our business. There are proposals being considered by the current administration to change the regulation of financial institutions that may affect, possibly adversely, investment managers or investment funds. Any change in the law or regulations that govern our business could have a material impact on us or our operations. Laws and regulations may be changed from time to time, and the interpretations of the relevant laws and regulations also are subject to change, which may have a material effect on 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. As a business development company, we may not acquire any assets other than “qualifying assets” unless, at the time of and after giving effect to such acquisition, at least 70% of our total assets are qualifying assets. Therefore, we may be precluded from investing in what we believe are attractive investments if such investments are not qualifying assets for purposes of the 1940 Act. If we do not invest a sufficient portion of our assets in qualifying assets, we could lose our status as a business development company, which would have a material adverse effect on our business, financial condition and results of operations. Similarly, these rules could prevent us from making additional investments in existing portfolio companies, which could result in the dilution of our position, or could require us to dispose of investments at inopportune times in order to comply with the 1940 Act. If we were forced to sell nonqualifying investments in the portfolio for compliance purposes, the proceeds from such sale could be significantly less than the current value of such investments.

Results may fluctuate and may not be indicative of future performance. Our operating results may fluctuate and, therefore, you should not rely on current or historical period results to be indicative of our performance in future reporting periods. Factors that could cause operating results to fluctuate include, but are not limited to, variations in the investment origination volume and fee income earned, changes in the accrual status of our loans and debt securities, variations in timing of prepayments, variations in and the timing of the recognition of net realized gains or losses and changes in unrealized appreciation or depreciation, the level of our expenses, the degree to which we encounter competition in our markets, and general economic conditions.

Our common stock price may be volatile. The trading price of our common stock may fluctuate substantially. The price of the common stock may be higher or lower than the price paid by stockholders, depending on many factors, some of which are beyond our control and may not be directly related to our operating performance. These factors include, but are not limited to, the following:


	•	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. Our publicly issued debt securities may or may not have an established trading market. We cannot assure that a trading market for our publicly issued debt securities will ever develop or be maintained if developed. In addition to our creditworthiness, many factors may materially adversely affect the trading market for, and market value of, our publicly issued debt securities. These factors include, but are not limited to, the following:


	•	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.

There also may be a limited number of buyers for our debt securities. This too may materially adversely affect the market value of the debt securities or the trading market for the debt securities.

Our credit ratings may not reflect all risks of an investment in the debt securities. Our credit ratings are an assessment of our ability to pay our obligations. Consequently, real or anticipated changes in our credit ratings will generally affect the market value of the publicly issued debt securities. Our credit ratings, however, may not reflect the potential impact of risks related to market conditions generally or other factors discussed above on the market value of, or trading market for, the publicly issued debt securities.

Terms relating to redemption may materially adversely affect the return on the debt securities. If our debt securities are redeemable at our option, we may choose to redeem the debt securities at times when prevailing interest rates are lower than the interest rate paid on the debt securities. In addition, if the debt securities are subject to mandatory redemption, we may be required to redeem the debt securities at times when prevailing interest rates are lower than the interest rate paid on the debt securities. In this circumstance, a holder of the debt securities may not be able to reinvest the redemption proceeds in a comparable security at an effective interest rate as high as the debt securities being redeemed.

Disclosure Regarding Forward-Looking Statements

Information contained or incorporated by reference in this prospectus, and any prospectus supplement accompanying this prospectus contains “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 above in the “Risk Factors” section. Other factors that could cause actual results to differ materially include:


	•	changes in the economy, including economic downturns or recessions;

	•	risks associated with possible disruption in our operations due to terrorism;

	•	future changes in laws or regulations or changes in accounting principles; and

	•	other risks and uncertainties as may be detailed from time to time in our public announcements and SEC filings.

The matters described in “Risk Factors” and certain other factors noted throughout this prospectus, and any prospectus supplement accompanying this prospectus and in any exhibits to the registration statement of which this prospectus is a part, constitute cautionary statements identifying important factors with respect to any such forward-looking statements, including certain risks and uncertainties, that could cause actual results to differ materially from those in such forward-looking statements.

Although we believe that the assumptions on which these forward-looking statements are based are reasonable, any of those assumptions could prove to be inaccurate, and as a result, the forward-looking statements based on those assumptions also could be incorrect. Important assumptions include our ability to originate new investments, maintain certain margins and levels of profitability, access the capital markets for debt and equity capital, the ability to meet regulatory requirements and the ability to maintain certain debt to asset ratios. In light of these and other uncertainties, the inclusion of a projection or forward-looking statement in this prospectus and any prospectus supplement accompanying this prospectus should not be regarded as a representation by us that our plans and objectives will be achieved. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this prospectus and the date on the cover of any such supplements with respect to such supplements. The forward-looking statements contained in this prospectus and any accompanying prospectus supplement are excluded from the safe harbor protection provided by Section 27A of the Securities Act of 1933.

USE OF PROCEEDS

We intend to use the net proceeds from selling shares of our common stock for general corporate purposes, which may include investing in debt or equity securities in primarily privately negotiated transactions, repayment of indebtedness, acquisitions and other general corporate purposes. Because our primary business is to provide long-term debt and equity capital to primarily middle market companies, we are continuously identifying, reviewing and, to the extent consistent with our investment objective, funding new investments. As a result, we typically raise capital as we deem appropriate to fund such new investments. Any supplement to this prospectus relating to an offering will more fully identify the use of the proceeds from such offering.

We anticipate that substantially all of the net proceeds of any offering of shares of our common stock will be used, as described above or in any prospectus supplement accompanying this prospectus, within six months, but in no event longer than two years. Pending investment, we intend to invest the net proceeds of any offering of shares of our common stock in time deposits, income-producing securities with maturities of three months or less that are issued or guaranteed by the federal government or an agency of the federal government, high quality debt securities maturing in one year or less from the time of investment or other qualifying investments. Our ability to achieve our investment objective may be limited to the extent that the net proceeds of any offering, pending full investment, are held in lower-yielding time deposits and other short-term instruments.

PRICE RANGE OF COMMON STOCK AND DISTRIBUTIONS

Our common stock is traded on the New York Stock Exchange and the Nasdaq Global Select Market under the symbol “ALD.” The following table lists the high and low closing sales prices for our common stock, the closing sales price as a percentage of net asset value (NAV) and quarterly dividends per share. On May 12, 2008, the last reported closing sale price of our common stock was $21.26 per share.


				Closing Sales				Premium			Premium
				Price				of High			of Low
								Sales Price			Sales Price			Declared
		NAV⁽¹⁾		High		Low		to NAV⁽²⁾			to NAV⁽²⁾			Dividends

*Year ended December 31, 2006*
	First Quarter	$	19.50	$	30.68	$	28.51		157	%		146	%	$	0.59
	Second Quarter	$	19.17	$	31.32	$	28.77		163	%		150	%	$	0.60
	Third Quarter	$	19.38	$	30.88	$	27.30		159	%		141	%	$	0.61
	Fourth Quarter	$	19.12	$	32.70	$	29.99		171	%		157	%	$	0.62
	Extra Dividend													$	0.05
*Year ended December 31, 2007*
	First Quarter	$	19.58	$	32.98	$	28.05		168	%		143	%	$	0.63
	Second Quarter	$	19.59	$	32.96	$	28.90		168	%		148	%	$	0.64
	Third Quarter	$	17.90	$	32.87	$	27.10		184	%		151	%	$	0.65
	Fourth Quarter	$	17.54	$	30.90	$	21.15		176	%		121	%	$	0.65
	Extra Dividend													$	0.07
*Year ended December 31, 2008*
	First Quarter	$	16.99	$	23.26	$	18.38		137	%		108	%	$	0.65
	Second Quarter (through May 12, 2008)		*	$	21.26	$	18.80		*			*		$	0.65


⁽¹⁾		Net asset value per share is determined as of the last day in the relevant quarter and therefore may not reflect the net asset value per share on the date of the high and low sales prices. The net asset values shown are based on outstanding shares at the end of each period.

⁽²⁾		Calculated as the respective high or low closing sales price divided by NAV.

^*		Not determinable at the time of filing.

We are not generally able to issue and sell our common stock at a price below net asset value per share. We may, however, sell our common stock, or sell warrants, options or rights to acquire such common stock, at a price below the current net asset value of the common stock if our board of directors determines that such sale is in our best interests and the best interests of our stockholders, and our stockholders approve our policy and practice of making such sales. In any such case, the price at which our securities are to be issued and sold may not be less than a price which, in the determination of our board of directors, closely approximates the market value of such securities (less any distributing commission or discount).

We intend to pay quarterly dividends to shareholders of our common stock. The amount of our quarterly dividends is determined by our Board of Directors. Our Board of Directors has established a dividend policy to review the dividend rate quarterly, and may adjust the quarterly dividend rate throughout the year. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Dividends and Distributions” and “Tax Status.” There can be no assurance that we will achieve investment results or maintain a tax status that will permit any particular level of dividend payment. Certain of our credit facilities limit our ability to declare dividends if we default under certain provisions.

We maintain an “opt in” dividend reinvestment plan for our common shareholders. As a result, if our Board of Directors declares a dividend, then our shareholders will receive cash dividends, unless they specifically “opt in” to the dividend reinvestment plan to reinvest their dividends and receive additional shares of common stock. See “Dividend Reinvestment Plan.”

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.

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

As a business development company, we are in the private equity business. Specifically, we provide long-term debt and equity investment capital to companies in a variety of industries. Our private finance activity principally involves providing financing to middle market U.S. companies through privately negotiated long-term debt and equity investment capital. Our financing is generally used to fund buyouts, acquisitions, growth, recapitalizations, note purchases, and other types of financings. We generally invest in private companies though, from time to time, we may invest in companies that are public but lack access to additional public capital. Our investment objective is to achieve current income and capital gains.

Our portfolio composition at March 31, 2008 and 2007, and at December 31, 2007, 2006, and 2005, was as follows:


	March 31,						December 31,

	2008			2007			2007			2006			2005

Private finance		98	%		97	%		97	%		97	%		96	%
Commercial real estate finance		2	%		3	%		3	%		3	%		4	%

Our earnings depend primarily on the level of interest and dividend income, fee and other income, and net realized and unrealized gains or losses on our investment portfolio after deducting interest expense on borrowed capital, operating expenses and income taxes, including excise tax. Interest income primarily results from the stated interest rate earned on a loan or debt security and the amortization of loan origination fees and discounts. The level of interest income is directly related to the balance of the interest-bearing investment portfolio outstanding during the period multiplied by the weighted average yield. Our ability to generate interest income is dependent on economic, regulatory, and competitive factors that influence new investment activity, interest rates on the types of loans we make, the level of repayments in the portfolio, the amount of loans and debt securities for which interest is not accruing and our ability to secure debt and equity capital for our investment activities. The level of fee income is primarily related to the level of new investment activity and the level of fees earned from portfolio companies and managed funds. The level of investment activity can vary substantially from period to period depending on many factors, including the amount of debt and equity capital available to middle market companies, the level of merger and acquisition activity for such companies, the general economic environment, and the competitive environment for the types of investments we make.

Because we are a regulated investment company for tax purposes, we intend to distribute substantially all of our annual taxable income available for distribution as dividends to our shareholders. See “Other Matters” below.

PORTFOLIO AND INVESTMENT ACTIVITY

The total portfolio at value, investment activity, and the yield on interest-bearing investments at and for the three months ended March 31, 2008 and 2007, and at and for the years ended December 31, 2007, 2006, and 2005, were as follows:


	At and for the
	Three Months Ended						At and for the
	March 31,						Years Ended December 31,

	2008			2007			2007			2006			2005
($ in millions)
Portfolio at value	$	4,635.6		$	4,498.8		$	4,780.5		$	4,496.1		$	3,606.4
Investments funded⁽¹⁾	$	275.1		$	170.2		$	1,846.0		$	2,437.8		$	1,675.8
Payment-in-kind or reinvested interest and dividends, net of collection	$	13.4		$	8.1		$	12.0		$	7.3		$	25.7
Principal collections related to investment repayments or sales⁽²⁾	$	264.8		$	235.5		$	1,211.6		$	1,055.3		$	1,503.4
Yield on interest-bearing investments⁽³⁾		12.3	%		11.6	%		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 three months ended March 31, 2008, and for the year ended December 31, 2007, included collections of $30.0 million and $224.2 million, respectively, related to the sale of loans to the Allied Capital Senior Debt Fund, L.P. See discussion below.



⁽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, plus the annual stated interest (LIBOR plus 7.5%) on the subordinated certificates in the Unitranche Fund LLC divided by (b) total interest-bearing investments at value. The weighted average yield is computed as of the balance sheet date.

Private Finance

The private finance portfolio at value, investment activity, and the yield on loans and debt securities at and for the three months ended March 31, 2008 and 2007, and at and for the years ended December 31, 2007, 2006, and 2005, were as follows:


				At and for								At and for the
				Three Months Ended March 31,								Years Ended December 31,

				2008				2007				2007				2006				2005

				Value		Yield⁽¹⁾		Value		Yield⁽¹⁾		Value		Yield⁽¹⁾		Value		Yield⁽¹⁾		Value		Yield⁽¹⁾
($ in millions)
Portfolio at value:
	Loans and debt securities:
		Senior loans		$	325.7		7.0%	$	365,0		8.4%	$	344.3		7.7%	$	405.2		8.4%	$	239.8		9.5%
		Unitranche debt			655.7		11.8%		780.2		11.4%		653.9		11.5%		799.2		11.2%		294.2		11.4%
		Subordinated debt			2,430.4		13.0%		1,946.1		12.5%		2,416.4		12.8%		1,980.8		12.9%		1,560.9		13.8%

			Total loans and debt securities		3,411.8		12.2%		3,091.3		11.7%		3,414.6		12.1%		3,185.2		11.9%		2,094.9		13.0%
Equity securities:
	Preferred shares/income notes of CLOs⁽²⁾				197.4		15.8%		96.1		13.5%		203.0		14.6%		97.2		15.5%		72.3		13.7%
	Subordinated certificates in Unitranche Fund LLC⁽²⁾				31.5		12.4%		—				0.7		12.4%		—				—
	Other equity securities				879.1				1,188.9				1,041.0				1,095.5				1,312.1

		Total equity securities			1,108.0				1,285.0				1,244.7				1,192.7				1,384.4

Total portfolio				$	4,519.8			$	4,376.3			$	4,659.3			$	4,377.9			$	3,479.3

Investments funded⁽³⁾				$	274.6			$	170.2			$	$1,828.0			$	2,423.4			$	1,462.3
Payment-in-kind interest and dividends, net of collections				$	13.2			$	5.3			$	12.7			$	3.4			$	25.7
Principal collections related to investment repayments or sales⁽⁴⁾				$	256.4			$	235.1			$	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 yield on the subordinated certificates in the Unitranche Fund LLC is computed as the (a) annual stated interest (LIBOR plus 7.5%) divided by (b) total investment at value. The weighted average yields are computed as of the balance sheet date.



⁽²⁾	Investments in the preferred shares/income notes of CLOs and subordinated certificates in the Unitranche Fund LLC 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 $48.6 million, $94.7 million, $393.4 million, $322.7 million, and $301.8 million for the three months ended March 31, 2008 and 2007, and for the years ended December 31, 2007, 2006, and 2005, respectively.

Our investment activity is primarily focused on making long-term investments in the debt and equity of primarily private middle market companies. Debt investments may include senior loans, unitranche debt (an investment that combines both senior and subordinated financing, generally in a first lien position), or subordinated debt (with or without equity features). The junior debt that we invest in that is lower in repayment priority than senior debt is also known as mezzanine debt. Equity investments may include a minority equity stake in connection with a debt investment or a substantial equity stake in connection with a buyout transaction. In a buyout transaction, we generally invest in senior and/or subordinated debt and

equity (preferred and/or voting or non-voting common) where our equity ownership represents a significant portion of the equity, but may or may not represent a controlling interest.

We intend to take a balanced approach to private equity investing that emphasizes a complementary mix of debt investments and buyout investments. The combination of these two types of investments provides current interest and related portfolio income and the potential for future capital gains. In addition, we may invest in funds that are managed or co-managed by us that are complementary to our business of investing in middle market companies, such as the Allied Capital Senior Debt Fund L.P. and the Unitranche Fund LLC. Investments in funds may provide current interest and related portfolio income, including management fees.

During the first six months of 2007, we found it difficult to find investments with attractive prices and structures. As a result, new investment activity was lower than in prior quarters. During the second half of 2007 and into the first quarter of 2008, our investment pace increased as pricing and structures improved. In the first quarter of 2008, we invested 274.6 million in private finance as compared to $170.2 million in the first quarter of 2007.

The level of investment activity for investments funded and principal repayments for private finance investments can vary substantially from period to period depending on the number and size of investments that we make or that we exit and many other factors, including the amount of debt and equity capital available to middle market companies, the level of merger and acquisition activity for such companies, the general economic environment, and the competitive environment for the types of investments we make.

Investments Funded. Investments funded and the weighted average yield on loans and debt securities funded for the three months ended March 31, 2008 and 2007, and for the years ended December 31, 2007, 2006, and 2005, consisted of the following:


			For the Three Months Ended March 31, 2008

			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		$	26.8			7.4	%	$	10.4		6.7	%	$	37.2		7.2	%
	Unitranche debt⁽²⁾			4.5			10.3	%		0.5		6.6	%		5.0		9.9	%
	Subordinated debt			129.9	⁽⁴⁾		12.0	%		31.3		14.2	%		161.2		12.4	%

		Total loans and debt securities		161.2			11.2	%		42.2		12.3	%		203.4		11.4	%
Preferred shares/income notes of CLOs ⁽⁵⁾				3.0			27.6	%		—					3.0		27.6	%
Subordinated certificates in Unitranche Fund LLC				30.7			12.4	%		—					30.7		12.4	%
Equity				13.6						23.9					37.5

	Total		$	208.5					$	66.1				$	274.6


			For the Three Months Ended March 31, 2007

			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		$	41.2		8.8	%	$	12.7		10.4	%	$	53.9		9.2	%
	Unitranche debt⁽²⁾			5.3		11.0	%		—		—			5.3		11.0	%
	Subordinated debt			14.4		9.3	%		62.1		10.5	%		76.5		10.3	%

		Total loans and debt securities		60.9		9.1	%		74.8		10.5	%		135.7		9.9	%
Equity				9.7					24.8					34.5

	Total		$	70.6				$	99.6				$	170.2


			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	%
Subordinated certificates in Unitranche Fund LLC				0.7			12.4	%		—		—			0.7		12.4	%
Equity				152.0	⁽⁶⁾					146.0					298.0

	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 on the subordinated certificates in the Unitranche Fund LLC is computed as the (a) annual stated interest (LIBOR plus 7.5%) divided by (b) total investment at value. The weighted average yield is calculated using yields as of the date an investment is funded.



⁽²⁾	Unitranche debt is an investment that combines both senior and subordinated financing, generally in a first lien position. The yield on a unitranche investment reflects the blended yield of senior and subordinated debt.


⁽³⁾	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 three months ended March 31, 2008, and the years ended December 31, 2007 and 2005, included $2.0 million, $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. See “Managed Funds” below.

We generally fund new investments using cash. In addition, we may acquire securities in exchange for our common equity. Also, we may acquire new securities through the reinvestment of previously accrued interest and dividends in debt or equity securities, or the current reinvestment of interest and dividend income through the receipt of a debt or equity security (payment-in-kind income). From time to time we may opt to reinvest accrued interest receivable in a new debt or equity security in lieu of receiving such interest in cash.

the underwritten commitment. In addition, we may fund most or all of the debt and equity capital upon the closing of certain buyout transactions, which may include investments in lower-yielding senior debt. Subsequent to the closing, the portfolio company may refinance all or a portion of the lower-yielding senior debt, which would reduce our investment. Principal collections include repayments of senior debt funded by us that was subsequently sold by us or refinanced or repaid by the portfolio companies.

We are currently focused on selling or encouraging the recapitalization or refinancing of some of our lower yielding debt investments. We may sell loans or debt securities to Managed Funds or portfolio companies may refinance their debt through a Managed Fund.

Yield. The weighted average yield on the private finance loans and debt securities was 12.2% at March 31, 2008, as compared to 11.7%, 12.1%, 11.9% and 13.0% at March 31, 2007, December 31, 2007, 2006 and 2005, respectively. The weighted average yield on the private finance loans and debt securities may fluctuate from period to period depending on the yield on new loans and debt securities funded, the yield on loans and debt securities repaid, the amount of loans and debt securities for which interest is not accruing (see “Portfolio Asset Quality — Loans and Debt Securities on Non-Accrual Status” below) and the amount of lower-yielding senior or unitranche debt in the portfolio at the end of the period.

The yield on the private finance portfolio declined in 2006 and 2007 partly due to our strategy to pursue investments where our position in the portfolio company capital structure is more senior, such as senior debt and unitranche investments that typically have lower yields than subordinated debt investments. In addition, during the fourth quarter of 2006, the guaranteed dividend yield on our investment in Ciena Capital LLC’s 25% Class A equity interests was placed on non-accrual status. The Class A equity interests are included in our loans and debt securities. See “Ciena Capital LLC” below.

Outstanding Investment Commitments. At March 31, 2008, we had outstanding private finance investment commitments as follows:


		Companies				Companies
		More Than		Companies 5%		Less Than
		25% Owned⁽¹⁾		to 25% Owned		5% Owned		Total

($ in millions)
Senior loans		$	8.6	$	12.0	$	98.5	$	119.1	⁽²⁾
Unitranche debt			3.0		—		44.6		47.6
Subordinated debt			23.0		4.3		—		27.3

	Total loans and debt securities		34.6		16.3		143.1		194.0
Unitranche Fund⁽³⁾			493.5		—		—		493.5
Equity securities			91.7		9.8		56.3		157.8	⁽⁴⁾

	Total	$	619.8	$	26.1	$	199.4	$	845.3


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


						Amount
		Committed		Amount		Available
		Amount		Drawn		to be Drawn
($ in millions)
Revolving line of credit for working capital		$	4.0	$	1.6	$	2.4
Subordinated debt to support warehouse facilities & warehousing activities^(*)			18.0		4.0		14.0

	Total	$	22.0	$	5.6	$	16.4


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



⁽²⁾	Includes $113.2 million in the form of revolving senior debt facilities to 33 companies.



⁽³⁾	Represents our commitment to the Unitranche Fund LLC (see discussion below), which we estimate will be funded over a two to three year period as investments are made by the Unitranche Fund.



⁽⁴⁾	Includes $66.1 million to 13 private equity and venture capital funds, including $3.9 million in co-investment commitments to one private equity fund.

In addition to these outstanding investment commitments at March 31, 2008, we may be required to fund additional amounts under earn-out arrangements primarily related to buyout transactions in the future if those companies meet agreed-upon performance targets. We also had commitments to private finance portfolio companies in the form of standby letters of credit and guarantees. See “Financial Condition, Liquidity and Capital Resources” below.

Investments in Collateralized Loan Obligations and Collateralized Debt Obligations (CLO/CDO Assets). At both March 31, 2008, and December 31, 2007, we had investments in ten CLO issuances and one CDO bond, which represented 5.7% and 5.6% of our total assets, respectively, and five CLO issuances and one CDO bond, which represented 2.9% of our total assets, at December 31, 2006. At March 31, 2008, and at December 31, 2007 and 2006, our CLO/CDO Assets were as follows:


		2008						2007						2006

		Cost		Value		Yield⁽¹⁾		Cost		Value		Yield⁽¹⁾		Cost		Value		Yield⁽¹⁾
($ in millions)
CLO/CDO bonds		$	92.7	$	92.1		12.7%	$	90.7	$	89.9		13.3%	$	45.4	$	45.6		12.8%
Preferred shares/income notes of CLOs			224.1		197.4		15.8%		218.3		203.0		14.6%		101.1		97.2		15.5%

	Total	$	316.8	$	289.5			$	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. See discussion below.

The CLO and CDO issuances in which we have invested are primarily invested in senior corporate loans. See also Note 3, “Portfolio” from our Notes to the Consolidated Financial Statements.

The initial yields on the cost basis of the CLO preferred shares and income notes are based on the estimated future cash flows expected to be paid to these CLO classes from the underlying collateral assets. As each CLO preferred share or income note ages, the estimated future cash flows are updated based on the estimated performance of the underlying collateral assets, and the respective yield on the cost basis is adjusted as necessary. As future cash flows are subject to uncertainties and contingencies that are difficult to predict and are subject to future events that may alter current assumptions, no assurance can be given that the anticipated yields to maturity will be achieved.

The CLOs and CDO in which we invest are invested primarily in first lien loans to corporate borrowers. We are not an investor in CLOs and CDO that hold subprime residential real estate loans. The CLO/CDO Assets in which we have invested are junior in priority for payment of interest and principal to the more senior notes issued by the CLOs and CDO. Cash flow from the underlying collateral assets in the CLOs and CDO is generally allocated first to the senior bonds in order of priority, then any remaining cash flow is generally distributed to the preferred shareholders and income note holders. To the extent there are defaults and unrecoverable losses on the underlying collateral assets that result in reduced cash flows, the preferred shares/income notes will bear this loss first and then the subordinated bonds would bear any loss after the preferred shares/income notes. At March 31, 2008, and December 31, 2007 and 2006, the face value of the CLO/CDO Assets held by us was subordinate to as much as 94%, 94% and 92%, respectively, of the face value of the securities outstanding in these CLOs and CDO.

At March 31, 2008, and December 31, 2007 and 2006, the underlying collateral assets of these CLO and CDO issuances, consisting primarily of senior corporate loans, were issued by 636 issuers, 671 issuers and 465 issuers, respectively, and had balances as follows:


		2008		2007		2006
($ in millions)
Bonds		$	286.1	$	288.5	$	245.4
Syndicated loans			4,206.5		4,122.7		1,769.9
Cash⁽¹⁾			101.4		104.4		59.5

	Total underlying collateral assets⁽²⁾	$	4,594.0	$	4,515.6	$	2,074.8


⁽¹⁾	Includes undrawn liability amounts.


⁽²⁾	At March 31, 2008, and December 31, 2007 and 2006, the total face value of defaulted obligations was $42.3 million, $18.4 million and $9.6 million, respectively, or approximately 0.9%, 0.4% and 0.5%, respectively, of the total underlying collateral assets.

Since the third quarter of 2007, the debt capital markets have been volatile and market yields for CLO securities have increased. We believe the market yields for our investments in CLO preferred shares/income notes have increased, and as a result, the fair value of certain of our investments in these assets has decreased. At March 31, 2008, the market yields used to value our preferred shares/income notes were 22% to 23%, with the exception of the income notes in one CLO with a cost and value of $23.1 million where we used a market yield of 18% due to the characteristics of the issuance. At December 31, 2007, the market yields used to value our preferred shares/income notes were 20% to 21%, with the exception of the income notes in one CLO with a cost and value of $18.7 million where we used a market yield of 15.9% and one CLO with a cost and value of $22.1 million where we used a market yield of 18% due to the characteristics of these issuances. Net change in unrealized appreciation or depreciation for the three months ended March 31, 2008, and for the year ended December 31, 2007,

included a net decrease of $11.2 million and $12.4 million, respectively, related to our investments in CLO/CDO Assets. We received valuation assistance for our investments in the CLO/CDO Assets in each quarter of 2007 and in the first quarter of 2008. See “Results of Operations — Valuation Methodology — Private Finance” below for further discussion of the third-party valuation assistance we received.

Ciena Capital LLC. Ciena Capital LLC (f/k/a Business Loan Express, LLC) (Ciena) focuses on loan products that provide financing to commercial real estate owners and operators. Ciena is also a participant in the SBA’s 7(a) Guaranteed Loan Program and its wholly-owned subsidiary is licensed by the SBA as a Small Business Lending Company (SBLC). Ciena is headquartered in New York, NY and maintains offices in other U.S. locations. We invested in Ciena in 2000.

At March 31, 2008, our investment in Ciena totaled $327.8 million at cost and $29.3 million at value, after the effect or unrealized depreciation of $298.5 million. See “Results of Operations, Valuation of Ciena Capital LLC” for a discussion of the determination of the value of Ciena at March 31, 2008. At December 31, 2007, our investment in Ciena totaled $327.8 million at cost and $68.6 million at value, after the effect of unrealized depreciation of $259.2 million. In 2007, we increased our investment in Ciena by $32.4 million. We acquired $29.2 million in additional Class A equity interests to fund payments to the SBA discussed below and to provide additional capital to Ciena. In addition, we purchased $3.2 million in Class A equity interests from Ciena’s former Chief Executive Officer. At December 31, 2006, our investment in Ciena totaled $295.3 million at cost and $210.7 million at value, after the effect of unrealized depreciation of $84.6 million.

Net change in unrealized appreciation or depreciation included a net decrease on our investment in Ciena of $39.3 million, $174.5 million and $142.3 million for the three months ended March 31, 2008, and for the years ended December 31, 2007 and 2006, respectively, and a net increase of $2.9 million for the year ended December 31, 2005. See “Results of Operations, Valuation of Ciena Capital LLC” below.

Total interest and related portfolio income earned from our investment in Ciena for the three months ended March 31, 2008, and 2007, and for the years ended December 31, 2007, 2006, and 2005, was as follows:


		Three Months
		Ended
		March 31,				Year Ended

		2008		2007		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			—		1.4		5.4		7.8		9.2

	Total interest and related portfolio income	$	—	$	1.4	$	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.

In the fourth quarter of 2006, we placed our investment in Ciena’s 25% Class A equity interests on non-accrual status. As a result, there was no interest income from our investment in Ciena for the three months ended March 31, 2008 and 2007, and for the year ended December 31, 2007, and interest income for 2006 was lower as compared to 2005. In consideration for providing a guaranty on Ciena’s revolving credit facility and standby letters of credit (discussed below), we earned fees of $1.4 million, $5.4 million, $6.1 million, and $6.3 million for the three months ended March 31, 2007 and for the years ended December 31, 2007, 2006, and 2005, respectively, which were included in fees and other income. Ciena has not yet paid the $5.4 million in such fees earned by us in 2007. At both March 31, 2008 and at December 31, 2007, such fees were included as a receivable in other assets. We considered this outstanding receivable in our valuation of Ciena at March 31, 2008, and at December 31, 2007. We did

not accrue the fees earned from Ciena for providing the guaranty and standby letters of credit for the three months ended March 31, 2008. The remaining fees and other income in 2006 and 2005 relate to management fees from Ciena. We did not charge Ciena management fees in the first quarter of 2008, in 2007 or in the fourth quarter of 2006.

We guarantee Ciena’s revolving credit facility that matures in March 2009. On January 30, 2008, Ciena completed an amendment of the terms of its revolving credit facility. The amendment reduced the commitments from the lenders under the facility from $500 million to $450 million at the effective date of the amendment, with further periodic reductions in total commitments to $325 million by December 31, 2008. In addition, certain financial and other covenants were amended. In connection with this amendment, we increased our unconditional guarantee from 60% to 100% of the total obligations under this facility (consisting of principal, letters of credit issued under the facility, accrued interest, and other fees) and replaced $42.5 million in letters of credit issued under the Ciena credit facility with new letters of credit under our revolving line of credit. The guaranty of the Ciena revolving credit facility can be called by the lenders in the event of a default, which includes the occurrence of any event of default under our revolving credit facility, subject to grace periods in certain cases. The amendment also prohibits cash payments from Ciena to us for interest, guarantee fees, management fees, and dividends. At March 31, 2008, the principal amount outstanding on Ciena’s revolving credit facility was $335.0 million and letters of credit issued under the facility were $46.9 million. The total obligation guaranteed by us at March 31, 2008, was $384.8 million. At March 31, 2008, we had provided standby letters of credit totaling $59.5 million in connection with term securitizations completed by Ciena. At December 31, 2007, the total obligation guaranteed by us was $258.7 million, and we had provided four standby letters of credit totaling $18.0 million in connection with four term securitization transactions completed by Ciena.

Ciena relies on the asset-backed securitization market to finance its loan origination activity. That financing source continues to be unreliable in the current capital markets, and as a result, Ciena has substantially curtailed loan origination activity, including loan originations under the SBA’s 7(a) Guaranteed Loan Program. Ciena continues to reposition its business. However, there is an inherent risk in this repositioning and we continue to work with Ciena on restructuring. Ciena maintains two non-recourse securitization warehouse facilities, and there is no assurance that Ciena will be able to refinance these facilities in the loan securitization market. We have issued performance guaranties whereby we have agreed to indemnify the warehouse providers for any damages, losses, liabilities and related costs and expenses that they may incur as a result of Ciena’s failure to perform any of its obligations as loan originator, loan seller or loan servicer under the warehouse securitizations.

The Office of the Inspector General of the SBA (OIG) and the United States Secret Service are conducting ongoing investigations of allegedly fraudulently obtained SBA guaranteed loans issued by Ciena. Specifically, on or about January 9, 2007, Ciena became aware of an indictment captioned as the United States v. Harrington, No. 2:06-CR-20662 pending in the United States District Court for the Eastern District of Michigan. The indictment alleged that a former Ciena employee in the Detroit office engaged in the fraudulent origination of loans guaranteed, in substantial part, by the SBA. We understand that Ciena is working cooperatively with the U.S. Attorney’s Office and the investigating agencies with respect to this matter. On October 1, 2007, the former Ciena employee pled guilty to one count of conspiracy to fraudulently originate SBA-guaranteed loans and one count of making a false statement before a grand jury.

the term of the agreement, any loans originated by Ciena that will be sold into the secondary market or loans that default after having been sold into the secondary market will be reviewed by an independent third party selected by the SBA prior to the sale of such loans into the secondary market or prior to reimbursement by the SBA. Ciena remains subject to SBA rules and regulations and as a result may be required to make additional payments to the SBA in the ordinary course of business.

As an SBA lender, Ciena is also subject to other SBA and OIG audits, investigations, and reviews. In addition, the Office of the Inspector General of the U.S. Department of Agriculture is conducting an investigation of Ciena’s lending practices under the Business and Industry Loan (B&I) program. The OIG and the U.S. Department of Justice are also conducting a civil investigation of Ciena’s lending practices in various jurisdictions. These investigations, audits and reviews are ongoing.

On or about January 16, 2007, Ciena and its subsidiary Business Loan Center LLC (BLC) became aware of a lawsuit titled, United States, ex rel James R. Brickman and Greenlight Capital, Inc. v. Business Loan Express LLC f/k/a Business Loan Express, Inc.; Business Loan Center LLC f/k/a Business Loan Center, Inc.; Robert Tannenhauser; Matthew McGee; and George Harrigan, 05-CV-3147 (JEC). The complaint includes allegations arising under the False Claims Act and relating to alleged fraud in connection with SBA guarantees on shrimp vessel loans. On December 18, 2007, the United States District Court for the Northern District of Georgia dismissed all claims in this matter. The plaintiffs are appealing the dismissal.

These investigations, audits, reviews, and litigation have had and may continue to have a material adverse impact on Ciena and, as a result, could continue to negatively affect our financial results. We have considered Ciena’s current regulatory issues, ongoing investigations, litigation, and the repositioning of its business in performing the valuation of Ciena at March 31, 2008, and December 31, 2007. See “Results of Operations — Valuation of Ciena Capital LLC” below. We are monitoring the situation.

Mercury Air Centers, Inc. At March 31, 2007, our investment in Mercury Air Centers, Inc. (Mercury) totaled $84.8 million at cost and $301.4 million at value, which included unrealized appreciation of $216.6 million. At December 31, 2006, our investment in Mercury totaled $84.3 million at cost and $244.2 million at value, or 5.0% of our total assets, which included unrealized appreciation of $159.9 million. We completed the purchase of a majority ownership in Mercury in April 2004.

In August 2007, we completed the sale of our majority equity interest in Mercury. For the year ended December 31, 2007, we realized a gain of $262.4 million, subject to post-closing adjustments. In addition, we were repaid approximately $51 million of subordinated debt outstanding to Mercury at closing.

Mercury owned and operated fixed base operations generally under long-term leases from local airport authorities, which consisted of terminal and hangar complexes that serviced the needs of the general aviation community. Mercury was headquartered in Richmond Heights, OH.

Total interest and related portfolio income earned from our investment in Mercury for the three months ended March 31, 2007 and for the years ended December 31, 2007, 2006, and 2005, was as follows:


		Three Months Ended		Year Ended
		March 31,		December 31

		2007		2007		2006		2005
($ in millions)
Interest income		$	2.0	$	5.1	$	9.3	$	8.8
Fees and other income			0.1		0.2		0.6		0.7

	Total interest and related portfolio income	$	2.1	$	5.3	$	9.9	$	9.5

Net change in unrealized appreciation or depreciation for the three months ended March 31, 2007, included an increase in unrealized appreciation totaling $56.7 million related to our investment in Mercury. Net change in unrealized appreciation or depreciation for the year ended December 31, 2007, included an increase in unrealized appreciation totaling $74.9 million for the first half of 2007 and the reversal of

$234.8 million associated with the sale of our majority equity interest in the third quarter of 2007. Net change in unrealized appreciation or depreciation included a net increase in unrealized appreciation on our investment in Mercury of $106.1 million and $53.8 million for the years ended December 31, 2006 and 2005, respectively.

Advantage Sales & Marketing, Inc. At December 31, 2005, our investment in Advantage totaled $257.7 million at cost and $660.4 million at value, or 16.4% of our total assets, which included unrealized appreciation of $402.7 million. Advantage is a sales and marketing agency providing outsourced sales, merchandising, and marketing services to the consumer packaged goods industry. Advantage has offices across the United States and is headquartered in Irvine, CA. We completed the purchase of a majority ownership in Advantage in June 2004.

On March 29, 2006, we sold our majority equity interest in Advantage. We were repaid our $184 million in subordinated debt outstanding at closing. For the year ended December 31, 2006, we realized a gain on the sale of our equity investment of $434.4 million, subject to post-closing adjustments and excluding any earn-out amounts. We realized additional gains in 2008 and 2007, resulting from post-closing adjustments and an earn-out payment totaling $1.7 million and $3.4 million, respectively, subject to additional post-closing adjustments.

As consideration for the common stock sold in the transaction, we received a $150 million subordinated note, with the balance of the consideration paid in cash. In addition, a portion of our cash proceeds from the sale of the common stock were placed in escrow, subject to certain holdback provisions. At March 31, 2008, and December 31, 2007, the amount of the escrow included in other assets on our consolidated balance sheet was approximately $23 million and $25 million, respectively. For tax purposes, the receipt of the $150 million subordinated note as part of our consideration for the common stock sold and the hold back of certain proceeds in escrow will generally allow us, through installment treatment, to defer the recognition of taxable income for a portion of our realized gain until the note or other amounts are collected.

Total interest and related portfolio income earned from our investment in Advantage while we held a majority equity interest was $14.1 million (which included a prepayment premium of $5.0 million), and $37.4 million, for the years ended December 31, 2006, and 2005, respectively. In addition, we earned structuring fees of $2.3 million on our new $150 million subordinated debt investment in Advantage upon the closing of the sale transaction in 2006. Net change in unrealized appreciation or depreciation for the year ended December 31, 2006, included the reversal of $389.7 million of previously recorded unrealized appreciation associated with the realization of a gain on the sale of our majority equity interest in Advantage and for the year ended December 31, 2005, included an increase in unrealized appreciation of $378.4 million, related to our majority equity interest investment in Advantage.

In connection with the sale transaction, we retained an equity investment in the business valued at $15 million at closing as a minority shareholder. During the fourth quarter of 2006, Advantage made a distribution on this minority equity investment, which resulted in a realized gain of $4.8 million.

Our investment in Advantage, which was composed of subordinated debt and a minority equity interest, totaled $155.7 million at cost and $167.6 million at value, which included unrealized appreciation of $11.9 million at March 31, 2008, and $154.8 million at cost and $165.8 million at value, which included unrealized appreciation of $11.0 million at December 31, 2007.

Commercial Real Estate Finance

The commercial real estate finance portfolio at value, investment activity, and the yield on interest-bearing investments at and for the three months ended March 31, 2008 and 2007, and at and for the years ended December 31, 2007, 2006, and 2005, were as follows:


		At and for the
		Three Months Ended March 31,								At and for the Years Ended December 31,

		2008				2007				2007					2006				2005

		Value		Yield⁽¹⁾		Value		Yield⁽¹⁾		Value			Yield⁽¹⁾		Value		Yield⁽¹⁾		Value		Yield⁽¹⁾
($ in millions)
Portfolio at value:
	Commercial mortgage loans	$	53.5		7.9%	$	72.2		7.5%		65.4			6.8%		71.9		7.5%		102.6		7.6%
	Real estate owned		30.2				21.0				21.3					19.6				13.9
	Equity interests		32.1				29.3				34.5					26.7				10.6

Total portfolio		$	115.8			$	122.5			$	121.2				$	118.2			$	127.1

Investments funded		$	0.5			$	—			$	18.0				$	14.4			$	213.5
Payment-in-kind interest, net of cash collections		$	0.2			$	0.2			$	(0.7	)			$	0.8			$	0.0
Principal collections related to investment repayments or sales ⁽²⁾		$	8.4			$	0.4			$	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.

Our commercial real estate investments funded for the three months ended March 31, 2008 and for the years ended December 31, 2007, 2006, and 2005, were as follows:


		Face					Amount
		Amount		Discount			Funded
($ in millions)
*For the Three Months Ended March 31, 2008*
Commercial mortgage loans		$	0.5	$	—		$	0.5
Equity interests			—		—			—

	Total	$	0.5		—		$	0.5

*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.

At March 31, 2008, we had outstanding funding commitments related to the commercial real estate portfolio of $40.0 million, and commitments in the form of standby letters of credit and guarantees related to equity interests of $8.2 million.

Sale of CMBS Bonds and Collateralized Debt Obligation Bonds and Preferred Shares. On May 3, 2005, we completed the sale of our portfolio of commercial mortgage-backed securities (CMBS) and real estate related collateralized debt obligation (CDO) bonds and preferred shares to affiliates of Caisse de dépôt et placement du Québec (the Caisse) for cash proceeds of $976.0 million and a net realized gain of $227.7 million, after transaction and other costs of $7.8 million. Transaction costs included investment banking fees, legal and other professional fees, and other transaction costs. The CMBS and CDO assets sold had a cost basis at closing of $739.8 million, including accrued interest of $21.7 million. Upon the closing of the sale, we settled all the hedge positions relating to these assets, which resulted in a net realized loss of $0.7 million, which was included in the net realized gain on the sale.

Simultaneous with the sale of our CMBS and CDO portfolio, we entered into a platform assets purchase agreement with CWCapital Investments LLC, an affiliate of the Caisse (CWCapital), pursuant to which we agreed to sell certain commercial real estate related assets, including servicer advances, intellectual property, software and other platform assets, subject to certain adjustments. Under this agreement, we agreed not to primarily invest in non-investment grade CMBS and real estate-related CDOs and refrain from certain other real estate-related investing or servicing activities for a period of three years or through May 2008 subject to certain limitations and excluding our existing portfolio and related activities.

The real estate securities purchase agreement, under which we sold the CMBS and CDO portfolio, and the platform asset purchase agreement contain customary representations and warranties, and require us to indemnify the affiliates of the Caisse that are parties to the agreements for certain liabilities arising under the agreements, subject to certain limitations and conditions.

Managed Funds

We manage funds that invest in the debt and equity of primarily private middle market companies in a variety of industries (together, the Managed Funds). As of March 31, 2008 and December 31, 2007, the funds that we manage had total assets of approximately $1.2 billion and $400 million, respectively. During 2007, we established the Allied Capital Senior Debt Fund, L.P. and the Unitranche Fund LLC, and in the first quarter of 2008, we formed the AGILE Fund I, LLC, and assumed the management of Kinghtsbridge CLO 2007-1 Ltd., all discussed below. Our responsibilities to the Managed Funds may include deal origination, underwriting, and portfolio monitoring and development services consistent with the activities that we perform for our portfolio. Each of the Managed Funds may separately invest in the debt or equity of a portfolio company. Our portfolio may include debt or equity investments issued by the same portfolio company as investments held by one or more Managed Funds, and these investments may be senior, pari passu or junior to the debt and equity investments held by us. We may or may not participate in investments made by investment funds managed by us or one of our affiliates. We expect to continue to grow our managed capital base and have identified other private equity-related funds that we intend to develop. By growing our privately managed capital base, we are seeking to diversify our sources of capital, leverage our core investment expertise and increase fees and other income from asset management activities. See “Risk Factors — There are potential conflicts of interest between us and the funds managed by us.”

subsidiary, is the investment manager and Callidus acts as special manager to ACSDF. One of our affiliates is the general partner of ACSDF, and AC Corp serves as collateral manager to a warehouse financing vehicle associated with ACSDF. AC Corp will earn a management fee of up to 2% per annum of the net asset value of ACSDF and will pay Callidus 25% of that management fee to compensate Callidus for its role as special manager.

We are a special limited partner in ACSDF, which is a portfolio investment, and have committed and funded $31.8 million to ACSDF. At March 31, 2008, our investment in ACSDF totaled $31.8 million at cost and $32.6 million at value, and at December 31, 2007 totaled $31.8 million at cost and $32.8 million at value. As a special limited partner, we expect to earn an incentive allocation of 20% of ACSDF’s annual net income earned in excess of a specified minimum return, subject to certain performance benchmarks. The value of our investment in ACSDF is based on the net asset value of ACSDF, which reflects the capital invested plus our allocation of the net earnings of ACSDF, including the incentive allocation.

We may offer to sell loans to ACSDF or the warehouse financing vehicle. ACSDF or the warehouse financing vehicle may purchase loans from us. In connection with ACSDF’s formation in June 2007 and during the second half of 2007, we sold $224.2 million of seasoned assets with a weighted average yield of 10.0% to a warehouse financing vehicle associated with ACSDF. In the first quarter of 2008, we sold $30.0 million of seasoned assets with a weighted average yield of 8.2% to the warehouse financing vehicle. ACSDF also purchases loans from other third parties. In addition, during the second half of 2007, we repurchased one asset for $12.0 million from ACSDF, which we had sold to ACSDF in June 2007.

Unitranche Fund LLC. In December 2007, we formed the Unitranche Fund LLC (Unitranche Fund), which we co-manage with an affiliate of General Electric Capital Corporation (GE). The Unitranche Fund is a private fund that generally focuses on making first lien unitranche loans to middle market companies with EBITDA of at least $15 million. The Unitranche Fund may invest up to $270 million in a single borrower. For financing needs greater than $270 million, we and GE may jointly underwrite additional financing for a total unitranche financing of up to $500 million. Allied Capital, GE and the Unitranche Fund may co-invest in a single borrower, with the Unitranche Fund holding at least a majority of the issuance. GE has committed $3.075 billion to the Unitranche Fund consisting of $3.0 billion of senior notes and $0.075 billion of subordinated certificates and we have committed $525.0 million of subordinated certificates. The Unitranche Fund will be capitalized as transactions are completed. At March 31, 2008 the Unitranche Fund had total assets of approximately $142 million. At March 31, 2008 and December 31, 2007, our investment in the Unitranche Fund totaled $31.5 million at cost and at value and $0.7 million at cost and at value, respectively.

The Unitranche Fund is governed by an investment committee with equal representation from Allied Capital and GE and both Allied Capital and GE provide origination, underwriting and portfolio management services to the Unitranche Fund and its affiliates. We will earn a management and sourcing fee totaling 0.375% per annum of managed assets.

AGILE Fund I, LLC. In January 2008, we entered into an investment agreement with the Goldman Sachs Private Equity Group, part of Goldman Sachs Asset Management (Goldman Sachs). As part of the investment agreement, we agreed to sell a pro-rata strip of private equity and debt investments to AGILE Fund I, LLC (AGILE), a private fund in which a fund managed by Goldman Sachs owns substantially all of the interests, for a total transaction value of $167 million. The sales of the assets closed in the first quarter of 2008.

subordinated debt investments in the buyout investments included in the equity sale. AGILE generally has the right to co-invest in its proportional share of any future follow-on investment opportunities presented by the companies in its portfolio.

We are the managing member of AGILE, and are entitled to an incentive allocation subject to certain performance benchmarks. We own the remaining interests in AGILE not held by Goldman Sachs. At March 31, 2008, AGILE had total assets of approximately $174 million and our investment in AGILE totaled $0.9 million at cost and at value.

In addition, pursuant to the investment agreement Goldman Sachs has committed to invest at least $125 million in future investment vehicles managed by us and will have future opportunities to invest in our affiliates, or vehicles managed by them, and to coinvest alongside us in the future, subject to various terms and conditions.

As part of this transaction, we sold nine venture capital and private equity limited partnership investments for approximately $28 million to a fund managed by Goldman Sachs, which assumed the $4.7 million of unfunded commitments related to these limited partnership investments. The sales of these limited partnership investments closed at the end of the first quarter of 2008 and resulted in a net realized loss of $5.5 million.

Knightsbridge CLO 2007-1 Ltd. On March 31, 2008, we assumed the management of Knightsbridge CLO 2007-1 Ltd. We earn a management fee of up to 0.6% per annum of the assets of the fund. Callidus may assist us in the management of the fund and we may pay Callidus a portion of the management fee earned for this assistance. This CLO invests primarily in middle market senior loans. At March 31, 2008 Knightsbridge CLO 2007-1 Ltd. had total assets of approximately $500 million and our investment in this CLO totaled $54.4 million at cost and $53.0 million at value.

In aggregate, including the total assets on our balance sheet and capital committed to our Managed Funds, we have more than $9 billion in managed capital.

PORTFOLIO ASSET QUALITY

Portfolio by Grade. We employ a grading system for our entire portfolio. Grade 1 is used for those investments from which a capital gain is expected. Grade 2 is used for investments performing in accordance with plan. Grade 3 is used for investments that require closer monitoring; however, no loss of investment return or principal is expected. Grade 4 is used for investments that are in workout and for which some loss of current investment return is expected, but no loss of principal is expected. Grade 5 is used for investments that are in workout and for which some loss of principal is expected.

At March 31, 2008, and December 31, 2007 and 2006, our portfolio was graded as follows:


	2008					2007					2006

	Portfolio		Percentage of			Portfolio		Percentage of			Portfolio		Percentage of
Grade	at Value		Total Portfolio			at Value		Total Portfolio			at Value		Total Portfolio

($ in millions)
1	$	1,301.7		28.1	%	$	1,539.6		32.2	%	$	1,307.3		29.1	%
2		3,079.8		66.4			2,915.7		61.0			2,672.3		59.4
3		141.1		3.1			122.5		2.6			308.1		6.9
4		61.6		1.3			157.2		3.3			84.2		1.9
5		51.4		1.1			45.5		0.9			124.2		2.7

	$	4,635.6		100.0	%	$	4,780.5		100.0	%	$	4,496.1		100.0	%

The amount of the portfolio in each grading category may vary substantially from period to period resulting primarily from changes in the composition of the portfolio as a result of new investment, repayment, and exit activity, changes in the grade of investments to reflect our expectation of performance,

and changes in investment values. We expect that a number of investments will be in the Grades 4 or 5 categories from time to time. Part of the private equity business is working with troubled portfolio companies to improve their businesses and protect our investment. The number and amount of investments included in Grade 4 and 5 may fluctuate from period to period. We continue to follow our historical practice of working with portfolio companies in order to recover the maximum amount of our investment.

Total Grade 4 and 5 portfolio assets were $113.0 million, $202.7 million and $208.4 million, respectively, or were 2.4%, 4.2% and 4.6%, respectively, of the total portfolio value at March 31, 2008, December 31, 2007 and 2006. Grade 4 and 5 assets include loans, debt securities, and equity securities.

At March 31, 2008, and December 31, 2007, our Class A equity interests in Ciena, valued at $29.3 million and $68.6 million, respectively, were classified as Grade 5 and Grade 4, respectively, and our Class B and Class C equity interests, which had no value, were classified as Grade 5 at both periods. At December 31, 2006, $135.9 million of our investment in Ciena at value was classified as Grade 3, which included our Class A equity interests and certain of our Class B equity interests that were not depreciated, and $74.8 million of our investment in Ciena at value was classified as Grade 5, which included certain of our Class B equity interests and all our Class C equity interests that were depreciated at December 31, 2006. See “— Private Finance — Ciena Capital LLC” above.

Loans and Debt Securities on Non-Accrual Status. In general, interest is not accrued on loans and debt securities if we have doubt about interest collection or where the enterprise value of the portfolio company may not support further accrual. In addition, interest may not accrue on loans to portfolio companies that are more than 50% owned by us depending on such company’s capital requirements. To the extent interest payments are received on a loan that is not accruing interest, we may use such payments to reduce our cost basis in the investment in lieu of recognizing interest income.

At March 31, 2008, and December 31, 2007 and 2006, loans and debt securities at value not accruing interest for the total investment portfolio were as follows:


			2008			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	$	62.4		$	114.1		$	51.1
		Companies 5% to 25% owned		2.6			11.7			4.0
		Companies less than 5% owned		23.3			23.8			31.6
	Commercial real estate finance			5.9			12.4			12.2
Loans and debt securities not in workout status
	Private finance
		Companies more than 25% owned		31.0			21.4			87.1
		Companies 5% to 25% owned		12.3			13.4			7.2
		Companies less than 5% owned		11.7			13.3			38.9
	Commercial real estate finance			1.5			1.9			6.7

		Total	$	150.7		$	212.0		$	238.8

		Percentage of total portfolio		3.3	%		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.

At March 31, 2008, and December 31, 2007 and 2006, our Class A equity interests in Ciena of $29.3 million, which represented 0.6% of the total portfolio at value, $68.6 million, which represented 1.4% of the total portfolio at value, and $66.6 million, which represented 1.5% of the total portfolio at value, respectively, were included in non-accruals. At March 31, 2008, these Class A equity interests were classified as Grade 5, at December 31, 2007, these Class A equity interests were classified as Grade 4 and at December 31, 2006, these Class A equity interests were classified as Grade 3. See “ — Private Finance — Ciena Capital LLC” above.

Loans and Debt Securities Over 90 Days Delinquent. Loans and debt securities greater than 90 days delinquent at value at March 31, 2008, December 31, 2007 and 2006, were as follows:


		2008		2007			2006

($ in millions)
Private finance		$	54.0	$	139.9		$	46.5
Commercial mortgage loans			15.4		9.2			1.9

	Total	$	69.4	$	149.1		$	48.4

	Percentage of total portfolio		1.5%		3.1	%		1.1	%

Loans and debt securities over 90 days delinquent at March 31,2008 and December 31, 2007, include our investment in the Class A equity interests of Ciena, which became over 90 days delinquent in the first quarter of 2007. The amount of loans and debt securities over 90 days delinquent increased from $48.4 million at December 31, 2006, to $149.1 million at December 31, 2007, primarily due to not receiving payment on our Class A equity interests of Ciena. At March 31, 2008, and December 31, 2007, the Class A equity interests were $29.3 million or 0.6% of the total portfolio at value and $68.6 million, or 1.4% of the total portfolio at value, respectively. These equity interests were placed on non-accrual during the fourth quarter of 2006. See “ — Private Finance, Ciena Capital LLC” above.

The amount of the portfolio that is on non-accrual status or greater than 90 days delinquent may vary from period to period. Loans and debt securities on non-accrual status and over 90 days delinquent should not be added together as they are two separate measures of portfolio asset quality. Loans and debt securities that are in both categories (i.e., on non-accrual status and over 90 days delinquent) totaled $55.5 million, $149.1 million and $44.3 million at March 31, 2008, December 31, 2007 and 2006, respectively.

OTHER ASSETS AND OTHER LIABILITIES

Other assets is primarily composed of fixed assets, prepaid expenses, deferred financing and offering costs, and accounts receivable, which includes amounts received in connection with the sale of portfolio companies, including amounts held in escrow, and other receivables from portfolio companies. At March 31, 2008, and December 31, 2007 and 2006, other assets totaled $171.3 million, $157.9 million and $123.0 million, respectively. The increase in other assets since year end 2007 was primarily the result of an increase in accounts receivable due to $32.4 million in consideration received in connection with the sale of investments, which was received in cash in April 2008, partially offset by the March 2008 distribution of the assets held in deferred compensation trusts, which totaled $21.1 million at December 31, 2007.

Accounts payable and other liabilities is primarily composed of the liabilities related to accrued interest, bonus and taxes, including excise tax. At March 31, 2008, and December 31, 2007 and 2006, accounts payable and other liabilities totaled $62.3 million, $153.3 million and $147.1 million, respectively. The decrease in accounts payable and other liabilities since year end 2007 was primarily the result of the termination of the deferred compensation plans in March 2008, the liability for which totaled $52.5 million at December 31, 2007. In addition, accounts payable and other liabilities were reduced by the payment of liabilities at December 31, 2007, related to accrued 2007 bonuses of $40.1 million and excise tax of $16.0 million, offset by increases in the first quarter of 2008 related to accrued bonuses and excise tax totaling $12.6 million and interest payable totaling $11.5 million. Accrued interest payable fluctuates from period to period depending on the amount of debt outstanding and the contractual payment dates of the interest on such debt.

RESULTS OF OPERATIONS

Comparison of the Three Months Ended March 31, 2008 and 2007

The following table summarizes our operating results for the three months ended March 31, 2008 and 2007.


			For the Three Months
			Ended March 31,
												Percent
			2008			2007			Change			Change
(In thousands, except per share amounts)
			(unaudited)
Interest and Related Portfolio Income
	Interest and dividends		$	134,660		$	101,983		$	32,677			32	%
	Fees and other income			10,284			5,969			4,315			72	%

		Total interest and related portfolio income		144,944			107,952			36,992			34	%

Expenses
	Interest			37,560			30,288			7,272			24	%
	Employee			22,652			21,928			724			3	%
	Employee stock options			4,195			3,661			534			15	%
	Administrative			9,019			13,224			(4,205	)		(32	)%

		Total operating expenses		73,426			69,101			4,325			6	%

		Net investment income before income taxes		71,518			38,851			32,667			84	%
	Income tax expense (benefit), including excise tax			1,969			(649	)		2,618			403	%

		Net investment income		69,549			39,500			30,049			76	%

Net Realized and Unrealized Gains (Losses)
	Net realized gains			3,143			27,666			(24,523	)		*
	Net change in unrealized appreciation or depreciation			(113,404	)		65,920			(179,324	)		*

	Total net gains (losses)			(110,261	)		93,586			(203,847	)		*

		Net income	$	(40,712	)	$	133,086		$	(173,798	)		(131	)%

Diluted earnings per common share			$	(0.25	)	$	0.87		$	(1.12	)		(129	)%

Weighted average common shares outstanding — diluted				161,507			152,827			8,686			6	%


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

Total Interest and Related Portfolio Income. Total interest and related portfolio income includes interest and dividend income and fees and other income.

Interest and Dividends. Interest and dividend income for the three months ended March 31, 2008 and 2007, was composed of the following:


			2008		2007
($ in millions)
Interest
	Private finance loans and debt securities		$	107.0	$	92.9
	Preferred shares/income notes of CLOs			7.5		3.7
	Subordinated certificates in Unitranche Fund LLC			0.3		—
	Commercial mortgage loans			1.2		1.3
	Cash, U.S. Treasury bills, money market and other securities			1.8		2.8

		Total interest		117.8		100.7
Dividends				16.9		1.3

		Total interest and dividends	$	134.7	$	102.0

The level of interest income, which includes interest paid in cash and in kind, is directly related to the balance of the interest-bearing investment portfolio outstanding during the period multiplied by the weighted average yield. The interest-bearing investments in the portfolio at value and the yield on the interest-bearing investments in the portfolio at March 31, 2008 and 2007, were as follows:


			2008					2007

			Value		Yield⁽¹⁾			Value		Yield⁽¹⁾
($ in millions)
Loans and debt securities:
	Private finance		$	3,411.8		12.2	%	$	3,091.3		11.7	%
	Commercial mortgage loans			53.5		7.9	%		72.2		7.5	%

		Total loans and debt securities		3,465.3		12.1	%	$	3,163.5		11.6	%
Equity securities:
	Preferred shares/income notes of CLOs			197.4		15.8	%		96.1		13.5	%
	Subordinated certificates in Unitranche Fund LLC			31.5		12.4	%		—		—

		Total	$	3,694.2		12.3	%	$	3,259.6		11.7	%


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

Our interest income from our private finance loans and debt securities has increased period over period primarily as a result of the growth in this portfolio. The private finance loan and debt securities portfolio yield at March 31, 2008, of 12.2% as compared to the private finance portfolio yield of 11.7% at March 31, 2007, reflects the mix of debt investments in the private finance loan and debt securities portfolio. The weighted average yield varies from period to period based on the current stated interest on loans and debt securities and the amount of loans and debt securities for which interest is not accruing. See the discussion of the private finance portfolio yield above under the caption “— Portfolio and Investment Activity — Private Finance.”

Interest income also includes the effective interest yield on our investments in the preferred shares/income notes of CLOs. Interest income from these investments has increased period over period primarily as a result of the growth in these assets. The weighted average yield on the preferred shares/income notes of the CLOs at March 31, 2008, was 15.8%, as compared to the weighted average yield on the preferred shares/income notes of the CLOs of 13.5% at March 31, 2007.

The value and weighted average yield of the cash, U.S. Treasury bills, money market and other securities was $201.6 million and 1.5%, respectively, at March 31, 2008, and $271.5 million and 5.3%, respectively, at March 31, 2007. See “Financial Condition, Liquidity and Capital Resources” below.

Dividend income results from the dividend yield on preferred equity interests, if any, or the declaration of dividends by a portfolio company on preferred or common equity interests. Dividend income for the three months ended March 31, 2008, was $16.9 million as compared to $1.3 million for the three months ended March 31, 2007. The increase period over period was primarily a result of a $7.1 million dividend received in connection with the recapitalization of Norwesco, Inc., a portfolio company, and $5.5 million of dividends paid in cash in connection with the sale to AGILE Fund I, LLC during the first quarter of 2008. See “Portfolio and Investment Activity — Managed Funds” above. Dividend income will vary from period to period depending upon the timing and amount of dividends that are declared or paid by a portfolio company on preferred or common equity interests.

Fees and Other Income. Fees and other income primarily include fees related to financial structuring, diligence, transaction services, management and consulting services to portfolio companies and managed funds, commitments, guarantees, and other services and loan prepayment premiums. As a business development company, we are required to make significant managerial assistance available to the companies in our investment portfolio. Managerial assistance includes, but is not limited to, management and consulting services related to corporate finance, marketing, human resources, personnel and board member recruiting, business operations, corporate governance, risk management and other general business matters.

Fees and other income for the three months ended March 31, 2008 and 2007, included fees relating to the following:


		2008		2007
($ in millions)
Structuring and diligence		$	5.1	$	1.8
Management, consulting and other services provided to portfolio companies			2.9		1.8
Commitment, guaranty and other fees from portfolio companies⁽¹⁾			1.7		2.0
Fund management fees⁽²⁾			0.6		—
Loan prepayment premiums			—		0.3
Other income			—		0.1

	Total fees and other income	$	10.3	$	6.0


⁽¹⁾	Includes guaranty and other fees from Ciena of $1.4 million for 2007. See “— Private Finance, Ciena Capital, LLC” above.
⁽²⁾	See “Portfolio and Investment Activity — Managed Funds” above.

Fees and other income are generally related to specific transactions or services and therefore may vary substantially from period to period depending on the level of investment activity and types of services provided and the level of assets in managed funds for which we earn management or other fees. Loan origination fees that represent yield enhancement on a loan are capitalized and amortized into interest income over the life of the loan.

Structuring and diligence fees primarily relate to the level of new investment originations. Private finance investments funded were $274.6 million for the three months ended March 31, 2008, as compared to $170.2 million for the three months ended March 31, 2007. Structuring and diligence fees for the three months ended March 31, 2008, included $1.8 million earned by us in connection with investments made by the Unitranche Fund, LLC.

While the scheduled maturities of private finance and commercial real estate loans generally range from five to ten years, it is not unusual for our borrowers to refinance or pay off their debts to us ahead of schedule. Therefore, we generally structure our loans to require a prepayment premium for the first three

to five years of the loan. Accordingly, the amount of prepayment premiums will vary depending on the level of repayments and the age of the loans at the time of repayment.

See “— Portfolio and Investment Activity” above for further information regarding our total interest related portfolio income for Ciena and Mercury.

Operating Expenses. Operating expenses include interest, employee, employee stock options, and administrative expenses.

Interest Expense. The fluctuations in interest expense during the three months ended March 31, 2008 and 2007, were primarily attributable to changes in the level of our borrowings under various notes payable and our revolving line of credit. Our borrowing activity and weighted average cost of debt, including fees and debt financing costs, at and for the three months ended March 31, 2008 and 2007, were as follows:


	2008			2007
($ in millions)
Total outstanding debt	$	2,191.6		$	1,891.5
Average outstanding debt	$	2,209.5		$	1,841.2
Weighted average cost⁽¹⁾		6.2	%		6.5	%


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

In addition, interest expense included interest paid to the Internal Revenue Service related to installment sale gains totaling $1.9 million and $0.3 million for the three months ended March 31, 2008 and 2007, respectively. Installment interest expense for the year ended December 31, 2008, is estimated to be a total of $7.7 million. See “Dividends and Distributions” below.

Employee Expense. Employee expenses for the three months ended March 31, 2008 and 2007, were as follows:


($ in millions)		2008			2007

Salaries and employee benefits		$	22.7		$	21.4
Individual performance award (IPA)			2.4			2.5
IPA mark to market expense (benefit)			(4.1	)		(4.0	)
Individual performance bonus (IPB)			1.7			2.0

	Total employee expense⁽¹⁾	$	22.7		$	21.9

Number of employees at end of period			186			170


	⁽¹⁾	Excludes stock options expense. See below.

The change in salaries and employee benefits reflects the effect of an increase in the number of employees, compensation increases, and the change in mix of employees given their area of responsibility and relevant experience level. Salaries and employee benefits include an accrual for employee bonuses, which are generally paid annually after the completion of the fiscal year. The quarterly accrual is based upon an estimate of annual bonuses and is subject to change. The amount of the current year bonuses will be finalized by the Compensation Committee and the Board of Directors at the end of the year. Salaries and employee benefits included accrued bonuses of $10.3 million and $10.4 million for the three months ended March 31, 2008 and 2007, respectively.

The IPA is an incentive compensation program for certain officers and is generally determined annually at the beginning of each year but may be adjusted throughout the year. Through December 31, 2007, the IPA was deposited in a deferred compensation trust in four equal installments, generally on a

quarterly basis, in the form of cash. The trustee was required to use the cash to purchase shares of our common stock in the open market.

Through December 31, 2007, the IPA amounts were contributed into the trust and invested in our common stock. The accounts of the trust were consolidated with our accounts. The common stock was classified as common stock held in deferred compensation trust in the accompanying financial statements and the deferred compensation obligation, which represented the amount owed to the employees, was included in other liabilities. Changes in the value of our common stock held in the deferred compensation trust were not recognized. However, the liability was marked to market with a corresponding charge or credit to employee compensation expense. On March 18, 2008, prior to the distribution of the assets held in the trust, we were required to record a final mark to market of the liability with a corresponding credit to employee compensation expense.

In December 2007, our Board of Directors made a determination that it was in Allied Capital’s best interest to terminate our deferred compensation arrangements. The Board of Directors’ decision was primarily in response to increased complexity resulting from recent changes in the regulation of deferred compensation arrangements. The Board of Directors resolved that the accounts under these Plans would be distributed to participants in full on March 18, 2008, the termination and distribution date, or as soon as was reasonably practicable thereafter, in accordance with the provisions of each of these Plans.

The accounts under the deferred compensation arrangements totaled $52.5 million at December 31, 2007. The balances on the termination date were distributed to participants in March 2008 subsequent to the termination date, in accordance with the transition rule for payment elections under Section 409A of the Code. Distributions from the plans were made in cash or shares of our common stock, net of required withholding taxes. The distribution of the accounts under the deferred compensation arrangements will result in a tax deduction for 2008, subject to the limitations set by Section 162(m) of the Code for persons subject to such section.

The IPB is distributed in cash to award recipients throughout the year (beginning in February of each respective year) as long as the recipient remains employed by us.

The Compensation Committee and the Board of Directors have determined the IPA and the IPB for 2008 and they are currently estimated to be approximately $9.5 million each; however, the Compensation Committee may adjust the IPA or IPB as needed, or make new awards as new officers are hired. For 2008, the Compensation Committee has determined that the IPAs will be paid in cash in two equal installments during the year, as long as the recipient remains employed by us. If a recipient terminates employment during the year, any further cash contribution for the IPA or remaining cash payments under the IPB would be forfeited.

Stock Options Expense. Effective January 1, 2006, we adopted FASB Statement No. 123 (Revised 2004), Share-Based Payment (SFAS 123R) using the modified prospective method of application, which required us to recognize compensation costs on a prospective basis beginning January 1, 2006. Under this method, the unamortized cost of previously awarded options that were unvested as of January 1, 2006, is recognized over the remaining service period in the statement of operations beginning in 2006, using the fair value amounts determined for proforma disclosure under SFAS 123R. With respect to options granted on or after January 1, 2006, compensation cost based on estimated grant date fair value is recognized in the consolidated statement of operations over the service period. Our employee stock options are typically granted with ratable vesting provisions, and we amortize the compensation cost over the related service period. On February 1, 2008, the Compensation Committee of our Board of Directors granted 7.1 million options with an exercise price of $22.96 per share. The options vest ratably over a three-year period beginning on June 30, 2009.

The stock option expense for the three months ended March 31, 2008 and 2007, was as follows:


			2008		2007
($ in millions)
Employee Stock Option Expense:
	Previously awarded, unvested options as of January 1, 2006		$	1.7	$	3.2
	Options granted on or after January 1, 2006			2.5		0.5

		Total employee stock option expense	$	4.2	$	3.7

We estimate that the employee-related stock option expense for outstanding unvested options as of March 31, 2008, will be approximately $13.2 million, $6.8 million, and $4.0 million for the years ended December 31, 2008, 2009, and 2010, respectively. This estimate may change if our assumptions related to future option forfeitures change. This estimate does not include any expense related to stock option grants after March 31, 2008, as the fair value of those stock options will be determined at the time of grant.

Administrative Expense. Administrative expenses include legal and accounting fees, valuation assistance fees, insurance premiums, the cost of leases for our headquarters in Washington, DC, and our regional offices, portfolio origination and development expenses, travel costs, stock record expenses, directors’ fees and stock option expense, and various other expenses.

Administrative expenses for the three months ended March 31, 2008 and 2007, were $9.0 million and $13.2 million, respectively. Administrative expenses declined due to a reduction in investigation and litigation costs, net of insurance reimbursements, of $3.8 million. Administrative expenses for the three months ended March 31, 2007, included costs of $1.4 million incurred to engage a third party to conduct a review of Ciena’s internal control systems. See “— Private Finance, Ciena Capital LLC” above.

Income Tax Expense (Benefit), Including Excise Tax. Income tax expense (benefit) for the three months ended March 31, 2008 and 2007, was as follows:


		2008			2007
($ in millions)
Income tax expense (benefit)		$	(0.3	)	$	(4.2	)
Excise tax expense⁽¹⁾			2.3			3.6

	Income tax expense (benefit), including excise tax	$	2.0		$	(0.6	)


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

Our wholly-owned subsidiary, A.C. Corporation, is a corporation subject to federal and state income taxes and records a benefit or expense for income taxes as appropriate based on its operating results in a given period.

Our excess taxable income carried over from 2007 plus our estimated annual taxable income for 2008 currently exceeds our estimated dividend distributions to shareholders in 2008, therefore, we expect to carry over excess taxable income earned in 2008 for distribution in 2009. Therefore, we will generally be required to pay an excise tax equal to 4% of the amount by which 98% of our annual taxable income exceeds the distributions for the year. We have recorded an estimated excise tax of $2.3 million for the three months ended March 31, 2008. See “Dividends and Distributions.”

from the sale and early repayment of private finance loans and commercial mortgage loans, offset by losses on investments. Net realized gains for the three months ended March 31, 2008 and 2007, were as follows:


	2008			2007
($ in millions)
Realized gains	$	32.7		$	33.2
Realized losses		(29.6	)		(5.5	)

Net realized gains	$	3.1		$	27.7

The realized gains and losses for the three months ended March 31, 2008, were primarily a result of the sale to AGILE Fund I, LLC. The net realized gain from this transaction totaled $8.8 million. In addition, realized losses for the quarter included $5.5 million related to the sale of the venture capital and private equity limited partnership investments to a fund managed by Goldman Sachs. See “— Managed Funds” above.

When we exit an investment and realize a gain or loss or receive a dividend on an equity security from a portfolio company, we make an accounting entry to reverse any unrealized appreciation or depreciation, respectively, we had previously recorded to reflect the appreciated or depreciated value of the investment. For the three months ended March 31, 2008 and 2007, we reversed previously recorded unrealized appreciation or depreciation when gains or losses were realized or when dividends were received as follows:


		2008			2007
($ in millions)
Reversal of previously recorded net unrealized appreciation associated with realized gains		$	(32.5	)	$	(32.1	)
Reversal of previously recorded net unrealized appreciation associated with dividends received			(13.5	)		—
Reversal of previously recorded net unrealized depreciation associated with realized losses			28.5			5.8

	Total reversal	$	(17.5	)	$	(26.3	)

Realized gains for the three months ended March 31, 2008 and 2007, were as follows:

($ in millions)


2008

Portfolio Company		Amount

Private Finance:
Norwesco, Inc.		$	10.7
BenefitMall, Inc.			4.9
Financial Pacific Company			3.1
Penn Detroit Diesel Allison, LLC			1.7
Service Champ, Inc.			1.7
Advantage Sales & Marketing, Inc.⁽¹⁾			3.2
Coverall North America, Inc.			1.4
CR Holding, Inc.			1.0
Other			4.9

Total private finance			32.6

Commercial Real Estate:
Other			0.1

	Total commercial real estate		0.1

Total realized gains		$	32.7


2007

Portfolio Company	Amount

Private Finance:
Palm Coast Data, LLC	$	20.0
Mogas Energy, LLC		4.5
Tradesmen International, Inc		3.8
ForeSite Towers, LLC		3.8
Other		1.1

Total realized gains	$	33.2


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

Realized losses for the three months ended March 31, 2008 and 2007, were as follows:

($ in millions)


2008

Portfolio Company		Amount

Private Finance:
Crescent Equity Corp. — Longview Cable & Data, LLC		$	8.4
Mid-Atlantic Venture Fund IV, L.P.			5.2
WMA Equity Corporation and Affiliates			4.5
Driven Brands, Inc.			1.9
Direct Capital Corporation			1.7
EarthColor, Inc.			1.7
Sweet Traditions, Inc.			1.0
Other			4.9

Total private finance			29.3

Commercial Real Estate:
Other			0.3

	Total commercial real estate		0.3

Total realized losses		$	29.6


2007

Portfolio Company	Amount

Private Finance:
Legacy Partners Group, LLC	$	5.8
Other		(0.3	)

Total realized losses	$	5.5

Change in Unrealized Appreciation or Depreciation. We determine the value of each investment in our portfolio on a quarterly basis, and changes in value result in unrealized appreciation or depreciation being recognized in our statement of operations. Value, as defined in Section 2(a)(41) of the Investment Company Act of 1940 (1940 Act), is (i) the market price for those securities for which a market quotation is readily available and (ii) for all other securities and assets, fair value is as determined in good faith by the Board of Directors. Since there is typically no readily available market value for the investments in our portfolio, we value substantially all of our portfolio investments at fair value as determined in good faith by the Board of Directors in accordance with our valuation policy and the provisions of the 1940 Act and FASB Statement No. 157, Fair Value Measurements (SFAS 157 or the Statement). We determine fair value to be the price that would be received for an investment in a current sale, which assumes an orderly transaction between market participants on the measurement date. At March 31, 2008, portfolio investments recorded at fair value using level 3 inputs (as defined under the Statement) were approximately 91% of our total assets. Because of the inherent uncertainty of determining the fair value of investments that do not have a readily available market quotation in an active market, the fair value of our investments determined in good faith by the Board of Directors may differ significantly from the values that would have been used had a ready market existed for the investments, and the differences could be material.

basis. Changes in fair value are recorded in the statement of operations as net change in unrealized appreciation or depreciation.

As a business development company, we invest in illiquid securities including debt and equity securities of portfolio companies, CLO bonds and preferred shares/income notes, CDO bonds and investment funds. The structure of each debt and equity security is specifically negotiated to enable us to protect our investment and maximize our returns. We include many terms governing interest rate, repayment terms, prepayment penalties, financial covenants, operating covenants, ownership parameters, dilution parameters, liquidation preferences, voting rights, and put or call rights. Our investments may be subject to certain restrictions on resale and generally have no established trading market.

Valuation Methodology. We adopted SFAS 157 on a prospective basis in the first quarter of 2008. SFAS 157 requires us to assume that the portfolio investment is assumed to be sold in the principal market to market participants, or in the absence of a principal market, the most advantageous market, which may be a hypothetical market. Market participants are defined as buyers and sellers in the principal or most advantageous market that are independent, knowledgeable, and willing and able to transact. In accordance with the Statement, we have considered our principal market, or the market in which we exit our portfolio investments with the greatest volume and level of activity.

We have determined that for our buyout investments, where we have control or could gain control through an option or warrant security, both the debt and equity securities of the portfolio investment would exit in the merger and acquisition (“M&A”) market as the principal market generally through a sale or recapitalization of the portfolio company. We believe that the in-use premise of value (as defined in SFAS 157), which assumes the debt and equity securities are sold together, is appropriate as this would provide maximum proceeds to the seller. As a result, we will continue to use the enterprise value methodology to determine the fair value of these investments under SFAS 157. Enterprise value means the entire value of the company to a market participant, including the sum of the values of debt and equity securities used to capitalize the enterprise at a point in time. Enterprise value is determined using various factors, including cash flow from operations of the portfolio company, multiples at which private companies are bought and sold, and other pertinent factors, such as recent offers to purchase a portfolio company, recent transactions involving the purchase or sale of the portfolio company’s equity securities, liquidation events, or other events. We allocate the enterprise value to these securities in order of the legal priority of the securities.

There is no one methodology to determine enterprise value and, in fact, for any one portfolio company, enterprise value is best expressed as a range of fair values. However, we must derive a single estimate of enterprise value. To determine the enterprise value of a portfolio company, we analyze its historical and projected financial results. This financial and other information is generally obtained from the portfolio companies, and may represent unaudited, projected or pro forma financial information. We generally require portfolio companies to provide annual audited and quarterly unaudited financial statements, as well as annual projections for the upcoming fiscal year. Typically in the private equity business, companies are bought and sold based on multiples of EBITDA, cash flow, net income, revenues or, in limited instances, book value. 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. When using EBITDA to determine enterprise value, we

may adjust EBITDA for non-recurring items. Such adjustments are intended to normalize EBITDA to reflect the portfolio company’s earnings power. Adjustments to EBITDA may include compensation to previous owners, acquisition, recapitalization, or restructuring related items or one-time non-recurring income or expense items.

In determining a multiple to use for valuation purposes, we generally look to private merger and acquisition statistics, the entry multiple for the transaction, discounted public trading multiples or industry practices. In estimating a reasonable multiple, we consider not only the fact that our portfolio company may be a private company relative to a peer group of public comparables, but we also consider the size and scope of our portfolio company and its specific strengths and weaknesses. In some cases, the best valuation methodology may be a discounted cash flow analysis based on future projections. If a portfolio company is distressed, a liquidation analysis may provide the best indication of enterprise value.

While we typically exit our securities upon the sale or recapitalization of the portfolio company in the M&A market, for investments in portfolio companies where we do not have control or the ability to gain control through an option or warrant security, we cannot typically control the exit of our investment into the principal market (the M&A market). As a result, in accordance with SFAS 157, we are required to determine the fair value of these investments assuming a sale of the individual investment in a hypothetical market to a hypothetical market participant (the in-exchange premise of value). We continue to perform an enterprise value analysis for investments in this category to assess the credit risk of the loan or debt security and to determine the fair value of our equity investment in these portfolio companies. The determined equity values are generally discounted when we have a minority ownership position, restrictions on resale, specific concerns about the receptivity of the capital markets to a specific company at a certain time, or other factors. For loan and debt securities, we perform a yield analysis assuming a hypothetical current sale of the investment. The yield analysis requires us to estimate the expected repayment date of the instrument and a market participant’s required yield. Our estimate of the expected repayment date of a loan or debt security is generally shorter than the legal maturity of the instruments as our loans have historically been repaid prior to the maturity date. The yield analysis considers changes in interest rates and changes in leverage levels of the loan or debt security as compared to market interest rates and leverage levels. Assuming the credit quality of the loan or debt security remains stable, we will use the value determined by the yield analysis as the fair value for that security. A change in the assumptions that we use to estimate the fair value of our loans and debt securities using the yield analysis could have a material impact on the determination of fair value. If there is deterioration in credit quality or a loan or debt security is in workout status, we may consider other factors in determining the fair value of a loan or debt security, including the value attributable to the loan or debt security from the enterprise value of the portfolio company or the proceeds that would be received in a liquidation analysis.

Our equity investments in private debt and equity funds are generally valued at the fund’s net asset value, unless other factors lead to a determination of fair value at a different amount. The value of our equity securities in public companies for which quoted prices in an active market are readily available is based on the closing public market price on the measurement date.

The fair value of our CLO/ CDO Assets is generally based on a discounted cash flow model that utilizes prepayment, re-investment and loss assumptions based on historical experience and projected performance, economic factors, the characteristics of the underlying cash flow and comparable yields for similar bonds and preferred shares/income notes, when available. We recognize unrealized appreciation or depreciation on our CLO/ CDO Assets as comparable yields in the market change and/or based on changes in estimated cash flows resulting from changes in prepayment, re-investment or loss assumptions in the underlying collateral pool. We determine the fair value of our CLO/ CDO Assets on an individual security-by-security basis. If we were to sell a group of these CLO/ CDO Assets in a pool in one or more transactions, the total value received for that pool may be different than the sum of the fair values of the individual assets.

We will record unrealized depreciation on investments when we determine that the fair value of a security is less than its cost basis, and will record unrealized appreciation when we determine that the fair value is greater than its cost basis. Because of the inherent uncertainty of valuation, the values determined at the measurement date may differ significantly from the values that would have been used had a ready market existed for the investments, and the differences could be material. Additionally, changes in the market environment and other events that may occur over the life of the investments may cause the gains or losses ultimately realized on these investments to be different than the values determined at the measurement date.

As a participant in the private equity business, we invest primarily in private middle market companies for which there is generally no publicly available information. Because of the private nature of these businesses, there is a need to maintain the confidentiality of the financial and other information that we have for the private companies in our portfolio. We believe that maintaining this confidence is important, as disclosure of such information could disadvantage our portfolio companies and could put us at a disadvantage in attracting new investments. Therefore, we do not intend to disclose financial or other information about our portfolio companies, unless required, because we believe doing so may put them at an economic or competitive disadvantage, regardless of our level of ownership or control.

We work with third-party consultants to obtain assistance in determining fair value for a portion of the private finance portfolio each quarter. We work with these consultants to obtain assistance as additional support in the preparation of our internal valuation analysis. In addition, we may receive third-party assessments of a particular private finance portfolio company’s value in the ordinary course of business, most often in the context of a prospective sale transaction or in the context of a bankruptcy process.

The valuation analysis prepared by management is submitted to our Board of Directors who is ultimately responsible for the determination of fair value of the portfolio in good faith. Valuation assistance from Duff & Phelps, LLC (Duff & Phelps) for our private finance portfolio consisted of certain limited procedures (the Procedures) we identified and requested them to perform. Based upon the performance of the Procedures on a selection of our final portfolio company valuations, Duff & Phelps concluded that the fair value of those portfolio companies subjected to the Procedures did not appear unreasonable. In addition, we also received third-party valuation assistance from other third-party consultants for certain private finance portfolio companies. For the three months ended March 31, 2008 and 2007, we received third-party valuation assistance as follows:


	2008			2007

Number of private finance portfolio companies reviewed		124			88
Percentage of private finance portfolio reviewed at value		94.0	%		91.8	%

Professional fees for third-party valuation assistance were $1.8 million for the year ended December 31, 2007, and are estimated to be approximately $2.3 million for 2008.

Net Change in Unrealized Appreciation or Depreciation. Net change in unrealized appreciation or depreciation for the three months ended March 31, 2008 and 2007, consisted of the following:


		2008⁽¹⁾			2007⁽¹⁾
($ in millions)
Net unrealized appreciation (depreciation)		$	(95.9	)	$	92.2
Reversal of previously recorded unrealized appreciation associated with realized gains			(32.5	)		(32.1	)
Reversal of previously recorded net unrealized appreciation associated with dividends received			(13.5	)		—
Reversal of previously recorded unrealized depreciation associated with realized losses			28.5			5.8

	Net change in unrealized appreciation or depreciation	$	(113.4	)	$	65.9


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

The primary drivers of the net unrealized depreciation of $95.9 million resulting from changes in portfolio value for the quarter ended March 31, 2008, were (i) non-buyout debt investments, which depreciated by $9.3 million as a result of using a yield analysis in connection with the adoption of SFAS 157, (ii) additional depreciation of $39.3 million on our investment in Ciena resulting from the decline in value of their residual interest assets and other financial assets as discussed below, and (iii) depreciation in our other financial services and asset management portfolio companies, and our CLO/ CDO investments, which totaled $39.4 million.

Valuation of Ciena Capital LLC. Our investment in Ciena totaled $327.8 million at cost and $29.3 million at value, which included unrealized depreciation of $298.5 million, at March 31, 2008, and $327.8 million at cost and $68.6 million at value, which included unrealized depreciation of $259.2 million, at December 31, 2007.

Ciena relies on the asset-backed securitization market to finance its loan origination activity. That financing source continues to be unreliable in the current capital markets, and as a result, Ciena has substantially curtailed loan origination activity. To value our investment at March 31, 2008, we continued to attribute no value to Ciena’s origination platform or enterprise due to the state of the securitization markets, among other factors. The decline in value at March 31, 2008, of $39.3 million reflects the decline in value of Ciena’s financial assets, including residual interests, which reduced its book value. We valued our investment in Ciena at March 31, 2008, solely based on the estimated realizable value of Ciena’s net assets, including the estimated realizable value of the cash flows generated from Ciena’s retained interests in its current servicing portfolio, which includes portfolio servicing fees as well as cash flows from Ciena’s equity investments in its securitizations and its interest-only strip. This resulted in a value to our investment, after repayment of senior debt outstanding, of $29.3 million at March 31, 2008.

We also continued to consider Ciena’s current regulatory issues and ongoing investigations and litigation in performing the valuation analysis at March 31, 2008. (See “— Private Finance, Ciena Capital LLC” above.)

Net change in unrealized appreciation or depreciation included a net decrease of $39.3 million for the three months ended March 31, 2008, and no change for the three months ended March 31, 2007. We received valuation assistance from Duff & Phelps for our investment in Ciena at March 31, 2008 and 2007. See “Valuation Methodology — Private Finance” above for further discussion of the third-party valuation assistance we received.

Per Share Amounts. All per share amounts included in the Management’s Discussion and Analysis of Financial Condition and Results of Operations section have been computed using the weighted average common shares used to compute diluted earnings per share, which were 161.5 million and 152.8 million for the three months ended March 31, 2008 and 2007, respectively.

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

The following table summarizes our operating results for 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.

Total Interest and Related Portfolio Income. Total interest and related portfolio income includes interest and dividend income and fees and other income.

Interest and Dividends. Interest and dividend income for the years ended December 31, 2007, 2006, and 2005, was composed of the following:


			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

The level of interest income, which includes interest paid in cash and in kind, is directly related to the balance of the interest-bearing investment portfolio outstanding during the year multiplied by the weighted average yield. The interest-bearing investments in the portfolio at value and the yield on the interest-bearing investments in the portfolio at December 31, 2007, 2006, and 2005, were as follows:


			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.

Our interest income from our private finance loans and debt securities has increased year over year primarily as a result of the growth in this portfolio. The private finance loan and debt securities portfolio yield at December 31, 2007, of 12.1% as compared to the private finance portfolio yield of 11.9% and 13.0% at December 31, 2006 and 2005, respectively, reflects the mix of debt investments in the private finance loan and debt securities portfolio. The weighted average yield varies from year to year based on the current stated interest on loans and debt securities and the amount of loans and debt securities for which interest is not accruing. See the discussion of the private finance portfolio yield above under the caption “— Portfolio and Investment Activity — Private Finance.”

Interest income also includes the effective interest yield on our investments in the preferred shares/income notes of CLOs. Interest income from these investments has increased year over year primarily as a result of the growth in these assets. The weighted average yield on the preferred shares/income notes of the CLOs at December 31, 2007, was 14.6%, as compared to the weighted average

yield on the preferred shares/income notes of the CLOs yield of 15.5% and 13.7% at December 31, 2006 and 2005, respectively.

There was no interest income from the CMBS and real estate-related CDO portfolio in 2007 or 2006 as we sold this portfolio on May 3, 2005. The CMBS and CDO portfolio sold had a cost basis of $718.1 million and a weighted average yield on the cost basis of the portfolio of approximately 13.8%. We generally reinvested the principal proceeds from the CMBS and CDO portfolio into our private finance portfolio.

Interest income from cash, U.S. Treasury bills, money market and other securities results primarily from interest earned on our liquidity portfolio and excess cash on hand. During the fourth quarter of 2005, we established a liquidity portfolio that was composed primarily of money market and other securities and U.S. Treasury bills. At December 31, 2007, the liquidity portfolio was composed primarily of money market securities. See “Financial Condition, Liquidity and Capital Resources” below. The value and weighted average yield of the liquidity portfolio was $201.2 million and 4.6%, respectively, at December 31, 2007, $201.8 million and 5.3%, respectively, at December 31, 2006, and $200.3 million and 4.2%, respectively, at December 31, 2005.

Dividend income results from the dividend yield on preferred equity interests, if any, or the declaration of dividends by a portfolio company on preferred or common equity interests. Dividend income will vary from year to year depending upon the timing and amount of dividends that are declared or paid by a portfolio company on preferred or common equity interests. Dividend income for the years ended December 31, 2007 and 2006, did not include any dividends from Ciena. See “— Private Finance, Ciena Capital LLC” above. Dividend income for the year ended December 31, 2005, included dividends from Ciena on the Class B equity interests held by us of $14.0 million. For the year ended December 31, 2005, $12.0 million of these dividends were paid in cash and $2.0 million of these dividends were paid through the issuance of additional Class B equity interests.

Fees and Other Income. Fees and other income primarily include fees related to financial structuring, diligence, transaction services, management and consulting services to portfolio companies, commitments, guarantees, and other services and loan prepayment premiums. As a business development company, we are required to make significant managerial assistance available to the companies in our investment portfolio. Managerial assistance includes, but is not limited to, management and consulting services related to corporate finance, marketing, human resources, personnel and board member recruiting, business operations, corporate governance, risk management and other general business matters.

Fees and other income for the years ended December 31, 2007, 2006, and 2005, included fees relating to the following:


		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.

Fees and other income are generally related to specific transactions or services and therefore may vary substantially from year to year depending on the level of investment activity, the types of services provided and the level of assets in managed funds for which we earn management or other fees. Loan origination fees that represent yield enhancement on a loan are capitalized and amortized into interest income over the life of the loan.

Structuring and diligence fees primarily relate to the level of new investment originations. Private finance investments funded were $1.8 billion for the year ended December 31, 2007, as compared to $2.4 billion and $1.5 billion for the years ended December 31, 2006 and 2005, respectively. This resulted in lower structuring and diligence fees in 2007 versus 2006.

Loan prepayment premiums for the year ended December 31, 2006, included $5.0 million related to the repayment of our subordinated debt in connection with the sale of our majority equity interest in Advantage on March 29, 2006. See “— Portfolio and Investment Activity” above for further discussion. While the scheduled maturities of private finance and commercial real estate loans generally range from five to ten years, it is not unusual for our borrowers to refinance or pay off their debts to us ahead of schedule. Therefore, we generally structure our loans to require a prepayment premium for the first three to five years of the loan. Accordingly, the amount of prepayment premiums will vary depending on the level of repayments and the age of the loans at the time of repayment.

See “— Portfolio and Investment Activity” above for further information regarding our total interest and related portfolio income for Ciena, Mercury, and Advantage.

Operating Expenses. Operating expenses include interest, employee, employee stock options, and administrative expenses.

Interest Expense. The fluctuations in interest expense during the years ended December 31, 2007, 2006, and 2005, were primarily attributable to changes in the level of our borrowings under various notes payable and our revolving line of credit. Our borrowing activity and weighted average cost of debt, including fees and debt financing costs, at and for the years ended December 31, 2007, 2006, and 2005, were as follows:


	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.

In addition, interest expense included interest paid to the Internal Revenue Service related to installment sale gains totaling $5.8 million, $0.9 million, and $0.6 million for the years ended December 31, 2007, 2006, and 2005, respectively. See “Dividends and Distributions” below.

Interest expense also included interest on our obligations to replenish borrowed Treasury securities related to our hedging activities of $0.7 million and $1.4 million for the years ended December 31, 2006 and 2005, respectively.

Employee Expense. Employee expenses for the years ended December 31, 2007, 2006, and 2005, were as follows:


		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.

The change in salaries and employee benefits reflects the effect of compensation increases, the change in mix of employees given their area of responsibility and relevant experience level and an increase in the number of employees. The overall increase in salaries and employee benefits also reflects the competitive environment for attracting and retaining talent in the private equity industry. Salaries and employee benefits include an accrual for employee bonuses, which are generally paid annually after the completion of the fiscal year. Salaries and employee benefits included bonus expense of $40.1 million, $38.2 million, and $26.9 million for the years ended December 31, 2007, 2006, and 2005, respectively.

The IPA is an incentive compensation program for certain officers and is generally determined annually at the beginning of each year. Through December 31, 2007, the IPA was deposited into a deferred compensation trust generally in four equal installments, on a quarterly basis, in the form of cash. The trustee was required to use the cash to purchase shares of our common stock in the open market. The accounts of the trust are consolidated with our accounts. We are required to mark to market the liability of the trust and this adjustment is recorded to the IPA compensation expense. Because the IPA has been deferred compensation, the cost of this award is not a current expense for purposes of computing our taxable income until distributions are made from the trust.

On December 14, 2007, our Board of Directors made a determination that it is in Allied Capital’s best interest to terminate our deferred compensation plans. The Board of Directors’ decision was primarily in response to increased complexity resulting from recent changes in the regulation of deferred compensation arrangements. The Board of Directors resolved that our deferred compensation plans would be terminated in accordance with the provisions of each of the plans and the accounts under the plans would be distributed to participants in full on March 18, 2008, the termination and distribution date, or as soon as reasonably practicable thereafter, in accordance with the transition rule for payment elections under Section 409A of the Internal Revenue Code of 1986. The termination and distribution of the plans was completed in the first quarter of 2008. Distributions from the plans were made in cash or shares of our common stock, net of required withholding taxes. See “Results of Operations — Comparison of the Three Months Ended March 31, 2008 and 2007 — Employee Expense” above. See also “Compensation of Executive Officers and Directors — Termination of Deferred Compensation Arrangements.”

The assets of the rabbi trust related to The Allied Capital Corporation Non-Qualified Deferred Compensation Plans (DCPs I) were primarily invested in assets other than shares of our common stock. At December 31, 2007, the liability to participants related to DCPs I was valued at $21.1 million in the aggregate, and that liability is fully funded by assets held in the rabbi trust.

The assets of the rabbi trust related to The Allied Capital Corporation Non-Qualified Deferred Compensation Plans II(DCPs II) were primarily invested in shares of our common stock. At

December 31, 2007, the liability to participants related to DCPs II was valued at $31.4 million in the aggregate, and that liability was fully funded by assets held in the rabbi trust. At December 31, 2007, the DCPs II rabbi trust held approximately 1.4 million shares of our common stock.

The account balances in the plans accumulated as a result of prior compensation earned by the participants. The contributions to the plans reflect a combination of participant elective compensation deferrals and non-elective employer contributions, including contributions related to previously earned individual performance awards. The distribution of the DCPs I and DCPs II assets will result in a tax deduction for 2008, subject to the limitations set by Section 162(m) of the Code for persons subject to such section.

The IPB is distributed in cash to award recipients throughout the year (beginning in February of each respective year) as long as the recipient remains employed by us.

The Compensation Committee of the Board of Directors and the Board of Directors have determined the IPA and the IPB for 2008 and they are currently estimated to be approximately $9.6 million each; however, the Compensation Committee may adjust the IPA or IPB as needed, or make new awards as new officers are hired. For 2008, the Compensation Committee has determined that the IPAs will be paid in cash in two equal installments during the year, as long as the recipient remains employed by us. If a recipient terminates employment during the year, any remaining payments under the IPA or IPB would be forfeited.

Stock Options Expense. Effective January 1, 2006, we adopted Statement No. 123 (Revised 2004), Share-Based Payment (SFAS 123R) using the modified prospective method of application, which required us to recognize compensation costs on a prospective basis beginning January 1, 2006. Under this method, the unamortized cost of previously awarded options that were unvested as of January 1, 2006, will be recognized over the remaining service period in the statement of operations beginning in 2006, using the fair value amounts determined for proforma disclosure under SFAS 123R. With respect to options granted on or after January 1, 2006, compensation cost based on estimated grant date fair value is recognized in the consolidated statement of operations over the service period. Our employee stock options are typically granted with ratable vesting provisions, and we amortize the compensation cost over the related service period. The stock option expense for the years ended December 31, 2007 and 2006, was as follows:


				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. In addition to the employee stock option expense for both options granted, for both the years ended December 31, 2007 and 2006, administrative expense included $0.2 million of expense related to options granted to directors during each year. Options were granted to non-officer directors in the second quarters of 2007 and 2006. Options granted to non-officer directors vest on the grant date and therefore, the full expense is recorded on the grant date.

During the second quarter of 2007, options were granted for 6.4 million shares. One-third of the options granted to employees vested on June 30, 2007; therefore, approximately one-third of the expense related to this grant, or $5.9 million, was recorded in the second quarter of 2007. Of the remaining options granted, one-half will vest on June 30, 2008, and one-half will vest on June 30, 2009. See “— Results of Operations for the Three Months Ended March 31, 2008 and 2007 — Stock Options Expense” above for the estimate of employee-related stock option expense for future periods.

Options Cancelled in Connection with Tender Offer. On July 18, 2007, we completed a tender offer to our optionees who held vested “in-the-money” stock options as of June 20, 2007,where optionees received an option cancellation payment (OCP), equal to the “in-the-money” value of the stock options cancelled determined using a Weighted Average Market Price of $31.75 paid one-half in cash and one-half in unregistered shares of our common stock. We accepted for cancellation 10.3 million vested options held by employees and non-officer directors, which in the aggregate had a weighted average exercise price of $21.50. This resulted in a total option cancellation payment of approximately $105.6 million, of which $52.8 million was paid in cash and $52.8 million was paid through the issuance of 1.7 million unregistered shares of the Company’s common stock. Our stockholders approved the issuance of the shares of our common stock in exchange for the cancellation of vested “in-the-money” stock options at our 2006 Annual Meeting of Stockholders. Cash payments to employee optionees were paid net of required payroll and income tax withholdings.

The OCP was equal to the “in-the-money” value of the stock options cancelled, determined using the Weighted Average Market Price of $31.75, and was paid one-half in cash and one-half in unregistered shares of the Company’s common stock. In accordance with the terms of the tender offer, the Weighted Average Market Price represented the volume weighted average price of our common stock over the fifteen trading days preceding the first day of the offer period, or June 20, 2007. Because the Weighted Average Market Price at the commencement of the tender offer on June 20, 2007, was higher than the market price of our common stock at the close of the offer on July 18, 2007, SFAS 123R required us to record a non-cash employee-related stock option expense of $14.4 million and administrative expense related to stock options cancelled that were held by non-officer directors of $0.4 million. The same amounts were recorded as an increase to additional paid-in capital and, therefore, had no effect on our net asset value. The portion of the OCP paid in cash of $52.8 million reduced our additional paid-in capital and therefore reduced our net asset value. For income tax purposes, our tax deduction resulting from the OCP will be similar to the tax deduction that would have resulted from an exercise of stock options in the market. Any tax deduction resulting from the OCP or an exercise of stock options in the market is limited by Section 162(m) of the Code.


		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

Administrative expenses, excluding investigation and litigation costs, for the year ended December 31, 2007, included costs of $1.4 million incurred in the first quarter of 2007 to engage a third party to conduct a review of Ciena’s internal control systems. See “— Private Finance, Ciena Capital LLC” above. In addition, administrative expenses for the year ended December 31, 2007, included $2.5 million in placement fees related to securing equity commitments to the Allied Capital Senior Debt Fund, L.P. in the second quarter of 2007. See “— Managed Funds — Allied Capital Senior Debt Fund, L.P.” above.

Administrative expenses, excluding investigation and litigation costs and the costs outlined above, were $40.9 million for the year ended December 31, 2007, which is an increase of $6.9 million from 2006. The increase was primarily due to increased expenses related to directors’ fees of $1.6 million, an increase in stock record expenses of $0.7 million due to the increase in our shareholder base, an increase in rent expense of $0.7 million, and an increase in costs related to evaluating potential new investments of $0.7 million. Costs related to debt investments are generally paid by the borrower, however, costs related

to buyout investments are generally funded by us. Accordingly, if a prospective deal does not close, we incur expenses that are not recoverable.

Investigation and litigation costs are difficult to predict and may vary from year to year. See “Legal Proceedings” below.

Income Tax Expense, Including Excise Tax. Income tax expense for the years ended December 31, 2007, 2006, and 2005, was as follows:


		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.

Our estimated annual taxable income for 2007 exceeded our dividend distributions to shareholders from such taxable income in 2007, and such estimated excess taxable income will be distributed in 2008. Therefore, we will generally be required to pay an excise tax equal to 4% of the amount by which 98% of our annual taxable income exceeds the distributions for the year. We have recorded an estimated excise tax of $16.3 million for the year ended December 31, 2007. See “Dividends and Distributions.”

In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes, which clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. This interpretation is effective for fiscal years beginning after December 15, 2006. The adoption of this interpretation did not have a significant effect on our consolidated financial position or our results of operations.

Realized Gains and Losses. Net realized gains primarily result from the sale of equity securities associated with certain private finance investments and the realization of unamortized discount resulting from the sale and early repayment of private finance loans and commercial mortgage loans, offset by losses on investments. In 2005, net realized gains also resulted from the sale of real estate-related CMBS bonds and CDO bonds and preferred shares. Net realized gains for the years ended December 31, 2007, 2006, and 2005, were as follows:


	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

When we exit an investment and realize a gain or loss, we make an accounting entry to reverse any unrealized appreciation or depreciation, respectively, we had previously recorded to reflect the appreciated or depreciated value of the investment. For the years ended December 31, 2007, 2006, and 2005, we

reversed previously recorded unrealized appreciation or depreciation when gains or losses were realized as follows:


		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.

Realized gains for the years ended December 31, 2007, 2006, and 2005, were as follows:

($ 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.

Realized losses for the years ended December 31, 2007, 2006, and 2005, were as follows:

($ 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. We determine the value of each investment in our portfolio on a quarterly basis, and changes in value result in unrealized appreciation or depreciation being recognized in our statement of operations. Value, as defined in Section 2(a)(41) of the Investment Company Act of 1940, is (i) the market price for those securities for which a market quotation is readily available and (ii) for all other securities and assets, fair value is as determined in good faith by the Board of Directors. Since there is typically no readily available market value for the investments in our portfolio, we value substantially all of our portfolio investments at fair value as determined in good faith by the Board of Directors pursuant to our valuation policy and a consistently applied valuation process. At December 31, 2007, portfolio investments recorded at fair value were approximately 92% of our total assets. Because of the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of our investments determined in good faith by the Board of Directors may differ significantly from the values that would have been used had a ready market existed for the investments, and the differences could be material.

There is no single standard for determining fair value in good faith. As a result, determining fair value requires that judgment be applied to the specific facts and circumstances of each portfolio investment while employing a consistently applied valuation process for the types of investments we make. Unlike banks, we are not permitted to provide a general reserve for anticipated loan losses. Instead, we are required to specifically value each individual investment on a quarterly basis. We will record unrealized depreciation on investments when we determine that the fair value of a security is less than its cost basis, and we will record unrealized appreciation when we determine that the fair value is greater than its cost basis. Changes in fair value are recorded in the statement of operations as net change in unrealized appreciation or depreciation.

As a business development company, we have invested in illiquid securities including debt and equity securities of companies, CLO bonds and preferred shares/income notes, CDO bonds and investment funds. The structure of each debt and equity security is specifically negotiated to enable us to protect our investment and maximize our returns. We include many terms governing interest rate, repayment terms, prepayment penalties, financial covenants, operating covenants, ownership parameters, dilution parameters, liquidation preferences, voting rights, and put or call rights. Our investments may be subject to certain restrictions on resale and generally have no established trading market.

In the first quarter of 2008, we adopted Statement No. 157, Fair Value Measurements, on a prospective basis. See “Results of Operations — Comparison of the Three Months Ended March 31, 2008 and 2007 — Change in Unrealized Appreciation or Depreciation” above.

Valuation Methodology — Private Finance. Our process for determining the fair value of a private finance investment begins with determining the enterprise value of the portfolio company. The fair value of our investment is based on the enterprise value at which the portfolio company could be sold in an orderly disposition over a reasonable period of time between willing parties other than in a forced or liquidation sale. The liquidity event whereby we exit a private finance investment is generally the sale, the recapitalization or, in some cases, the initial public offering of the portfolio company.

If there is adequate enterprise value to support the repayment of our debt, the fair value of our loan or debt security normally corresponds to cost unless the borrower’s condition or other factors lead to a determination of fair value at a different amount. The fair value of equity interests in portfolio companies is determined based on various factors, including the enterprise value remaining for equity holders after the repayment of the portfolio company’s debt and other preference capital, and other pertinent factors such as recent offers to purchase a portfolio company, recent transactions involving the purchase or sale of the portfolio company’s equity securities, liquidation events, or other events. The determined equity values are generally discounted when we have a minority position, restrictions on resale, specific concerns about the receptivity of the capital markets to a specific company at a certain time, or other factors.

CLO/CDO Assets are carried at fair value, which is based on a discounted cash flow model that utilizes prepayment, re-investment and loss assumptions based on historical experience and projected performance, economic factors, the characteristics of the underlying cash flow and comparable yields for similar bonds and preferred shares/income notes, when available. We recognize unrealized appreciation or depreciation on our CLO/CDO Assets as comparable yields in the market change and/ or based on changes in estimated cash flows resulting from changes in prepayment, re-investment or loss assumptions in the underlying collateral pool. We determine the fair value of our CLO/CDO Assets on an individual security-by-security basis. If we were to sell a group of these CLO/CDO Assets in a pool in one or more transactions, the total value received for that pool may be different than the sum of the fair values of the individual assets.

We currently intend to continue to work with third-party consultants to obtain assistance in determining fair value for a portion of the private finance portfolio each quarter. We work with these consultants to obtain assistance as additional support in the preparation of our internal valuation analysis. In addition, we may receive third-party assessments of a particular private finance portfolio company’s value in the ordinary course of business, most often in the context of a prospective sale transaction or in the context of a bankruptcy process.

The valuation analysis prepared by management is submitted to our Board of Directors who is ultimately responsible for the determination of fair value of the portfolio in good faith. Valuation assistance from Duff & Phelps, LLC (Duff & Phelps) for our private finance portfolio consisted of certain limited procedures (the Procedures) we identified and requested them to perform. Based upon the performance of the Procedures on a selection of our final portfolio company valuations, Duff & Phelps concluded that the fair value of those portfolio companies subjected to the Procedures did not appear unreasonable. In addition, we also received third-party valuation assistance from other third-party consultants for certain private finance portfolio companies. For the years ended December 31, 2007, 2006, and 2005, we received third-party valuation assistance as follows:


	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	%

Professional fees for third-party valuation assistance for the years ended December 31, 2007, 2006, and 2005, were $1.8 million, $1.5 million, and $1.4 million, respectively.

Net Change in Unrealized Appreciation or Depreciation. Net change in unrealized appreciation or depreciation for the years ended December 31, 2007, 2006, and 2005, consisted of the following:


		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. Our investment in Ciena totaled $327.8 million at cost and $68.6 million at value, which included unrealized depreciation of $259.2 million, at December 31, 2007, and $295.3 million at cost and $210.7 million at value, which included unrealized depreciation of $84.6 million, at December 31, 2006.

Ciena relies on the asset-backed securitization market to finance its loan origination activity. That financing source is an unreliable one in the current capital markets, and as a result, Ciena has significantly curtailed loan origination activity. To value our investment at December 31, 2007, we determined that no value could be attributed to Ciena’s origination platform or enterprise due to the state of the securitization markets, among other factors. In addition, Ciena’s book value declined during the quarter ended December 31, 2007. We valued our investment in Ciena at December 31, 2007 solely based on the estimated realizable value of Ciena’s net assets, including the estimated realizable value of the cash flows generated from Ciena’s retained interests in its current servicing portfolio, which includes portfolio servicing fees as well as cash flows from Ciena’s equity investments in its securitizations and its interest-only strip. This resulted in a value to our investment, after repayment of senior debt outstanding, of $68.6 million at December 31, 2007.

We also continued to consider Ciena’s current regulatory issues and ongoing investigations and litigation in performing the valuation analysis at December 31, 2007. (See “— Private Finance, Ciena Capital LLC” above.)

Net change in unrealized appreciation or depreciation included a net decrease of $174.5 million and $142.3 million for the years ended December 31, 2007 and 2006, respectively, and a net increase of $2.9 million for the year ended December 31, 2005, related to our investment in Ciena. We received valuation assistance from Duff & Phelps for our investment in Ciena at December 31, 2007, 2006, and 2005. See “Valuation Methodology — Private Finance” above for further discussion of the third-party valuation assistance we received.

Per Share Amounts. All per share amounts included in the Management’s Discussion and Analysis of Financial Condition and Results of Operations section have been computed using the weighted average common shares used to compute diluted earnings per share, which were 154.7 million, 145.6 million, and 137.3 million for the years ended December 31, 2007, 2006, and 2005, respectively.

OTHER MATTERS

Regulated Investment Company Status. We have elected to be taxed as a regulated investment company under Subchapter M of the Code. As long as we qualify as a regulated investment company, we are not taxed on our investment company taxable income or realized net capital gains, to the extent that such taxable income or gains are distributed, or deemed to be distributed, to shareholders on a timely basis.

Dividends are paid to shareholders from taxable income. Taxable income generally differs from net income for financial reporting purposes due to temporary and permanent differences in the recognition of income and expenses, and generally excludes net unrealized appreciation or depreciation, as gains or losses generally are not included in taxable income until they are realized. In addition, gains realized for financial reporting purposes may differ from gains included in taxable income as a result of our election to recognize gains using installment sale treatment, which generally results in the deferment of gains for tax purposes until notes or other amounts, including amounts held in escrow, received as consideration from the sale of investments are collected in cash. See “Dividends and Distributions” below.

Dividends declared and paid by us in a year generally differ from taxable income for that year as such dividends may include the distribution of current year taxable income, the distribution of prior year taxable income carried over into and distributed in the current year, or returns of capital. We are generally required to distribute 98% of our taxable income during the year the income is earned to avoid paying an excise tax. If this requirement is not met, the Code imposes a nondeductible excise tax equal to 4% of the amount by which 98% of the current year’s taxable income exceeds the distribution for the year from such taxable income. The taxable income on which an excise tax is paid is generally carried over and distributed to shareholders in the next tax year. Depending on the level of taxable income earned in a tax year, we may choose to carry over taxable income in excess of current year distributions from such taxable income into the next tax year and pay a 4% excise tax on such income, as required. See “Dividends and Distributions” below.

In order to maintain our status as a regulated investment company and obtain regulated investment company tax benefits, we must, in general, (1) continue to qualify as a business development company; (2) derive at least 90% of our gross income from dividends, interest, gains from the sale of securities and other specified types of income; (3) meet asset diversification requirements as defined in the Code; and (4) timely distribute to shareholders at least 90% of our annual investment company taxable income as defined in the Code. We intend to take all steps necessary to continue to qualify as a regulated investment company. However, there can be no assurance that we will continue to qualify for such treatment in future years.

DIVIDENDS AND DISTRIBUTIONS

Dividends to common shareholders were $0.65 per common share for the first quarter of 2008 and $0.63 per common share for the first quarter of 2007. Total regular quarterly dividends to common shareholders were $2.57, $2.42, and $2.30 per common share for the years ended December 31, 2007, 2006, and 2005, respectively. An extra cash dividend of $0.07, $0.05, and $0.03 per common share was declared during 2007, 2006, and 2005, respectively, and was paid to shareholders on December 27, 2007, January 19, 2007, and January 27, 2006, respectively. The Board of Directors has declared a dividend of $0.65 per common share for the second quarter of 2008.

Our Board of Directors reviews the dividend rate quarterly, and may adjust the quarterly dividend throughout the year. Dividends are declared considering our estimate of annual taxable income available for distribution to shareholders and the amount of taxable income carried over from the prior year for distribution in the current year. Our goal is to declare what we believe to be sustainable increases in our regular quarterly dividends. To the extent that we earn annual taxable income in excess of dividends paid from such taxable income for the year, we may carry over the excess taxable income into the next year and such excess income will be available for distribution in the next year as permitted under the Code (see discussion below). Such income will be treated under the Code as having been distributed during the prior year for purposes of our qualification for RIC tax treatment for such year. The maximum amount of excess taxable income that we may carry over for distribution in the next year under the Code is the total amount of dividends paid in the following year, subject to certain declaration and payment guidelines. Excess taxable income carried over and paid out in the next year is generally subject to a nondeductible 4% excise tax. We believe that carrying over excess taxable income into future periods may provide increased visibility with respect to taxable earnings available to pay the regular quarterly dividend.

Taxable income includes our taxable interest, dividend and fee income, as well as taxable net capital gains. Taxable income generally differs from net income for financial reporting purposes due to temporary and permanent differences in the recognition of income and expenses, and generally excludes net unrealized appreciation or depreciation, as gains or losses are not included in taxable income until they are realized. In addition, gains realized for financial reporting purposes may differ from gains included in taxable income as a result of our election to recognize gains using installment sale treatment, which generally results in the deferment of gains for tax purposes until notes or other amounts, including amounts held in escrow, received as consideration from the sale of investments are collected in cash. Taxable income includes non-cash income, such as changes in accrued and reinvested interest and dividends, which includes contractual payment-in-kind interest, and the amortization of discounts and fees. Cash collections of income resulting from contractual payment-in-kind interest or the amortization of discounts and fees generally occur upon the repayment of the loans or debt securities that include such items. Non-cash taxable income is reduced by non-cash expenses, such as realized losses and depreciation and amortization expense.

The summary of our taxable income and distributions of such taxable income for the years ended December 31, 2007, 2006, and 2005, is as follows:


		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” above and Note 10, “Dividends and Distributions and Taxes” of our Notes to our annual Consolidated Financial Statements.



⁽²⁾	See Note 10, “Dividends and Distributions and Taxes” of our Notes to our annual Consolidated Financial Statements for further information on the differences between net income for book purposes and taxable income.

Our estimated annual taxable income for 2007 exceeded our dividend distributions to shareholders for 2007 from such taxable income, and, therefore, we have carried over excess taxable income, which is currently estimated to be $403.1 million, for distribution to shareholders in 2008. Estimated excess taxable income for 2007 represents approximately $50.0 million of ordinary income and approximately $353.1 million of net long-term capital gains. The maximum amount of excess taxable income that may be carried over for distribution in the next year under the Code is the total amount of dividends paid in the following year, subject to certain declaration and payment guidelines. Excess taxable income carried over and paid out in the next year is generally subject to a 4% excise tax. For the years ended December 31, 2007, 2006, and 2005, excise tax expense was $16.3 million, $15.1 million, and $6.2 million, respectively. See “Other Matters — Regulated Investment Company Status” above.

Dividends paid in 2008 will first be paid out of the excess taxable income carried over from 2007. Given our regular quarterly dividend payout, which for the first quarter of 2008 was $108.1 million, we expect that a majority of the 2008 dividend payments will be made from excess 2007 taxable earnings. Given the significant amount of estimated excess taxable income carried forward from 2007 for distribution in 2008, we currently expect that our excess taxable income carried over from 2007 plus our estimated annual taxable income for 2008 will be in excess of our estimated dividend distributions to shareholders in 2008, therefore, we expect to carry over excess taxable income earned in 2008 for distribution to shareholders in 2009. We expect that we will generally be required to pay a 4% excise tax on the excess of 98% of our taxable income for 2008 over the amount of actual distributions from such taxable income in 2008. For the three months ended March 31, 2008, we have recorded an excise tax of $2.3 million. Excise taxes are accrued based upon estimated excess taxable income as estimated taxable income is earned, therefore, the excise tax accrued to date in 2008 may be adjusted as appropriate in the remainder of 2008

to reflect changes in our estimate of the carry over amount and additional excise tax may be accrued during the remainder of 2008 as additional excess taxable income is earned, if any. Our ability to earn the estimated annual taxable income for 2008 depends on many factors, including our ability to make new investments at attractive yields, the level of repayments in the portfolio, the realization of gains or losses from portfolio exits, and the level of operating expenses incurred. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors.”

In addition, we currently estimate that we have cumulative deferred taxable income related to installment sale gains of approximately $234.5 million as of December 31, 2007, which is composed of cumulative deferred taxable income of $211.5 million as of December 31, 2006, and approximately $23.0 million for the year ended December 31, 2007. These gains have been recognized for financial reporting purposes in the respective years they were realized, but generally will be deferred for tax purposes until the notes or other amounts received from the sale of the related investments are collected in cash. The installment sale gains for 2007 are estimates and will not be finally determined until we file our 2007 tax return in September 2008. See “Other Matters — Regulated Investment Company Status” above.

To the extent that installment sale gains are deferred for recognition in taxable income, we pay interest to the Internal Revenue Service. Installment-related interest expense for the three months ended March 31, 2008 and 2007, and for the years ended December 31, 2007, 2006, and 2005, was $1.9 million, $0.3 million, $5.8 million, $0.9 million, and $0.6 million, respectively. This interest is included in interest expense in our Consolidated Statement of Operations.

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

At March 31, 2008, and December 31, 2007 and 2006, our cash, U.S. Treasury bills, investments in money market and other securities, total assets, total debt outstanding, total shareholders’ equity, debt to equity ratio and asset coverage for senior indebtedness were as follows:


	2008			2007			2006
($ in millions)
Cash, U.S. Treasury bills, investments in money market and other securities (including U.S. Treasury bills, money market and other securities: 2008-$120.4, 2007-$201.2; 2006-$202.2)	$	201.6		$	204.8		$	203.9
Total assets	$	5,082.2		$	5,214.6		$	4,887.5
Total debt outstanding	$	2,191.6		$	2,289.5		$	1,899.1
Total shareholders’ equity	$	2,828.4		$	2,771.8		$	2,841.2
Debt to equity ratio		0.77			0.83			0.67
Asset coverage ratio⁽¹⁾		229	%		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.

Cash generated from the portfolio includes cash flow from net investment income and net realized gains and principal collections related to investment repayments or sales. Cash flow provided by our operating activities before new investment activity for the three months ended March 31, 2008 and 2007, and for the years ended December 31, 2007, 2006, and 2005, was as follows:


		For the Three
		Months Ended
		March 31,				For the Year Ended December 31,

		2008		2007		2007			2006			2005
($ in millions)
Net cash provided by (used in) operating activities		$	111.3	$	19.4	$	(112.2	)	$	(597.5	)	$	116.0
Add: portfolio investments funded			275.1		170.2		1,846.0			2,257.8			1,668.1

	Total cash provided by operating activities before new investments	$	386.4	$	189.6	$	1,733.8		$	1,660.3		$	1,784.1

In addition to the net cash flow provided by our operating activities before funding investments, we have sources of liquidity through our cash, U.S. Treasury bills, investments in money market and other securities and revolving line of credit as discussed below.

At March 31, 2008, and December 31, 2007 and 2006, the value and yield of the cash, U.S. Treasury bills, investments in money market and other securities were as follows:


		2008					2007					2006

		Value		Yield			Value		Yield			Value		Yield
($ in millions)
U.S. Treasury bills⁽¹⁾		$	120.0		1.6	%	$	—		—	%	$	—		—	%
Money market securities			0.4		3.2	%		201.2		4.6	%		161.2		5.3	%
Certificate of Deposit			—		—			—		—			40.6		5.6	%
Cash			81.2		1.5	%		3.6		2.9	%		1.7		1.5	%

	Total	$	201.6		1.5	%	$	204.8		4.6	%	$	203.9		5.3	%


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

We maintain this pool of liquid assets within our balance sheet given that our investment portfolio is primarily composed of private, illiquid assets for which there is no readily available market. We assess the amount held in and the composition of these investments throughout the year. As the capital markets became increasingly uncertain in March 2008, we moved our liquidity portfolio entirely into cash and very short-term treasuries.

We invest otherwise uninvested cash in U.S. government- or agency-issued or guaranteed securities that are backed by the full faith and credit of the United States, or in high quality, short-term securities. We place our cash with financial institutions and, at times, cash held in checking accounts in financial institutions may be in excess of the Federal Deposit Insurance Corporation insured limit.

We employ an asset-liability management approach that focuses on matching the estimated maturities of our investment portfolio to the estimated maturities of our borrowings. We use our revolving line of credit facility as a means to finance our business pending long-term financing in the form of debt or equity capital, which may or may not result in temporary differences in the matching of estimated maturities. We evaluate our interest rate exposure on an ongoing basis. Generally, we seek to fund our primarily fixed-rate debt portfolio and our equity portfolio with fixed-rate debt or equity capital. To the extent deemed necessary, we may hedge variable and short-term interest rate exposure through interest rate swaps or other techniques.

During the three months ended March 31, 2008 and 2007, and the years ended December 31, 2007 and 2006, we sold new equity of $170.9 million, $93.8 million, $171.3 million and $295.8 million, respectively, in public offerings. We did not sell new equity in a public offering during the year ended December 31, 2005. During the year ended December 31, 2005, we issued $7.2 million of our common stock as consideration for investments. In addition, shareholders’ equity increased through capital share transactions by $3.9 million, $5.8 million, $31.5 million, $27.7 million, and $77.5 million through the exercise of stock options, the collection of notes receivable from the sale of common stock, and the issuance of shares through our dividend reinvestment plan for the three months ended March 31, 2008 and 2007, and the years ended December 31, 2007, 2006, and 2005, respectively. In addition, shareholders’ equity increased by $26.4 million during the three months ended March 31, 2008, as a result of the distribution of the common stock held in deferred compensation trusts. See Note 8, “Employee Compensation Plans” from our Notes to Consolidated Financial Statements for the first quarter of 2008. For the year ended December 31, 2007, shareholders’ equity decreased by $52.8 for the cash portion of the option cancellation payment made in connection with out tender offer. See “— Results of Operations, Stock Option Expense, Options Cancelled in Connection with Tender Offer.” See Note 13, “Financial Highlights” from our Notes to the Consolidated Financial Statements for further detail on the change in shareholders’ equity for the periods.

We generally target a debt to equity ratio ranging between 0.50:1.00 to 0.70:1.00 because we believe that it is prudent to operate with a larger equity capital base and less leverage. At March 31, 2008, our debt to equity ratio net of cash, U.S. Treasury bills and other securities was 0.70:1.00. In April 2008, we

completed a public offering of 3.2 million shares of common stock for net proceeds, after the underwriting discount and estimated offering expenses, of $56.3 million.

At March 31, 2008, and December 31, 2007 and 2006, we had outstanding debt as follows:


			2008										2007									2006

											Annual									Annual									Annual
											Return to									Return to									Return to
								Annual			Cover						Annual			Cover						Annual			Cover
			Facility		Amount			Interest			Interest		Facility		Amount		Interest			Interest		Facility		Amount		Interest			Interest
			Amount		Outstanding			Cost⁽¹⁾			Payments⁽²⁾		Amount		Outstanding		Cost⁽¹⁾			Payments⁽²⁾		Amount		Outstanding		Cost⁽¹⁾			Payments⁽²⁾
($ in millions)
Notes payable and debentures:
	Privately issued unsecured notes payable		$	1,042.8	$	1,042.8			6.1%			1.3%	$	1,042.2	$	1,042.2		6.1%			1.2%	$	1,041.4	$	1,041.4		6.1%			1.3%
	Publicly issued unsecured notes payable			880.0		880.0			6.7%			1.2%		880.0		880.0		6.7%			1.1%		650.0		650.0		6.6%			0.9%

		Total notes payable and debentures		1,922.8		1,922.8			6.4%			2.4%		1,922.2		1,922.2		6.4%			2.3%		1,691.4		1,691.4		6.3%			2.2%
Revolving line of credit				922.5		268.8	⁽⁵⁾		3.8%	⁽³⁾		0.3%		922.5		367.3		5.9%	⁽³⁾		0.5%		922.5		207.7		6.4%	⁽³⁾		0.3%

		Total debt	$	2,845.3	$	2,191.6			6.2%	⁽⁴⁾		2.7%	$	2,844.7	$	2,289.5		6.5%	⁽⁴⁾		2.8%	$	2,613.9	$	1,899.1		6.5%	⁽⁴⁾		2.5%


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


⁽²⁾	The annual return to cover interest payments is calculated as the March 31, 2008, December 31, 2007 and 2006, annualized cost of debt per class of financing outstanding divided by total assets at March 31, 2008, December 31, 2007 and 2006, respectively.



⁽³⁾	The annual interest cost reflects the interest rate payable for borrowings under the revolving line of credit in effect at the balance sheet date. In addition to the current interest rate payable, there were annual costs of commitment fees, other facility fees and amortization of debt financing costs of $3.7 million, $3.7 million and $3.9 million at March 31, 2008, 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. The annual interest cost reflects the facilities in place on the balance sheet date.



⁽⁵⁾	On April 9, 2008, we entered into a three-year unsecured revolving line of credit with total commitments of $632.5 million, which replaced our previous line of credit. Under this new revolving line of credit, in addition to the current interest rate payable, the annual costs of commitment fees, other facility fees and amortization of debt financing costs will be approximately $6.7 million. See discussion below.

Privately Issued Unsecured Notes Payable. We have privately issued unsecured long-term notes to institutional investors, primarily insurance companies. The notes have five- or seven-year maturities and fixed rates of interest. The notes generally require payment of interest only semi-annually, and all principal is due upon maturity. At March 31, 2008, the notes had maturities from May 2008 to May 2013. The notes may be prepaid in whole or in part, together with an interest premium, as stipulated in the note agreements.

We have issued five-year unsecured long-term notes denominated in Euros and Sterling for a total U.S. dollar equivalent of $15.2 million. The notes have fixed interest rates and have substantially the same terms as our other unsecured notes. The Euro notes require annual interest payments and the Sterling notes require semi-annual interest payments until maturity. These notes mature in March 2009. Simultaneous with issuing the notes, we entered into a cross currency swap with a financial institution which fixed our interest and principal payments in U.S. dollars for the life of the debt.

Publicly Issued Unsecured Notes Payable. At March 31, 2008, we had outstanding publicly issued unsecured notes as follows:


		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

The 6.625% Notes due 2011 and the 6.000% Notes due 2012 require payment of interest only semi-annually, and all principal is due upon maturity. We have the option to redeem these notes in whole or in part, together with a redemption premium, as stipulated in the notes.

On March 28, 2007, we completed the issuance of $200.0 million of 6.875% Notes due 2047 for net proceeds of $193.0 million. In April 2007, we issued additional notes, through an over-allotment option, totaling $30.0 million for net proceeds of $29.1 million. Net proceeds are net of underwriting discounts and estimated offering expenses. The notes are listed on the New York Stock Exchange under the trading symbol AFC.

The 6.875% Notes due 2047 require payment of interest only quarterly, and all principal is due upon maturity. We may redeem these notes in whole or in part at any time or from time to time on or after April 15, 2012, at par and upon the occurrence of certain tax events as stipulated in the notes.

Revolving Line of Credit. At March 31, 2008, and December 31, 2007 and 2006, we had an unsecured revolving line of credit with a committed amount of $922.5 million that was scheduled to expire on September 30, 2008.

On April 9, 2008, we entered into a three-year unsecured revolving line of credit with total commitments of $632.5 million, with Bank of America, N.A., as a lender and as administrative agent, and the other lenders thereunder, which replaced our previous revolving line of credit. We may obtain additional commitments up to a total committed facility of $1.5 billion, subject to customary conditions. The revolving line of credit expires on April 11, 2011.

At our option, borrowings under the revolving line of credit effective April 9, 2008, generally bear interest at a rate per annum equal to (i) LIBOR (for the period selected by us) plus 2.00% or (ii) the higher of the Federal Funds rate plus 0.50% or the Bank of America N.A. prime rate. The revolving line of credit requires the payment of an annual commitment fee equal to 0.50% of the committed amount (whether used or unused). The revolving line of credit generally requires payments of interest at the end of each LIBOR interest period, but no less frequently than quarterly, on LIBOR-based loans, and monthly payments of interest on other loans. All principal is due upon maturity.

The annual cost of commitment fees, other facility fees and amortization of debt financing costs prior to entering into the new three-year facility in April 2008, was $3.7 million at March 31, 2008. Subsequent to entering into the new facility in April 2008, the annual cost of commitment fees, other facility fees and amortization of debt financing costs will be approximately $6.7 million.

At April 9, 2008, there was $210.8 million outstanding on our unsecured revolving line of credit. The amount available under the line at April 9, 2007, was $325.4 million, net of amounts committed for standby letters of credit of $96.3 million. Net repayments on the revolving line of credit for the three months ended March 31, 2008, were $98.5 million. Net borrowings under the revolving lines of credit for the years ended December 31, 2007 and 2006, were $159.5 million and $116.0 million, respectively.

Covenant Compliance. We have various financial and operating covenants required by the revolving line of credit and the privately issued unsecured notes payable outstanding at March 31, 2008, December 31, 2007 and 2006. These covenants require us to maintain certain financial ratios, including asset coverage, debt to equity and interest coverage, and a minimum net worth. These credit facilities provide for customary events of default, including, but not limited to, payment defaults, breach of representations or covenants, cross-defaults, bankruptcy events, failure to pay judgments, attachment of our assets, change of control and the issuance of an order of dissolution. Certain of these events of default are subject to notice and cure periods or materiality thresholds. Our credit facilities limit our ability to declare dividends if we default under certain provisions. As of March 31, 2008, and December 31, 2007 and 2006, we were in compliance with these covenants. The financial and operating covenants under the new revolving line of credit are substantially similar to the previous facility.

We have certain financial and operating covenants that are required by the publicly issued unsecured notes payable, including that we will maintain a minimum ratio of 200% of total assets to total borrowings, as required by the Investment Company Act of 1940, as amended, while these notes are outstanding. At March 31, 2008, December 31, 2007 and 2006, we were in compliance with these covenants.

Contractual Obligations. The following table shows our significant contractual obligations for the repayment of debt and payment of other contractual obligations as of March 31, 2008.


				Payments Due By Year

														After
		Total		2008		2009		2010		2011		2012		2012
($ in millions)
Unsecured notes payable		$	1,922.8	$	153.0	$	270.3	$	408.0	$	472.5	$	339.0	$	280.0
Revolving line of credit⁽¹⁾			268.8		268.8		—		—		—		—		—
Operating leases			19.1		3.3		4.6		4.5		1.8		1.8		3.1

	Total contractual obligations	$	2,210.7	$	425.1	$	274.9	$	412.5	$	474.3	$	340.8	$	283.1


⁽¹⁾	At March 31, 2008, $268.8 million was borrowed on the revolving line of credit and $96.3 million of standby letters of credit were issued under the credit facility. In April 2008, we entered into a new unsecured revolving line of credit, which replaced the previous revolving line of credit, with total commitments of $632.5 million. See “Revolving Line of Credit” above.

Off-Balance Sheet Arrangements

In the ordinary course of business, we have issued guarantees and have extended standby letters of credit through financial intermediaries on behalf of certain portfolio companies. We have generally issued guarantees of debt and lease obligations. Under these arrangements, we would be required to make payments to third-party beneficiaries if the portfolio companies were to default on their related payment obligations. The following table shows our guarantees and standby letters of credit that may have the effect of creating, increasing, or accelerating our liabilities as of March 31, 2008.


				Amount of Commitment Expiration Per Year

														After
		Total		2008		2009		2010		2011		2012		2012
($ in millions)
Guarantees		$	394.0	$	0.3	$	387.3	$	—	$	4.4	$	0.1	$	1.9
Standby letters of credit⁽¹⁾			96.3		96.3		—		—		—		—		—

	Total commitments⁽²⁾	$	490.3	$	96.6	$	387.3	$	—	$	4.4	$	0.1	$	1.9



⁽¹⁾	Standby letters of credit are issued under our revolving line of credit that expires in September 2008. Therefore, unless a standby letter of credit is set to expire at an earlier date, we have assumed that the standby letters of credit will expire contemporaneously with the expiration of our line of credit that was in effect at March 31, 2008, which was scheduled to expire in September 2008. In April 2008, we entered into a new three-year revolving line of credit that expires in April 2011.



⁽²⁾	Our most significant commitments relate to our investment in Ciena Capital LLC (Ciena), which commitments totaled $444.3 million at March 31, 2008. At March 31, 2008, the principal components of these guarantees included a guarantee of 100% of the outstanding total obligations on Ciena’s revolving line of credit, which matures in March 2009, for a total guaranteed amount of $384.8 million and standby letters of credit issued totaling $59.5 million in connection with term securitizations completed by Ciena. See “— Private Finance, Ciena Capital LLC” above for further discussion.

In addition, we had outstanding commitments to fund investments totaling $885.3 million at March 31, 2008, including $843.5 million related to private finance investments and $40.0 million related to commercial real estate finance investments. Outstanding commitments related to private finance investments included $493.5 million to the Unitranche Fund LLC, which we believe will be funded over a two to three year period as investments are funded by the Unitranche Fund. See “— Portfolio and Investment Activity — Outstanding Commitments” above. We intend to fund these commitments and prospective investment opportunities with existing cash, through cash flow from operations before new investments, through borrowings under our line of credit or other long-term debt agreements, or through the sale or issuance of new equity capital.

CRITICAL ACCOUNTING POLICIES

The consolidated financial statements are based on the selection and application of critical accounting policies, which require management to make significant estimates and assumptions. Critical accounting policies are those that are both important to the presentation of our financial condition and results of

operations and require management’s most difficult, complex, or subjective judgments. Our critical accounting policies are those applicable to the valuation of investments, certain revenue recognition matters and certain tax matters as discussed below.

Valuation of Portfolio Investments. We, as a BDC, have invested in illiquid securities including debt and equity securities of portfolio companies, CLO bonds and preferred shares/income notes, CDO bonds and investment funds. Our investments may be subject to certain restrictions on resale and generally have no established trading market. We value substantially all of our investments at fair value as determined in good faith by the Board of Directors in accordance with our valuation policy and the provisions of the Investment Company Act of 1940 and FASB Statement No. 157, Fair Value Measurements (SFAS 157 or the Statement). We determine fair value to be the price that would be received for an investment in a current sale, which assumes an orderly transaction between market participants on the measurement date. Our valuation policy considers the fact that no ready market exists for substantially all of the securities in which it invests and that fair value for its investments must typically be determined using unobservable inputs. Our valuation policy is intended to provide a consistent basis for determining the fair value of the portfolio.

We adopted SFAS 157 on a prospective basis in the first quarter of 2008. In accordance with the Statement, we have considered our principal market, or the market in which we exit our portfolio investments with the greatest volume and level of activity. SFAS 157 requires us to assume that the portfolio investment is assumed to be sold in the principal market to market participants, or in the absence of a principal market, the most advantageous market, which may be a hypothetical market. Market participants are defined as buyers and sellers in the principal or most advantageous market that are independent, knowledgeable, and willing and able to transact.

We have determined that for our buyout investments, where we have control or could gain control through an option or warrant security, both the debt and equity securities of the portfolio investment would exit in the merger and acquisition (M&A) market as the principal market generally through a sale or recapitalization of the portfolio company. We believe that the in-use premise of value (as defined in SFAS 157), which assumes the debt and equity securities are sold together, is appropriate as this would provide maximum proceeds to the seller. As a result, we will continue to use the enterprise value methodology to determine the fair value of these investments under SFAS 157. Enterprise value means the entire value of the company to a market participant, including the sum of the values of debt and equity securities used to capitalize the enterprise at a point in time. Enterprise value is determined using various factors, including cash flow from operations of the portfolio company, multiples at which private companies are bought and sold, and other pertinent factors, such as recent offers to purchase a portfolio company, recent transactions involving the purchase or sale of the portfolio company’s equity securities, liquidation events, or other events. We allocate the enterprise value to these securities in order of the legal priority of the securities.

market interest rates and leverage levels. Assuming the credit quality of the loan or debt security remains stable, we will use the value determined by the yield analysis as the fair value for that security. If there is deterioration in credit quality or a loan or debt security is in workout status, we may consider other factors in determining the fair value of a loan or debt security, including the value attributable to the loan or debt security from the enterprise value of the portfolio company or the proceeds that would be received in a liquidation analysis.

The value of our equity investments in private debt and equity funds are generally valued at the fund’s net asset value, unless other factors lead to a determination of fair value at a different amount. The value of our equity securities in public companies for which quoted prices in an active market are readily available is based on the closing public market price on the measurement date.

The fair value of our CLO bonds and preferred shares/income notes and CDO bonds (CLO/CDO Assets) is generally based on a discounted cash flow model that utilizes prepayment, re-investment and loss assumptions based on historical experience and projected performance, economic factors, the characteristics of the underlying cash flow, and comparable yields for similar bonds and preferred shares/income notes, when available. We recognize unrealized appreciation or depreciation on our CLO/CDO Assets as comparable yields in the market change and/or based on changes in estimated cash flows resulting from changes in prepayment, re-investment or loss assumptions in the underlying collateral pool. We determine the fair value of our CLO/CDO Assets on an individual security-by-security basis.

The impact on our consolidated financial statements for periods subsequent to the period of adoption cannot be determined at this time as it will be influenced by the estimates of fair value for those periods, the number and amount of investments we originate, acquire or exit, and the effect of any additional guidance or any changes in the interpretation of this statement.

See “— Results of Operations — Change in Unrealized Appreciation or Depreciation” above for more discussion on portfolio valuation.

Net Realized Gains or Losses and Net Change in Unrealized Appreciation or Depreciation. Realized gains or losses are measured by the difference between the net proceeds from the repayment or sale and the cost basis of the investment without regard to unrealized appreciation or depreciation previously recognized, and include investments charged off during the year, net of recoveries. Net change in unrealized appreciation or depreciation primarily reflects the change in portfolio investment values during the reporting period, including the reversal of previously recorded unrealized appreciation or depreciation when gains or losses are realized. Net change in unrealized appreciation or depreciation also reflects the change in the value of U.S. Treasury bills and depreciation on accrued interest and dividends receivable and other assets where collection is doubtful.

Interest and Dividend Income. Interest income is recorded on an accrual basis to the extent that such amounts are expected to be collected. For loans and debt securities with contractual payment-in-kind interest, which represents contractual interest accrued and added to the loan balance that generally becomes due at maturity, we will not accrue payment-in-kind interest if the portfolio company valuation indicates that the payment-in-kind interest is not collectible. In general, interest is not accrued on loans and debt securities if we have doubt about interest collection or where the enterprise value of the portfolio company may not support further accrual.

When we receive nominal cost warrants or free equity securities (nominal cost equity), we allocate our cost basis in our investment between debt securities and nominal cost equity at the time of origination. At that time, the original issue discount basis of the nominal cost equity is recorded by increasing the cost basis in the equity and decreasing the cost basis in the related debt securities. Loans in workout status do

not accrue interest. In addition, interest may not accrue on loans or debt securities to portfolio companies that are more than 50% owned by us depending on such company’s capital requirements. Loan origination fees, original issue discount, and market discount are capitalized and then amortized into interest income using a method that approximates the effective interest method. Upon the prepayment of a loan or debt security, any unamortized loan origination fees are recorded as interest income and any unamortized original issue discount or market discount is recorded as a realized gain.

We recognize interest income on the CLO preferred shares/income notes using the effective interest method, based on the anticipated yield that is determined using the estimated cash flows over the projected life of the investment. Yields are revised when there are changes in actual or estimated cash flows due to changes in prepayments and/or re-investments, credit losses or asset pricing. Changes in estimated yield are recognized as an adjustment to the estimated yield over the remaining life of the preferred shares/income notes from the date the estimated yield was changed. CLO and CDO bonds have stated interest rates. The weighted average yield on the CLO/CDO Assets is calculated as the (a) annual stated interest or the effective interest yield on the accruing bonds or the effective yield on the preferred shares/income notes, divided by (b) CLO/CDO Assets at value. The weighted average yields are computed as of the balance sheet date.

Fee Income. Fee income includes fees for loan prepayment premiums, guarantees, commitments, and services rendered by us to portfolio companies and other third parties such as diligence, structuring, transaction services, management and consulting services, and other services. Loan prepayment premiums are recognized at the time of prepayment. Guaranty and commitment fees are generally recognized as income over the related period of the guaranty or commitment, respectively. Diligence, structuring, and transaction services fees are generally recognized as income when services are rendered or when the related transactions are completed. Management, consulting and other services fees, including fund management fees, are generally recognized as income as the services are rendered. Fees are not accrued if the Company has doubt about collection of those fees.

Federal and State Income Taxes and Excise Tax. We intend to comply with the requirements of the Internal Revenue Code that are applicable to regulated investment companies (RIC) and real estate investment trusts (REIT). We and any of our subsidiaries that qualify as a RIC or a REIT intend to distribute or retain through a deemed distribution all of our annual taxable income to shareholders; therefore, we have made no provision for income taxes for these entities.

If we do not distribute at least 98% of our annual taxable income in the year earned, we will generally be required to pay an excise tax equal to 4% of the amount by which 98% of our annual taxable income exceeds the distributions from such taxable income for the year. To the extent that we determine that our estimated current year annual taxable income will be in excess of estimated current year dividend distributions from such taxable income, we accrue excise taxes, if any, on estimated excess taxable income as taxable income is earned using an annual effective excise tax rate. The annual effective excise tax rate is determined by dividing the estimated annual excise tax by the estimated annual taxable income.

Income taxes for AC Corp are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases as well as operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.

Recent Accounting Pronouncements. In September 2006, the FASB issued Statement No. 157, Fair Value Measurements. This statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. This statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. We have adopted this statement on a prospective basis beginning in the quarter ended March 31, 2008. Adoption of this statement did not have a material effect

on our consolidated financial statements for the period ended March 31, 2008. However, the impact on our consolidated financial statements for periods subsequent to the period of adoption cannot be determined at this time as it will be influenced by the estimates of fair value for those periods, the number and amount of investments we originate, acquire or exit, and the effect of any additional guidance or any changes in the interpretation of this statement.

QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Our business activities contain elements of risk. We consider the principal types of market risk to be fluctuations in interest rates. We consider the management of risk essential to conducting our businesses. Accordingly, our risk management systems and procedures are designed to identify and analyze our risks, to set appropriate policies and limits and to continually monitor these risks and limits by means of reliable administrative and information systems and other policies and programs.

Because we borrow money to make investments, our net investment income is dependent upon the difference between the rate at which we borrow funds and the rate at which we invest these funds. As a result, there can be no assurance that a significant change in market interest rates will not have a material adverse effect on our net investment income. In periods of rising interest rates, our cost of funds would increase, which would reduce our net investment income. We use a combination of long-term and short-term borrowings and equity capital to finance our investing activities. We utilize our revolving line of credit as a means to bridge to long-term financing. Our long-term fixed-rate investments are financed primarily with long-term fixed-rate debt and equity. We may use interest rate risk management techniques in an effort to limit our exposure to interest rate fluctuations. Such techniques may include various interest rate hedging activities to the extent permitted by the 1940 Act. We have analyzed the potential impact of changes in interest rates on interest income net of interest expense.

In addition, we may have risk regarding portfolio valuation. See “Business — Portfolio Valuation” above.

SENIOR SECURITIES

Information about our senior securities is shown in the following tables as of December 31 for the years indicated in the table, unless otherwise noted. The report of our independent registered public accounting firm on the senior securities table as of December 31, 2007, is attached as an exhibit to the registration statement of which this prospectus is a part. The “—” indicates information which the SEC expressly does not require to be disclosed for certain types of senior securities.


	Total Amount
	Outstanding				Involuntary
	Exclusive of		Asset		Liquidating		Average
	Treasury		Coverage		Preference		Market Value
Class and Year	Securities⁽¹⁾		Per Unit⁽²⁾		Per Unit⁽³⁾		Per Unit⁽⁴⁾

Privately Issued Unsecured Notes Payable
1998	$	180,000,000	$	2,734	$	—		N/A
1999		419,000,000		2,283		—		N/A
2000		544,000,000		2,445		—		N/A
2001		694,000,000		2,453		—		N/A
2002		694,000,000		2,704		—		N/A
2003		854,000,000		3,219		—		N/A
2004		981,368,000		2,801		—		N/A
2005		1,164,540,000		3,086		—		N/A
2006⁽⁵⁾		1,041,400,000		2,496		—		N/A
2007⁽⁵⁾		1,042,200,000		2,211		—		N/A
March 31, 2008 (unaudited)⁽⁸⁾		1,042,800,000		2,291		—		N/A

Publicly Issued Unsecured Notes Payable
1998	$	0	$	0	$	—		N/A
1999		0		0		—		N/A
2000		0		0		—		N/A
2001		0		0		—		N/A
2002		0		0		—		N/A
2003		0		0		—		N/A
2004		0		0		—		N/A
2005		0		0		—		N/A
2006⁽⁵⁾		650,000,000		2,496		—	$	1,000
2007⁽⁵⁾		880,000,000		2,211		—	$	745
March 31, 2008 (unaudited)⁽⁸⁾		880,000,000		2,291		—	$	745

Revolving Lines of Credit
1998	$	95,000,000	$	2,734	$	—		N/A
1999		82,000,000		2,283		—		N/A
2000		82,000,000		2,445		—		N/A
2001		144,750,000		2,453		—		N/A
2002		204,250,000		2,704		—		N/A
2003		0		0		—		N/A
2004		112,000,000		2,801		—		N/A
2005		91,750,000		3,086		—		N/A
2006		207,750,000		2,496		—		N/A
2007		367,250,000		2,211		—		N/A
March 31, 2008 (unaudited)⁽⁸⁾		268,750,000		2,291		—		N/A
Small Business Administration Debentures⁽⁶⁾
1998	$	47,650,000	$	2,734	$	—		N/A
1999		62,650,000		2,283		—		N/A
2000		78,350,000		2,445		—		N/A
2001		94,500,000		2,453		—		N/A
2002		94,500,000		2,704		—		N/A
2003		94,500,000		3,219		—		N/A
2004		77,500,000		2,801		—		N/A
2005		28,500,000		3,086		—		N/A
2006		0		0		—		N/A
2007		0		0		—		N/A
March 31, 2008 (unaudited)		0		0		—		N/A


	Total Amount
	Outstanding				Involuntary
	Exclusive of		Asset		Liquidating		Average
	Treasury		Coverage		Preference		Market Value
Class and Year	Securities⁽¹⁾		Per Unit⁽²⁾		Per Unit⁽³⁾		Per Unit⁽⁴⁾


Overseas Private Investment Corporation Loan
1998	$	5,700,000	$	2,734	$	—		N/A
1999		5,700,000		2,283		—		N/A
2000		5,700,000		2,445		—		N/A
2001		5,700,000		2,453		—		N/A
2002		5,700,000		2,704		—		N/A
2003		5,700,000		3,219		—		N/A
2004		5,700,000		2,801		—		N/A
2005		0		0		—		N/A
2006		0		0		—		N/A
2007		0		0		—		N/A
March 31, 2008 (unaudited)		0		0		—		N/A

Auction Rate Reset Note
1998	$	0	$	0	$	—		N/A
1999		0		0		—		N/A
2000		76,598,000		2,445		—		N/A
2001		81,856,000		2,453		—		N/A
2002		0		0		—		N/A
2003		0		0		—		N/A
2004		0		0		—		N/A
2005		0		0		—		N/A
2006		0		0		—		N/A
2007		0		0		—		N/A
March 31, 2008 (unaudited)		0		0		—		N/A

Master Repurchase Agreement and Master Loan and Security Agreement
1998	$	6,000,000	$	2,734	$	—		N/A
1999		23,500,000		2,283		—		N/A
2000		0		0		—		N/A
2001		0		0		—		N/A
2002		0		0		—		N/A
2003		0		0		—		N/A
2004		0		0		—		N/A
2005		0		0		—		N/A
2006		0		0		—		N/A
2007		0		0		—		N/A
March 31, 2008 (unaudited)		0		0		—		N/A

Redeemable Cumulative Preferred Stock⁽⁶⁾⁽⁷⁾
1998	$	1,000,000	$	267	$	100		N/A
1999		1,000,000		225		100		N/A
2000		1,000,000		242		100		N/A
2001		1,000,000		244		100		N/A
2002		1,000,000		268		100		N/A
2003		1,000,000		319		100		N/A
2004		0		0		—		N/A
2005		0		0		—		N/A
2006		0		0		—		N/A
2007		0		0		—		N/A
March 31, 2008 (unaudited)		0		0		—		N/A


	Total Amount
	Outstanding				Involuntary
	Exclusive of		Asset		Liquidating		Average
	Treasury		Coverage		Preference		Market Value
Class and Year	Securities⁽¹⁾		Per Unit⁽²⁾		Per Unit⁽³⁾		Per Unit⁽⁴⁾

Non-Redeemable Cumulative Preferred Stock⁽⁶⁾
1998	$	6,000,000	$	267	$	100		N/A
1999		6,000,000		225		100		N/A
2000		6,000,000		242		100		N/A
2001		6,000,000		244		100		N/A
2002		6,000,000		268		100		N/A
2003		6,000,000		319		100		N/A
2004		0		0		—		N/A
2005		0		0		—		N/A
2006		0		0		—		N/A
2007		0		0		—		N/A
March 31, 2008 (unaudited)		0		0		—		N/A


⁽¹⁾	Total amount of each class of senior securities outstanding at the end of the period presented.

⁽²⁾	The asset coverage ratio for a class of senior securities representing indebtedness is calculated as our consolidated total assets, less all liabilities and indebtedness not represented by senior securities, divided by senior securities representing indebtedness. This asset coverage ratio is multiplied by $1,000 to determine the Asset Coverage Per Unit. The asset coverage ratio for a class of senior securities that is preferred stock is calculated as our consolidated total assets, less all liabilities and indebtedness not represented by senior securities, divided by senior securities representing indebtedness, plus the involuntary liquidation preference of the preferred stock (see footnote 3). The Asset Coverage Per Unit for preferred stock is expressed in terms of dollar amounts per share.

⁽³⁾	The amount to which such class of senior security would be entitled upon the involuntary liquidation of the issuer in preference to any security junior to it.


⁽⁴⁾	Not applicable, except for publicly issued unsecured notes payable, as other senior securities are not registered for public trading. The average market value of the publicly issued unsecured notes payable is calculated as the weighted average face value of the notes. On May 6, 2008, the closing price of our $230 million 6.875% Notes due 2047 was $17.50 per share.


⁽⁵⁾	See Note 4 to our December 31, 2007, consolidated financial statements for a description of the terms.

⁽⁶⁾	Issued by our small business investment company subsidiary to the Small Business Administration. These categories of senior securities were not subject to the asset coverage requirements of the 1940 Act. During 2006, our small business investment company (SBIC) subsidiary surrendered its SBIC license and was merged into its parent.

⁽⁷⁾	The Redeemable Cumulative Preferred Stock was reclassified to Other Liabilities on the accompanying financial statements during 2003 in accordance with SFAS No. 150.


⁽⁸⁾	See Note 4 to our March 31, 2008, Consolidated Financial Statements for a description of the terms.

BUSINESS

General

We are a business development company, or BDC, in the private equity business and we are internally managed. Specifically, we provide long-term debt and equity capital to primarily private middle market companies in a variety of industries. We believe the private equity capital markets are important to the growth of small and middle market companies because such companies often have difficulty accessing the public debt and equity capital markets. We believe that we are well positioned to be a source of capital for such companies. We provide our investors the opportunity to participate in the U.S. private equity industry through an investment in our publicly traded stock.

We have participated in the private equity business since we were founded in 1958. Since then through March 31, 2008, we have invested more than $13 billion in thousands of companies nationwide. We primarily invest in the American entrepreneurial economy, helping to build middle market businesses and support American jobs. We generally invest in established companies with adequate cash flow for debt service and that are well positioned for growth. We are not venture capitalists, and we generally do not provide seed, or early stage, capital. At March 31, 2008, our private finance portfolio included investments in 124 companies that generate aggregate annual revenues of over $13 billion and employ more than 98,000 people.

Our investment objective is to achieve current income and capital gains. In order to achieve this objective, we primarily invest in debt and equity securities of private companies in a variety of industries. However, from time to time, we may invest in companies that are public but lack access to additional public capital.

In addition to managing our own assets, we manage certain funds that also invest in the debt and equity securities of primarily private middle market companies in a variety of industries. We may invest in the equity of these funds, along with other third parties, from which we may earn a current return and/or a future incentive allocation. We may also manage the assets held by these funds, for which we may earn management or other fees for our services. See “Managed Funds” below.

Private Equity Investing

As a private equity investor, we spend significant time and effort identifying, structuring, performing due diligence, monitoring, developing, valuing, and ultimately exiting our investments. We generally target companies in less cyclical industries with, among other things, high returns on invested capital, management teams with meaningful equity ownership, well-capitalized balance sheets, and the ability to generate free cash flow. Each investment is subject to an extensive due diligence process. It is not

uncommon for a single investment to take from two months to a full year to complete, depending on the complexity of the transaction.

Our investment activity is primarily focused on making long-term investments in the debt and equity of primarily private middle market companies. These investments are generally long-term in nature and privately negotiated, and no readily available market exists for them. This makes our investments highly illiquid and, as a result, we cannot readily trade them. When we make an investment, we enter into a long-term arrangement where our ultimate exit from that investment may be three to ten years in the future.

We believe illiquid investments generally provide better investment returns on average over time than do more liquid investments, such as public equities and public debt instruments, because generally increased returns are associated with the liquidity risk in holding such investments. Investors in illiquid investments cannot manage risk through investment trading techniques. In order to manage our risk, we focus on careful investment selection, thorough due diligence, portfolio monitoring and portfolio diversification. Our investment management processes have been designed to incorporate these disciplines.

We have focused on investments in the debt and equity of primarily private middle market companies because they can be structured to provide recurring cash flow to us as the investor. In addition to earning interest income, we may earn income from management, consulting, diligence, structuring or other fees. We may also enhance our total return with capital gains realized from investments in equity instruments or from equity features, such as nominal cost warrants. For the years 1998 through 2007, we have realized $1.4 billion in cumulative net realized gains from our investment portfolio. Net realized gains for this period as a percentage of total assets are shown in the chart below.

One measure of the performance of a private equity investor is the internal rate of return generated by the investor’s portfolio. Since our merger on December 31, 1997, through March 31, 2008, our combined aggregate cash flow internal rate of return, or IRR, has been approximately 21% for private finance and real estate-related CMBS/CDO investments exited during this period. The IRR is calculated using the aggregate portfolio cash flow for all investments exited over this period. For investments exited during this period, we invested capital totaling $4.7 billion. The weighted average holding period of these investments was 39 months. Investments are considered to be exited when the original investment objective has been achieved through the receipt of cash and/or non-cash consideration upon the repayment of our debt

investment or sale of an equity investment, or through the determination that no further consideration was collectible and, thus, a loss may have been realized. The aggregate cash flow IRR for private finance investments was approximately 20% and for CMBS/CDO investments was approximately 24% for the same period. The weighted average holding period of the private finance and CMBS/CDO investments was 49 months and 22 months, respectively, for the same period. These IRR results represent historical results. Historical results are not necessarily indicative of future results.

We believe our business model is well suited for long-term investing in illiquid assets. Our balance sheet is capitalized with significant equity capital and we use only a modest level of debt capital, which allows us the ability to be patient and to manage through difficult market conditions with less risk of liquidity issues. Under the Investment Company Act of 1940 (the 1940 Act), we are restricted to a debt to equity ratio of approximately one-to-one. Thus, our capital structure, which includes a modest level of long-term leverage, is well suited for long-term illiquid investments.

In general, we compete for investments with a large number of private equity funds and mezzanine funds, other business development companies, hedge funds, investment banks, other equity and non-equity based investment funds, and other sources of financing, including specialty finance companies and traditional financial services companies such as commercial banks. However, we primarily compete with other providers of long-term debt and equity capital to middle market companies, including private equity funds and other business development companies.

Private Finance Portfolio. Our private finance portfolio is primarily composed of debt and equity investments. We generally invest in private companies though, from time to time, we may invest in companies that are public but lack access to additional public capital. These investments are also generally illiquid.

Our capital is generally used to fund:


• Buyouts		• Recapitalizations
• Acquisitions		• Note purchases
• Growth		• Other types of financings

When assessing a prospective private finance investment, we generally look for companies in less cyclical industries in the middle market (i.e., generally $50 million to $500 million in revenues) with certain target characteristics, which may or may not be present in the companies in which we invest. Our target investments generally are in companies with the following characteristics:


	•	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-capitalized balance sheet

We generally target investments in companies in the following industries:


• Business Services		• Financial Services
• Consumer Products		• Consumer Services
• Industrial Products		• Retail

We intend to take a balanced approach to private equity investing that emphasizes a complementary mix of debt investments and buyout investments. The combination of these two types of investments provides current interest and related portfolio income and the potential for future capital gains. Our strategy is to manage risk in these investments through the structure and terms of our debt and equity investments. It is our preference to structure our investments with a focus on current recurring interest and other income, which may include management, consulting or other fees. We generally target debt investments of $10 million to $150 million and buyout investments of up to $300 million of invested capital.

Debt investments may include senior loans, unitranche debt (an instrument that combines both senior and subordinated financing, generally in a first lien position), or subordinated debt (with or without equity features). The junior debt that we invest in that is lower in repayment priority than senior debt is also known as mezzanine debt. We may make equity investments for a minority equity stake in portfolio companies or may receive equity features, such as nominal cost warrants, in conjunction with our debt investments.

Senior loans may carry a fixed rate of interest or a floating rate of interest, usually set as a spread over LIBOR, and may require payments of both principal and interest throughout the life of the loan. Senior loans generally have contractual maturities of three to six years and interest is generally paid to us monthly or quarterly. Unitranche debt generally carries a fixed rate of interest. Unitranche debt generally requires payments of both principal and interest throughout the life of the loan. Unitranche debt generally has contractual maturities of five to six years and interest is generally paid to us quarterly. Subordinated debt generally carries a fixed rate of interest generally with contractual maturities of five to ten years and generally has interest-only payments in the early years and payments of both principal and interest in the later years, although maturities and principal amortization schedules may vary. Interest on subordinated debt is generally paid to us quarterly.

We may underwrite or arrange senior loans related to our portfolio investments or for other companies that are not in our portfolio. When we underwrite or arrange senior loans, we may earn a fee for such activities. Senior loans underwritten or arranged by us may or may not be funded by us at closing. When these senior loans are closed, we may fund all or a portion of the underwritten commitment pending sale of the loan to other investors, which may include loan sales to Callidus Capital Corporation (Callidus), a portfolio company controlled by us, or funds managed by Callidus or by us, including the Allied Capital Senior Debt Fund, L.P. or Knightsbridge CLO 2007-1 Ltd. After completion of the loan sales, we may or may not retain a position in these senior loans. We generally earn a fee on the senior loans we underwrite or arrange whether or not we fund the underwritten commitment. In addition, we may fund most or all of the debt and equity capital upon the closing of certain buyout transactions, which may include investments in lower-yielding senior debt. Subsequent to the closing, the portfolio company may refinance all or a portion of the lower-yielding senior debt, which would reduce our investment. Principal collections include repayments of senior debt funded by us that was subsequently sold by us or refinanced or repaid by the portfolio companies.

We may also invest in the bonds or preferred shares/income notes of collateralized loan obligations (CLOs) or collateralized debt obligations (CDOs), where the underlying collateral pool consists of senior loans. Certain of the CLOs and CDOs in which we invest may be managed by Callidus Capital Management, a subsidiary of Callidus, or by us. The CLOs and CDOs in which we invest are invested

primarily in first lien loans to corporate borrowers. We are not an investor in CLOs and CDOs that hold subprime residential real estate loans.

In a buyout transaction, we generally invest in senior debt, subordinated debt and equity (preferred and/or voting or non-voting common) where our equity ownership represents a significant portion of the equity, but may or may not represent a controlling interest. If we invest in non-voting equity in a buyout investment, we generally have an option to acquire a controlling stake in the voting securities of the portfolio company at fair market value. We generally structure our buyout investments such that we seek to earn a blended current return on our total capital invested of approximately 10% through a combination of interest income on our loans and debt securities, dividends on our preferred and common equity, and management, consulting, or transaction services fees to compensate us for the managerial assistance that we may provide to the portfolio company. As a result of our significant equity investment in a buyout investment there is potential to realize larger capital gains through buyout investing as compared to debt or mezzanine investing.

The structure of each debt and equity security is specifically negotiated to enable us to protect our investment, with a focus on preservation of capital, and maximize our returns. We include many terms governing interest rate, repayment terms, prepayment penalties, financial covenants, operating covenants, ownership parameters, dilution parameters, liquidation preferences, voting rights, and put or call rights. Our senior loans and unitranche debt are generally in a first lien position, however in a liquidation scenario, the collateral, if any, may not be sufficient to support our outstanding investment. Our junior or mezzanine loans are generally unsecured. Our investments may be subject to certain restrictions on resale and generally have no established trading market.

At March 31, 2008, 80.6% of the private finance portfolio at value consisted of interest bearing securities and 19.4% consisted of equity securities. At March 31, 2008, 85% of our private finance loans and debt securities carried a fixed rate of interest and 15% carried a floating rate of interest. The mix of fixed and variable rate loans and debt securities in the portfolio may vary depending on the level of floating rate senior loans or unitranche debt in the portfolio at a given time. The weighted average yield on our private finance loans and debt securities was 12.2% at March 31, 2008.

At March 31, 2008, 25.7% of the private finance investments at value were in companies more than 25% owned, 8.4% were in companies 5% to 25% owned, and 65.9% were in companies less than 5% owned.

Our ten largest investments at value at March 31, 2008, were as follows:


		At March 31, 2008
($ in millions)
				Unrealized
Portfolio				Appreciation					Percentage of
Company	Company Information	Cost		(Depreciation)			Value		Total Assets

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.	$	180.7	$	3.0		$	183.7		3.6%

Advantage Sales & Marketing, Inc.	Sales and marketing agency providing outsourced sales, merchandising, and marketing services to the consumer packaged goods industry.	$	155.7	$	11.9		$	167.6		3.3%

BenefitMall, Inc.	Insurance general agency providing brokers with products, tools, and services that make selling employee benefits to small businesses more efficient.	$	115.3	$	42.9		$	158.2		3.1%

WMA Equity Corporation and Affiliates d/b/a/ Wear Me Apparel	Designer and marketer of licensed and private children’s apparel.	$	175.3	$	(36.8	)	$	138.5		2.7%

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.	$	149.3	$	(20.4	)	$	128.9		2.5%

Norwesco, Inc.	Designs, manufactures and markets a broad assortment of polyethylene tanks primarily to the agricultural and septic tank markets.	$	65.2	$	61.2		$	126.4		2.5%

Financial Pacific Company	Specialized commercial finance company that leases business-essential equipment to small businesses nationwide.	$	89.5	$	20.0		$	109.5		2.2%

The Step2 Company, LLC	Manufacturer of branded plastic children’s and home products manufactured through a rotational molding process.	$	97.6	$	1.3		$	98.9		2.0%

Huddle House, Inc.	Franchisor of value-priced, full service family dining restaurants primarily in the Southeast.	$	91.5	$	1.0		$	92.5		1.8%

Cook Inlet Alternative Risk, LLC	Provider of fee-based management services for self-insured groups.	$	90.1	$	1.6		$	91.7		1.8%

We monitor the portfolio to maintain diversity within the industries in which we invest. We may or may not concentrate in any industry or group of industries in the future. The industry composition of the private finance portfolio at value at March 31, 2008, and December 31, 2007, was as follows:


		2008			2007

Industry
Business services			36	%		37	%
Consumer products			25			25
Industrial products			8			10
Financial services			5			6
CLO/ CDO⁽¹⁾			6			6
Retail			5			4
Consumer services			5			4
Healthcare services			3			3
Asset management			2			1
Other			5			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, and by us.

Commercial Real Estate Finance Portfolio. Since 1998, our commercial real estate investments were generally in the non-investment grade tranches of commercial mortgage-backed securities, also known as CMBS, and in the bonds and preferred shares of collateralized debt obligations, also known as CDOs. On May 3, 2005, we completed the sale of our portfolio of CMBS and CDO investments to affiliates of Caisse de dépôt et placement du Québec (the Caisse). See “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Simultaneous with the sale of our CMBS and CDO portfolio, we entered into a platform assets purchase agreement, under which we have agreed not to primarily invest in non-investment grade CMBS and real estate related CDOs and refrain from certain other real estate related investing or servicing activities for a period of three years or through May 2008 subject to certain limitations and excluding our existing portfolio and related activities.

At March 31, 2008, our commercial real estate finance portfolio consisted of commercial mortgage loans, real estate owned and equity interests, which totaled $115.8 million at value, or 2.3% of our total assets.

Managed Funds

We manage funds that invest in the debt and equity of primarily private middle market companies in a variety of industries (together, the Managed Funds). As of March 31, 2008, the funds that we manage had total assets of approximately $1.2 billion. During 2007, we established the Allied Capital Senior Debt Fund, L.P. and the Unitranche Fund LLC, and in the first quarter of 2008, we formed the AGILE Fund I, LLC and assumed the management of Knightsbridge CLO 2007-1 Ltd., all discussed below. Our responsibilities to the Managed Funds may include deal origination, underwriting, and portfolio monitoring and development services consistent with the activities that we perform for our portfolio as outlined below. Each of the Managed Funds may separately invest in the debt or equity of a portfolio company. Our portfolio may include debt or equity investments issued by the same portfolio company as investments held by one or more Managed Funds, and these investments may be senior, pari passu or junior to the debt and equity investments held by us. We may or may not participate in investments made by investment funds managed by us or one of our affiliates. We expect to continue to grow our managed capital base and have identified other private equity-related funds that we intend to develop. By growing our privately managed capital base, we are seeking to diversify our sources of capital, leverage our core investment expertise and increase fees and other income from asset management activities. See “Risk Factors — There are potential conflicts of interest between us and the funds managed by us.”

Allied Capital Senior Debt Fund, L.P. The Allied Capital Senior Debt Fund, L.P. (ACSDF) is a private fund that generally invests in senior, unitranche and second lien debt. ACSDF has closed on $125 million in equity capital commitments and had total assets of approximately $432 million at March 31, 2008. A.C. Corporation (AC Corp), our wholly-owned subsidiary, is the investment manager and Callidus acts as special manager to ACSDF. One of our affiliates is the general partner of ACSDF, and AC Corp serves as collateral manager to a warehouse financing vehicle associated with ACSDF. AC Corp will earn a management fee of up to 2% per annum of the net asset value of ACSDF and will pay Callidus 25% of that management fee to compensate Callidus for its role as special manager.

We are a special limited partner in ACSDF, which is a portfolio investment, and have committed and funded $31.8 million to ACSDF. At March 31, 2008, our investment in ACSDF totaled $31.8 million at cost and $32.8 million at value. As a special limited partner, we expect to earn an incentive allocation of 20% of ACSDF’s annual net income earned in excess of a specified minimum return, subject to certain performance benchmarks.

From time to time, we may offer to sell loans to ACSDF or the warehouse financing vehicle. ACSDF or the warehouse financing vehicle may purchase loans from us. They also purchase loans from other third parties.

Unitranche Fund LLC. In December 2007, we formed the Unitranche Fund LLC (Unitranche Fund), which we co-manage with an affiliate of General Electric Capital Corporation (GE). The Unitranche Fund is a private fund that generally focuses on making first lien unitranche loans to middle market companies with Earning Before Interest, Taxes, Depreciation, and Amortization (EBITDA) of at least $15 million. The Unitranche Fund may invest up to $270 million in a single borrower. For financing needs greater than $270 million, we and GE may jointly underwrite additional financing for a total unitranche financing of up to $500 million. Allied Capital, GE and the Unitranche Fund may co-invest in a single borrower, with the Unitranche Fund holding at least a majority of the issuance. We may hold the portion of a unitranche loan underwritten by us. GE has committed $3.075 billion to the Unitranche Fund consisting of $3.0 billion of senior notes and $0.075 billion of subordinated certificates and we have committed $525.0 million of subordinated certificates. The Unitranche Fund will be capitalized as transactions are completed. At March 31, 2008, our investment in the Unitranche Fund totaled $31.5 million at cost and at value.

The Unitranche Fund is governed by an investment committee with equal representation from Allied Capital and GE and both Allied Capital and GE and its affiliates provide origination, underwriting and portfolio management services to the Unitranche Fund. We will earn a management and sourcing fee totaling 0.375% per annum of managed assets.

The sale to AGILE included 13.7% of our equity investments in 23 of our buyout portfolio companies and 36 of our minority equity portfolio companies for a total purchase price of $104 million, which resulted in a net realized gain of $8.8 million and dividend income of $5.4 million. In addition, we sold approximately $63 million in debt investments, which represented 7.3% of our unitranche, second lien and subordinated debt investments in the buyout investments included in the equity sale. AGILE generally has the right to co-invest in its proportional share of any future follow-on investment opportunities presented by the companies in its portfolio.

We are the managing member of AGILE, and will be entitled to an incentive allocation subject to certain performance benchmarks. We own the remaining interests in AGILE not held by Goldman Sachs. At March 31, 2008, AGILE has total assets of approximately $174 million and our investment in AGILE totaled $0.9 million at cost and at value.

In addition, pursuant to the investment agreement Goldman Sachs has committed to invest at least $125 million in future investment vehicles managed by us and will have future opportunities to invest in our affiliates, or vehicles managed by them, and to co-invest alongside us in the future, subject to various terms and conditions.

As part of this transaction, we sold nine venture capital and private equity limited partnership investments for approximately $28 million to a fund managed by Goldman Sachs, which will assume the $4.7 million of unfunded commitments related to these limited partnership investments. The sales of these limited partnership investments closed at the end of the first quarter of 2008, and resulted in a net realized loss of $5.5 million.

Knightsbridge CLO 2007-1 Ltd. On March 31, 2008, we assumed the management of Knightsbridge CLO 2007-1 Ltd. We earn a management fee of up to 0.6% per annum of the assets of the fund. Callidus may assist us in the management of the fund and we may pay Callidus a portion of the management fee earned for this assistance. This CLO invests primarily in middle market senior loans. At March 31, 2008, Knightsbridge CLO 2007-1 Ltd. had total assets of approximately $500 million and our investment in this CLO totaled $54.4 million at cost and $53.0 million at value.

In aggregate, including the total assets on our balance sheet and capital committed to our Managed Funds, we have more than $9 billion in managed capital.

Business Processes

Business Development and New Deal Origination. Over the years, we believe we have developed and maintained a strong industry reputation and an extensive network of relationships. We have business development professionals dedicated to sourcing investments through our relationships with numerous private equity investors, investment banks, business brokers, merger and acquisition advisors, financial services companies, banks, law firms and accountants through whom we source investment opportunities. Through these relationships, we believe we have been able to strengthen our position as a private equity investor. We are well known in the private equity industry, and we believe that our experience and reputation provide a competitive advantage in originating new investments.

We believe that our debt portfolio relationships and sponsor relationships are a significant source for buyout investments. We generally source our buyout transactions in ways other than going to broad auctions, which include capitalizing on existing relationships with companies and sponsors to participate in proprietary buyout opportunities. We work closely with these companies and sponsors while we are debt investors so that we may be positioned to partner with them on buyout opportunities in a subsequent transaction.

From time to time, we may receive referrals for new prospective investments from our portfolio companies as well as other participants in the capital markets. We may pay referral fees to those who refer transactions to us that we consummate.

New Deal Underwriting and Investment Execution. In a typical transaction, we review, analyze, and substantiate through due diligence, the business plan and operations of the potential portfolio company. We perform financial due diligence, perform operational due diligence, study the industry and competitive landscape, and conduct reference checks with company management or other employees, customers, suppliers, and competitors, as necessary. We may work with external consultants, including accounting firms and industry or operational consultants, in performing due diligence and in monitoring our portfolio investments.

Once we have determined that a prospective portfolio company is suitable for investment, we work with the management and the other capital providers, including senior, junior, and equity capital providers, to structure a “deal.” We negotiate among these parties to agree on the rights and terms of our investment relative to the other capital in the portfolio company’s capital structure. The typical debt transaction requires approximately two to six months of diligence and structuring before funding occurs. The typical buyout transaction may take longer to complete because the due diligence and structuring process is significantly longer when investing in a substantial equity stake in the company.

Our investments are tailored to the facts and circumstances of each deal. The specific structure is designed to protect our rights and manage our risk in the transaction. We generally structure the debt instrument to require restrictive affirmative and negative covenants, default penalties, or other protective provisions. In addition, each debt investment is individually priced to achieve a return that reflects our rights and priorities in the portfolio company’s capital structure, the structure of the debt instrument, and our perceived risk of the investment. Our loans and debt securities have an annual stated interest rate; however, that interest rate is only one factor in pricing the investment. The annual stated interest rate may include some component of contractual payment-in-kind interest, which represents contractual interest accrued and added to the loan balance that generally becomes due at maturity or upon prepayment. In addition to the interest earned on loans and debt securities, our debt investments may include equity features, such as nominal cost warrants or options to buy a minority interest in the portfolio company. In a buyout transaction where our equity investment represents a significant portion of the equity, our equity ownership may or may not represent a controlling interest. If we invest in non-voting equity in a buyout, we generally have an option to acquire a controlling stake in the voting securities of the portfolio company at fair market value.

We have a centralized, credit-based approval process. The key steps in our investment process are:


	•	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).

The investment process benefits from the significant professional experience of the members of our investment committee, which is chaired by our Chief Executive Officer and includes our Chief Operating Officer, our Chief Financial Officer, and certain of our Managing Directors, two of whom serve as vice chairmen of the investment committee.

Portfolio Monitoring and Development. Middle market companies often lack the management expertise and experience found in larger companies. As a BDC, we are required by the 1940 Act to make available significant managerial assistance to our portfolio companies. Our senior level professionals work with portfolio company management teams to assist them in building their businesses. Managerial assistance includes, but is not limited to, management and consulting services related to corporate finance, marketing, human resources, personnel and board member recruiting, business operations, corporate governance, risk management and other general business matters. Our corporate finance assistance includes supporting our portfolio companies’ efforts to structure and attract additional capital. We believe our extensive network of industry relationships and our internal resources help make us a collaborative partner in the development of our portfolio companies.

Our team of investment professionals regularly monitors the status and performance of each investment. This portfolio company monitoring process generally includes review of the portfolio company’s financial performance against its business plan, review of current financial statements and compliance with financial covenants, evaluation of significant current developments and assessment of future exit strategies. For debt investments we may have board observation rights that allow us to attend portfolio company board meetings. For buyout investments, we generally hold a majority of the seats on the board of directors where we own a controlling interest in the portfolio company and we have board observation rights where we do not own a controlling interest in the portfolio company.

Our portfolio management committee is responsible for review and oversight of the investment portfolio, including reviewing the performance of selected portfolio companies, overseeing portfolio companies in workout status, reviewing and approving certain modifications or amendments to or certain additional investments in existing investments, reviewing and approving certain portfolio exits, reviewing and approving certain actions by portfolio companies whose voting securities are more than 50% owned by us, reviewing significant investment-related litigation matters where we are a named party, and reviewing and approving proxy votes with respect to our portfolio investments. Our portfolio management committee is chaired by our Chief Executive Officer and includes our Chief Operating Officer, Chief Financial Officer, Chief Valuation Officer (non-voting member), our private finance general counsel, and certain of our Managing Directors. From time to time we will identify investments that require closer monitoring or become workout assets. We develop a workout strategy for workout assets and the portfolio management committee gauges our progress against the strategy.

We seek to price our investments to provide an investment return considering the fact that certain investments in the portfolio may underperform or result in loss of investment return or investment principal. As a private equity investor, we will incur losses from our investing activities, however we have a history of working with troubled portfolio companies in order to recover as much of our investments as is practicable.

Portfolio Grading

We employ a grading system for our entire portfolio. Grade 1 is for those investments from which a capital gain is expected. Grade 2 is for investments performing in accordance with plan. Grade 3 is for investments that require closer monitoring; however, no loss of investment return or principal is expected. Grade 4 is for investments that are in workout and for which some loss of current investment return is expected, but no loss of principal is expected. Grade 5 is for investments that are in workout and for which some loss of principal is expected. At March 31, 2008, Grade 1, 2, and 3 investments totaled $4,522.6 million, or 97.6% of the total portfolio at value, and Grade 4 and 5 investments totaled $113.0 million, or 2.4% of the total portfolio at value.

Portfolio Valuation

We determine the value of each investment in our portfolio on a quarterly basis, and changes in value result in unrealized appreciation or depreciation being recognized in our statement of operations. Value, as defined in Section 2(a)(41) of the 1940 Act, is (i) the market price for those securities for which a market quotation is readily available and (ii) for all other securities and assets, fair value is as determined in good faith by the Board of Directors. Since there is typically no readily available market value for the investments in our portfolio, we value substantially all of our portfolio investments at fair value as determined in good faith by the Board of Directors in accordance with our valuation policy and the provisions of the 1940 Act and FASB Statement No. 157, Fair Value Measurements (SFAS 157 or the Statement). We determine fair value to be the price that would be received for an investment in a current sale, which assumes an orderly transaction between market participants on the measurement date. At March 31, 2008, portfolio investments recorded at fair value using level 3 inputs (as defined under the Statement) were approximately 91% of our total assets. Because of the inherent uncertainty of determining

the fair value of investments that do not have a readily available market value, the fair value of our investments determined in good faith by the Board of Directors may differ significantly from the values that would have been used had a ready market existed for the investments, and the differences could be material. Additionally, changes in the market environment and other events that may occur over the life of our investments may cause the gains or losses ultimately realized on our investments to be different than the values determined at the measurement date.

There is no single approach for determining fair value in good faith. As a result, determining fair value requires that judgment be applied to the specific facts and circumstances of each portfolio investment while employing a consistently applied valuation process for the types of investments we make. Unlike banks, we are not permitted to provide a general reserve for anticipated loan losses. Instead, we are required to specifically value each individual investment on a quarterly basis. We will record unrealized depreciation on investments when we determine that the fair value of a security is less than its cost basis, and we will record unrealized appreciation when we determine that the fair value is greater than its cost basis. Changes in fair value are recorded in the statement of operations as net change in unrealized appreciation or depreciation. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations — Change in Unrealized Appreciation or Depreciation” for a discussion of our valuation methodology.

Valuation Process. The portfolio valuation process is managed by our Chief Valuation Officer (CVO). The CVO works with the investment professionals responsible for each investment. The following is an overview of the steps we take each quarter to determine the value of our portfolio.


	•	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.

	•	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.

In connection with our valuation process to determine the fair value of a private finance investment, we work with third-party consultants to obtain assistance and advice as additional support in the preparation of our internal valuation analysis for a portion of the portfolio each quarter. In addition, we may receive other third-party assessments of a particular private finance portfolio company’s value in the ordinary course of business, most often in the context of a prospective sale transaction or in the context of a bankruptcy process.

received third-party valuation assistance from other third-party consultants for certain private finance portfolio companies. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” above.

We work with third-party consultants to obtain valuation assistance for a portion of the private finance portfolio each quarter. We currently anticipate that we will generally obtain valuation assistance for all companies in the portfolio where we own more than 50% of the outstanding voting equity securities on a quarterly basis and that we will generally obtain assistance for companies where we own equal to or less than 50% of the outstanding voting equity securities at least once during the course of the calendar year. Valuation assistance may or may not be obtained for new companies that enter the portfolio after June 30 of any calendar year during that year or for investments with a cost and value less than $250,000. For the quarter ended March 31, 2008, we received valuation assistance for 124 portfolio companies, which represented 94% of the private finance portfolio at value. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” above.

Disposition of Investments

We manage our portfolio of investments in an effort to maximize our expected returns. We are generally repaid by our borrowers and exit our debt and equity investments as portfolio companies are sold, recapitalized or complete an initial public offering.

We may retain a position in the senior loans we originate or we may sell all or a portion of these investments. In our debt investments where we have equity features, we are generally in a minority ownership position in a portfolio company, and as a result, generally exit the investment when the majority equity stakeholder decides to sell or recapitalize the company. Where we have a control position in an investment, as we may have in buyout investments, we have more flexibility and can determine whether or not we should exit our investment. Our most common exit strategy for a buyout investment is the sale of a portfolio company to a strategic or financial buyer. If an investment has appreciated in value, we may realize a gain when we exit the investment. If an investment has depreciated in value, we may realize a loss when we exit the investment.

We are in the investment business, which includes acquiring and exiting investments. It is our policy not to comment on potential transactions in the portfolio prior to reaching a definitive agreement or, in many cases, prior to consummating a transaction. To the extent we enter into any material transactions, we would provide disclosure as required.

Dividends

We have elected to be taxed as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986 (the Code). Assuming that we continue to qualify as a regulated investment company, we generally will not be subject to corporate level income taxation on income we timely distribute to our stockholders as dividends. We pay regular quarterly dividends based upon an estimate of annual taxable income available for distribution to shareholders, which includes our taxable interest, dividend, and fee income, as well as taxable net capital gains. Taxable income generally differs from net income for financial reporting purposes due to temporary and permanent differences in the recognition of income and expenses, and generally excludes net unrealized appreciation or depreciation, as gains or losses generally are not included in taxable income until they are realized. In addition, gains realized for financial reporting purposes may differ from gains included in taxable income as a result of our election to recognize gains using installment sale treatment, which generally results in the deferment of gains for tax purposes until notes or other amounts, including amounts held in escrow, received as consideration from the sale of investments are collected in cash. Taxable income includes non-cash income, such as changes in accrued and reinvested interest and dividends, which includes contractual payment-in-kind interest, and the amortization of discounts and fees. Cash collections of income resulting from contractual payment-in-kind interest or the amortization of discounts and fees generally occur upon the repayment of the loans or debt

securities that include such items. Non-cash taxable income is reduced by non-cash expenses, such as realized losses and depreciation and amortization expense.

As a regulated investment company, we distribute substantially all of our annual taxable income to shareholders through the payment of cash dividends. Our Board of Directors reviews the dividend rate quarterly, and may adjust the quarterly dividend throughout the year. Dividends are declared considering our estimate of annual taxable income available for distribution to shareholders and the amount of taxable income carried over from the prior year for distribution in the current year. Our goal is to declare what we believe to be sustainable increases in our regular quarterly dividends. To the extent that we earn annual taxable income in excess of dividends paid from such taxable income for the year, we may carry over the excess taxable income into the next year and such excess income will be available for distribution in the next year as permitted under the Code. The maximum amount of excess taxable income that may be carried over for distribution in the next year under the Code is the total amount of dividends paid in the following year, subject to certain declaration and payment guidelines. Excess taxable income carried over and paid out in the next year is generally subject to a nondeductible 4% excise tax. See “Management’s Discussion and Analysis of Financial Condition and Results of Operation — Other Matters — Regulated Investment Company Status”. We believe that carrying over excess taxable income into future periods may provide increased visibility with respect to taxable earnings available to pay the regular quarterly dividend.

We began paying quarterly dividends in 1963, and our portfolio has provided sufficient ordinary taxable income and realized net capital gains to sustain or grow our dividends over time. Since inception through December 31, 2007, our average annual total return to shareholders (assuming all dividends were reinvested) was 16.9%. Over the past one, three, five and ten years (assuming each period ended on December 31, 2007), our total return to shareholders (assuming all dividends were reinvested) has been (27.6%), 2.5%, 8.9% and 8.8%, respectively, with the dividend providing a meaningful portion of this return.

The percentage of our dividend generated by ordinary taxable income versus capital gain income will vary from year to year. The percentage of ordinary taxable income versus net capital gain income supporting the dividend since 1987 is shown below.

Corporate Structure and Offices

We are a Maryland corporation and a closed-end, non-diversified management investment company that has elected to be regulated as a business development company under the 1940 Act. We have a real

estate investment trust subsidiary, Allied Capital REIT, Inc., and several subsidiaries that are single-member limited liability companies established for specific purposes, including holding real estate property. We also have a subsidiary, A.C. Corporation, that generally provides diligence and structuring services, as well as transaction, management, consulting, and other services, including underwriting and arranging senior loans, to Allied Capital and our portfolio companies. A.C. Corporation also provides fund management services to certain funds managed by us.

Our executive offices are located at 1919 Pennsylvania Avenue, NW, Washington, DC 20006-3434 and our telephone number is (202) 721-6100. In addition, we have regional offices in New York, Chicago, and Los Angeles.

Properties

Our principal offices are located at 1919 Pennsylvania Avenue, N.W., Washington, DC 20006-3434. Our lease for approximately 56,000 square feet of office space at that location expires in December 2010. The office is equipped with an integrated network of computers for word processing, financial analysis, accounting and loan servicing. We believe our office space is suitable for our needs for the foreseeable future. We also maintain offices in New York, NY; Chicago, IL; and Los Angeles, CA.

Employees

At March 31, 2008, we employed 186 individuals including investment and portfolio management professionals, operations professionals and administrative staff. The majority of our employees are located in our Washington, DC office. We believe that our relations with our employees are excellent.

Legal Proceedings

On June 23, 2004, we were notified by the SEC that they were conducting an informal investigation of us. The investigation related to the valuation of securities in our private finance portfolio and other matters. On June 20, 2007, we announced that we entered into a settlement with the SEC that resolved the SEC’s informal investigation. As part of the settlement and without admitting or denying the SEC’s allegations, we agreed to the entry of an administrative order. In the order the SEC alleged that, between June 30, 2001, and March 31, 2003, we did not maintain books, records and accounts which, in reasonable detail, supported or accurately and fairly reflected valuations of certain securities in our private finance portfolio and, as a result, did not meet certain recordkeeping and internal controls provisions of the federal securities laws. In the administrative order, the SEC ordered us to continue to maintain certain of our current valuation-related controls. Specifically, for a period of two years, we have undertaken to: (1) continue to employ a Chief Valuation Officer, or a similarly structured officer-level employee, to oversee our quarterly valuation processes; and (2) continue to employ third-party valuation consultants to assist in our quarterly valuation processes.

On December 22, 2004, we received letters from the U.S. Attorney for the District of Columbia requesting the preservation and production of information regarding us and Business Loan Express, LLC (currently known as Ciena Capital LLC) in connection with a criminal investigation relating to matters similar to those investigated by and settled with the SEC as discussed above. We produced materials in response to the requests from the U.S. Attorney’s office and certain current and former employees were interviewed by the U.S. Attorney’s Office. We have voluntarily cooperated with the investigation.

In late December 2006, we received a subpoena from the U.S. Attorney for the District of Columbia requesting, among other things, the production of records regarding the use of private investigators by us or our agents. The Board established a committee, which was advised by its own counsel, to review this matter. In the course of gathering documents responsive to the subpoena, we became aware that an agent of Allied Capital obtained what were represented to be telephone records of David Einhorn and which purport to be records of calls from Greenlight Capital during a period of time in 2005. Also, while we were gathering documents responsive to the subpoena, allegations were made that our management had authorized the acquisition of these records and that management was subsequently advised that these records had been obtained. Our management has stated that these allegations are not true. We have cooperated fully with the inquiry by the U.S. Attorney’s Office.

On February 13, 2007, Rena Nadoff filed a shareholder derivative action in the Superior Court of the District of Columbia, captioned Rena Nadoff v. Walton, et al., CA 001060-07, seeking unspecified compensatory and other damages, as well as equitable relief on behalf of Allied Capital Corporation. The complaint was summarily dismissed in July 2007. The complaint alleged breach of fiduciary duty by the Board of Directors arising from internal control failures and mismanagement of Business Loan Express, LLC, an Allied Capital portfolio company. On October 5, 2007, Rena Nadoff sent a letter to our Board of Directors with substantially the same claims and a request that the Board of Directors investigate the claims and take appropriate action. The Board of Directors has established a committee, which is advised by its own counsel, to review the matter.

On February 26, 2007, Dana Ross filed a class action complaint in the U.S. District Court for the District of Columbia in which she alleges that Allied Capital Corporation and certain members of management violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. Thereafter, the court appointed new lead counsel and approved new lead plaintiffs. On July 30, 2007, plaintiffs served an amended complaint. Plaintiffs claim that, between November 7, 2005, and January 22, 2007, Allied Capital either failed to disclose or misrepresented information about our portfolio company, Business Loan Express, LLC. Plaintiffs seek unspecified compensatory and other damages, as well as other relief. We believe the lawsuit is without merit, and we intend to defend the lawsuit vigorously. On September 13, 2007, we filed a motion to dismiss the lawsuit. The motion is pending.

In addition to the above matters, we are party to certain lawsuits in the normal course of business.

While the outcome of any of the open legal proceedings described above cannot at this time be predicted with certainty, we do not expect these matters will materially affect our financial condition or results of operations; however, there can be no assurance whether any pending legal proceedings will have a material adverse effect on our financial condition or results of operations in any future reporting period.

PORTFOLIO COMPANIES

The following is a listing of each portfolio company or its affiliate, together referred to as portfolio companies, in which we had an equity investment at March 31, 2008. Percentages shown for class of securities held by us represent percentage of the class owned and do not necessarily represent voting ownership or economic ownership. Percentages shown for equity securities other than warrants or options represent the actual percentage of the class of security held before dilution. Percentages shown for warrants and options held represent the percentage of class of security we may own assuming we exercise our warrants or options before dilution.

The portfolio companies are presented in three categories: companies more than 25% owned which represent portfolio companies where we directly or indirectly own more than 25% of the outstanding voting securities of such portfolio company and, therefore, are deemed controlled by us under the 1940 Act; companies owned 5% to 25% which represent portfolio companies where we directly or indirectly own 5% to 25% of the outstanding voting securities of such portfolio company or where we hold one or more seats on the portfolio company’s board of directors and, therefore, are deemed to be an affiliated person under the 1940 Act; and companies less than 5% owned which represent portfolio companies where we directly or indirectly own less than 5% of the outstanding voting securities of such portfolio company and where we have no other affiliations with such portfolio company. We make available significant managerial assistance to our portfolio companies. We generally receive rights to observe the meetings of our portfolio companies’ board of directors, and may have one or more voting seats on their boards.

For information relating to the amount and nature of our investments in portfolio companies, see our consolidated statement of investments at March 31, 2008, at pages F-76 to F-92.


				Percentage
Name and Address		Nature of its	Title of Securities	of Class
of Portfolio Company		Principal Business	Held by the Company	Held

PRIVATE FINANCE
Companies More Than 25% Owned

AGILE Fund I, LLC⁽¹⁾		Private Equity Fund	Equity Interests		0.5%
	1919 Pennsylvania Ave, N.W.
	Washington, DC 20006

Alaris Consulting, LLC⁽¹⁾⁽²⁾		Consulting Firm	Equity Interests		83.1%
	1815 South Meyers Road
	Suite 1000
	Oakbrook, IL 60181

AllBridge Financial, LLC⁽¹⁾		Real Estate	Class A Equity Interests		95.2%
	5080 Spectrum Drive	Finance Company
	Suite 1150 E
	Addison, TX 75001

Allied Capital Senior Debt Fund, L.P. ^(1)(12)		Private Debt Fund	Class A-1 Limited
	1919 Pennsylvania Ave, N.W.		Partnership Interest		41.0%
	Washington, DC 20006

Avborne, Inc.⁽¹⁾⁽⁷⁾		Aviation Services	Series B Preferred Stock		23.8%
	PO Box 52-2602		Common Stock		27.2%
	Miami, FL 33152

Avborne Heavy Maintenance, Inc.⁽¹⁾⁽⁷⁾		Aviation Services	Series A Preferred Stock		27.5%
	PO Box 52-2602		Common Stock		27.5%
	Miami, FL 33152

Aviation Properties Corporation⁽¹⁾		Aviation Services	Common Stock		100.0%
	1919 Pennsylvania Avenue, N.W.
	Washington, DC 20006

Border Foods, Inc.⁽¹⁾		Mexican Ingredient & Food	Series A Preferred Stock		100.0%
	4065 I Street SE	Product Manufacturer	Series A Common Stock		100.0%
	Deming, NM 88030

Calder Capital Partners, LLC⁽¹⁾		Private Investment Firm	Equity Interests		65.0%
	321 North Clark Street, 8th Floor
	Chicago, IL 60610

Callidus Capital Corporation⁽¹⁾⁽⁴⁾		Asset Manager and	Common stock		100.0%
	520 Madison Avenue	Finance Company
	New York, NY 10022


				Percentage
Name and Address		Nature of its	Title of Securities	of Class
of Portfolio Company		Principal Business	Held by the Company	Held

Ciena Capital LLC⁽¹⁾		Real-Estate Secured	Class A Equity Interests		100.0%
	1633 Broadway	Lender	Class B Equity Interests		100.0%
	New York, NY 10019		Class C Equity Interests		94.9%
			Equity Interest in Ciena
			Subsidiary⁽³⁾		20.0%

CitiPostal, Inc.⁽¹⁾		Document Storage and	Common Stock		63.1%
	5 North 11th Street	Management
	Brooklyn, NY 11211

Coverall North America, Inc.⁽¹⁾		Corporate Cleaning Service	Common Stock		85.2%
	5201 Congress Avenue	Provider
	Suite 275
	Boca Raton, FL 33487

CR Holding, Inc.⁽¹⁾		Household Cleaning	Common Stock		70.9%
	141 Venture Boulevard	Products
	Spartanburg, SC 29306

Crescent Equity Corp.⁽¹¹⁾		Hotel Management	Common Stock		86.3%
	1919 Pennsylvania Ave, N.W.	Company and
	Washington, DC 20006	Multi-system Cable Operator

Direct Capital Corporation⁽¹⁾		Business Equipment	Class A Common Stock		57.3%
	155 Commerce Way	Leasing
	Portsmouth, NH 03801

Financial Pacific Company⁽¹⁾		Commercial Finance	Series A Preferred Stock		85.7%
	3455 South 344th Way	Leasing	Common Stock		85.8%
	Suite 300
	Federal Way, WA 98001

ForeSite Towers, LLC ⁽¹⁾		Tower Leasing	Common Equity Interest		88.1%
	5809 Feldspar Way
	Birmingham, AL 35244

Hot Light Brands, Inc.		Retail	Common Stock		100.0%
	11780 Manchester Road
	Suite 207
	St. Louis, MO 63131

Hot Stuff Foods, LLC ⁽¹⁾		Foodservice to	Class B Common Stock		95.0%
	2930 W. Maple Street	Convenience Stores	Class A Common Stock		66.1%
	Sioux Falls, SD 57118

Huddle House, Inc.⁽¹⁾		Restaurant Franchisor	Common Stock		84.0%
	5901-B Peachtree-Dunwoody Road
	Suite 450
	Atlanta, Georgia 30328

Impact Innovations Group, LLC		Information Technology	Equity Interests in
	2500 Northwinds Parkway	Services Provider	Affiliate⁽⁵⁾		50.0%
	Suite 200
	Alpharetta, GA 30004

Insight Pharmaceuticals Corporation ⁽¹⁾		Marketer of Over-The-	Preferred Stock		100.0%
	1170 Wheeler Way	Counter Pharmaceuticals	Common Stock		99.7%
	Suite 150
	Langhorne, PA 19047

Legacy Partners Group, Inc.⁽¹⁾		Merger and Acquisition	Equity Interests		100.0%
	1919 Pennsylvania Ave, N.W.	Advisor
	Washington, DC 20006

Litterer Beteiligungs-GmbH		Scaffolding Company	Equity Interest		25.0%
	68165 Manheim
	Germany

MHF Logistical Solutions, Inc.⁽¹⁾⁽⁶⁾		Third-Party	Class B Common Stock		58.3%
	800 Cranberry Woods Drive	Environmental Logistics	Series A Preferred Stock		100.0%
	Suite 450		Class A Common Stock		98.9%
	Cranberry Township, PA 16066

MVL Group, Inc.⁽¹⁾		Market Research	Common Stock		55.9%
	1061 E. Indiantown Road	Services
	Suite 300
	Jupiter, FL 33477
Old Orchards Brand, LLC⁽¹⁾		Beverage Manufacturer	Equity Interests		78.8%
	1991 Twelve Mile Road	and Marketer
	Sparta, MI 49345


				Percentage
Name and Address		Nature of its	Title of Securities	of Class
of Portfolio Company		Principal Business	Held by the Company	Held

Penn Detroit Diesel Allison, LLC⁽¹⁾		Distributor of Engines,	Equity Interests		78.1%
	8330 State Road	Transmissions, and Parts
	Philadelphia, PA 19136

Service Champ, Inc.⁽¹⁾		Wholesale Distributor of	Common Stock		54.8%
	180 New Britain Boulevard	Auto Parts
	Chalfont, PA 18914

Startec Equity, LLC		Telecommunications	Equity Interests		100.0%
	1919 Pennsylvania Avenue N.W.	Services
	Washington, DC 20006

Sweet Traditions, Inc.⁽¹⁾		Franchisor of Krispy	Class B-2 Preferred Stock		100.0%
	11780 Manchester Road	Kreme Doughnut	Class A-1 Common Stock		51.0%
	Suite 207	Corporation
	St. Louis, MO 63131

Unitranche Fund LLC ⁽¹⁾		Private Debt Fund	Equity Interests		87.5%
	c/o Corporation Service Company
	2711 Centerville Road
	Wilmington, DE 19808

Worldwide Express Operations, LLC⁽¹⁾		Reseller of	Equity Interests		53.8%
	2828 Routh Street	Shipping Services	Warrants to Purchase
	Suite 400		Equity Interests		0.7%
	Dallas, TX 75201

Companies 5% to 25% Owned

10th Street, LLC		Document Storage	Equity Interests		10.0%
	5 North 11th Street
	Brooklyn, NY 11211

Advantage Sales & Marketing, Inc.⁽¹⁾		Sales and Marketing	Equity Interests		4.2%
	19100 Von Karman Avenue	Agency
	Suite 600
	Irvine, CA 92612

Air Medical Group Holdings LLC		Air Ambulance Service	Series A Preferred Equity
	306 Davis Drive		Interests		6.4%
	P.O. Box 768		Series B Preferred Equity
	West Plains, MO 65775		Interests		6.2%

Alpine ESP Holdings, Inc.		Engineering and Technical	Preferred Stock		11.3%
	3361 Rouse Road	Services	Common Stock		9.3%
	Suite 165
	Orlando, FL 32817

Amerex Group, LLC⁽¹⁾		Outerwear Apparel	Class B Equity Interests		100.0%
	512 Seventh Avenue	Supplier
	New York, NY 10118

BB&T Capital Partners/ Windsor		Private Equity Fund	Class A Equity Interests⁽¹⁴⁾		32.6%
Mezzanine Fund, LLC
	101 N. Cherry Street
	Suite 400
	Winston-Salem, NC 27101

Becker Underwood, Inc.		Speciality Chemical	Common Stock		4.8%
	801 Dayton Avenue	Manufacturer
	Ames, IA 50010

BI Incorporated		Electronic Monitoring	Common Stock		6.1%
	6400 Lookout Road	Equipment
	Boulder, CO 80301

Creative Group, Inc.⁽¹⁾		Concept-to-Completion	Class B Common Stock		100.0%
	1601 Broadway, 10th Floor	Development	Warrants to Purchase
	New York, NY 10019		Class B Common Stock		100.0%

Drew Foam Companies, Inc.		Polystyrene Block Plastic	Preferred Stock		7.6%
	1093 Highway 278 East	Foam Manufacturer	Common Stock		6.3%
	Monticello, AR 71655

Hilden America, Inc.		Distributor of Luxury	Common Stock		8.1%
	1044 Commerce Lane	Sheets
	South Boston, VA 24592

MedBridge Healthcare, LLC⁽¹⁾		Sleep Diagnostic Facilities	Debt Convertible
	110 West North Street		into Equity Interests		75.0%
	Suite 100		Class C Equity Interest		100.0%
	Greenville, SC 29601


				Percentage
Name and Address		Nature of its	Title of Securities	of Class
of Portfolio Company		Principal Business	Held by the Company	Held

Multi-Ad Services, Inc.		Marketing Services	Series A Preferred Equity
	1720 W. Detweiller Drive		Interests		17.4%
	Peoria, IL 61615		Class A Common Equity Interests		10.5%

Progressive International
	Corporation	Retail Kitchenware	Series A Redeemable
	6111 S. 228th Street		Preferred Stock		14.3%
	Kent, WA 98032		Class A Common Stock		1.0%
			Warrants to Purchase
			Class A Common Stock		42.3%

Regency Healthcare Group, LLC		Hospice Services	Class A Equity Interests		8.8%
	2151 Highland Avenue
	Suite 350
	Birmingham, AL 35205

SGT India Private Limited⁽¹⁾		Software/Business Process	Common Stock		21.8%
	5858 Westheimer Road	Developer
	Houston, TX 77057

Soteria Imaging Services, LLC		Diagnostic Imaging	Class A Preferred Equity
	6009 Brownsboro Park Boulevard	Facilities Operator	Interests		10.8%
	Suite H
	Louisville, KY 40207

Universal Environmental Services, LLC		Used Oil Recycling	Preferred Equity
	411 Dividend Drive		Interests		15.0%
	Peachtree City, GA 30269

Companies Less Than 5% Owned

Augusta Sportswear Group, Inc.		Retail Athletic Apparel	Common Stock		1.6%
	425 Park West Drive
	Augusta, GA 30907

Axium Healthcare Pharmacy, Inc.		Pharmaceutical Services	Common Stock		12.6%
	550 Technology Park
	Lake Mary, FL 32746

Baird Capital Partners IV Limited Partnership		Private Equity Fund	Limited Partnership Interest		2.5%
	777 East Wisconsin Avenue
	Milwaukee, WI 53201

BenefitMall, Inc.		Insurance General Agency	Series B Common Stock⁽¹⁰⁾		85.3%
	4851 LBJ Freeway, Suite 1100	to Small Businesses	Warrant to Purchase
	Dallas, TX 75244		Class C Common Stock⁽¹⁰⁾		100.0%

Callidus Debt Partners CLO Fund III, Ltd.⁽⁸⁾		CDO/CLO Fund	Preferred Shares		68.4%
	520 Madison Avenue
	New York, NY 10022

Callidus Debt Partners CLO Fund IV, Ltd.⁽⁸⁾		CDO/CLO Fund	Income Notes		27.5%
	520 Madison Avenue
	New York, NY 10022

Callidus Debt Partners CLO Fund V, Ltd.⁽⁸⁾		CDO/CLO Fund	Income Notes		43.1%
	520 Madison Avenue
	New York, NY 10022

Callidus Debt Partners CLO Fund VI, Ltd.⁽⁸⁾		CDO/CLO Fund	Income Notes		100.0%
	520 Madison Avenue
	New York, NY 10022

Callidus Debt Partners CLO Fund VII, Ltd.⁽⁸⁾		CDO/CLO Fund	Income Notes		50.9%
	520 Madison Avenue
	New York, NY 10022

Callidus MAPS CLO Fund I LLC⁽⁸⁾		CDO/CLO Fund	Income Notes		86.5%
	520 Madison Avenue
	New York, NY 10022

Callidus MAPS CLO Fund II, Ltd.⁽⁸⁾		CDO/CLO Fund	Income Notes		47.1%
	520 Madison Avenue
	New York, NY 10022

Carlisle Wide Plank Floors, Inc.		Wide Plank Wood Flooring	Class A-1 Preferred Stock		4.5%
	1676 Route 9
	Stoddard, NH 03464

Catterton Partners VI, L.P.		Private Equity Fund	Limited Partnership
	599 West Putnam Avenue		Interest		0.5%
	Greenwich, CT 06830


				Percentage
Name and Address		Nature of its	Title of Securities	of Class
of Portfolio Company		Principal Business	Held by the Company	Held


Centre Capital Investors V, LP		Private Equity Fund	Limited Partnership
	30 Rockefeller Plaza		Interest		3.7%
	New York, NY 10020

CK Franchising, Inc.		Non-Medical,	Preferred Stock		28.5%
	6640 Poe Avenue	In-Home Care	Class B Common Stock		86.3%
	Suite 200	Franchiser
	Dayton, OH 45414

Commercial Credit Group, Inc.		Equipment Finance and	Series A-1 Preferred Stock		43.1%
	121 West Trade Street	Leasing	Series B Preferred Stock		43.1%
	Suite 2100		Series C Preferred Stock		86.3%
	Charlotte, NC 28202		Series D Preferred Stock		44.8%
			Warrant to Purchase
			Common Stock⁽¹⁰⁾		66.4%

Cook Inlet Alternative Risk, LLC		Management Services	Equity Interests		3.7%
	10 British American Boulevard
	Latham, NY 12110

Cortec Group Fund IV, L.P.		Private Equity Fund	Limited Partnership
	200 Park Avenue		Interest		2.5%
	New York, NY 10166

Digital VideoStream, LLC		Media Post Production	Debt Convertible
	2600 West Olive Avenue		into Equity Interests		20.8%
	Burbank, CA 91505

DirectBuy Holdings, Inc.		Franchisor of Consumer	Equity Interests		4.6%
	8450 Broadway	Buying Centers
	Merrilville, IN 46410

Distant Lands Trading Co.		Provider of Premium	Series A-1 Common Stock		8.5%
	801 Houser Way North	Coffee and Coffee	Class A Common Stock		3.8%
	Renton, WA 98055	Beans

Driven Brands, Inc. (d/b/a Meineke Car Care Centers^® and Econo Lube N’ Tune^®)		Franchisor of	Class B Common Stock⁽¹⁰⁾		84.7%
	128 South Tryon Street	Car Care Centers	Warrant to Purchase
	Suite 900		Class A Common Stock⁽¹⁰⁾		51.0%
	Charlotte, NC 28202

Dryden XVIII Leveraged Loan 2007 Limited		CDO/CLO Fund	Income Notes		80.0%
	Prudential Investment Management
	Four Gateway Center
	Newark, NJ 07102

Dynamic India Fund IV		Fund Focused on Real	Equity Interests		5.4%
	International Financial Services Limited	Estate in India
	IFS Court, Twenty Eight Cybercity, Ebene, Mauritius

EarthColor, Inc.		Full Service Commercial	Class B Common Stock⁽¹⁰⁾		86.3%
	249 Pomeroy Road	Printer	Warrant to Purchase
	Parsippany, NJ 07054		Class C Common Stock⁽¹⁰⁾		100.0%

eCentury Capital Partners, L.P.		Private Equity Fund	Limited Partnership
	8180 Greensboro Drive		Interest⁽⁶⁾		25.0%
	Suite 1150
	McLean, VA 22102

eInstruction Corporation		Provider of Student	Class A Common Stock		2.4%
	308 N. Carroll Blvd.	Response Systems
	Denton, TX 76201

FCP-BHI Holdings, LLC		Restaurants	Equity Interests		1.5%
	9432 Southern Pine Boulevard
	Charlotte, NC 28273

Fidus Mezzanine Capital, L.P.		Private Equity Fund	Limited Partnership Interest⁽⁶⁾		30.0%
	101 North Tryon Street
	Charlotte, NC 28246

Frozen Specialties, Inc.		Private Label Frozen	Warrants to Purchase
	720 Barre Road	Food Manufacturer	Class A Common Stock		2.5%
	Archbold, OH 43502

Geotrace Technologies, Inc.		Oil and Gas Reservoir	Warrant to Purchase
	1011 Highway 6 South	Analysis	Preferred Stock		8.9%
	Suite 220		Warrant to Purchase
	Houston, TX 77077		Common Stock		8.1%


				Percentage
Name and Address		Nature of its	Title of Securities	of Class
of Portfolio Company		Principal Business	Held by the Company	Held


Havco Wood Products LLC		Hardwood Flooring	Equity Interests		4.5%
	3200 East Outer Road	Products Manufacturer
	Scott City, MO 63780

Higginbotham Insurance Agency, Inc.		Insurance Brokerage Firm	Class B Common Stock		87.0%
	500 W. 13th Street		Warrant to purchase
	Fort Worth, TX 76102		Class C Common Stock		100.0%

The Homax Group, Inc.		Supplier of Branded	Preferred Stock		0.1%
	P.O. Box 5643	Consumer Products	Common Stock		0.1%
	Bellingham, WA 98227		Warrant to Purchase
			Preferred Stock		1.0%
			Warrant to Purchase
			Common Stock		1.0%

International Fiber Corporation		Cellulose and Fiber	Series A Preferred Stock		4.0%
	50 Bridge Street	Producer
	North Tonawanda, NY 14120

Knightsbridge CLO 2007-1 Limited		CDO/CLO Fund	Income Notes		70.0%
	Deutsche Banc Securities Inc.
	60 Wall Street
	New York, NY 10005

Kodiak Fund LP		Real Estate Finance Fund	Equity Interests		4.1%
	2107 Wilson Boulevard
	Suite 400
	Arlington, VA 22201

MedAssets, Inc.		Healthcare Outsourcing	Common Stock		0.5%
	100 North Pointe Center
	Suite 150
	Alpharetta, GA 30022

Network Hardware Resale, Inc.		Provider of Pre-Owned	Debt Convertible into
	26 Castilian Drive	Networking Equipment	Common Stock		21.8%
	Suite A
	Santa Barbara, CA 93117

Norwesco, Inc.		Polyethylene Tanks	Class B Common Stock⁽¹⁰⁾		83.2%
	P.O. BOX 439	Manufacturer	Warrants to Purchase
	4365 Steiner St.		Class A Common Stock⁽¹⁰⁾		50.2%
	St. Bonifacius, MN 55375

Novak Biddle Venture Partners III, L.P.		Private Equity Fund	Limited Partnership
	7501 Wisconsin Avenue		Interest		2.5%
	East Tower, Suite 1380
	Bethesda, MD 20814

Passport Health Communications, Inc.		Healthcare Technology	Preferred Stock		5.8%
	720 Cool Springs Blvd		Common Stock		0.1%
	Suite 450
	Franklin, TN 37067

Pendum, Inc.		Outsourced ATM Services	Series C-2 Preferred Stock		100.0%
	4600 S. Ulster Street	Provider	Warrants to Purchase Class C-2
	Denver, CO 80237		Common Stock		100.0%

Performant Financial Corporation		Collections and	Common Stock		2.3%
	333 N. Canyons Pkwy	Default Prevention
	Suite 100	Services
	Livermore, CA 94551

Peter Brasseler Holdings, LLC		Dental Equipment	Class A Equity Interests		5.5%
	One Brasseler Boulevard	Distributor
	Savannah, GA 31419

Postle Aluminum Company, LLC		Aluminum Extrusions	Class B Equity Interests		100.0%
	511 Pine Creek Court	Distributor and
	Elkhart, IN 46516	Manufacturer

Pro Mach, Inc.		Packaging Machinery	Equity Interests		2.2%
	6279 Tri-Ridge Boulevard	Manufacturer
	Suite 410
	Loveland, OH 45140

Reed Group, Ltd.		Publisher	Class A Equity Interests		4.2%
	10155 Westmoor Drive
	Suite 210
	Westminster, CO 80021


				Percentage
Name and Address		Nature of its	Title of Securities	of Class
of Portfolio Company		Principal Business	Held by the Company	Held

S.B. Restaurant Company (d/b/a Elephant Bar)		Restaurants	Series B Convertible
	14241 Firestone Boulevard		Preferred Stock		2.1%
	Suite 315		Warrants to Purchase
	La Mirada, CA 90638		Series A Common Stock		11.5%

Service Center Metals, LLC		Manufacturer Aluminum	Series C Preferred
	5850 Quality Way	Products	Equity Interests		2.8%
	Prince George, VA 23875

Snow Phipps Group, L.P.		Private Equity Fund	Limited Partnership
	667 Madison Avenue		Interest		1.6%
	New York, NY 10021

SPP Mezzanine Funding II, L.P.		Private Equity Fund	Limited Partnership
	330 Madison Avenue, 28th Floor		Interest⁽¹⁴⁾		42.7%
	New York, NY 10017

Summit Energy Services, Inc.		Provider of Energy	Common Stock		2.0%
	10350 Ormsby Park Place	Management and
	Suite 400	Procurement Services
	Louisville, KY 40223

Tappan Wire and Cable Inc.		Manufacturer and	Class B Common Stock		86.3%
	100 Bradley Parkway	Distributor of Cable	Warrant to Purchase
	Blauvelt, NY 10913		Class C Common Stock		100.0%

The Step2 Company, LLC		Manufacturer of Plastic	Preferred Equity Interests		3.3%
	10010 Aurora-Hudson Road	Childrens and Home	Common Equity Interests		3.3%
	Streetsboro, Ohio 44241	Products

TransAmerican Auto Parts, LLC		Auto Parts and	Preferred Equity Interests		1.4%
	801 West Artesia Boulevard	Accessories Retailer	Common Equity Interests		1.4%
	Compton, CA 90220	and Wholesaler

Triax Holdings, LLC		Pharmaceutical Marketer	Class A Equity Interests		100.0%
	20 Commerce Drive		Class B Equity Interests		100.0%
	Suite 232		Common Equity Interests		61.0%
	Cranford, NJ 07016

Venturehouse-Cibernet Investors, LLC		Third-Party Billing	Equity Interest		3.3%
	509 Seventh Street, N.W.
	Washington, DC 20004

VICORP Restaurants, Inc.		Restaurants	Warrant to Purchase
	400 W. 48th Avenue		Preferred Stock		1.9%
	Denver, CO 80216		Warrant to Purchase
			Common Stock		3.4%

Walker Investment Fund II, LLLP		Private Equity Fund	Limited Partnership
	3060 Washington Road		Interest		5.1%
	Suite 200
	Glenwood, MD 21738

WMA Equity Corporation and Affiliates ⁽¹³⁾		Marketer of Children’s	Common Stock		86.3%
	31 West 34th Street	Apparel
	New York, NY 10001

Webster Capital II, L.P.		Private Equity Fund	Limited Partnership Interest		3.5%
	950 Winter Street
	Suite 4200
	Waltham, MA 02451

Woodstream Corporation		Pest Control	Common Stock		3.9%
	69 North Locust Street	Manufacturer
	Lititz, PA 17543

York Insurance Services Group, Inc.		Insurance Claims	Common Stock		2.2%
	99 Cherry Hill Road	Administrator
	Suite 102
	Parsippany, NJ 07054
COMMERCIAL REAL ESTATE FINANCE⁽⁹⁾
Aquila Binks Forest Development, LLC⁽¹⁾		Real Estate Developer	Equity Interest		50.0%
	15430 Endeavour Drive
	Jupiter, FL 33478

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				Percentage
Name and Address		Nature of its	Title of Securities	of Class
of Portfolio Company		Principal Business	Held by the Company	Held

MGP Park Place
	Equity, LLC	Commercial Real	Equity Interest		70.0%
	6901 Rockledge Drive	Estate Development
	Suite 230
	Bethesda, MD 20817

NPH, Inc.⁽¹⁾		Commercial Real	Common Stock		100.0%
	1919 Pennsylvania Ave, N.W.	Estate Developer
	Washington, DC 20006

Stemmons Freeway Hotel, LLC⁽¹⁾		Hotel	Equity Interests		100.0%
	1919 Pennsylvania Ave, N.W.
	Washington, DC 20006

WSA Commons LLC		Residential Real	Equity Interests		50.0%
	421 East 4th Street	Estate Development
	Cincinnati, OH 45202

WSALD-CEH, LLC⁽¹⁾		Commercial Real	Equity Interest		50.0%
	1919 Pennsylvania Ave, N.W.	Estate Developer
	Washington, DC 20006

Van Ness Hotel, Inc.⁽¹⁾		Hotel	Common Stock		100.0%
	1919 Pennsylvania Ave, N.W.
	Washington, DC 20006


⁽¹⁾	The portfolio company is deemed to be an affiliated person under the 1940 Act because we hold one or more seats on the portfolio company’s board of directors, are the general partner, or are the managing member.

⁽²⁾	Alaris Consulting, LLC owns 95% of Alaris Consulting, Inc.

⁽³⁾	Included in Class C Equity Interests in the Consolidated Statement of Investments.

⁽⁴⁾	Callidus Capital Corporation owns 80% (subject to dilution) of Callidus Capital Management, LLC.


⁽⁵⁾	The affiliate holds subordinated debt issued by Impact Innovations Group, LLC. We made an investment in and exchanged our existing subordinated debt for equity interests in the affiliate.



⁽⁶⁾	Limited partnership interests are non-voting.


⁽⁷⁾	Avborne, Inc. and Avborne Heavy Maintenance, Inc. are affiliated companies.

⁽⁸⁾	Callidus Capital Management, LLC is the manager of the fund (see Note 4 above).

⁽⁹⁾	These portfolio companies are included in the Commercial Real Estate Finance — Equity Interests in the Consolidated Statement of Investments.


⁽¹⁰⁾	Common stock is non-voting. In addition to non-voting stock ownership, we have an option to acquire a majority of the voting securities of the portfolio company at fair market value.


⁽¹¹⁾	Crescent Equity Corp. holds investments in Crescent Hotels & Resorts, LLC and affiliates and Longview Cable & Data, LLC.



⁽¹²⁾	Our affiliate holds 100% of the general partnership interests in the Allied Capital Senior Debt Fund, L.P. (the Fund). See “Management’s Discussion and Analysis and Results of Operations — Allied Capital Senior Debt Fund, L.P.” above. We hold 41% of the Class A-1 limited partnership interests in the Fund, however; we only own 26% of the total limited partnership interests in the Fund.



⁽¹³⁾	WMA Equity Corporation and Affiliates hold 29.4% of the equity interests in Wear Me Apparel LLC.

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DETERMINATION OF NET ASSET VALUE

Quarterly Net Asset Value Determination

We determine the net asset value per share of our common stock quarterly. The net asset value per share is equal to the value of our total assets minus liabilities divided by the total number of common shares outstanding.

We determine the value of each investment in our portfolio on a quarterly basis, and changes in value result in unrealized appreciation or depreciation being recognized in our statement of operations. Value, as defined in Section 2(a)(41) of the 1940 Act, is (i) the market price for those securities for which a market quotation is readily available and (ii) for all other securities and assets, fair value is as determined in good faith by the Board of Directors. Since there is typically no readily available market value for the investments in our portfolio, we value substantially all of our portfolio investments at fair value as determined in good faith by the Board of Directors in accordance with our valuation policy and the provisions of the 1940 Act and FASB Statement No. 157, Fair Value Measurements (SFAS 157 or the Statement). We determine fair value to be the price that would be received for an investment in current sale, which assumes an orderly transaction between market participants on the measurement date. At March 31, 2008, portfolio investments recorded at fair value using level 3 inputs (as defined under the Statement) were approximately 91% of our total assets. Because of the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of our investments determined in good faith by the Board of Directors may differ significantly from the values that would have been used had a ready market existed for the investments, and the differences could be material.

As a business development company, we invest in illiquid securities including debt and equity securities of portfolio companies, CLO bonds and preferred shares/income notes CDO bonds and investment funds. The structure of each debt and equity security is specifically negotiated to enable us to protect our investment and maximize our returns. We include many terms governing interest rate, repayment terms, prepayment penalties, financial covenants, operating covenants, ownership parameters, dilution parameters, liquidation preferences, voting rights, and put or call rights. Our investments may be subject to certain restrictions on resale and generally have no established trading market.

Because of the type of investments that we make and the nature of our business, our valuation process requires an analysis of various factors. Our fair value methodology includes the examination of, among other things, the underlying investment performance, financial condition, and market changing events that impact valuation. See “Business — Portfolio Valuation” and “Management’s Discussion and Analysis and Results of Operations — Change in Unrealized Appreciation or Depreciation.”

Determinations In Connection With Offerings

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stockholders approve our policy and practice of making such sales. In any such case, the price at which our securities are to be issued and sold may not be less than a price which, in the determination of our board of directors, closely approximates the market value of such securities (less any distributing commission or discount).

In connection with each offering of shares of our common stock, the Board of Directors or a committee thereof is required to make the determination that we are not selling shares of our common stock at a price below our then current net asset value at the time at which the sale is made, subject to certain exceptions discussed above. The Board of Directors considers the following factors, among others, in making such determination:


	•	the net asset value of our common stock disclosed in the most recent periodic report we filed with the SEC;

	•	our management’s assessment of whether any material change in the net asset value has occurred (including through the realization of net gains on the sale of our portfolio investments) from the period beginning on the date of the most recently disclosed net asset value to the period ending two days prior to the date of the sale of our common stock; and

	•	the magnitude of the difference between the net asset value disclosed in the most recent periodic report we filed with the SEC and our management’s assessment of any material change in the net asset value since the date of the most recently disclosed net asset value, and the offering price of the shares of our common stock in the proposed offering.

Importantly, this determination does not require that we calculate net asset value in connection with each offering of shares of our common stock, but instead it involves the determination by the Board of Directors or a committee thereof that we are not selling shares of our common stock at a price below the then current net asset value at the time at which the sale is made, subject to certain exceptions discussed above.

To the extent that there is even a remote possibility that we may issue shares of our common stock at a price below the then current net asset value of our common stock at the time at which the sale is made then the Board of Directors or a committee thereof will elect either to postpone the offering until such time that there is no longer the possibility of the occurrence of such event or to undertake to determine net asset value within two days prior to any such sale to ensure that such sale will not be below our then current net asset value. Moreover, to the extent that there is even a remote possibility that we may trigger the undertaking to suspend the offering of shares of our common stock pursuant to this prospectus if the net asset value fluctuates by certain amounts in certain circumstances until the prospectus is amended, (which we provided to the SEC in the registration statement to which this prospectus is a part) the Board of Directors or a committee thereof will elect to comply with such undertaking or to undertake to determine net asset value to ensure that such undertaking has not been triggered.

These processes and procedures are part of our compliance policies and procedures. Records will be made contemporaneously with all determinations described in this section and these records will be maintained with other records we are required to maintain under the 1940 Act.

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MANAGEMENT

Our Board of Directors oversees our management. The responsibilities of the Board of Directors include, among other things, the oversight of our investment activity, the quarterly valuation of our assets, oversight of our financing arrangements and corporate governance activities. The Board of Directors maintains an Executive Committee, Board Investment Review Committee, Audit Committee, Compensation Committee, and Corporate Governance/Nominating Committee, and may establish additional committees from time to time as necessary. All of our directors also serve as directors of our subsidiaries.

The management of our company and our investment portfolio is the responsibility of various corporate committees, including the management committee, the investment committee, and the portfolio management committee. See “Portfolio Management.”

Structure of Board of Directors

Our Board of Directors is classified into three approximately equal classes with three-year terms, with the term of office of only one of the three classes expiring each year. Directors serve until their successors are elected and qualified.

Directors

Our directors have been divided into two groups — interested directors and independent directors. Interested directors are “interested persons” of Allied Capital as defined in the 1940 Act. Information regarding our Board of Directors at May 6, 2008, is as follows:


				Director		Expiration
Name	Age		Position	Since⁽¹⁾		of Term

Interested Directors
William L. Walton		58	Chairman, Chief Executive Officer and President		1986		2010
Joan M. Sweeney		48	Chief Operating Officer ⁽²⁾		2004		2010
Robert E. Long		77	Director		1972		2010
Independent Directors
Ann Torre Bates		50	Director		2003		2009
Brooks H. Browne		58	Director		1990		2010
John D. Firestone		64	Director		1993		2011
Anthony T. Garcia		51	Director		1991		2011
Edwin L. Harper		66	Director		2006		2009
Lawrence I. Hebert		61	Director		1989		2011
John I. Leahy		77	Director		1994		2009
Alex J. Pollock		65	Director		2003		2009
Marc F. Racicot		59	Director		2005		2011
Guy T. Steuart II		76	Director		1984		2009
Laura W. van Roijen		56	Director		1992		2011


^⁽¹⁾	Includes service as a director of any of the predecessor companies of Allied Capital.


^⁽²⁾	On April 28, 2008, we announced that Ms. Sweeney intends to retire from the company at the end of 2008. Following her retirement, she will continue to serve on our Board of Directors and is expected to enter into a consulting agreement with us.

Each director has the same address as Allied Capital, 1919 Pennsylvania Avenue, N.W., Washington, D.C. 20006.

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Executive Officers

Information regarding our executive officers at May 6, 2008, is as follows:


Name	Age		Position

William L. Walton		58	Chairman, Chief Executive Officer and President
Joan M. Sweeney		48	Chief Operating Officer
Kelly A. Anderson		54	Executive Vice President and Treasurer
Scott S. Binder		53	Chief Valuation Officer
Ralph G. Blasey III		47	Executive Vice President and Private Finance General Counsel
John M. Fruehwirth		40	Managing Director and Deputy Head of Private Finance
Michael J. Grisius		44	Managing Director
Jeri J. Harman		50	Managing Director
Miriam G. Krieger		31	Chief Compliance Officer and Corporate Secretary
Thomas C. Lauer		40	Managing Director
G. Scott Lesmes		40	Managing Director
Robert D. Long		51	Managing Director and Head of Asset Management
Justin S. Maccarone		49	Managing Director
Robert M. Monk		41	Managing Director
Diane E. Murphy		54	Executive Vice President and Director of Human Resources
Penni F. Roll		42	Chief Financial Officer
Daniel L. Russell		43	Managing Director
John M. Scheurer		55	Managing Director and Head of Commercial Real Estate Finance
John D. Shulman		45	Managing Director
Suzanne V. Sparrow		42	Executive Vice President and Chief Administrative Officer — Managed Funds

Each executive officer has the same address as Allied Capital, 1919 Pennsylvania Avenue, N.W., Washington, D.C. 20006.

Biographical Information

Directors

Our directors have been divided into two groups — interested directors and independent directors. Interested directors are “interested persons” of Allied Capital as defined in the 1940 Act.

Interested Directors

William L. Walton has been Chairman, President and Chief Executive Officer of Allied Capital since 1997 and a director since 1986. Mr. Walton’s previous experience includes serving as a Managing Director of Butler Capital Corporation, as personal investment advisor to William S. Paley, founder of CBS, and as Senior Vice President in Lehman Brothers Kuhn Loeb’s Merger and Acquisition Group. He also founded two education service companies — Language Odyssey and SuccessLab. Mr. Walton currently serves on the boards of the U.S. Chamber of Commerce, Freedom House, and the Financial Services Roundtable, and he is President of the National Symphony Orchestra.

Joan M. Sweeney is the Chief Operating Officer of Allied Capital and has been employed by Allied Capital since 1993. Ms. Sweeney oversees Allied Capital’s daily operations. Prior to joining Allied Capital, Ms. Sweeney was employed by Ernst & Young, Coopers & Lybrand, and the Division of Enforcement of the Securities and Exchange Commission.

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Robert E. Long has been the Chief Executive Officer and a director of GLB Group, Inc., an investment management firm, since 1997 and President of Ariba GLB Asset Management, Inc., the parent company of GLB Group, Inc., since 2005. He has been the Chairman of Emerald City Radio Partners, LLC since 1997. Mr. Long was the President of Business News Network, Inc. from 1995 to 1998, the Chairman and Chief Executive Officer of Southern Starr Broadcasting Group, Inc. from 1991 to 1995, and a director and the President of Potomac Asset Management, Inc. from 1983 to 1991. Mr. Long is a director of AmBase Corporation, CSC Scientific, Inc., and Advanced Solutions International, Inc. He has served as a director of Allied Capital or one of its predecessors since 1972. Mr. Long is the father of Robert D. Long, an executive officer of Allied Capital.

Independent Directors

Ann Torre Bates has been a strategic and financial consultant since 1997. From 1995 to 1997, Ms. Bates served as Executive Vice President, CFO and Treasurer of NHP, Inc., a national real estate services firm. From 1991 to 1995, Ms. Bates was Vice President and Treasurer of US Airways. She currently serves on the boards of Franklin Mutual Series Funds, the Franklin Mutual Recovery Fund, the Franklin Templeton Funds, and SLM Corporation (Sallie Mae).

Brooks H. Browne has been a private investor since 2002. Mr. Browne was the President of Environmental Enterprises Assistance Fund from 1993 to 2002 and served as a director from 1991 to 2005. He currently serves as Chairman of the Board for Winrock International, a non-profit organization.

John D. Firestone has been a Partner of Secor Group, a venture capital firm since 1978. Mr. Firestone has also served as a director of Security Storage Company of Washington, DC, since 1978. He is currently a director of Cuisine Solutions, Inc., and several non-profit organizations.

Anthony T. Garcia has been a private investor since March 2007. Previously, Mr. Garcia was Vice President of Finance of Kirusa, a developer of mobile services, from January to March 2007, and was a private investor from 2003 through 2006. Mr. Garcia was Vice President of Finance of Formity Systems, Inc., a developer of software products for business management of data networks, from 2002 through 2003. Mr. Garcia was a private investor from 2000 to 2001, the General Manager of Breen Capital Group, an investor in tax liens, from 1997 to 2000, and a Senior Vice President of Lehman Brothers Inc. from 1985 to 1996.

Edwin L. Harper has been an executive for Assurant, Inc., a financial services and insurance provider, since 1998. He currently serves as Senior Vice President, Public Affairs and Government Relations and previously served as Chief Operating Officer and Chief Financial Officer for Assurant’s largest subsidiary. From 1992 to 1997, Mr. Harper served as President and Chief Executive Officer of the Association of American Railroads. He also spent five years with Campbell Soup Company, serving as Chief Financial Officer from 1986 to 1991. Earlier in his career, Mr. Harper served on the White House staffs of both President Reagan and President Nixon. Mr. Harper currently serves as Director for the Council for Excellence in Government.

Lawrence I. Hebert is Chairman of Dominion Advisory Group, LLC, a provider of anti-money laundering consulting services, and served as Senior Advisor at PNC Bank from 2005 to 2007. He served as a director and President and Chief Executive Officer of Riggs Bank N.A., a subsidiary of Riggs National Corporation, from 2001 to 2005. Mr. Hebert also served as Chief Executive Officer of Riggs National Corporation during 2005 and served as a director of Riggs National Corporation from 1988 to 2005. Mr. Hebert served as a director of Riggs Investment Advisors and Riggs Bank Europe Limited (both indirect subsidiaries of Riggs National Corporation). Mr. Hebert previously served as Vice Chairman from 1983 to 1998, President from 1984 to 1998, and Chairman and Chief Executive Officer from 1998 to 2001 of Allbritton Communications Company.

John I. Leahy has been the President of Management and Marketing Associates, a management consulting firm, since 1986. Previously, Mr. Leahy spent 34 years of his career with Black & Decker Corporation, where he served as President and CEO of the United States subsidiary from 1979 to 1981 and President and Group Executive Officer of the Western Hemisphere of Black & Decker Corporation

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from 1982 to 1985. Mr. Leahy is currently a director of B&L Sales, Inc. and Chairman of Integra Health Management, Inc. He is also Trustee Emeritus of the Sellinger School of Business at Loyola College, Maryland.

Alex J. Pollock has been a Resident Fellow at the American Enterprise Institute since 2004. He was President and Chief Executive Officer of the Federal Home Loan Bank of Chicago from 1991 to 2004. He currently serves as a director of the CME Group, Great Lakes Higher Education Corporation, the Great Books Foundation, the Illinois Council on Economic Education and the International Union for Housing Finance.

Marc F. Racicot has served as President and Chief Executive Officer of the American Insurance Association since August 2005. Prior to that, he was an attorney at the law firm of Bracewell & Giuliani, LLP from 2001 to 2005. He is a former Governor (1993 to 2001) and Attorney General (1989 to 1993) of the State of Montana. Mr. Racicot was appointed by President Bush to serve as the Chairman of the Republican National Committee from 2002 to 2003 and he served as Chairman of the Bush/Cheney Re-election Committee from 2003 to 2004. He presently serves on the Board of Directors for Burlington Northern Santa Fe Corporation, Massachusetts Mutual Life Insurance Company, and the Board of Visitors for the University of Montana School of Law.

Guy T. Steuart II has been a director of Steuart Investment Company, which manages, operates, and leases real and personal property and holds stock in operating subsidiaries engaged in various businesses, since 1960 where he served as President until 2003 and currently serves as Chairman. Mr. Steuart has served as Trustee Emeritus of Washington and Lee University since 1992.

Laura W. van Roijen has been a private investor since 1992. Ms. van Roijen was a Vice President at Citicorp from 1980 to 1990.

Executive Officers who are not Directors

Kelly A. Anderson, Executive Vice President and Treasurer, has been employed by Allied Capital since 1987. Ms. Anderson’s responsibilities include Allied Capital’s infrastructure operations, business process management, and certain treasury functions.

Scott S. Binder, Chief Valuation Officer, has been employed by Allied Capital since 1997. He has served as Chief Valuation Officer since 2003. He served as a consultant to the Company from 1991 until 1997. Prior to joining the Company, Mr. Binder formed and was President of Overland Communications Group. He also served as a board member and financial consultant for a public affairs and lobbying firm in Washington, DC. Mr. Binder founded Lonestar Cablevision in 1986, serving as President until 1991. In the early 1980’s, Mr. Binder worked for two firms specializing in leveraged lease transactions. From 1976 to 1981, he was employed by Coopers & Lybrand.

Ralph G. Blasey III, Executive Vice President and Private Finance General Counsel, has been employed by Allied Capital since 2004. Prior to joining Allied Capital, Mr. Blasey practiced law from 1987 to 2004. He joined the law firm of Baker & Hostetler, LLP in 1989 and was named a partner in 1996.

John M. Fruehwirth, Managing Director and Deputy Head of Private Finance, has been employed by Allied Capital since 2003. Previously, he worked at Wachovia Securities (previously First Union Securities) in several merchant banking groups including Wachovia Capital Partners, Leveraged Capital and Middle Market Capital from 1999 to 2003. Prior to that, Mr. Fruehwirth worked in First Union’s Leveraged Finance Group from 1996 to 1998.

Michael J. Grisius, Managing Director, has been employed by Allied Capital since 1992. Prior to joining Allied Capital, Mr. Grisius worked in leveraged finance at Chemical Bank from 1989 to 1992 and held senior accountant and consultant positions with KPMG LLP from 1985 to 1988.

Jeri J. Harman, Managing Director, has been employed by Allied Capital since 2004. Prior to joining Allied Capital, Ms. Harman served as a Managing Director and Principal for American Capital Strategies, Ltd., a business development company, from 2000 until 2004. She worked as a Managing Director and Head of Private Placements for First Security Van Kasper from 1996 to 2000 and a Managing Director of

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Coopers & Lybrand from 1993 to 1996. From 1982 to 1993, Ms. Harman held various senior level positions in the private placement arm of The Prudential Insurance Company of America. She has served on the Board of Directors for the Association of Corporate Growth since 2000 and currently serves on the Board of the Women’s Leadership Council.

Miriam G. Krieger, Chief Compliance Officer and Corporate Secretary, has been employed by Allied Capital since March 2008. Prior to joining Allied Capital, Ms. Krieger served as Senior Vice President and Chief Compliance Officer at MCG Capital Corporation from 2006 to 2008 and Vice President and Assistant General Counsel from 2004 to 2006. From 2001 to 2004, she was an associate in the Financial Services Group of the law firm of Sutherland Asbill & Brennan LLP.

Thomas C. Lauer, Managing Director, has been employed by Allied Capital since 2004. Prior to joining Allied Capital, Mr. Lauer worked in GE Capital’s sponsor finance group from 2003 to 2004 and in the merchant banking and leveraged finance groups of Wachovia Securities (previously First Union Securities) from 1997 to 2003. He also held senior analyst positions at Intel Corporation and served as a corporate lender and credit analyst at National City Corporation.

G. Scott Lesmes, Managing Director, has been employed by Allied Capital since July 2007. Prior to joining Allied Capital, Mr. Lesmes served as Senior Vice President and Deputy General Counsel at Fannie Mae from 2005 to 2007 where he was responsible for corporate, securities and securitization legal matters. From 2000 to 2005, he was a Vice President and Deputy General Counsel for corporate and securities matters at Fannie Mae.

Robert D. Long, Managing Director and Head of Asset Management, has been employed by Allied Capital since 2002 and currently manages business development activities. Prior to joining Allied Capital, Mr. Long was Managing Director and Head of Investment Banking at C.E. Unterberg from 2001 to 2002, and Managing Director at E*OFFERING/Wit SoundView from 2000 to 2001. He also held management positions at Bank of America (Montgomery Securities) from 1996 to 2000, and Nomura Securities International from 1992 to 1996, and prior to that he served as a Managing Director at CS First Boston.

Justin S. Maccarone, Managing Director, has been employed by Allied Capital since 2005. Prior to joining Allied Capital, Mr. Maccarone served as a partner with UBS Capital Americas, LLC, a private equity fund focused on middle market investments, from 1993 to 2005. Prior to that, Mr. Maccarone served as a Senior Vice President at GE Capital specializing in merchant banking and leveraged finance from 1989 to 1993 and served as Vice President of the Leveraged Finance Group at HSBC/ Marine Midland Bank from 1981 to 1989.

Robert M. Monk, Managing Director, has been employed by Allied Capital since 1993. Prior to joining Allied Capital, Mr. Monk worked in the leveraged finance group at First Union Securities (currently Wachovia Securities).

Diane E. Murphy, Executive Vice President and Director of Human Resources, has been employed by Allied Capital since 2000. Prior to joining Allied Capital, Ms. Murphy was employed by Allfirst Financial from 1982 to 1999 and served in several capacities including head of the retail banking group in the Greater Washington Metro Region from 1994 to 1996 and served as the senior human resources executive from 1996 to 1999.

Penni F. Roll, Chief Financial Officer, has been employed by Allied Capital since 1995. Ms. Roll is responsible for Allied Capital’s financial operations. Prior to joining Allied Capital, Ms. Roll was employed by KPMG LLP in the firm’s audit practice.

Daniel L. Russell, Managing Director, has been employed by Allied Capital since 1998. Prior to joining Allied Capital, Mr. Russell was employed by KPMG LLP in the firm’s financial services group.

John M. Scheurer, Managing Director and Head of Commercial Real Estate Finance, has been employed by Allied Capital since 1991. Mr. Scheurer is currently a member of the Board of Governors of the Commercial Mortgage Securities Association. He has also served as Chairman and as a Vice Chair of the Capital Markets Committee for the Commercial Real Estate Finance Committee of the Mortgage Bankers Association.

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John D. Shulman, Managing Director, has been employed by Allied Capital since 2001. Prior to joining Allied Capital, Mr. Shulman served as the President and CEO of Onyx International, LLC, a private equity firm, from 1994 to 2001. He currently serves as a member of the investment committee of Greater China Private Equity Fund.

Suzanne V. Sparrow, Executive Vice President and Chief Administrative Officer for Managed Funds, has been employed by Allied Capital since 1987. Ms. Sparrow’s responsibilities include the Company’s fund management activities and various special projects for Allied Capital.

Committees of the Board of Directors

Our Board of Directors has established an Executive Committee, an Audit Committee, a Compensation Committee, and a Corporate Governance/ Nominating Committee. In January 2008, the Board of Directors also established a Board Investment Review Committee. From time to time, the Board may establish special purpose committees to address particular matters on behalf of the Board. The Audit Committee, Compensation Committee, and Corporate Governance/ Nominating Committee each operate pursuant to a committee charter. The charter of each Committee is available on our web site at www.alliedcapital.com in the Investor Resources section and is also available in print to any stockholder or other interested party who requests a copy.

The following table indicates the current members of the committees of the Board of Directors. All of the directors are independent directors, except for Messrs. Walton and Long, and Ms. Sweeney, who are “interested persons” as defined in Section 2(a)(19) of the 1940 Act.

Board

Corporate

Investment

Governance/

Executive

Review

Audit

Compensation

Nominating

Committee

William L. Walton

Chair

Chair⁽¹⁾

Ann Torre Bates

Member

Chair

Brooks H. Browne

Member

John D. Firestone

Member

Anthony T. Garcia

Member

Chair

Edwin L. Harper

Member

Lawrence I. Hebert

Member

⁽¹⁾

Member

Chair

John I. Leahy

Member

⁽¹⁾

Member

Robert E. Long

Member

⁽¹⁾

Alex J. Pollock

Member

⁽¹⁾

Member

Marc F. Racicot

Member

Guy T. Steuart II

Member

Joan M. Sweeney

Member

Laura W. van Roijen

Member


	^⁽¹⁾	Permanent member for 2008.

The Executive Committee. The Executive Committee has and may exercise those rights, powers, and authority that the Board of Directors from time to time grants to it, except where action by the Board is required by statute, an order of the Securities and Exchange Commission (the Commission), or Allied Capital’s charter or bylaws. During 2007, the Executive Committee was delegated authority from the Board to review and approve certain investments. The Executive Committee met 42 times during 2007.

The Board Investment Review Committee. In January 2008, the Board established a Board Investment Review Committee and delegated authority to it to review and approve certain types of investments, a role previously undertaken by the Executive Committee. The Board Investment Review Committee is composed of five permanent members, who have been appointed to serve for the year, and

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three additional members, each of whom will serve during at least one quarter during the year on a rotating schedule.

The Audit Committee. The Audit Committee operates pursuant to a charter approved by the Board of Directors and meets the requirements of Section 3(a)(58)(A) of the Securities Exchange Act of 1934 (the Exchange Act). The charter sets forth the responsibilities of the Audit Committee. The primary function of the Audit Committee is to serve as an independent and objective party to assist the Board of Directors in fulfilling its responsibilities for overseeing and monitoring the quality and integrity of our financial statements, the adequacy of our system of internal controls, the review of the independence, qualifications and performance of our independent registered public accounting firm, and the performance of our internal audit function. The Audit Committee met 18 times during 2007. None of the members of the Audit Committee is an “interested person” of Allied Capital as defined in Section 2(a)(19) of the 1940 Act, pursuant to the requirements of the rules promulgated by the NYSE. In addition, our Board of Directors has determined that Ms. Bates and Messrs. Browne, Garcia, and Harper are “audit committee financial experts” as defined under Item 407(d)(5) of Regulation S-K of the Exchange Act, as each meets the experience requirements of Rule 10A-3 of the Exchange Act.

The Compensation Committee. The Compensation Committee approves the compensation of our executive officers, and reviews the amount of salary and bonus for each of our other officers and employees. In addition, the Compensation Committee approves stock option grants for our officers under our Amended Stock Option Plan, and determines other compensation arrangements for employees. None of the members of the Compensation Committee is an “interested person” of Allied Capital as defined in Section 2(a)(19) of the 1940 Act, pursuant to the requirements of the rules promulgated by the NYSE. The Compensation Committee met 13 times during 2007.

The Corporate Governance/ Nominating Committee. The Corporate Governance/ Nominating Committee recommends candidates for election as directors to the Board of Directors and makes recommendations to the Board as to our corporate governance policies. None of the members of the Corporate Governance/ Nominating Committee is an “interested person” of Allied Capital as defined in Section 2(a)(19) of the 1940 Act, pursuant to the requirements of the rules promulgated by the NYSE. The Corporate Governance/ Nominating Committee met six times during 2007.

The Corporate Governance/ Nominating Committee will consider qualified director nominees recommended by stockholders when such recommendations are submitted to the care of the Corporate Secretary in accordance with our bylaws, Corporate Governance Policy, and any other applicable law, rule or regulation regarding director nominations. When submitting a nomination for consideration, a stockholder must provide certain information that would be required under applicable Commission rules, including the following minimum information for each director nominee: full name, age and address; principal occupation during the past five years; current directorships on publicly held companies and investment companies; number of shares of our common stock owned, if any; and, a written consent of the individual to stand for election if nominated by the Board of Directors and to serve if elected by the stockholders.

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PORTFOLIO MANAGEMENT

Our management committee is responsible for, among other things, business planning and the establishment and review of general investment criteria. The management committee is chaired by William Walton, our Chief Executive Officer (CEO), and currently includes Joan Sweeney, our Chief Operating Officer (COO), Penni Roll, our Chief Financial Officer (CFO), Scott Binder, our Chief Valuation Officer (CVO), and John Fruehwirth, Michael Grisius, Thomas Lauer, Robert D. Long, Justin Maccarone, Robert Monk, Daniel Russell, John Scheurer, and John Shulman, all managing directors. The composition of the committee may change from time to time.

Our investment committee is responsible for approving new investments. Our investment committee is chaired by William Walton, CEO, and currently includes Joan Sweeney, COO, Penni Roll, CFO, Scott Binder, CVO (non-voting), John Fruehwirth, Michael Grisius (vice chairman of the committee), Thomas Lauer, Robert D. Long, Justin Maccarone, Robert Monk, Daniel Russell (vice chairman of the committee), John Scheurer, and John Shulman, all managing directors. The composition of the committee may change from time to time.

In addition to approval by the investment committee, each transaction that represents a commitment equal to or greater than $20 million, every buyout transaction, and any other investment that in our judgment demonstrates unusual risk/reward characteristics also requires the approval of the Board Investment Review Committee. The Board Investment Review Committee is composed of five permanent members, who have been appointed to serve for the year, and three additional members, each of whom will serve during at least one quarter during the year on a rotating schedule. See “— Committees of the Board of Directors” above for the current membership.

Our portfolio management committee is responsible for review and oversight of the investment portfolio, including reviewing the performance of selected portfolio companies, overseeing portfolio companies in workout status, reviewing and approving certain modifications or amendments to or certain additional investments in existing portfolio companies, reviewing and approving certain portfolio exits, reviewing and approving certain actions by portfolio companies whose voting securities are more than 50% owned by us, reviewing significant investment-related litigation matters where we are a named party and approving related activities, and reviewing and approving proxy votes with respect to our portfolio investments. From time to time we will identify investments that require closer monitoring or become workout assets. We develop a workout strategy for workout assets and the portfolio management committee gauges our progress against the strategy. Our portfolio management committee is chaired by William Walton, CEO, and currently includes Joan Sweeney, COO, Penni Roll, CFO, Scott Binder, CVO (non-voting), Ralph Blasey, Private Finance General Counsel, and Christina DelDonna, Susan Mayer, and John Scheurer, all managing directors. The composition of the committee may change from time to time.

We are internally managed and our investment professionals manage the investments in our portfolio. These investment professionals have extensive experience in managing investments in private businesses in a variety of industries, and are familiar with our approach of lending and investing. Because we are internally managed, we pay no external investment advisory fees, but instead we pay the operating costs associated with employing investment and other professionals.

Biographical Information for Non-Executive Officers

Information regarding the business experience of the additional investment professionals who are directors or executive officers is contained under the caption “Management — Biographical Information.”

Christina L. DelDonna, Managing Director, has been employed by Allied Capital since 1992. Ms. DelDonna has previously worked in a number of other managerial roles during her tenure with Allied

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Capital. Prior to joining Allied Capital, Ms. DelDonna held several accounting, audit, and financial analyst roles within a variety of industries.

Susan Mayer, Managing Director, has been employed by Allied Capital since 2003. Prior to joining Allied Capital, Ms. Mayer served in various investment and management positions with MCI Communications Corporation from 1993 to 2003. Before joining MCI, Ms. Mayer served in a variety of corporate development, management, and consulting roles and was employed by NHP, Inc. from 1991 to 1993, Comsat, Inc. from 1986 to 1991, and the Boston Consulting Group from 1979 to 1986.

Compensation

The compensation for the members of our management committee, investment committee, and portfolio management committee includes: (i) annual base salary; (ii) annual cash bonus; (iii) stock options, priced at current market value; and (iv) individual performance award and/or individual performance bonus. Compensation for the members of our Board Investment Review Committee, with the exception of Mr. Walton, consists of: (i) annual retainers; (ii) annual committee retainers; and (iii) stock options. The compensation of the members of the management committee, investment committee and portfolio management committee is determined in the same manner as the compensation received by our named executive officers. See “Management” and “Compensation of Directors and Executive Officers” for additional information regarding our compensation program and our determination of individual compensation.

Beneficial Ownership

Messrs. Walton, Browne, Firestone, Garcia, and Steuart, and Mmes. Sweeney and van Roijen, all members of the Board Investment Review Committee, beneficially own shares of our common stock with a value of more than $1,000,000, based on the closing price of $19.89 on May 6, 2008. Messrs. Long, Hebert, Leahy and Pollock and Ms. Bates, all members of the Board Investment Review Committee, beneficially own shares of our common stock with a value of $500,001 to $1,000,000, based on the May 6, 2008, closing price. Mr. Harper, member of the Board Investment Review Committee, beneficially owns shares of our common stock with a value of $100,001 to $500,000, based on the May 6, 2008, closing price, and Mr. Racicot, member of the Board Investment Review Committee, beneficially owns shares of our common stock with a value of $10,001 to $50,000, based on the May 6, 2008, closing price. Each member of the investment committee, management committee and the portfolio management committee beneficially owns shares of our common stock with a value of more than $1,000,000, based on the May 6, 2008 closing price.

Conflicts of Interest

Certain of the members of the Board Investment Review Committee, the management committee, the investment committee, and the portfolio management committee serve or may serve in an investment management capacity to funds managed by us. Specifically, the credit committees and the investment committees of our Managed Funds include certain of our officers, including our CEO, who serve in similar roles for us. These investment professionals intend to allocate such time and attention as is deemed appropriate and necessary to carry out the operations of the managed funds effectively. In this respect, they may experience diversions of their attention from us and potential conflicts of interest between their work for us and their work for the managed funds in the event that the interests of the managed funds run counter to our interests. Accordingly, they may have obligations to investors in the managed funds, the fulfillment of which might not be in the best interests of us or our shareholders. See “Risk Factors — There are potential conflicts of interest between us and the funds managed by us.”

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COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS

Under SEC rules applicable to business development companies, we are required to set forth certain information regarding the compensation of certain executive officers and directors. The following tables set forth compensation earned during the year ended December 31, 2007, by all of our directors, our principal executive officer, our principal financial officer, and each of our three highest paid executive officers (collectively, the Named Executive Officers or NEOs) in each capacity in which each NEO served. Certain of the NEOs served as both officers and directors.

DIRECTOR COMPENSATION

The following table sets forth compensation that we paid during the year ended December 31, 2007, to our directors. Our directors have been divided into two groups — interested directors and independent directors. Interested directors are “interested persons” as defined in Section 2(a)(19) of the 1940 Act.


									Change in
									Pension Value
									and
	Fees								Non-qualified
	Earned or						Non-Equity		Deferred
	Paid in		Stock		Option		Incentive Plan		Compensation		All Other
Name	Cash		Awards		Awards⁽¹⁾		Compensation		Earnings⁽³⁾		Compensation⁽⁴⁾		Total

*Interested Directors*
William L. Walton⁽²⁾	$	—		n/a	$	—		n/a		n/a	$	—	$	—
Joan M. Sweeney⁽²⁾	$	—		n/a	$	—		n/a		n/a	$	—	$	—
Robert E. Long	$	145,000		n/a	$	14,884		n/a		n/a	$	39,367	$	199,251
*Independent Directors*
Ann Torre Bates	$	237,000		n/a	$	14,884		n/a		n/a	$	15,465	$	267,349
Brooks H. Browne	$	208,000		n/a	$	14,884		n/a		n/a	$	15,593	$	238,477
John D. Firestone	$	190,000		n/a	$	14,884		n/a		n/a	$	39,367	$	244,251
Anthony T. Garcia	$	195,000		n/a	$	14,884		n/a		n/a	$	62,110	$	271,994
Edwin L. Harper	$	254,500		n/a	$	14,884		n/a		n/a	$	—	$	269,384
Lawrence I. Hebert	$	222,000		n/a	$	14,884		n/a		n/a	$	62,110	$	298,994
John I. Leahy	$	190,000		n/a	$	14,884		n/a		n/a	$	58,542	$	263,426
Alex J. Pollock	$	199,000		n/a	$	14,884		n/a		n/a	$	13,758	$	227,642
Marc F. Racicot	$	286,000		n/a	$	14,884		n/a		n/a	$	14,490	$	315,374
Guy T. Steuart II	$	190,000		n/a	$	14,884		n/a		n/a	$	62,110	$	266,994
Laura W. van Roijen	$	211,000		n/a	$	14,884		n/a		n/a	$	15,593	$	241,477


	^⁽¹⁾	Reflects the annual grant of 5,000 options. Options granted vested immediately. The fair value of the options was estimated on the grant date for financial reporting purposes using the Black-Scholes option pricing model and pursuant to the requirements of FASB Statement No. 123 (Revised), or SFAS 123R. See Note 2 to our Consolidated Financial Statements for the year ended December 31, 2007, for the assumptions used in determining SFAS 123R values.
	^⁽²⁾	Mr. Walton and Ms. Sweeney did not receive any compensation for serving on the Board of Directors. See “Summary Compensation Table” below.
	^⁽³⁾	There were no above market or preferential earnings on the non-qualified deferred compensation plans. See “Non-Qualified Deferred Compensation” below.
	^⁽⁴⁾	Represents the SFAS 123R expense related to stock options cancelled in connection with the option cancellation payment (OCP). See “Option Cancellation and the OCP” below.

During 2007, our Board of Directors adopted and implemented the following compensation structure for non-officer directors, which is also effective for 2008. Each non-officer director receives an annual retainer of $100,000. In addition, each member of each committee receives an annual retainer of $45,000 to attend the meetings of the committee, with a maximum of $90,000 to be paid to any one director for committee retainers. Each committee chair also receives an annual retainer of $5,000. In addition, members who serve on special purpose committees receive $3,000 per meeting. We also reimburse directors for expenses related to meeting attendance. Directors who are employees receive no additional compensation for serving on our Board of Directors or its committees.

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For 2007, directors could choose to defer any portion of their cash compensation through the 2005 Allied Capital Non-Qualified Deferred Compensation Plan, and could choose to have such deferred income invested in shares of the Company’s common stock through a trust, which is owned by the Company. See “Non-Qualified Deferred Compensation” for additional information.

Non-officer directors are eligible for stock option awards under our Amended Stock Option Plan pursuant to an exemptive order from the Commission, which was granted in September 1999. The terms of the order provided for a one-time grant of 10,000 options to each non-officer director on the date that the order was issued, or on the date that any new director is elected by stockholders to the Board of Directors. Thereafter, each non-officer director will receive 5,000 options each year on the date of the Annual Meeting of Stockholders at the fair market value on the date of grant. See “Amended Stock Option Plan.” The options granted to our directors vest immediately.

EXECUTIVE COMPENSATION

Compensation Discussion and Analysis

Overview of the Compensation Program

Compensation Philosophy. Allied Capital’s compensation and benefits programs are designed with the goal of providing compensation that is fair, reasonable and competitive. The programs are intended to help us align the compensation paid to our executive officers with the achievement of certain corporate and executive performance objectives that have been established to achieve the long-term objectives of Allied Capital. We also believe that the compensation programs should enable us to attract, motivate, and retain key officers who will contribute to our future success.

The design of our compensation programs is based on the following three guiding factors:


	•	Achievement of Corporate and Individual Performance Objectives — We believe that the best way to accomplish alignment of compensation with the interests of our stockholders is to link pay to individual performance and individual contributions to the returns generated for stockholders. Compensation is determined on a discretionary basis and is dependent on the achievement of certain corporate and individual performance objectives that have been established to achieve long-term objectives of Allied Capital. When individual performance exceeds expectations and performance goals established during the year, pay levels for the individual are expected to be above competitive market levels. When individual performance falls below expectations, pay levels are expected to be below competitive levels.

	•	Competitiveness and Market Alignment — Our compensation and benefits programs are designed to be competitive with those provided by companies with whom we compete for talent and to be sufficient to attract the best talent from an increasingly competitive market for top performers in the private equity industry. Benefit programs are designed to provide competitive levels of protection and financial security and are not based on performance. As part of its annual review process, the Compensation Committee reviews the competitiveness of our current compensation levels of our key employees and executives with a third-party compensation consultant against the competitive market and relative to overall corporate performance during the year. The Compensation Committee also reviews tally sheets annually, which illustrate all components of compensation for the NEOs.

	•	Alignment with Requirements of the 1940 Act — Our compensation program must align with the requirements of the 1940 Act, which imposes certain limitations on the structure of a BDC’s compensation program. For example, the 1940 Act prohibits a BDC from maintaining a stock option plan and a profit sharing arrangement simultaneously. As a result, if a BDC has a stock option plan, it is prohibited from using a carried interest formula, a common form of compensation in the private equity industry, as a form of compensation. Because of these and other similar limitations imposed by the 1940 Act, the Compensation Committee is limited as to the type of compensation arrangements that can be utilized in order to attract, retain and motivate employees.

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Components of Total Compensation. The Compensation Committee determined that the compensation packages for 2007 for the NEOs should generally consist of the following five key components:


	•	Annual base salary;

	•	Annual cash bonus;

	•	Stock options, priced at current market value;

	•	Individual Performance Award (IPA), which is a cash award that is generally determined at the beginning of the year based upon the individual performance of the officer, which during 2006 and 2007 was used exclusively to purchase shares of our common stock in the market through a deferred compensation plan; and

	•	Individual Performance Bonus (IPB), which is a cash award that is generally determined at the beginning of the year based upon the individual performance of the officer and is paid as current compensation during the year.

Base Salary. Base salary is designed to attract and retain experienced executives who can drive the achievement of our goals and objectives. While an executive’s initial base salary is determined by an assessment of competitive market levels, the factors used in determining increases in base salary include individual performance, changes in role and/or responsibility and changes in the competitive market environment.

We have entered into employment agreements with William L. Walton, our Chairman and Chief Executive Officer, Joan M. Sweeney, our Chief Operating Officer, and Penni F. Roll, our Chief Financial Officer. See “— Employment Agreements” below for information regarding the material terms of these agreements.

Annual Cash Bonus. The annual cash bonus is designed to reward those executives that have achieved certain corporate and executive performance objectives and have contributed to the achievement of certain long-term objectives of Allied Capital. The amount of the annual cash bonus is determined by the Compensation Committee on a discretionary basis. The annual cash bonus, when combined with base salary and the IPA and IPB described below, is benchmarked against a range of compensation that is competitive between the median (50th percentile) and 75th percentile of market compensation levels based on the performance of the individual.

Stock Options. Our principal objective in awarding stock options to our officers and directors is to align each optionee’s interests with the success of Allied Capital and the financial interests of our stockholders by linking a portion of such optionee’s compensation with the performance of our stock and the value delivered to stockholders. The Compensation Committee evaluates a number of criteria, including the past service of each such optionee to Allied Capital, the present and potential contributions of such optionee to the success of Allied Capital, and such other factors as the Compensation Committee shall deem relevant in connection with accomplishing the purposes of the Amended Stock Option Plan, including the recipient’s current stock holdings, years of service, position with us, and other factors. The Compensation Committee does not apply a formula assigning specific weights to any of these factors when making its determination. The Compensation Committee awards stock options on a subjective basis and such awards depend in each case on the performance of the officer under consideration, and in the case of new hires, their potential performance. See “Amended Stock Option Plan” for additional information.

IPA. Following the enactment of The Sarbanes-Oxley Act of 2002, we were no longer permitted to provide loans to executive officers for the exercise of stock options, as is statutorily provided for in the 1940 Act. This was a significant development, since a substantial component of the total return to stockholders comes in the form of the dividend paid on our common stock. Under the former loan program, an officer could exercise vested stock options with a loan for the purpose of buying the underlying shares and would then receive dividends on the shares obtained through such exercise and pay us interest on the loan until maturity. The loan program caused the officers to share in the risk of

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ownership of the stock, since the loan would have to be repaid. As such, under the loan program, there was a balance of the benefits and risks of share ownership for the officers.

When the loan program was discontinued, the Compensation Committee established a long-term incentive compensation program whereby the Compensation Committee of the Board of Directors determines an IPA for certain officers annually, generally at the beginning of each year. In determining the award for any one officer, the Compensation Committee considers individual performance factors, as well as the individual’s contribution to the returns generated for stockholders, among other factors. Stockholders approved the Non-Qualified Deferred Compensation Plan II (DCP II), through which the IPA is administered, in 2004. See “Non-Qualified Deferred Compensation — The 2005 Deferred Compensation Plan II” for additional detail regarding the determination by the Board of Directors to terminate our deferred compensation arrangements in 2008. For 2008, the Compensation Committee has determined that the IPAs will be paid in cash generally in two equal installments during the year to eligible officers, as long as the recipient remains employed by us.

IPB. As a result of changes in the Code regarding non-qualified deferred compensation plans, as well as an increase in the competitive market for recruiting and retaining top performers in private equity firms, beginning in 2005 the Board of Directors determined that a portion of the IPA should be paid as an IPB. The IPB is determined annually, generally at the beginning of the year, and is distributed in cash in equal installments to award recipients throughout the year as long as each recipient remains employed by us. If a recipient terminates employment during the year, any remaining cash payments under the IPB would be forfeited. In determining an IPB award for any one officer, the Compensation Committee considers individual performance factors, as well as the individual’s contribution to the returns generated for stockholders, among other factors.

Employment Agreements and Severance Arrangements. We entered into employment agreements in 2004 with Mr. Walton and Mmes. Sweeney and Roll. These agreements were reviewed in 2007 and amended to comply with regulatory changes in the Code and to address other tax related matters. Pursuant to each of these agreements, if the executive’s employment is terminated without cause during the term of the agreement, or within 24 months of a change in control, the executive shall be entitled to severance pay. See “Severance and Change in Control Arrangements” for more detail.

401(k) Plan. We maintain a 401(k) Plan. All employees who are at least 21 years of age have the opportunity to contribute pre-tax of after-tax salary deferrals to the 401(k) Plan, up to $15,500 annually for the 2008 plan year, and to direct the investment of these contributions. Plan participants who are age 50 or older during the 2008 plan year are eligible to defer an additional $5,000 during 2008. The 401(k) Plan allows eligible participants to invest in the Allied Capital Stock Fund, consisting of Allied Capital common stock and cash, among other investment options. The 401(k) Plan held less than 1% of our outstanding shares.

During the 2007 plan year, we contributed up to 5% of each participant’s eligible compensation for the year, up to maximum compensation of $225,000, to each participant’s plan account on the participant’s behalf, which fully vested at the time of the contribution. For 2007, our contribution with respect to compensation in excess of $225,000 was made in cash to the participant in the first quarter of 2008.

For the 2008 plan year, we amended our 401(k) Plan to provide that we will match 100% of the first 4% of deferral contributions made by each participant up to $230,000 of eligible compensation. No excess contribution will be made for 2008.

Insurance. We also make available to all employees health insurance, dental insurance, and group life and disability insurance. Prior to the Sarbanes-Oxley Act of 2002, we provided split dollar life insurance arrangements for certain senior officers. We have subsequently terminated our obligations to pay future premiums with respect to existing split-dollar life insurance arrangements.

Perquisites. We provide only limited perquisites such as company-paid parking to our NEOs. We utilize corporate aircrafts for business use in an effort to improve the efficiency of required business travel. Imputed income determined in accordance with the Internal Revenue Service requirements is reflected in

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an NEO’s aggregate compensation for income tax purposes for any business trip on which a non-employee family member or guest accompanies the NEO. For compensation disclosure purposes, the value of such travel by non-employee family members or guests is calculated by allocating costs incurred. With respect to travel by non-employee family members or guests, this is computed by allocating direct and indirect expenses, other than depreciation, on a per hour basis. Direct and indirect expenses generally include crew compensation and expenses, fuel, oil, catering expenses, hangar, rent, insurance, landing and similar fees, and maintenance costs.

Establishing Compensation Levels

Role of the Compensation Committee. The Compensation Committee is comprised entirely of independent directors who are also non-employee directors as defined in Rule 16b-3 under the Exchange Act and independent directors as defined by New York Stock Exchange rules.

The Compensation Committee operates pursuant to a charter that sets forth the mission of the Compensation Committee and its specific goals and responsibilities. The Compensation Committee’s mission is to evaluate and make recommendations to the Board regarding the compensation of the Chief Executive Officer and other of our executive officers, and their performance relative to their compensation, and to assure that they are compensated effectively in a manner consistent with the compensation philosophy discussed earlier, internal equity considerations, competitive practice, and the requirements of applicable law and the appropriate regulatory bodies. In addition, the Compensation Committee evaluates and makes recommendations to the Board regarding the compensation of the directors, including their compensation for services on Board committees.

The Compensation Committee’s charter reflects these goals and responsibilities, and the Compensation Committee annually reviews and revises its charter as necessary. To assist in carrying out its responsibilities, the Compensation Committee periodically receives reports and recommendations from management and from a third-party compensation consultant that it selects and retains. The Compensation Committee may also, from time to time, consult with legal, accounting or other advisors all in accordance with the authority granted to the Compensation Committee in its charter.

Role of Management. The key members of management involved in the compensation process are the Chief Executive Officer, the Chief Operating Officer and the Director of Human Resources. Management proposes certain corporate and individual performance objectives for executive management that could be established to achieve long-term objectives of Allied Capital and used to determine total compensation, and these proposals are presented to the Compensation Committee for review and approval. Management also participates in the discussion of peer companies to be used to benchmark NEO compensation, and recommends the overall funding level for the annual cash bonus, IPA and IPB. Management’s recommendations are presented to the Compensation Committee for review and approval.

Role of the Compensation Consultant. The Compensation Committee annually retains a third-party compensation consultant to assess the competitiveness of the current and proposed compensation levels of our NEOs in light of competitive market practices. The Compensation Committee has engaged Ernst & Young LLP’s Performance and Reward Practice or its predecessor (the Compensation Consultant) for this purpose for more than five years.

The Compensation Consultant attends Compensation Committee meetings, meets with the Compensation Committee without management present and provides third-party data, advice and expertise on current and proposed executive and director compensation. At the direction of the Compensation Committee, the Compensation Consultant prepares an analysis of compensation matters including positioning of programs in the competitive market, including peer group review, and the design of plans consistent with the Compensation Committee’s compensation philosophy.

Ernst & Young, LLP provides consulting and other services to us, however, the Compensation Committee believes this does not compromise the Compensation Consultant’s ability to provide an

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independent perspective on executive compensation. During 2007, the Compensation Consultant was paid $128,689 for its services to the Compensation Committee.

Assessment of Market Data, Peer Comparisons and Benchmarking of Compensation. The Compensation Consultant assists the Compensation Committee with the assessment of the compensation practices of comparable companies. Given our structure as a publicly traded, internally managed BDC coupled with the fact that most of our direct competitors are privately held private equity partnerships, specific compensation information with respect to our direct competitors typically is not publicly available. There are a limited number of published survey sources that have a primary focus on the private equity industry and that provide annualized information on long-term incentive plans in the industry, which typically take the form of carried interest.

As a part of the annual assessment of compensation, the Compensation Committee and the Compensation Consultant analyze NEO compensation information relative to:


	•	a peer group of publicly traded companies, as determined by the Compensation Committee, including internally managed BDCs, deemed similar to Allied Capital in terms of industry segment, company size and competitive industry and geographic market for executive talent;

	•	published survey data on similarly sized private equity firms; and

	•	an estimation of aggregate compensation levels paid by externally managed publicly traded BDCs and similar pass-through structures, such as real estate investment trusts.

Through this process, the Compensation Committee benchmarks our compensation for NEOs, including the CEO, to the median (50^th percentile) through the 75th percentile of competitive market data. However, the Compensation Committee is unable to benchmark the compensation data of individual NEOs from the externally managed companies because no individual compensation data is available.

Our peer group is the same peer group used for our 2006 analysis and is composed of the following nine publicly traded companies in the financial services industry:


	•	AllianceBernstein Holding L.P.

	•	American Capital Strategies, Ltd.

	•	CapitalSource Inc.

	•	CIT Group Inc.

	•	Federated Investors, Inc.

	•	Friedman, Billings, Ramsey Group, Inc.

	•	iStar Financial, Inc.

	•	Legg Mason, Inc.

	•	T. Rowe Price Group, Inc.

While comparisons to compensation levels at our peer group is helpful in assessing the overall competitiveness of our executive compensation program, we believe that our executive compensation program also must be internally consistent and equitable in order for us to achieve our investment objectives and to continue to attract and retain outstanding employees.

The Compensation Committee uses the private equity published survey data to assess the market for investment professionals, but also considers each individual’s contribution to Allied Capital that year to assess internal pay equity. As a result, the composition of our NEOs, excluding the Chief Executive Officer and the Chief Financial Officer, may change from year to year.

Review of Tally Sheets. The Compensation Committee annually reviews tally sheets that illustrate all components of the compensation provided to our NEOs, including base salary, annual cash bonus, IPAs

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and IPBs, stock option awards, perquisites and benefits and the accumulated balance under non-qualified deferred compensation plans. Furthermore, the Compensation Committee annually reviews tally sheets prepared by the Compensation Consultant that illustrate the aggregate amounts that may be paid as the result of certain events of termination under employment agreements including a change of control for Mr. Walton and Mmes. Sweeney and Roll. The purpose of these tally sheets is to bring together, in one place, all of the elements of actual and potential future compensation for our executives who have employment agreements, as well as information about wealth accumulation, so that the Compensation Committee may analyze both the individual elements of compensation as well as the aggregate total amount of actual and projected compensation. The Compensation Committee also provides a full report of all compensation program components to the Board of Directors, including the review and discussion of the tally sheets.

Assessment of Corporate and Individual Performance. The Compensation Committee considered certain corporate and individual performance measures that have been established to achieve long-term total return to stockholders. The corporate and individual performance measures for 2007 included, among others, the following:


	•	Setting strategic direction;

	•	Maintaining the highest ethical standards, internal controls and adherence to regulatory requirements;

	•	Maintaining appropriate dividend payouts to shareholders with the appropriate balance of interest and fee income and capital gain harvest;

	•	Maintaining a conservative balance sheet and investment grade status;

	•	Continually innovating and improving the Company’s investment process;

	•	Maintaining portfolio credit quality and improving overall portfolio performance;

	•	Continually innovating and improving financial and operating services provided to portfolio companies; and

	•	Attracting and retaining the best and brightest talent, developing potential successors for future leadership roles.

During 2007, we achieved numerous strategic investment and operational goals and objectives, including, among other things:


	•	Invested $1.8 billion;

	•	Generated $268.5 million in net realized capital gains;

	•	Paid $407.3 million in dividends to stockholders, a 7% increase in dividends per share over 2006;

	•	Established the Allied Capital Senior Debt Fund, L.P. with an initial closing of $125 million in equity capital commitments; and

	•	Partnered with GE Commercial Finance to establish the $3.6 billion Unitranche Fund LLC.

Compensation Determination

In identifying prevailing market competitive compensation and benefit levels for similarly situated companies, Allied Capital employs the three-pronged approach discussed above. In determining the individual compensation for our NEOs, the Compensation Committee considers the total compensation to be awarded to each NEO and may exercise discretion in determining the portion allocated to the various components of total compensation and there is no pre-determined weighting of any specific components. We believe that the focus on total compensation provides the ability to align pay decisions with short- and long-term needs of the business. This approach also allows for the flexibility needed to recognize differences in performance by providing differentiated pay.

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Individual compensation levels for NEOs are determined based on individual performance and the achievement of certain corporate and executive performance objectives that have been established to achieve our long-term objectives. Increases to base salary are awarded to recognize an executive for assuming additional responsibilities and his/her related performance, to address changes in the external competitive market for a given position, or to achieve an appropriate competitive level due to a promotion to a more senior position.

In determining the amount of an executive’s variable compensation — the annual cash bonus, IPA and IPB — the Compensation Committee uses market-based total compensation guidelines described above, which are the proxy peer group analysis, private equity published survey data, and estimates of and comparisons to compensation paid by externally managed publicly traded pass-through companies. Within those guidelines, the Compensation Committee considers the overall funding available for such awards, the executive’s performance, and the desired mix between the various components of total compensation. We do not use a formula-based approach in determining individual awards or weighting between the components. Rather, discretion is exercised in determining the overall total compensation to be awarded to the executive. As a result, the amounts delivered in the form of an annual cash bonus, IPA and IPB are designed to work together in conjunction with base salary to deliver an appropriate total compensation level to the NEO.

We believe that the discretionary design of our variable compensation program supports our overall compensation objectives by allowing for significant differentiation of pay based on individual performance and by providing the flexibility necessary to ensure that pay packages for our NEOs are competitive relative to our market.

Determination of 2007 Compensation for the CEO and other NEOs. The compensation of our Chief Executive Officer and other NEOs is determined based on the achievement of certain corporate and individual performance objectives discussed above. 2007 was a year of continued progress in achieving the objectives that contribute to the long-term success of Allied Capital. Among other things described above, we invested $1.8 billion, generated $268.5 million in net realized gains, and paid $407.3 million in dividends to stockholders. The Compensation Committee acknowledged the fact that, while management had achieved numerous strategic investment and operational goals and objectives for the year, market conditions had resulted in a significant reduction in our stock price during the latter half of 2007, which adversely affected total return to stockholders for the year.

Mr. Walton is paid an annual base salary of $1,500,000, the same rate that has been in effect since February 2004. Mr. Walton received an annual bonus for 2007 of $2,150,000, a 22% reduction from the annual bonus that was paid for 2006. Mr. Walton also received a 2007 IPA of $1,475,000 and a 2007 IPB of $1,475,000, which were the same amounts as the prior year. Mr. Walton received a grant of 186,000 stock options in 2007; he did not receive a stock option grant in 2006.

Ms. Sweeney is paid an annual base salary of $1,000,000, the same rate that has been in effect since February 2004. Ms. Sweeney received an annual bonus for 2007 of $1,300,000, a 13% reduction from the annual bonus that was paid for 2006. Ms. Sweeney also received a 2007 IPA of $750,000 and a 2007 IPB of $750,000, which were the same amounts as the prior year. Ms. Sweeney received a grant of 139,500 stock options in 2007; she did not receive a stock option grant in 2006.

For 2007, Ms. Roll was paid an annual base salary of $525,000, the same rate that has been in effect since 2006. Ms. Roll received an annual bonus for 2007 of $850,000, the same annual bonus that she received in 2006, in recognition of Allied Capital’s performance and her individual performance. Ms. Roll also received a 2007 IPA of $350,000 and a 2007 IPB of $350,000. Ms. Roll received a grant of 139,500 stock options in 2007.

For 2007, Mr. Russell was paid an annual base salary of $550,000. Mr. Russell received an annual bonus for 2007 of $2,475,000 in recognition of Allied Capital’s performance and his individual performance. Mr. Russell also received a 2007 IPA of $475,000 and a 2007 IPB of $475,000. Mr. Russell received a grant of 186,000 stock options in 2007.

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For 2007, Mr. Scheurer was paid an annual base salary of $600,000. Mr. Scheurer received an annual bonus for 2007 of $1,700,000 in recognition of Allied Capital’s performance and his individual performance. Mr. Scheurer also received a 2007 IPA of $550,000 and a 2007 IPB of $550,000. Mr. Scheurer received a grant of 139,500 stock options in 2007.

After reviewing the 2007 peer group information, tally sheets and the achievement of corporate and executive performance measures for each of these executives, the Compensation Committee determined that the total compensation levels for each of these executives was within a competitive range to existing market levels and remained consistent with the Compensation Committee’s expectations.

Stock Option Practices

Our principal objective in awarding stock options to our officers and directors is to align each optionee’s interests with the success of Allied Capital and the financial interests of our stockholders by linking a portion of such optionee’s compensation with the performance of our stock and the value delivered to stockholders. The Compensation Committee awards stock options on a subjective basis and such awards depend in each case on the performance of the officer under consideration, and in the case of new hires, their potential performance. Stock options are priced at the closing price of the stock on the date the option is granted. See “Amended Stock Option Plan.”

Restricted Stock

In October 2007, we filed an exemptive application with the Commission to permit the issuance of restricted stock to our employees and non-officer directors. If we were to receive an order from the Commission to permit such issuance, we would be required to seek the approval of stockholders before we may issue restricted stock. Assuming we obtained stockholder approval, the Board of Directors would consider the issuance of restricted stock together with the issuance of stock options as another form of equity compensation.

Target Ownership Program

During 2006, the Board of Directors established a target ownership program to encourage share ownership by our senior officers, so that the interests of the officers and stockholders are aligned. Generally, officers have five years to achieve their target ownership level, which is determined on an individual basis by the Compensation Committee and adjusted annually to reflect increases in base salary, if any. The Compensation Committee considers these target ownership levels and each individual’s progress toward achieving his or her target ownership in connection with its annual compensation review. See “Target Ownership” for additional information related to the target ownership program.

Impact of Regulatory Requirements — Tax Deductibility of Pay

Section 162(m) of the Code places a limit of $1,000,000 on the amount of compensation that we may deduct in any one year, which applies with respect to certain of our most highly paid executive officers for 2007. There is an exception to the $1,000,000 limitation for performance-based compensation meeting certain requirements. To maintain flexibility in compensating executive officers in a manner designed to promote varying corporate goals, the Compensation Committee has not adopted a performance-based compensation policy. The total compensation for each of Messrs. Walton, Russell, Scheurer and Ms. Sweeney is above the $1,000,000 threshold for 2007; accordingly, for 2007, a portion of their total compensation, including salaries, bonuses, IPBs, and other compensation is not deductible by us.

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Summary Compensation

The following table sets forth compensation paid to our principal executive officer, principal financial officer and each of our three highest paid executive officers (collectively, the Named Executive Officers or NEOs) in each capacity in which each NEO served. Certain of the NEOs served as both officers and directors.


															Change in
															Pension Value
															and
													Non-Equity		Non-Qualified
													Incentive		Deferred
Name and Principal									Stock		Option		Plan		Compensation		All Other
Position			Year		Salary		Bonus⁽¹⁾		Awards		Awards⁽²⁾		Compensation		Earnings⁽³⁾		Compensation⁽⁴⁾		Total

William L. Walton,				2007	$	1,505,769	$	5,301,250		n/a	$	488,229		n/a		n/a	$	3,658,402	$	10,953,650
	Chief Executive			2006		1,500,000		5,700,000		n/a		421,142		n/a		n/a		250,763		7,871,905
		Officer
Joan M. Sweeney,				2007	$	1,003,846	$	2,913,750		n/a	$	366,172		n/a		n/a	$	1,986,159	$	6,269,927
	Chief Operating			2006		1,000,000		3,000,000		n/a		314,827		n/a		n/a		134,418		4,449,245
		Officer
Penni F. Roll,				2007	$	527,019	$	1,607,500		n/a	$	576,854		n/a		n/a	$	509,089	$	3,220,462
	Chief Financial			2006		523,558		1,550,000		n/a		490,659		n/a		n/a		70,571		2,634,788
		Officer
Daniel L. Russell,
	Managing Director			2007	$	550,673	$	3,506,154		n/a	$	725,172		n/a		n/a	$	372,028	$	5,154,027
John M. Scheurer,
	Managing Director			2007	$	602,308	$	2,868,750		n/a	$	352,941		n/a		n/a	$	1,308,357	$	5,132,356

^⁽¹⁾

This column includes annual cash bonus, IPA, IPB and for 2007 the excess 401(k) Plan contribution, which represents the excess amount of the 5% employer contribution over the IRS limit of how much an employer may contribute to the 401(k) plan which was paid in cash for 2007. For 2006, this excess contribution was contributed to the 2005 DCP I. For a discussion of these compensation components, see “Compensation Discussion and Analysis” above. The following table provides detail as to the composition of the bonus received by each of the NEOs:


									Excess 401(k)
	Year		Bonus		IPA		IPB		Contribution

Mr. Walton		2007	$	2,150,000	$	1,475,000	$	1,475,000	$	201,250
		2006	$	2,750,000	$	1,475,000	$	1,475,000		—
Ms. Sweeney		2007	$	1,300,000	$	750,000	$	750,000	$	113,750
		2006	$	1,500,000	$	750,000	$	750,000		—
Ms. Roll		2007	$	850,000	$	350,000	$	350,000	$	57,500
		2006	$	850,000	$	350,000	$	350,000		—
Mr. Russell		2007	$	2,475,000	$	475,000	$	475,000	$	81,154
Mr. Scheurer		2007	$	1,700,000	$	550,000	$	550,000	$	68,750

^⁽²⁾

The following table sets forth the amount included in the “Option Awards” column with respect to prior year awards and the 2007 awards. See Note 2 to our 2007 consolidated financial statements for the assumptions used in determining SFAS 123R values. See the “Grants of Plan-Based Awards” table for the full fair value of the options granted to NEOs in 2007. The amount recognized for financial statement reporting purposes represents the SFAS 123R fair value of options awarded in prior and current years that vested in 2007, which are non-cash expenses.


	SFAS 123R Expenses Included in the
	Table Attributed to:

2007 Non-Cash Expense for Option Awards	Prior-Year Awards		2007 Awards

Mr. Walton	$	210,882	$	277,347
Ms. Sweeney	$	158,162	$	208,010
Ms. Roll	$	368,844	$	208,010
Mr. Russell	$	447,826	$	277,346
Mr. Scheurer	$	144,931	$	208,010


^⁽³⁾	There were no above market or preferential earnings on the non-qualified deferred compensation plans. See “Non-Qualified Deferred Compensation” below.

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⁽⁴⁾	All Other Compensation is composed of the following:


			Company		Employer		SFAS 123R
			Contribution		Contribution		Expense
			to 401(k)		to 2005		Related
	Year		Plan		DCP I^(A)		to the OCP^(B)		Other^(C)

Mr. Walton		2007	$	11,250		—	$	3,612,697	$	34,455
		2006	$	11,000	$	201,500		n/a	$	38,263
Ms. Sweeney		2007	$	11,250		—	$	1,966,137	$	8,772
		2006	$	11,000	$	114,000		n/a	$	9,418
Ms. Roll		2007	$	11,250		—	$	493,223	$	4,616
		2006	$	11,000	$	55,154		n/a	$	4,417
Mr. Russell		2007	$	11,250		—	$	356,667	$	4,111
Mr. Scheurer		2007	$	11,250		—	$	1,287,492	$	9,615


	^{^(A)}	Because the IRS limits the amount an employer may contribute to a 401(k) plan on behalf of each participant, for 2006 we contributed the excess amount of the 5% employer contribution over this limit to the 2005 DCP I on behalf of the participant. For 2007, this excess contribution was paid in cash to the participant and is included as a bonus in 2007.


	^{^(B)}	Because the weighted average market price of our common stock at the commencement of the tender offer was higher than the market price at the close of the tender offer, SFAS 123R required the Company to record stock option expense related to the stock options cancelled. This is a non-cash expense deemed to be compensation for financial reporting purposes.


	^{^(C)}	This amount includes perquisites such as company-paid parking and the imputed income value of split dollar life insurance arrangements. For Messrs. Walton and Scheurer, the amount also includes the premiums associated with executive long-term disability insurance. In addition, the amount includes $23,994 for Mr. Walton and $2,370 for Ms. Sweeney, and $1,241 for Mr. Russell related to the allocated costs associated with the travel of non- employee family members or guests when they have accompanied the NEOs on trips for business purposes. The value of this perquisite is different than each NEO’s imputed income, which is calculated in accordance with IRS requirements.

Employment Agreements

We entered into employment agreements in 2004 with William L. Walton, our Chairman and CEO, Joan M. Sweeney, our Chief Operating Officer, and Penni F. Roll, our Chief Financial Officer. These agreements were amended in 2007 to comply with Section 409A of the Code and to address other tax-related matters. Each of the agreements provides for a three-year term that extends one day at the end of every day during its length, unless either party provides written notice of termination of such extension. In that case, the agreement would terminate three years from such notification.

Each agreement specifies each executive’s base salary compensation during the term of the agreement. The Compensation Committee has the right to increase the base salary during the term of the employment agreement. In addition, each employment agreement states that the Compensation Committee may provide, at their sole discretion, an annual cash bonus. This bonus is to be determined with reference to each executive’s performance in accordance with performance criteria to be determined by the Compensation Committee in its sole discretion. Under each agreement, each executive is also entitled to participate in our Amended Stock Option Plan, and to receive all other awards and benefits previously granted to each executive including, the payment of life insurance premiums.

The executive has the right to voluntarily terminate employment at any time with 30 days’ notice, and in such case, the employee will not receive any severance pay. Among other things, the employment agreements prohibit the solicitation of employees from us in the event of an executive’s departure for a period of two years. See “Severance and Change in Control Arrangements” for a discussion of the severance and change in control arrangements set forth in each of these agreements.

In connection with Ms. Sweeney’s planned retirement at the end of 2008, we expect to enter into a consulting agreement with Ms. Sweeney.

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Grants of Plan-Based Awards


																	All Other
															All Other		Option
			Estimated Future Payouts						Estimated Future Payouts						Stock		Awards;				Grant Date
			Under Non-Equity Incentive						Under Equity Incentive						Awards;		Number		Exercise		Fair Value
			Plan Awards						Plan Awards						Number of		of		or Base		of Stock
															Shares of		Securities		Price of		and
	Grant														Stock or		Underlying		Option		Option
Name	Date		Threshold		Target		Maximum		Threshold		Target		Maximum		Units		Options⁽¹⁾		Awards		Awards

William L. Walton		5/15/07		—		—		—		—		—		—		—		186,000	$	29.58	$	553,685
Joan M. Sweeney		5/15/07		—		—		—		—		—		—		—		139,500		29.58		415,264
Penni F. Roll		5/15/07		—		—		—		—		—		—		—		139,500		29.58		415,264
Daniel L. Russell		5/15/07		—		—		—		—		—		—		—		186,000		29.58		553,685
John M. Scheurer		5/15/07		—		—		—		—		—		—		—		139,500		29.58		415,264


^⁽¹⁾	The options granted in 2007 vest in three installments on 6/30/07, 6/30/08, and 6/30/09.

Amended Stock Option Plan

Our Amended Stock Option Plan is intended to encourage stock ownership in Allied Capital by our officers and directors, thus giving them a proprietary interest in our performance, to reward outstanding performance, and to provide a means to attract and retain persons of outstanding ability to the service of Allied Capital. The Amended Stock Option Plan was most recently approved by our stockholders on May 15, 2007. At March 31, 2008, there were 37.2 million shares authorized for issuance under the Amended Stock Option Plan.

As discussed in the Compensation Discussion and Analysis, our Compensation Committee believes that stock-based incentive compensation is a key element of officer and director compensation. The Compensation Committee’s principal objective in awarding stock options to our eligible officers is to align each optionee’s interests with our success and the financial interests of our stockholders by linking a portion of such optionee’s compensation with the performance of our stock and the value delivered to stockholders.

Stock options are granted under the Amended Stock Option Plan at a price not less than the prevailing market value at the grant date and will have realizable value only if our stock price increases. The Compensation Committee determines the amount and features of the stock options, if any, to be awarded to optionees. The Compensation Committee evaluates a number of criteria, including the past service of each such optionee to Allied Capital, the present and potential contributions of such optionee to the success of Allied Capital, and such other factors as the Compensation Committee shall deem relevant in connection with accomplishing the purposes of the Amended Stock Option Plan, including the recipient’s current stock holdings, years of service, position with Allied Capital, and other factors. The Compensation Committee does not apply a formula assigning specific weights to any of these factors when making its determination. The Compensation Committee awards stock options on a subjective basis and such awards depend in each case on the performance of the officer under consideration, and in the case of new hires, their potential performance. Pursuant to the 1940 Act, options may not be repriced for any participant.

All rights to exercise options terminate 60 days after an optionee ceases to be (i) a non-officer director, (ii) both an officer and a director, if such optionee serves in both capacities, or (iii) an officer (if such officer is not also a director) for any reason other than death or total and permanent disability. If an optionee’s employment is terminated for any reason other than death or total and permanent disability before expiration of his option and before he has fully exercised it, the optionee has the right to exercise the option during the balance of a 60-day period from the date of termination. If an optionee dies or becomes totally and permanently disabled before expiration of the option without fully exercising it, he or she or the executors or administrators or legatees or distributees of the estate shall, as may be provided at the time of the grant, have the right, within one year after the optionee’s death or total and permanent disability, to exercise the option in whole or in part before the expiration of its term.

124

All outstanding options will become fully vested and exercisable upon a Change of Control. For purposes of the Option Plan, a “Change of Control” means (i) the sale or other disposition of all or substantially all of our assets; or (ii) the acquisition, whether directly, indirectly, beneficially (within the meaning of Rule 13d-3 of the Exchange Act), or of record, as a result of a merger, consolidation or otherwise, of securities of the Company representing fifteen percent (15%) or more of the aggregate voting power of the Company’s then outstanding common stock by any person (within the meaning of Section 13(d) and 14(d) of the Exchange Act), including, but not limited to, any corporation or group of persons acting in concert, other than (A) us or our subsidiaries and/or (B) any employee pension benefit plan (within the meaning of Section 3(2) of the Employee Retirement Income Security Act of 1974) of us or our subsidiaries, including a trust established pursuant to any such plan; or (iii) the individuals who were members of the Board of Directors as of the Effective Date (the “Incumbent Board”) cease to constitute at least two-thirds (²/3) of the Board of Directors; provided, however, that any director appointed by at least two-thirds (²/3) of the then Incumbent Board or nominated by at least two-thirds (²/3) of the Corporate Governance/ Nominating Committee of the Board of Directors (a majority of the members of the Corporate Governance/ Nominating Committee are members of the then Incumbent Board or appointees thereof), other than any director appointed or nominated in connection with, or as a result of, a threatened or actual proxy or control contest, shall be deemed to constitute a member of the Incumbent Board.

The Amended Stock Option Plan is designed to satisfy the conditions of Section 422 of the Code so that options granted under the Amended Stock Option Plan may qualify as “incentive stock options.” To qualify as “incentive stock options,” options may not become exercisable for the first time in any year if the number of incentive options first exercisable in that year multiplied by the exercise price exceeds $100,000.

On February 1, 2008, options to purchase 7.1 million shares were granted with an exercise price of $22.96 per share. The options vest ratably over a three year period beginning on June 30, 2009. The estimated expense included in the Grants of Plan Based Awards table, above, does not include any expense related to the options granted in 2008.

We have received approval from the SEC to grant non-qualified options under the Amended Stock Option Plan to non-officer directors. Pursuant to the SEC order, non-officer directors receive options to purchase 10,000 shares upon election by stockholders to the Board of Directors, and options to purchase 5,000 shares each year thereafter, on the date of the Annual Meeting of Stockholders.

125

Outstanding Equity Awards at Fiscal Year-End

The following table sets forth the stock option awards outstanding at December 31, 2007:

Option Awards⁽¹⁾

Stock Awards⁽³⁾

Equity

Incentive

Plan

Awards:

Equity

Number of

Market or

Incentive

Unearned

Payout

Plan

Shares,

Value of

Awards:

Market

Units or

Unearned

Number of

Value of

Other

Shares,

Securities

Shares or

Rights

Units

Underlying

Units of

That

of Other

Unexercised

Option

Stock That

Have

Rights That

Options

Unearned

Exercise

Expiration

Have Not

Not

Have Not

Name

Exercisable⁽²⁾

Unexercisable

Options

Price

Date

Vested

William L. Walton

400,000

—

28.98

3/11/2014

n/a

62,000

124,000

(4)

—

29.58

5/15/2014

n/a

Joan M. Sweeney

5,633

—

17.75

12/30/2009

n/a

4,646

—

21.52

12/13/2012

n/a

78,450

—

28.98

3/11/2014

n/a

46,500

93,000

(4)

—

29.58

5/15/2014

n/a

Penni F. Roll

122,677

—

21.52

12/13/2012

n/a

200,000

—

28.98

3/11/2014

n/a

133,334

66,666

(5)

—

27.51

8/3/2015

n/a

46,500

93,000

(4)

—

29.58

5/15/2014

n/a

Daniel L. Russell

4,085

—

21.59

9/20/2011

n/a

4,646

—

21.52

12/13/2012

n/a

100,000

—

28.98

3/11/2014

n/a

200,000

100,000

(5)

—

27.51

8/3/2015

n/a

62,000

124,000

(4)

—

29.58

5/15/2014

n/a

John M. Scheurer

150,000

—

28.98

3/11/2014

n/a

33,334

16,666

(5)

—

27.51

8/3/2015

n/a

46,500

93,000

(4)

—

29.58

5/15/2014

n/a


^⁽¹⁾	During 2007, we completed a tender offer for vested in-the-money options and cancelled a total of 10.3 million options.
^⁽²⁾	No stock option awards have been transferred.
^⁽³⁾	We have not made any stock awards. As a business development company, we are prohibited by the 1940 Act from issuing stock awards except pursuant to a Commission exemptive order. We have filed an application seeking exemptive relief to issue restricted stock.
^⁽⁴⁾	The options granted vest in three installments on 6/30/07, 6/30/08, and 6/30/09.
^⁽⁵⁾	The options granted vest in three installments on 6/30/06, 6/30/07, and 6/30/08.

Option Exercises and Stock Vested

No stock option awards were exercised by any NEO during the year ended December 31, 2007.

Option Awards

Stock Awards

Number of Shares

Acquired on

Value Realized

Acquired on

Value Realized

Name

Year

Exercise

on Exercise

Vesting

on Vesting

William L. Walton

2007

—

n/a

Joan M. Sweeney

2007

—

n/a

Penni F. Roll

2007

—

n/a

Daniel L. Russell

2007

—

n/a

John M. Scheurer

2007

—

n/a

Option Cancellation and the OCP

In connection with our 2006 Annual Meeting of Stockholders, the stockholders approved the issuance of up to 2,500,000 shares of our common stock in exchange for the cancellation of vested “in-the-money” stock options granted to certain officers and directors under the Amended Stock Option Plan. Under the initiative, which was reviewed and approved by our Board of Directors, all optionees who held vested stock options with exercise prices below the market value of the stock (or “in-the-money” options), were offered the opportunity to receive cash and unregistered common stock in exchange for their voluntary cancellation of their vested stock options. The sum of the cash and common stock to be received by each optionee would equal the “in-the-money” value of the stock option cancelled. On July 18, 2007, we completed a tender offer to all optionees who held vested “in-the-money” stock options as of June 20, 2007. We

126

accepted for cancellation 10.3 million vested options held by employees and non-officer directors, which in the aggregate had a weighted average exercise price per share of $21.50. This resulted in a total OCP of approximately $105.6 million, of which $52.8 million was paid in cash to satisfy required tax liabilities and $52.8 million was paid through the issuance of 1.7 million unregistered shares of our common stock, determined using the Weighted Average Market Price of $31.75, which represented the volume-weighted average price of our common stock over the fifteen trading days preceding the first day the offer period. The NEOs received the following OCPs in connection with their participation in the tender offer:


	Shares		Cash

William L. Walton		455,211	$	14,452,966
Joan S. Sweeney		247,864		7,869,699
Penni F. Roll		59,855		1,900,424
Daniel L. Russell		38,274		1,215,205
John M. Scheurer		138,099		4,384,674

Non-Qualified Deferred Compensation


								Aggregate		Aggregate
	Executive		Company		Aggregate			Withdrawals/		Balance at
	Contributions in		Contributions in		Earnings in			Distributions in		December 31,
Name	2007⁽¹⁾⁽⁴⁾		2007⁽²⁾⁽⁴⁾		2007⁽³⁾			2007		2007⁽⁵⁾

William L. Walton	$	1,453,612	$	198,578	$	(2,313,904	)	$	—	$	11,366,271
Joan M. Sweeney	$	739,125	$	112,347	$	(1,092,826	)	$	—	$	5,832,948
Penni F. Roll	$	344,925	$	54,354	$	(409,013	)	$	—	$	2,247,601
Daniel L. Russell	$	468,112	$	64,020	$	(271,709	)	$	—	$	1,693,936
John M. Scheurer	$	542,025	$	60,608	$	(789,761	)	$	—	$	5,697,511


^⁽¹⁾	Executive contributions are based on the IPAs earned during the 2007 plan year (net of FICA tax) and contributed to the 2005 DCP II. There are no other executive deferrals.

^⁽²⁾	Our contributions (net of FICA tax) are based on the excess 401(k) employer contribution made to the 2005 DCP I in 2007 (for the 2006 plan year) and allocated to the participant’s account.

^⁽³⁾	Includes interest and dividend income and realized and unrealized gains and losses on all deferred compensation arrangements.

^⁽⁴⁾	Executive and company contributions are also reflected in the Summary Compensation Table.

^⁽⁵⁾	During 2007, our Board of Directors determined to terminate our deferred compensation arrangements, and the balances will be distributed to the participants in 2008. See “Termination of Deferred Compensation Arrangements” below.

The 2005 Deferred Compensation Plan I

The 2005 Allied Capital Corporation Non-Qualified Deferred Compensation Plan (2005 DCP I) is an unfunded plan, as defined in the Code, that provides for the voluntary deferral of compensation by our directors, employees, and consultants. Prior to 2005, such voluntary deferrals were made to the Allied Capital Corporation Non-Qualified Deferred Compensation Plan (DCP I). Any director, senior officer, or consultant is eligible to participate in the 2005 DCP I at such time and for such period as designated by the Board of Directors. The 2005 DCP I is administered through a grantor trust, and we fund this plan through cash contributions.

The 2005 Deferred Compensation Plan II

The 2005 Allied Capital Corporation Non-Qualified Deferred Compensation Plan II (2005 DCP II) is an unfunded plan, as defined in the Code, that provides for the deferral of compensation by our officers. All IPA contributions made for 2005, 2006, and 2007 were made into the 2005 DCP II. Prior to 2005, IPA contributions were made to the Allied Capital Corporation Non-Qualified Deferred Compensation Plan II (DCP II).

The IPAs were generally deposited in the trust in equal installments, on a quarterly basis, in the form of cash. The Compensation Committee designed both DCP II and 2005 DCP II to require the trustee to

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use the cash to purchase shares of our common stock in the market. A participant only vests in the award as it is deposited into the trust. The Compensation Committee, in its sole discretion, designates the senior officers who were to receive IPAs and participate in 2005 DCP II. During any period of time in which a participant had an account in either DCP II or 2005 DCP II, any dividends declared and paid on shares of common stock allocated to the participant’s accounts were reinvested in shares of our common stock.

The Compensation Committee of our Board of Directors administers all of our deferred compensation arrangements. The Board of Directors reserves the right to amend, terminate, or discontinue DCP II and 2005 DCP II, provided that no such action will adversely affect a participant’s rights under the plans with respect to the amounts contributed to his or her deferral accounts.

Termination of Deferred Compensation Arrangements. In December 2007, our Board of Directors made a determination that it is in our best interests to terminate our deferred compensation arrangements (each individually a Plan, or collectively, the Plans). The Board of Directors’ decision was primarily in response to increased complexity resulting from recent changes in the regulation of deferred compensation arrangements.

The Board of Directors resolved that DCP I and DCP II would be terminated in accordance with the provisions of each of these Plans, and the accounts under these Plans would be distributed to participants in full on March 18, 2008, the termination and distribution date, or as soon as is reasonably practicable thereafter.

The Board of Directors also resolved to amend and restate 2005 DCP I and 2005 DCP II to provide for termination of each of these Plans and distribution of the accounts under these Plans on March 18, 2008, or as soon as is reasonably practicable thereafter, in full in accordance with the transition rule for payment elections under Section 409A of the Code.

Distributions from the Plans would be made in cash or shares of our common stock, net of required withholding taxes. The assets of the rabbi trust related to DCP I and 2005 DCP I were primarily invested in assets other than shares of our common stock. At December 31, 2007, the liability to participants related to DCP I and 2005 DCP I was valued at $21.1 million in the aggregate, and that liability was fully funded by assets held in the rabbi trust.

The assets of the rabbi trust related to DCP II and 2005 DCP II were primarily invested in shares of our common stock. At December 31, 2007, the liability to participants related to DCP II and 2005 DCP II was valued at $31.4 million in the aggregate, and that liability was fully funded by assets held in the rabbi trust. At December 31, 2007, the rabbi trust held approximately 1.4 million shares for DCP II and 2005 DCP II.

The account balances in the Plans reflect a combination of participant elective compensation deferrals and non-elective employer contributions, including contributions related to previously earned IPAs. As of March 18, 2008, the termination and distribution date, the account balances of the NEOs related to DCP I, 2005 DCP I, DCP II and 2005 DCP II were $10.5 million for Mr. Walton, $5.3 million for Ms. Sweeney, $2.1 million for Ms. Roll, $1.5 million for Mr. Russell, and $5.2 million for Mr. Scheurer. The balances on the termination date were distributed in March 2008 subsequent to the termination date, in accordance with the transition rule for payment elections under Section 409A of the Code. Distributions from the plans were made in cash or shares of our common stock, net of required withholding taxes.

Changes in Method of Payment of IPA for 2008. As a result of the termination of our deferred compensation arrangements, the Compensation Committee is considering our compensation structure and other changes that may be implemented if we obtain Commission and stockholder approval to issue restricted stock. 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, rather than contributed to a deferred compensation plan and invested in shares of our common stock.

The total of 2008 IPAs and IPBs are estimated to be $19.2 million. The 2008 IPAs for the named executive officers are: Mr. Walton — $1,475,000; Ms. Sweeney — $850,000; Ms. Roll — $350,000; Mr. Russell — $475,000; and Mr. Scheurer — $550,000. The 2008 IPBs for the named executive officers

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are: Mr. Walton — $1,475,000; Ms. Sweeney — $850,000; Ms. Roll — $350,000; Mr. Russell — $475,000; and Mr. Scheurer — $550,000.

Severance and Change in Control Arrangements

We entered into employment agreements in 2004 with William L. Walton, Chairman and CEO, Joan M. Sweeney, Chief Operating Officer, and Penni F. Roll, Chief Financial Officer. These agreements were reviewed in 2007 and amended to comply with Section 409A and to address other tax-related matters. Each of the agreements provides for a three-year term that extends one day at the end of every day during its length, unless either party provides written notice of termination of such extension. In that case, the agreement would terminate three years from such notification. The following tables quantify the potential payments and benefits upon termination for each of the NEOs with an employment agreement, assuming the NEO’s employment terminated on December 31, 2007, given the NEO’s compensation and service level as of that date, excluding $11,366,271 for Mr. Walton, $5,832,948 for Ms. Sweeney and $2,247,601 for Ms. Roll representing each NEO’s current deferred compensation balances, which will be distributed to each NEO in 2008 pursuant to the Board of Director’s determination in December 2007 to terminate our deferred compensation arrangements. Due to the number of factors that affect these calculations, including the price of our common stock, any actual amounts paid or distributed may be different.


	Termination Scenarios

	By Executive For
	Good Reason or
	By Company		Death or		Change of
	Without Cause		Disability		Control
William L. Walton
Cash Payments	$	15,633,023	$	7,228,000	$	15,633,023
Accelerated Vesting of Option Awards		—		—		0
Continued Benefits		206,769		206,769		206,769
Tax Equalization Payment		—		—		6,733,465

Total	$	15,839,792	$	7,434,769	$	22,573,257


	Termination Scenarios

	By Executive For
	Good Reason or
	By Company		Death or		Change of
	Without Cause		Disability		Control
Joan M. Sweeney
Cash Payments	$	10,324,067	$	5,264,333	$	10,324,067
Accelerated Vesting of Option Awards		—		—		0
Continued Benefits		152,268		152,268		152,268
Tax Equalization Payment		—		—		4,266,217

Total	$	10,476,335	$	5,416,601	$	14,742,552


	Termination Scenarios

	By Executive For
	Good Reason or
	By Company		Death or
	Without Cause		Disability		Change of Control
Penni F. Roll
Cash Payments	$	5,665,983	$	2,850,000	$	5,665,983
Accelerated Vesting of Option Awards		—		—		0
Continued Benefits		104,149		104,149		104,149
Tax Equalization Payment		—		—		2,472,084

Total	$	5,770,132	$	2,954,149	$	8,242,216

By Executive For Good Reason or By Company Without Cause. Pursuant to each of those agreements, if the executive resigns without good reason or his/her employment is terminated with cause, the executive will not receive any severance pay. If, however, employment is terminated by us without cause or by the executive for good reason, the executive will be entitled to severance pay for a period not to exceed 36 months. Severance pay will include three times the average base salary for the preceding three years, plus three times the average bonus compensation for the preceding three years, plus a lump sum severance amount, plus certain benefits for a period of one year. These benefits include COBRA premiums for Mr. Walton, Ms. Sweeney and Ms. Roll and their eligible family members for the maximum

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period of continuation coverage provided under COBRA, and also include the full cost for substantially equivalent health and dental insurance benefits for six months after such maximum continuation coverage expires at our sole expense. These benefits also include participation in our stock option plan, split-dollar life insurance plan, executive long term disability plan, and deferred compensation plan, if applicable. Severance payments will generally be paid in a lump sum no earlier than six months after separation.

Change of Control. In the event of a change of control, in addition to the severance value described above, Mr. Walton, Ms. Sweeney and Ms. Roll would each be entitled to a tax equalization payment to offset any applicable excise tax penalties imposed on the executive under Section 4999 of the Code. Under the terms of the Amended Stock Option Plan, all outstanding options will vest immediately upon a change of control.

Death or Disability. If employment is terminated as a result of death or disability (as defined in the executives’ employment agreements) and no notice of non-renewal has been given, the executive will be entitled to severance pay equal to one times his/her average base salary for the preceding three years, plus one times his/her average bonus compensation for the preceding three years, plus a lump sum severance amount, plus certain benefits previously described for a period of one year.

Notice of Non-Renewal. If a notice of non-renewal has been given prior to death or disability of the executive, then instead of using a one times multiple of the average base salary and average bonus compensation as described above, the severance amount that relates to base salary and bonus compensation would be calculated using the number of years remaining between the date of the executive’s death or disability and the third anniversary of the notice of non-renewal, but in no event less than one year. Any severance relating to disability will be paid in a lump sum no earlier than six months after separation. Any severance relating to death will be paid in two installments: 75% of such pay will be paid at the time of separation and 25% will be paid on the first anniversary of such separation.

If the term of employment expires in accordance with the agreement after the delivery of a non-renewal notice by either party, the executive would continue to be employed for three years after the notice of non-renewal (unless otherwise terminated under the agreement). At the end of the three-year term, the executive would receive severance pay equal to one times the average base salary for the preceding three years, plus one times the average bonus compensation for the preceding three years, plus a lump sum severance amount, plus the benefits previously described. Severance payments will be paid in a lump sum no earlier than six months after separation.

If any provision of the employment agreements would cause the executive to incur any additional tax under Section 409A of the Code or any regulations or Treasury guidance promulgated thereunder, we will reform the provision in a manner that maintains, to the extent possible, the original intent of the applicable provision without violating the provisions of Section 409A of the Code. In addition, in such a situation, we will notify and consult with the executives prior to the effective date of any such change.

Indemnification Agreements

We have entered into indemnification agreements with our directors and certain of our senior officers including each of the NEOs. The indemnification agreements are intended to provide these directors and senior officers the maximum indemnification permitted under Maryland law and the 1940 Act. Each indemnification agreement provides that we shall indemnify the director or officer who is a party to the agreement (an “Indemnitee”), including the advancement of legal expenses, if, by reason of his or her corporate status, the Indemnitee is, or is threatened to be, made a party to or a witness in any threatened, pending, or completed proceeding, other than a proceeding by or in the right of Allied Capital.

Target Ownership

During 2006, our Board of Directors established a target ownership program, which requires senior officers to achieve and retain certain stock ownership levels commensurate with their positions at Allied Capital. From the inception of the target ownership program in 2006, officers have five years to achieve the required ownership levels. Individuals who are hired or promoted after the implementation of the target ownership program would be required to achieve the target ownership level within the later of five

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years from the date of hire or three years from the date of promotion to the relevant title. Many of our senior officers already own a substantial number of our shares and few have chosen to sell shares over their tenure with us. The Board of Directors believes that it is in the best interest of stockholders to encourage share ownership by our senior officers, so that the interests of officers and stockholders are aligned.

The Board of Directors has determined target ownership levels for our senior officers, as follows:


			Minimum Share
Senior Officer	Multiple of Base Salary		Ownership Range

Chief Executive Officer		5x	250,000 shares
Management Committee Members		4x	55,000 — 130,000 shares
Managing Directors and Executive Vice Presidents who are not members of the Management Committee		3x	21,500 — 45,000 shares
Principals		2x	10,000 — 20,500 shares

Target ownership amounts represent the lesser of a multiple of base salary or a specified number of shares. Minimum share ownership requirements are determined on an individual basis and are adjusted annually by the Compensation Committee.

Our Chief Executive Officer, Chief Operating Officer and Chief Financial Officer, as well as certain other senior officers, have met their target ownership levels set forth above. See “Control Persons and Principal Holders of Securities.”

In addition, pursuant to our Corporate Governance Policy, each non-officer director is required to own $100,000 worth of shares, and directors are required to achieve this target ownership level within five years of joining the Board or (in the case of those directors who were serving on the Board at the time the policy was adopted by the Board) by February 2011. The majority of our directors have achieved this target ownership level.

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CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES

As of May 6, 2008, there were no persons that owned 25% or more of our outstanding voting securities, and no person would be deemed to control us, as such term is defined in the 1940 Act.

The following table sets forth, as of May 6, 2008, each stockholder who owned more than 5% of our outstanding shares of common stock, each director, each NEO, and our directors and executive officers as a group. Unless otherwise indicated, we believe that each beneficial owner set forth in the table has sole voting and investment power. Certain shares beneficially owned by our executive officers and directors may be held in accounts with third party brokerage firms, where such shares may from time to time be subject to a security interest for margin credit provided in accordance with such brokerage firm’s policies.

Our directors are divided into two groups — interested directors and independent directors. Interested directors are “interested persons” as defined in Section 2(a)(19) of the 1940 Act.

Each director and executive officer has the same address as Allied Capital Corporation, 1919 Pennsylvania Avenue, NW, Washington, DC 20006.

Dollar Range of

Number of

Equity Securities

Name of

Shares Owned

Percentage

Beneficially Owned

Beneficial Owner

Beneficially⁽¹⁾

of Class⁽²⁾

by Directors⁽³⁾

Interested Directors:

William L. Walton⁽⁴⁾

1,717,340

1.0

over $100,000

Joan M. Sweeney⁽⁵⁾

919,319

over $100,000

Robert E. Long⁽⁶⁾

45,716

over $100,000

Independent Directors:

Ann Torre Bates⁽⁷⁾

33,845

over $100,000

Brooks H. Browne⁽⁸⁾

90,236

over $100,000

John D. Firestone⁽⁹⁾

76,231

over $100,000

Anthony T. Garcia⁽¹⁰⁾

79,083

over $100,000

Edwin L. Harper⁽¹¹⁾

11,446

over $100,000

Lawrence I. Hebert⁽¹²⁾

38,971

over $100,000

John I. Leahy⁽¹³⁾

31,637

over $100,000

Alex J. Pollock⁽¹⁴⁾

37,823

over $100,000

Marc F. Racicot⁽¹⁵⁾

6,088

$10,001-$50,000

Guy T. Steuart II⁽¹⁶⁾

334,924

over $100,000

Laura W. van Roijen⁽¹⁷⁾

82,804

over $100,000

Named Executive Officers:

Penni F. Roll⁽¹⁸⁾

866,580

over $100,000

Daniel L. Russell⁽¹⁹⁾

616,604

over $100,000

John M. Scheurer⁽²⁰⁾

833,429

over $100,000

All directors and executive officers as a group (32 in number)

12,441,818

7.03

* Less than 1%


	^⁽¹⁾	Beneficial ownership has been determined in accordance with Rule 13d-3 of the Securities Exchange Act of 1934.

	^⁽²⁾	Based on a total of 169,691,875 shares of our common stock issued and outstanding on May 6, 2008, and 7,353,167 shares of our common stock issuable upon the exercise of stock options exercisable within 60 days held by each executive officer and non-officer director.

	^⁽³⁾	Beneficial ownership has been determined in accordance with Rule 16a-1(a)(2) of the Securities Exchange Act of 1934.


	^⁽⁴⁾	Includes 1,172,259 shares owned directly and 524,000 options exercisable within 60 days of May 6, 2008. Also includes 9,066 shares allocated to 401(k) plan and 12,015 shares held in IRA or Keogh accounts.


	^⁽⁵⁾	Includes 718,031 shares owned directly and options to purchase 181,729 shares exercisable within 60 days of May 6, 2008. Also includes 19,559 shares allocated to 401(k) plan.


	^⁽⁶⁾	Includes exercisable options to purchase 25,000 shares.


	^⁽⁷⁾	Includes 7,250 shares held in IRA or Keogh accounts and includes exercisable options to purchase 25,000 shares.


	^⁽⁸⁾	Includes 12,280 shares held in IRA or Keogh accounts and includes exercisable options to purchase 35,000 shares.


	^⁽⁹⁾	Includes 3,415 shares held in IRA or Keogh accounts and includes exercisable options to purchase 30,000 shares.


	^⁽¹⁰⁾	Includes exercisable options to purchase 15,000 shares.


	^⁽¹¹⁾	Includes 5,000 shares held in a revocable trust, 1,000 shares held by spouse in a revocable trust, and includes exercisable options to purchase 5,000 shares.


	^⁽¹²⁾	Includes exercisable options to purchase 15,000 shares and 9,000 shares held in a revocable trust.

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	^⁽¹³⁾	Includes exercisable options to purchase 5,000 shares.


	^⁽¹⁴⁾	Includes 3,000 shares held in IRA or Keogh accounts and includes exercisable options to purchase 15,000 shares.


	^⁽¹⁵⁾	Includes exercisable options to purchase 5,000 shares.



	^⁽¹⁶⁾	Includes 276,691 shares held by a corporation for which Mr. Steuart serves as an executive officer, and includes exercisable options to purchase 5,000 shares.


	^⁽¹⁷⁾	Includes 10,739 shares held in IRA or Keogh accounts and includes exercisable options to purchase 45,000 shares.


	^⁽¹⁸⁾	Includes 236,327 shares owned directly and options to purchase 615,677 shares exercisable within 60 days of May 6, 2008. Also includes 14,576 shares allocated to 401(k) plan.


	^⁽¹⁹⁾	Includes 83,873 shares owned directly and options to purchase 532,731 shares exercisable within 60 days of May 6, 2008.


	^⁽²⁰⁾	Includes 493,548 shares owned directly and options to purchase 293,000 shares exercisable within 60 days of May 6, 2008. Also includes 46,881 shares allocated to 401(k) plan.

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CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

We have procedures in place for the review, approval and monitoring of transactions involving us and certain related persons of us. As a business development company, we are prohibited by the 1940 Act from participating in transactions with any persons affiliated with the business development company, including, officers, directors, and employees of the business development company and any person controlling or under common control with the business development company, or the Affiliates, absent a Commission exemptive order.

In the ordinary course of business, we enter into transactions with portfolio companies that may be considered related party transactions. We have implemented procedures to ensure that we do not engage in any prohibited transactions with any persons affiliated with us.

In addition, our Code of Business Conduct, which is annually reviewed and approved by the Board of Directors and acknowledged in writing by all employees, requires that all employees and directors avoid any conflict, or the appearance of a conflict, between an individual’s personal interests and our interests. Pursuant to the Code of Business Conduct, each employee and director must disclose any conflicts of interest, or actions or relationships that might give rise to a conflict, to the Chief Compliance Officer. In the event that either of these officers is involved in the action or relationship giving rise to the conflict of interest, the individual is directed to disclose the conflict to another member of the our senior management team. The Corporate Governance/ Nominating Committee is charged with monitoring and making recommendations to the Board of Directors regarding policies and practices relating to corporate governance. Certain actions or relationships that might give rise to a conflict of interest are reviewed and approved by the Board of Directors.

The following table sets forth certain information, as of May 6, 2008, regarding indebtedness to Allied Capital in excess of $120,000 of any person serving as a director or executive officer of Allied Capital at any time since January 1, 2007. All of such indebtedness results from loans we made to enable the exercise of stock options. The loans are required to be fully collateralized and are full recourse against the borrower and have varying terms not exceeding ten years. The interest rates charged generally reflect the applicable federal rate on the date of the loan. As of December 31, 2007, the total loans outstanding to such executive officers of Allied Capital was $2.7 million or 0.1% of Allied Capital’s total assets at December 31, 2007.

As a business development company under the Investment Company Act of 1940, we are entitled to provide and have provided loans to our officers in connection with the exercise of stock options. However, as a result of provisions of the Sarbanes-Oxley Act of 2002, we have been prohibited from making new loans to our executive officers since July 30, 2002.


	Amount		Amount				Range of
	of Principal		of Interest		Highest Amount		Interest Rates					Amount
Name and Position	Paid During		Paid During		Outstanding							Outstanding at
with Company	2007		2007		During 2007		High			Low		May 6, 2008

Executive Officers:
Kelly A. Anderson	$	—	$	24,116	$	496,225		5.96%	—		3.91%	$	464,293
Michael J. Grisius	$	24,000	$	8,851	$	206,727		4.68%	—		3.91%	$	172,727
Penni F. Roll	$	—	$	30,338	$	531,524		4.90%	—		4.45%	$	531,524
Suzanne V. Sparrow	$	—	$	16,624	$	281,213		4.98%	—		4.45%	$	281,213

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TAX STATUS

The following discussion is a general summary of the material United States federal income tax considerations applicable to us and to an investment in our common stock. This summary does not purport to be a complete description of the income tax considerations applicable to such an investment. The discussion is based upon the Code, Treasury Regulations, and administrative and judicial interpretations, each as of the date of this prospectus and all of which are subject to change. You should consult your own tax advisor with respect to tax considerations that pertain to your purchase of our common stock.

This summary is intended to apply to investments in our common stock and assumes that investors hold our common stock as capital assets. This summary does not discuss all aspects of federal income taxation relevant to holders of our common stock in light of particular circumstances, or to certain types of holders subject to special treatment under federal income tax laws, including dealers in securities, pension plans and trusts and financial institutions. This summary does not discuss any aspects of U.S. estate and gift tax or foreign, state or local tax. It does not discuss the special treatment under federal income tax laws that could result if we invested in tax-exempt securities or certain other investment assets.

Except as specifically indicated herein, this summary is intended to apply to U.S. Stockholders (as defined below) and does not purport to discuss all U.S. federal income tax consequences to persons who are not U.S. Stockholders (“Non-U.S. Stockholders”) from an investment in our common stock. (A “U.S. Stockholder” is a stockholder who is (i) a citizen or resident of the United States, (ii) a corporation or partnership created in or organized under the laws of the United States or any political subdivision thereof, (iii) an estate, the income of which is subject to United States federal income taxation regardless of its source, or (iv) a trust subject to the supervision of a court within the United States and the control of a United States person.) Non-U.S. Stockholders should consult their own tax advisors to discuss the consequences of an investment in our common stock.

Taxation as a Regulated Investment Company

We intend to be treated for tax purposes as a “regulated investment company” under Subchapter M of Chapter 1 of the Code. If we (i) qualify as a regulated investment company and (ii) distribute to stockholders in a timely manner at least 90% of our “investment company taxable income,” as defined in the Code (i.e., net ordinary investment income, including accrued original issue discount, and net realized short-term capital gain in excess of net realized long-term capital loss) (the “90% Distribution Requirement”) each year, we generally will not be subject to federal income tax on the portion of our investment company taxable income and net capital gain (i.e., net realized long-term capital gain in excess of net realized short-term capital loss) we distribute (or treat as “deemed distributed”) to stockholders. In addition, we are generally required to distribute in a timely manner an amount at least equal to the sum of (i) 98% of our ordinary income for each calendar year, (ii) 98% of our capital gain net income for the one-year period ending December 31 of that calendar year, and (iii) any income realized, but not taxed or distributed in prior years, in order to avoid the 4% nondeductible federal excise tax on certain undistributed income of regulated investment companies (the “Excise Tax Avoidance Requirements”). If we do not satisfy the Excise Tax Avoidance Requirements for any year, we will be required to pay this 4% excise tax on the amount by which 98% of the current year’s taxable income exceeds the distribution for the year. The ordinary income or net capital gain income on which the excise tax is paid is generally distributed to shareholders in the next tax year. Depending on the level of ordinary income or net capital gain income for a tax year, we may choose to carry over the portion of such income in excess of our current year distributions into the next tax year and pay the 4% excise tax, as required. We will be subject to federal income tax at the regular corporate rate on any amounts of investment company taxable income or net capital gain not distributed (or deemed distributed) to our stockholders.

In order to qualify as a regulated investment company for federal income tax purposes, we must, among other things: (a) continue to qualify as a business development company under the 1940 Act; (b) derive in each taxable year at least 90% of our gross income from (i) dividends, interest, payments

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with respect to securities loans, gains from the sale of stock or other securities, or other income derived with respect to our business of investing in such stock or securities or (ii) net income derived from an interest in a “qualified publicly traded partnership” (the “90% Income Test”); and (c) diversify our holdings so that at the end of each quarter of the taxable year (i) at least 50% of the value of our assets consists of cash, cash items, U.S. government securities, securities of other regulated investment companies, and other securities if such other securities of any one issuer do not represent more than 5% of our assets or more than 10% of the outstanding voting securities of the issuer, and (ii) no more than 25% of the value of our assets is invested in the securities of any one issuer (other than U.S. government securities or securities of other regulated investment companies), the securities of two or more issuers that are controlled (as determined under applicable Code rules) by us and are engaged in the same or similar or related trades or businesses, or the securities of one or more “qualified publicly traded partnerships” (the “Diversification Tests”).

If we acquire or are deemed to have acquired debt obligations that were issued originally at a discount or that otherwise are treated under applicable tax rules as having original issue discount or market discount, we must include in income each year a portion of the original issue discount that accrues over the life of the obligation regardless of whether cash representing such income is received by us in the same taxable year. Any amount accrued as original issue discount will be included in our investment company taxable income for the year of accrual and cash or other assets equal to the amount of such original issue discount accrual may have to be distributed to our stockholders in order to satisfy the 90% Distribution Requirement or the Excise Tax Avoidance Requirements even though we have not received any cash representing such income.

To the extent we engage in certain hedging transactions, including hedging transactions in options, future contracts, and straddles, or other similar transactions, we may be subject to special tax rules (including constructive sale, mark-to-market, straddle, wash sale, and short sale rules), the effect of which may be to accelerate our income, disallow, suspend or otherwise limit our losses or deductions, cause adjustments in the holding periods of our securities, convert long-term capital gains into short-term capital gains or ordinary income, or convert short-term capital losses into long-term capital losses, or other tax consequences.

In addition, although we do not currently intend to do so, if we were to invest in certain options, futures, or forward contracts, we may be required to report income from such investments on a mark-to-market basis, which could result in us recognizing unrealized gains and losses for federal income tax purposes even though we may not realize such gains and losses when we ultimately dispose of such investments. We could also be required to treat such gains and losses as 60% long-term capital gain or loss and 40% short-term capital gain or loss regardless of our holding period for the investments.

These rules could affect our investment company taxable income or net capital gain for a taxable year and thus affect the amounts that we would be required to distribute to our stockholders pursuant to the 90% Distribution Requirement and the Excise Tax Avoidance Requirements for such year.

Although we do not presently expect to do so, we are authorized to borrow funds and to sell assets in order to satisfy distribution requirements. However, under the 1940 Act, we are not permitted to make distributions to stockholders while our debt obligations and other senior securities are outstanding unless certain “asset coverage” tests are met. Moreover, our ability to dispose of assets to meet our distribution requirements may be limited by the illiquid nature of our portfolio and other requirements relating to our status as a regulated investment company, including the Diversification Tests. If we dispose of assets in order to meet the 90% Distribution Requirement or the Excise Tax Avoidance Requirements, we may make such dispositions at times that, from an investment standpoint, are not advantageous.

If we fail to satisfy the 90% Distribution Requirement or fail to qualify as a regulated investment company in any taxable year, we will be subject to tax in that year on all of our taxable income, regardless of whether we make any distributions to our stockholders. In that case, all of our income will be subject to corporate-level tax, reducing the amount available for debt service and distribution to our stockholders, and

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our distributions to our stockholders generally will be characterized as ordinary income (to the extent of our current and accumulated earnings and profits), although such distributions may constitute “qualified dividend income” to individual shareholders subject to the same reduced maximum rate of tax applicable to long-term capital gains. In contrast, if we qualify as a regulated investment company, our corporate-level federal income tax should be substantially reduced or eliminated, and a portion of our distributions or deemed distributions may be characterized as long-term capital gain in the hands of our stockholders.

The remainder of this summary assumes that we qualify as a regulated investment company and satisfy the 90% Distribution Requirement.

Taxation of Stockholders

Our distributions generally are taxable to stockholders as ordinary income or capital gains. Our distributions of investment company taxable income will be taxable as ordinary income to stockholders to the extent of our current or accumulated earnings and profits, whether paid in cash or reinvested in additional common stock (including any dividends reinvested through our dividend reinvestment plan). A portion of our distributions of investment company taxable income may constitute “qualified dividend income.” Qualified dividend income of individual shareholders currently is subject to the same reduced maximum rate of tax applicable to long-term capital gains. Our distributions of net capital gains properly designated by us as “capital gain dividends” will be taxable to each stockholder as long-term capital gains regardless of the stockholder’s holding period for his or her common stock and regardless of whether paid in cash or reinvested in additional common stock (including any dividends reinvested through our dividend reinvestment plan). Distributions in excess of the Company’s earnings and profits will be designated as a “return of capital” and first will reduce a stockholder’s adjusted tax basis in such stockholder’s common stock and, after the adjusted basis is reduced to zero, will generally constitute capital gains to such stockholder.

At our option, we may elect to retain some or all of our net capital gains for a tax year, but designate the retained amount as a “deemed distribution.” In that case, among other consequences, we will pay tax on the retained amount for the benefit of our stockholders, the stockholders will be required to report their share of the deemed distribution on their tax returns as if it had been distributed to them, and the stockholders will report a credit for their share of the tax paid thereon by us. The amount of the deemed distribution net of such tax will be added to the stockholder’s cost basis for his or her common stock. Since we would be required to pay tax at our regular corporate capital gain tax rate on any retained net capital gains that are deemed to be distributed, and since that rate is in excess of the maximum rate currently payable by individuals on long-term capital gains, the amount of tax that individual stockholders will be treated as having paid and for which they will receive a credit will exceed the amount of tax that such stockholders would be required to pay on the retained net capital gains. Such excess generally will be available to offset other tax liabilities of the stockholders. A stockholder that does not have a sufficient amount of other tax liabilities or that is not subject to U.S. federal income tax should be able to file a return on the appropriate form or a claim for refund that allows such stockholder to recover the taxes paid on his or her behalf. In the event we select this option, we must provide written notice to the stockholders prior to the expiration of 60 days after the close of the relevant tax year.

For purposes of determining (i) whether the 90% Distribution Requirement is satisfied for any year and (ii) the amount of capital gains dividends paid for that year, we may, under certain circumstances, elect to treat a dividend that is paid during the following taxable year as if it had been paid during the taxable year in question. If we make such an election, the U.S. Stockholder will still be treated as receiving the dividend in the taxable year in which the distribution is made, and any capital gain dividend will be treated as a capital gain dividend to the U.S. Stockholder.

In addition, any dividend declared by us in October, November, or December of any calendar year, payable to stockholders of record on a specified date in such a month and actually paid during January of

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the following year will be treated as if it had been received by the stockholders on December 31 of the year in which the dividend was declared to the extent of earnings and profits for the calendar year.

In some taxable years, we may be subject to the alternative minimum tax (AMT). If we have tax items that are treated differently for AMT purposes than for regular tax purposes, we may apportion those items between us and our stockholders, and this may affect our stockholder’s AMT liabilities. Although regulations explaining the precise method of apportionment have not yet been issued by the Internal Revenue Service, we may apportion these items in the same proportion that dividends paid to each stockholder bear to our taxable income (determined without regard to the dividends paid deduction), unless we determine that a different method for a particular item is warranted under the circumstances. You should consult your own tax advisor to determine how an investment in our stock could affect your AMT liability.

You should consider the tax implications of buying common stock just prior to a distribution. Even if the price of the common stock includes the amount of the forthcoming distribution, you may be taxed upon receipt of the distribution and will not be entitled to offset the distribution against the tax basis in your common stock.

You may recognize taxable gain or loss if you sell or exchange your common stock. The amount of the gain or loss will be measured by the difference between your adjusted tax basis in your common stock and the amount of the proceeds you receive in exchange for such stock. Any gain or loss arising from the sale or exchange of common stock generally will be a capital gain or loss. This capital gain or loss normally will be treated as a long-term capital gain or loss if you have held your common stock for more than one year; otherwise, it will be classified as short-term capital gain or loss. However, any capital loss arising from the sale or exchange of common stock held for six months or less generally will be treated as a long-term capital loss to the extent of the amount of capital gain dividends received (or treated as deemed distributed) with respect to such stock and, for this purpose, the special rules of Section 852(b)(4)(C) of the Code generally apply in determining the holding period of such stock. In addition, all or a portion of any loss realized upon a taxable disposition of common stock will be disallowed if other shares of our common stock are purchased (under our dividend reinvestment plan or otherwise) within 30 days before or after the disposition.

We will send to each of our stockholders, as promptly as possible after the end of each calendar year, a notice detailing, on a per share and per distribution basis, the amounts includible in such stockholder’s taxable income for such year as ordinary income (including the amount of any qualified dividend income) and as long-term capital gains. In addition, the federal tax status of each year’s distributions generally will be reported to the IRS. Distributions may also be subject to additional state, local, and foreign taxes depending on a stockholder’s particular situation. Our ordinary income dividends to corporate stockholders may, if certain conditions are met, qualify for the dividends received deduction to the extent that we have received qualifying dividend income during the taxable year; capital gain dividends distributed by us are not eligible for the dividends received deduction.

A Non-U.S. Stockholder may be subject to withholding of U.S. federal tax at a 30% rate (or lower applicable treaty rate) on distributions (including certain redemptions of common stock) from us. However, the portion of our distributions that are properly designated by us as long-term capital gain dividends, short-term capital gain dividends or interest-related dividends may be exempt from such withholding if you have provided to us (or another appropriate withholding agent) in a timely manner a properly completed Form W-8BEN or applicable form. Currently, we do not anticipate that any significant amount of our distribution will be designated as eligible for this exemption from withholding. Non-U.S. Stockholders should consult their own tax advisors with respect to the appropriate forms to file to avoid withholding tax and for all other issues concerning U.S. federal income and withholding tax, and state, local, and foreign tax, consequences of an investment in our common stock.

We may be required to withhold U.S. federal income tax (“backup withholding”) at a 28% rate from all taxable distributions payable to (i) any stockholder who fails to furnish us with its correct taxpayer

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identification number or a certificate that the stockholder is exempt from backup withholding, and (ii) any stockholder with respect to whom the IRS notifies us that the stockholder has failed to properly report certain interest and dividend income to the IRS and to respond to notices to that effect. We may be required to report annually to the IRS and to each Non-U.S. Stockholder the amount of dividends paid to such stockholder and the amount, if any, of tax withheld pursuant to the backup withholding rules with respect to such dividends. This information may also be made available to the tax authorities in the Non-U.S. Stockholder’s country of residence. Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules from payments made to a stockholder may be refunded or credited against such stockholder’s United States federal income tax liability, if any, provided that the required information is furnished to the IRS.

You should consult your own tax advisor with respect to the particular tax consequences to you of an investment in us, including the possible effect of any pending legislation or proposed regulation.

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CERTAIN GOVERNMENT REGULATIONS

We operate in a highly regulated environment. The following discussion generally summarizes certain government regulations that we are subject to.

Business Development Company. A business development company is defined and regulated by the 1940 Act. A business development company must be organized in the United States for the purpose of investing in or lending to primarily private companies and making managerial assistance available to them. A business development company may use capital provided by public shareholders and from other sources to invest in long-term, private investments in businesses. A business development company provides shareholders the ability to retain the liquidity of a publicly traded stock, while sharing in the possible benefits, if any, of investing in primarily privately owned companies.

As a business development company, we may not acquire any asset other than “qualifying assets” unless, at the time we make the acquisition, the value of our qualifying assets represent at least 70% of the value of our total assets. The principal categories of qualifying assets relevant to our business are:


	•	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.

An eligible portfolio company is generally a domestic company that is not an investment company and that:


	•	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.

Control, as defined by the 1940 Act, is presumed to exist where a business development company beneficially owns more than 25% of the outstanding voting securities of the portfolio company.

We do not intend to acquire securities issued by any investment company that exceed the limits imposed by the 1940 Act. Under these limits, we generally cannot acquire more than 3% of the voting stock of any investment company (as defined in the 1940 Act), invest more than 5% of the value of our total assets in the securities of one such investment company or invest more than 10% of the value of our total assets in the securities of such investment companies in the aggregate. With regard to that portion of our portfolio invested in securities issued by investment companies, it should be noted that such investments might subject our stockholders to additional expenses.

In October 2006, the SEC re-proposed rules providing for an additional definition of eligible portfolio company. As re-proposed, the rule would expand the definition of eligible portfolio company to include certain public companies that list their securities on a national securities exchange. The SEC sought comment regarding the application of this proposed rule to companies with: (1) a public float of less than $75 million; (2) a market capitalization of less than $150 million; or (3) a market capitalization of less than $250 million. There is no assurance that such proposal will be adopted or what the final proposal will entail.

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To include certain securities described above as qualifying assets for the purpose of the 70% test, a business development company must make available to the issuer of those securities significant managerial assistance such as providing significant guidance and counsel concerning the management, operations, or business objectives and policies of a portfolio company. We offer to provide significant managerial assistance to our portfolio companies.

As a business development company, we are entitled to issue senior securities in the form of stock or senior securities representing indebtedness, including debt securities and preferred stock, as long as each class of senior security has an asset coverage of at least 200% immediately after each such issuance. In addition, while any senior securities remain outstanding, we must make provisions to prohibit any distribution to our shareholders unless we meet the applicable asset coverage ratio at the time of the distribution.

We are not generally able to issue and sell our common stock at a price below net asset value per share. We may, however, sell our common stock, at a price below the current net asset value of the common stock, or sell warrants, options or rights to acquire such common stock, at a price below the current net asset value of the common stock if our board of directors determines that such sale is in the best interests of the Company and our stockholders, and our stockholders approve our policy and practice of making such sales. We have included such a proposal in our proxy statement for our 2008 Annual Meeting of Stockholders. In any such case, the price at which our securities are to be issued and sold may not be less than a price which, in the determination of our board of directors, closely approximates the market value of such securities (less any distributing commission or discount).

We are also limited in the amount of stock options that may be issued and outstanding at any point in time. The 1940 Act provides that the amount of a business development company’s voting securities that would result from the exercise of all outstanding warrants, options and rights at the time of issuance may not exceed 25% of the business development company’s outstanding voting securities, except that if the amount of voting securities that would result from the exercise of all outstanding warrants, options, and rights issued to the business development company’s directors, officers, and employees pursuant to any executive compensation plan would exceed 15% of the business development company’s outstanding voting securities, then the amount of voting securities that would result from the exercise of all outstanding warrants, options, and rights at the time of issuance shall not exceed 20% of the outstanding voting securities of the business development company.

We have applied for an exemptive order of the SEC to permit us to issue restricted shares of our common stock as part of the compensation packages for certain of our employees and directors. There can be no assurance that the SEC will grant an exemptive order to allow the granting of restricted stock. In addition, the issuance of restricted shares of our common stock will require the approval of our stockholders.

We may also be prohibited under the 1940 Act from knowingly participating in certain transactions with our affiliates without the prior approval of the members of our Board of Directors who are not interested persons and, in some cases, prior approval by the SEC. We have been granted an exemptive order by the SEC permitting us to engage in certain transactions that would be permitted if we and our subsidiaries were one company and permitting certain transactions among our subsidiaries, subject to certain conditions and limitations.

We have designated a chief compliance officer and established a compliance program pursuant to the requirements of the 1940 Act. We are periodically examined by the SEC for compliance with the 1940 Act.

As with other companies regulated by the 1940 Act, a business development company must adhere to certain substantive regulatory requirements. A majority of our directors must be persons who are not interested persons, as that term is defined in the 1940 Act. Additionally, we are required to provide and maintain a bond issued by a reputable fidelity insurance company to protect us against larceny and embezzlement. Furthermore, as a business development company, we are prohibited from protecting any

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director or officer against any liability to us or our shareholders arising from willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of such person’s office.

We maintain a code of ethics that establishes procedures for personal investment and restricts certain transactions by our personnel. Our code of ethics generally does not permit investment by our employees in securities that have been or are contemplated to be purchased or held by us. Our code of ethics is posted on our website at www.alliedcapital.com and is also filed as an exhibit to our registration statement which is on file with the SEC. You may read and copy the code of ethics at the SEC’s Public Reference Room in Washington, D.C. You may obtain information on operations of the Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the code of ethics is available on the EDGAR database on the SEC Internet site at http://www.sec.gov. You may obtain copies of the code of ethics, after paying a duplicating fee, by electronic request at the following email address: publicinfo@sec.gov, or by writing to the SEC’s Public Reference Section, 100 F Street, NE, Washington, D.C. 20549.

We may not change the nature of our business so as to cease to be, or withdraw our election as, a business development company unless authorized by vote of a “majority of the outstanding voting securities,” as defined in the 1940 Act. A majority of the outstanding voting securities of a company is defined under the 1940 Act as the lesser of: (i) 67% or more of such company’s shares present at a meeting if more than 50% of the outstanding shares of such company are present and represented by proxy or (ii) more than 50% of the outstanding shares of such company.

Taxable income generally differs from net income for financial reporting purposes due to temporary and permanent differences in the recognition of income and expenses, and generally excludes net unrealized appreciation or depreciation, as gains or losses generally are not included in taxable income until they are realized. In addition, gains realized for financial reporting purposes may differ from gains included in taxable income as a result of our election to recognize gains using installment sale treatment, which generally results in the deferment of gains for tax purposes until notes or other amounts, including amounts held in escrow, received as consideration from the sale of investments are collected in cash.

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Compliance with the Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley Act of 2002 (the Sarbanes-Oxley Act) imposes a wide variety of regulatory requirements on publicly held companies and their insiders. Many of these requirements apply to us, including:


	•	Our Chief Executive Officer and Chief Financial Officer certify the financial statements contained in our periodic reports through the filing of Section 302 certifications;

	•	Our periodic reports disclose our conclusions about the effectiveness of our disclosure controls and procedures;

	•	Our annual report on Form 10-K contains a report from our management on internal control over financial reporting, including a statement that our management is responsible for establishing and maintaining adequate internal control over financial reporting as well as our management’s assessment of the effectiveness of our internal control over financial reporting, 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.

We have adopted procedures to comply with the Sarbanes-Oxley Act and the regulations promulgated thereunder. We will continue to monitor our compliance with all future regulations that are adopted under the Sarbanes-Oxley Act and will take actions necessary to ensure that we are in compliance therewith.

We have adopted certain policies and procedures to comply with the New York Stock Exchange (NYSE) corporate governance rules. In accordance with the NYSE procedures, shortly after our 2008 Annual Meeting of Stockholders, we will submit the required CEO certification to the NYSE pursuant to Section 303A.12(a) of the listed company manual.

Proxy Voting Policies and Procedures

We vote proxies relating to our portfolio securities in the best interest of our shareholders. We review on a case-by-case basis each proposal submitted to a shareholder vote to determine its impact on the portfolio securities held by us. Although we generally vote against proposals that may have a negative impact on our portfolio securities, we may vote for such a proposal if there exists compelling long-term reasons to do so.

Our proxy voting decisions are made by our portfolio management committee. To ensure that our vote is not the product of a conflict of interest, we require that: (i) anyone involved in the decision making process disclose to our Chief Compliance Officer any potential conflict that he or she is aware of and any contact that he or she has had with any interested party regarding a proxy vote; and (ii) employees involved in the decision making process or vote administration are prohibited from revealing how we intend to vote on a proposal in order to reduce any attempted influence from interested parties.

Stockholders may obtain information regarding how we voted proxies with respect to our portfolio securities without charge by making a written request for proxy voting information to: Corporate Secretary, Allied Capital Corporation, 1919 Pennsylvania Avenue, N.W., Washington, D.C. 20006 or by telephone at (202) 721-6100.

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STOCK TRADING PLANS

Our Board of Directors has established a policy to permit our officers and directors to enter into trading plans to sell shares of our common stock in accordance with Rule 10b5-1 of the Securities Act of 1934. The policy allows our participating officers and directors to adopt a pre-arranged stock trading plan to buy or sell pre-determined amounts of our shares of common stock over a period of time. Our Board of Directors established the policy in recognition of the liquidity and diversification objectives of our officers and directors, including the desire of certain of our officers and directors to sell certain shares of our common stock, subject to the target ownership program. See “Target Ownership.”

DIVIDEND REINVESTMENT PLAN

We currently maintain a dividend reinvestment plan that provides for reinvestment of our distributions on behalf of our shareholders by our transfer agent. The dividend reinvestment plan is an “opt in” plan, which means that if our Board of Directors declares a cash dividend then our shareholders that have not “opted in” to our dividend reinvestment plan will receive cash dividends, rather than reinvesting dividends in additional shares of common stock.

To enroll in the dividend reinvestment plan, each shareholder must complete an enrollment status form and return it to the plan agent. The plan agent shall then automatically reinvest any dividend in additional shares of common stock. Shareholders may change their status in the dividend reinvestment plan at any time by contacting our transfer agent and plan administrator in writing.

A shareholder’s ability to participate in a dividend reinvestment plan may be limited according to how the shares of common stock are held. A nominee may preclude beneficial owners holding shares in street name from participating in the dividend reinvestment plan. Shareholders who wish to participate in a dividend reinvestment plan may need to hold their shares of common stock in their own name. Shareholders who hold shares in the name of a nominee should contact the nominee for details.

All distributions to investors who do not participate (or whose nominee elects not to participate) in the dividend reinvestment plan will be paid directly, or through the nominee, to the record holder by or under the discretion of the plan agent. The plan agent is American Stock Transfer and Trust Company, 59 Maiden Lane, New York, New York 10038. Their telephone number is (800) 937-5449.

Under the dividend reinvestment plan, we may issue new shares if the issue price of the new shares of common stock is greater than 110% of the last reported net asset value. Alternatively, the plan agent may buy shares of common stock in the market. We value newly issued shares of common stock for the dividend reinvestment plan at the average of the reported last sale prices of the outstanding shares of common stock on the last five trading days prior to the payment date of the distribution, but not less than 95% of the opening bid price on such date. The price in the case of shares bought in the market will be the average actual cost of such shares of common stock, including any brokerage commissions. There are no other fees charged to shareholders in connection with the dividend reinvestment plan. Any distributions reinvested under the plan will nevertheless remain taxable to the shareholders.

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DESCRIPTION OF CAPITAL STOCK

The following summary description is based on relevant portions of the Maryland General Corporation Law and our charter and bylaws. This summary is not necessarily complete, and we refer you to the Maryland General Corporation Law and our charter and bylaws for a detailed description of the provisions summarized below.

Capital Stock

Our authorized capital stock consists of 400,000,000 shares, $0.0001 par value per share, all of which has been initially designated as common stock. Our Board of Directors may classify and reclassify any unissued shares of our capital stock by setting or changing in one or more respects the preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends, qualifications, terms or conditions or redemption or other rights of such shares of capital stock.

Common Stock

At May 6, 2008, there were 169,691,875 shares of common stock outstanding and 29,222,587 shares of common stock reserved for issuance under our amended stock option plan. The following are the outstanding classes of securities of Allied Capital as of May 6, 2008:

(4)

(3)

Amount

Amount Held

Outstanding

(2)

by Us

Exclusive of

(1)

Amount

or for Our

Amounts Shown

Title of Class

Authorized

Account

Under(3)

Allied Capital Corporation

Common Stock

400,000,000

—

169,691,875

All shares of common stock have equal rights as to earnings, assets, dividends and voting and all outstanding shares of common stock are fully paid and non-assessable. Distributions may be paid to the holders of common stock if and when declared by our Board of Directors out of funds legally available therefor. Our common stock has no preemptive, exchange, conversion, or redemption rights and is freely transferable, except where their transfer is restricted by federal and state securities law or by contract. In the event of liquidation, dissolution or winding-up of Allied Capital, each share of common stock is entitled to share ratably in all of our assets that are legally available for distributions after payment of all debts and liabilities and subject to any prior rights of holders of preferred stock, if any, then outstanding. Each share of common stock is entitled to one vote on all matters submitted to a vote of shareholders, including the election of directors. Except as provided with respect to any other class or series of capital stock, the holders of our common stock will possess exclusive voting power. There is no cumulative voting in the election of directors, which means that holders of a majority of the shares, if they so choose, could elect all of the directors, and holders of less than a majority of the shares would, in that case, be unable to elect any director. All shares of common stock offered hereby will be, when issued and paid for, fully paid and non-assessable.

Preferred Stock

Our charter authorizes our Board of Directors to classify and reclassify any unissued shares of stock into other classes or series of stock, including preferred stock. Prior to issuance of shares of each class or series, the Board of Directors is required by Maryland law and by our charter to set the terms, preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications and terms or conditions of redemption for each class or series. Thus, the Board of Directors could authorize the issuance of shares of preferred stock with terms and conditions which could have the

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effect of delaying, deferring or preventing a transaction or a change in control that might involve a premium price for holders of our common stock or otherwise be in their best interest.

In addition, any issuance of preferred stock must comply with the requirements of the 1940 Act. The 1940 Act requires, among other things, that (1) immediately after issuance and before any dividend or other distribution is made with respect to our common stock, we maintain a coverage ratio of total assets to total senior securities, which include all of our borrowings and our preferred stock we may issue in the future, of at least 200%, and (2) the holders of shares of preferred stock, if any are issued, must be entitled as a class to elect two directors at all times and to elect a majority of the directors if dividends on such preferred stock are in arrears by two years or more. The features of preferred stock will be further limited by the requirements applicable to regulated investment companies under the Code.

Limitation on Liability of Directors and Officers; Indemnification and Advance of Expenses

We have adopted provisions in our charter limiting the liability of our directors and officers for monetary damages. The effect of these provisions in the charter is to eliminate the rights of Allied Capital and its stockholders (through stockholders’ derivative suits on our behalf) to recover monetary damages against a director or officer for breach of the fiduciary duty of care as a director or officer (including breaches resulting from negligent behavior) except for liability resulting from (i) actual receipt of an improper benefit or profit in money, property or services or (ii) active and deliberate dishonesty established by a final judgment as being material to the cause of action. These provisions do not limit or eliminate the rights of Allied Capital or any stockholder to seek non-monetary relief such as an injunction or rescission in the event of a breach of a director’s or officer’s duty of care. These provisions will not alter the liability of directors or officers under federal securities laws.

Our charter and bylaws authorize us, to the maximum extent permitted by Maryland law and subject to the requirements of the 1940 Act, to indemnify any present or former director or officer or any individual who, while a director and at our request, serves or has served another corporation, real estate investment trust, partnership, joint venture, trust, employee benefit plan or other enterprise as a director, officer, partner or trustee, from and against any claim or liability to which that person may become subject or which that person may incur by reason of his or her status as a present or former director or officer and to pay or reimburse their reasonable expenses in advance of final disposition of a proceeding. The charter and bylaws also permit us to indemnify and advance expenses to any person who served a predecessor of us in any of the capacities described above and any of our employees or agents or any employees or agents of our predecessor. In accordance with the 1940 Act, we will not indemnify any person for any liability to which such person would be subject by reason of such person’s willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his or her office. In addition, we will only indemnify any person in a manner consistent with the SEC’s policy regarding any request to hold harmless or indemnify any individual as permitted under Section 17(h) and 17(i) of the 1940 Act where liability has not been adjudicated, where the matter has been settled, or in a situation involving an advance of attorney’s fees or other expenses.

Maryland law requires a corporation (unless its charter provides otherwise, which our charter does not) to indemnify a director or officer who has been successful, on the merits or otherwise, in the defense of any proceeding to which he or she is made a party by reason of his or her service in that capacity. Maryland law permits a corporation to indemnify its present and former directors and officers, among others, against judgments, penalties, fines, settlements and reasonable expenses actually incurred by them in connection with any proceeding to which they may be made a party by reason of their service in those or other capacities unless it is established that (a) the act or omission of the director or officer was material to the matter giving rise to the proceeding and (1) was committed in bad faith or (2) was the result of active and deliberate dishonesty, (b) the director or officer actually received an improper personal benefit in money, property or services or (c) in the case of any criminal proceeding, the director or officer had reasonable cause to believe that the act or omission was unlawful. However, under Maryland law, a Maryland corporation may not indemnify for an adverse judgment in a suit by or in the right of the corporation or for a judgment of liability on the basis that a personal benefit was improperly received, unless in either case a court orders indemnification, and then only for expenses. In addition, Maryland law

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permits a corporation to advance reasonable expenses to a director or officer upon the corporation’s receipt of (a) a written affirmation by the director or officer of his or her good faith belief that he or she has met the standard of conduct necessary for indemnification by the corporation and (b) a written undertaking by him or her or on his or her behalf to repay the amount paid or reimbursed by the corporation if it is ultimately determined that the standard of conduct was not met.

We have entered into indemnification agreements with our directors and certain of our senior officers. The indemnification agreements provide these directors and senior officers the maximum indemnification permitted under Maryland law and the 1940 Act.

Certain Anti-Takeover Provisions

Our charter and bylaws and certain statutory and regulatory requirements contain certain provisions that could make more difficult the acquisition of Allied Capital by means of a tender offer, a proxy contest or otherwise. These provisions are expected to discourage certain types of coercive takeover practices and inadequate takeover bids and to encourage persons seeking to acquire control of us to negotiate first with the Board of Directors. We believe that the benefits of these provisions outweigh the potential disadvantages of discouraging such proposals because, among other things, negotiation of such proposals might result in an improvement of their terms; however, such provisions may have the effect of depriving shareholders of an opportunity to sell their shares at a premium over market prices by discouraging a third party from seeking to obtain control of Allied Capital. The description set forth below is intended only to be a summary of certain of our anti-takeover provisions and is qualified in its entirety by reference to our charter and the bylaws.

Classified Board of Directors

Our bylaws provide for our Board of Directors to be divided into three classes of directors serving staggered three-year terms, with each class to consist as nearly as possible of one-third of the directors then elected to the board. A classified board may render more difficult a change in control of Allied Capital or removal of incumbent management. We believe, however, that the longer time required to elect a majority of a classified Board of Directors helps to ensure continuity and stability of our management and policies.

Issuance of Preferred Stock

Our Board of Directors, without stockholder approval, has the authority to reclassify authorized but unissued common stock as preferred stock and to issue preferred stock. Such stock could be issued with voting, conversion or other rights designed to have an anti-takeover effect.

Number of Directors; Vacancies; Removal

Our charter provides that the number of directors will be set only by the Board of Directors in accordance with our bylaws. Our bylaws provide that a majority of our entire Board of Directors may at any time increase or decrease the number of directors. However, unless our bylaws are amended, the number of directors may never be less than three nor more than fifteen. Except as may be provided by the Board of Directors in setting the terms of any class or series of preferred stock, any and all vacancies on the Board of Directors may be filled only by the affirmative vote of a majority of the remaining directors in office, even if the remaining directors do not constitute a quorum, and any director elected to fill a vacancy will serve for the remainder of the full term of the directorship in which the vacancy occurred and until a successor is elected and qualified.

Our bylaws provides that a director may be removed by stockholders only “with cause” and then only by the affirmative vote of at least a majority of the votes entitled to be cast in the election of directors.

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Action by Stockholders

Under the Maryland General Corporation Law, stockholder action can be taken only at an annual or special meeting of stockholders or by unanimous written consent in lieu of a meeting. These provisions, combined with the requirements of our bylaws regarding the calling of a stockholder-requested special meeting of stockholders discussed below, may have the effect of delaying consideration of a stockholder proposal until the next annual meeting.

Advance Notice Provisions for Stockholder Nominations and Stockholder Proposals

Our bylaws provide that with respect to an annual meeting of stockholders, nominations of persons for election to the Board of Directors and the proposal of business to be considered by stockholders may be made only (1) pursuant to our notice of the meeting, (2) by the Board of Directors or (3) by a stockholder who is entitled to vote at the meeting and who has complied with the advance notice procedures of the bylaws. With respect to special meetings of stockholders, only the business specified in our notice of the meeting may be brought before the meeting. Nominations of persons for election to the Board of Directors at a special meeting may be made only (1) pursuant to our notice of the meeting, (2) by the Board of Directors or (3) provided that the Board of Directors has determined that directors will be elected at the meeting, by a stockholder who is entitled to vote at the meeting and who has complied with the advance notice provisions of the bylaws.

The purpose of requiring stockholders to give us advance notice of nominations and other business is to afford our Board of Directors a meaningful opportunity to consider the qualifications of the proposed nominees and the advisability of any other proposed business and, to the extent deemed necessary or desirable by our Board of Directors, to inform stockholders and make recommendations about such qualifications or business, as well as to provide a more orderly procedure for conducting meetings of stockholders. Although our bylaws do not give our Board of Directors any power to disapprove stockholder nominations for the election of directors or proposals recommending certain action, they may have the effect of precluding a contest for the election of directors or the consideration of stockholder proposals if proper procedures are not followed and of discouraging or deterring a third party from conducting a solicitation of proxies to elect its own slate of directors or to approve its own proposal without regard to whether consideration of such nominees or proposals might be harmful or beneficial to us and our stockholders.

Calling of Special Meetings of Stockholders

Our bylaws provide that special meetings of stockholders may be called by our Board of Directors and certain of our officers. Additionally, our bylaws provide that, subject to the satisfaction of certain procedural and informational requirements by the stockholders requesting the meeting, a special meeting of stockholders will be called by our Corporate Secretary upon the written request of stockholders entitled to cast not less than a majority of all the votes entitled to be cast at such meeting.

Amendments; Supermajority Vote Requirements

Our bylaws impose supermajority vote requirements in connection with the amendment of provisions of our bylaws, including those provisions relating to the classified Board of Directors, the ability of stockholders to call special meetings and the advance notice provisions for stockholder meetings.

Maryland General Corporation Law

Maryland General Corporation Law provides for the Business Combination Statute and the Control Share Acquisition Statute, as defined below. The partial summary of the foregoing statutes contained in

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this prospectus is not intended to be complete and reference is made to the full text of such statutes for their entire terms.

Business Combination Statute. Certain provisions of the Maryland General Corporation Law establish special requirements with respect to “business combinations” between Maryland corporations and “interested stockholders” unless exemptions are applicable (the “Business Combination Statute”). Among other things, the Business Combination Statute prohibits for a period of five years a merger or other specified transactions between a company and an interested stockholder and requires a supermajority vote for such transactions after the end of such five-year period.

“Interested stockholders” are all persons owning beneficially, directly or indirectly, 10% or more of the outstanding voting stock of a Maryland corporation. “Business combinations” include certain mergers or similar transactions subject to a statutory vote and additional transactions involving transfer of assets or securities in specified amounts to interested stockholders or their affiliates.

Unless an exemption is available, a “business combination” may not be consummated between a Maryland corporation and an interested stockholder or its affiliates for a period of five years after the date on which the stockholder first became an interested stockholder and thereafter may not be consummated unless recommended by the board of directors of the Maryland corporation and approved by the affirmative vote of at least 80% of the votes entitled to be cast by all holders of outstanding shares of voting stock and 66²/3% of the votes entitled to be cast by all holders of outstanding shares of voting stock other than the interested stockholder or its affiliates or associates, unless, among other things, the corporation’s stockholders receive a minimum price (as defined in the Business Combination Statute) for their shares and the consideration is received in cash or in the same form as previously paid by the interested stockholder for its shares.

A business combination with an interested stockholder which is approved by the board of directors of a Maryland corporation at any time before an interested stockholder first becomes an interested stockholder is not subject to the five-year moratorium or special voting requirements. An amendment to a Maryland corporation’s charter electing not to be subject to the foregoing requirements must be approved by the affirmative vote of at least 80% of the votes entitled to be cast by all holders of outstanding shares of voting stock and 66²/3% of the votes entitled to be cast by holders of outstanding shares of voting stock who are not interested stockholders. Any such amendment is not effective until 18 months after the vote of stockholders and does not apply to any business combination of a corporation with a stockholder who became an interested stockholder on or prior to the date of such vote.

Control Share Acquisition Statute. The Maryland General Corporation Law imposes limitations on the voting rights of shares acquired in a “control share acquisition.” The control share statute defines a “control share acquisition” to mean the acquisition, directly or indirectly, of “control shares” subject to certain exceptions. “Control shares” of a Maryland corporation are defined to be voting shares of stock which, if aggregated with all other shares of stock previously acquired by the acquiror, would entitle the acquiror to exercise voting power in electing directors with one of the following ranges of voting power:


	(1)	one-tenth or more but less than one-third;

	(2)	one-third or more but less than a majority; or

	(3)	a majority of all voting power.

The requisite stockholder approval must be obtained each time an acquiror crosses one of the thresholds of voting power set forth above. Control shares do not include shares which the acquiring person is entitled to vote as a result of having previously obtained stockholder approval. Control shares of a Maryland corporation acquired in a control share acquisition have no voting rights except to the extent approved by a vote of two-thirds of the votes entitled to be cast by stockholders in the election of directors, excluding shares of stock as to which the acquiring person, officers of the corporation and directors of the corporation who are employees of the corporation are entitled to exercise or direct the exercise of the voting power of the shares in the election of the directors.

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The control share statute also requires Maryland corporations to hold a special meeting at the request of an actual or proposed control share acquiror generally within 50 days after a request is made with the submission of an “acquiring person statement,” but only if the acquiring person:


	(1)	gives a written undertaking and, if required by the directors of the issuing corporation, posts a bond for the cost of the meeting; and

	(2)	submits definitive financing agreements for the acquisition of the control shares to the extent that financing is not provided by the acquiring person.

In addition, unless the issuing corporation’s charter or bylaws provide otherwise, the control share statute provides that the issuing corporation, within certain time limitations, shall have the right to redeem control shares (except those for which voting rights have previously been approved) for “fair value” as determined pursuant to the control share statute in the event:


	(1)	there is a stockholder vote and the grant of voting rights is not approved; or

	(2)	an “acquiring person statement” is not delivered to the target within 10 days following a control share acquisition.

Moreover, unless the issuing corporation’s charter or bylaws provide otherwise, the control share statute provides that if, before a control share acquisition occurs, voting rights are accorded to control shares which result in the acquiring person having majority voting power, then all stockholders other than the acquiring person have appraisal rights as provided under the Maryland General Corporation Law. An acquisition of shares may be exempted from the control share statute provided that a charter or bylaw provision is adopted for such purpose prior to the control share acquisition by any person with respect to Allied Capital. The control share acquisition statute does not apply to shares acquired in a merger, consolidation or share exchange to which the corporation is a party.

Our Board of Directors has opted out of the Control Share Acquisition Statute through an amendment to our bylaws.

DESCRIPTION OF PUBLIC NOTES

The following summary description is based on the indenture between us and the Bank of New York, as trustee, dated June 16, 2006 (the “Indenture”) and any supplements to the Indenture. This summary is not necessarily complete and we refer you to the Indenture and any supplements to the Indenture for a detailed description of the provisions summarized below.

As of March 31, 2008, we have completed public issuances of unsecured notes as follows:


		Amount		Maturity Date
($ in millions)
6.625% Notes due 2011⁽¹⁾⁽²⁾		$	400.0		July 15, 2011
6.000% Notes due 2012⁽¹⁾⁽²⁾			250.0		April 1, 2012
6.875% Notes due 2047⁽¹⁾⁽³⁾			230.0		April 15, 2047

	Total	$	880.0


^⁽¹⁾	The terms of the notes are governed by two additional covenants, through which we have agreed to not violate Section 18(a)(1)(A) as modified by Section 61(a)(1) of the 1940 Act, as amended, while the notes are outstanding, and to provide financial information to the holders of the notes and the trustee if we should no longer be subject to the reporting requirements under the Securities Exchange Act of 1934, as amended. The supplements to the Indenture governing the issuance of the notes also revise certain events of default. The amendments to the Indenture apply to the notes only and do not apply to any prior or future issuance of debt securities under the Indenture unless so provided in an applicable supplement to the Indenture.

^⁽²⁾	We may redeem the notes in whole at any time or in part from time to time provided that any exercise of our option to redeem the notes will be done in compliance with the 1940 Act, and the rules and regulations promulgated thereunder, to the extent applicable.

^⁽³⁾	These notes are listed on the New York Stock Exchange under the trading symbol “AFC.” We may redeem the notes in whole or in part at any time or from time to time on or after April 15, 2012, and upon the occurrence of certain tax events provided that any exercise of our option to redeem the notes will be done in compliance with the 1940 Act, and the rules and regulations promulgated thereunder, to the extent applicable.

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The debt securities are our direct unsecured obligations and rank equally with our other outstanding unsecured indebtedness. The Indenture permits us to issue debt securities from time to time and debt securities issued under the Indenture will be issued as part of a series that has been established by us under such Indenture. We will initially issue all debt securities in global form, which form shall include master notes evidencing medium-term notes, commercial paper or retail notes.

DTC acts as securities depository for our debt securities. The debt securities were issued as fully-registered securities registered in the name of Cede & Co. (DTC’s partnership nominee). One fully-registered certificate was issued for the debt securities in connection with each public offering, in the aggregate principal amount of such issue and was deposited with DTC. In the case of our 6.875% Notes due 2047, an additional fully-registered certificate was issued in the aggregate principal amount of the notes issued upon exercise by the underwriters of their option to purchase additional notes to cover over-allotments.

The following provisions apply to all series of debt securities issued under the Indenture including our outstanding public notes, except as set forth in the applicable supplemental indenture.

Mergers and Similar Transactions. We are generally permitted to consolidate or merge with another company. We are also permitted to sell substantially all of our assets to another company or to buy substantially all of the assets of another company. However, we may not consolidate or merge with another company or convey, transfer or lease our properties or assets substantially as an entirety or permit another company to consolidate or merge with us unless certain conditions are met.

Modification and Waiver of Contractual Rights. Under certain circumstances, we can make changes to the Indenture and the securities. Some types of changes require the approval of each security holder affected thereby, some require approval by a majority vote with respect to each affected series of securities and some changes do not require any approval at all.

Defeasance and Covenant Defeasance. When we establish a series of debt securities, we may provide that the series be subject to the defeasance and discharge provisions of the Indenture. If those provisions are made applicable, we may elect either:


	•	to defease and be discharged from, subject to some limitations, all of our obligations with respect to those debt securities; or

	•	to be released from our obligations to comply with certain covenants relating to those debt securities.

To effect the defeasance or covenant defeasance, we must irrevocably deposit in trust with the relevant trustee an amount in any combination of funds or government obligations, which, through the payment of principal and interest in accordance with their terms, will provide money sufficient to make payments on those debt securities and any mandatory sinking fund or analogous payments on those debt securities.

Redemption. The Indenture under which the debt securities are issued may permit us to redeem such securities. If so, we may be able to pay off such securities before their scheduled maturity. If we have this right with respect to specific securities, the right will be outlined in the applicable supplemental indenture. It will also specify when we can exercise this right and how much we will have to pay in order to redeem the debt securities.

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Events of Default

A holder has special rights if an event of default occurs and is not cured. The following constitute events of default under the Indenture, unless otherwise specified in the applicable supplemental indenture.


	•	we fail to make any interest payment on a security when it is due, and we do not cure this default within 30 days;

	•	we fail to make any payment of principal when it is due at the maturity of any security, and we do not cure this default within 5 days;

	•	we fail to deposit a sinking fund payment when due, and we do not cure this default within 5 days;

	•	we fail to comply with the indenture, and after we have been notified of the default by the trustee or holders of 25% in principal amount of the series, we do not cure the default within 60 days;

	•	we file for bankruptcy, or other events in bankruptcy, insolvency or reorganization occur and remain undischarged or unstayed for a period of 60 days;

	•	on the last business day of each of twenty-four consecutive calendar months, we have an asset coverage of less than 100 per centum, or

	•	any other event of default described as being applicable to any particular series of debt securities.

A holder has certain remedies if an event of default occurs as set forth in detail in the Indenture and in the applicable supplemental indenture.

The holders of a majority in principal amount of the relevant series of debt securities may waive a default for all the relevant series of debt securities. If this happens, the default will be treated as if it has not occurred. No one can waive a payment default on a holder’s debt security, however, without his individual approval.

Certain Covenants

The Indenture under which the debt securities are issued will require us to, unless otherwise specified in the applicable supplemental indenture:


	•	duly and punctually pay the principal of and any premium and interest on the debt securities of each series in accordance with the terms of the debt securities and the indenture;

	•	maintain an office or agency where the debt securities may be presented or surrendered for payment, registration of transfer or exchange, and where notices and demands to or upon us regarding the securities and the indenture may be served. We will give prompt written notice to the trustee of the location, and any change in the location, of such office or agency;

	•	if we act as our own paying agent at any time, segregate and hold in trust, for the benefit of the holders, an amount of money, in the currency in which the securities are payable, sufficient to pay the principal and any premium or interest due on the securities of any series on or before the due date for such payment;

	•	do all things necessary to preserve and keep in full force and effect our existence, rights (charter and statutory) and franchises unless failure to do so would not disadvantage the Holders in any material respect;

	•	deliver an officers’ certificate to the trustee, within 120 calendar days after the end of each fiscal year, stating whether or not, to the best knowledge of the persons signing the officers’ certificate, we are in default in the performance and observance of any of the terms, provisions and conditions of

152


		the indenture and, if we are, specifying all such defaults and the nature and status thereof of which we may have knowledge;

	•	maintain, preserve, and keep our material properties that are used in the conduct of our business in good repair, condition and working order, ordinary wear and tear excepted; and

	•	pay or discharge when due all taxes, assessments and governmental charges levied or imposed upon us or our income, profits or property, as well as all lawful claims for labor, materials and supplies that, if unpaid, might by law become a lien upon our property, except those contested in good faith or that would not have a material adverse effect on us.

PLAN OF DISTRIBUTION

We may offer, from time to time, up to 50,000,000 shares of our common stock. We may sell the shares of our common stock through underwriters or dealers, directly to one or more purchasers, through agents or through a combination of any such methods of sale. Any underwriter or agent involved in the offer and sale of the shares of our common stock will be named in the applicable prospectus supplement.

The distribution of the shares of our common stock may be effected from time to time in one or more transactions at a fixed price or prices, which may be changed, at prevailing market prices at the time of sale, at prices related to such prevailing market prices, or at negotiated prices. The offering price of the shares and the proceeds to us and any discounts, commissions or concessions allowed or reallowed or paid to any underwriters or dealers will be set forth in the applicable prospectus supplement.

In connection with the sale of the shares of our common stock, underwriters or agents may receive compensation from us or from purchasers of the shares of our common stock, for whom they may act as agents, in the form of discounts, concessions or commissions. Underwriters may sell shares of our common stock to or through dealers and such dealers may receive compensation in the form of discounts, concessions or commissions from the underwriters and/or commissions from the purchasers for whom they may act as agents. Underwriters, dealers and agents that participate in the distribution of shares of our common stock may be deemed to be underwriters under the Securities Act, and any discounts and commissions they receive from us and any profit realized by them on the resale of shares of our common stock may be deemed to be underwriting discounts and commissions under the Securities Act. Any such underwriter or agent will be identified and any such compensation received from us will be described in the applicable prospectus supplement.

Any common stock sold pursuant to a prospectus supplement will be quoted on the New York Stock Exchange, or another exchange on which the common stock is traded.

Under agreements into which we may enter, underwriters, dealers and agents who participate in the distribution of shares of our common stock may be entitled to indemnification by us against certain liabilities, including liabilities under the Securities Act. Underwriters, dealers and agents may engage in transactions with, or perform services for, us in the ordinary course of business.

If so indicated in the applicable prospectus supplement, we will authorize underwriters or other persons acting as our agents to solicit offers by certain institutions to purchase shares of our common stock from us pursuant to contracts providing for payment and delivery on a future date. Institutions with which such contracts may be made include commercial and savings banks, insurance companies, pension funds, investment companies, educational and charitable institutions and others, but in all cases such institutions must be approved by us. The obligations of any purchaser under any such contract will be subject to the condition that the purchase of shares of our common stock shall not at the time of delivery be prohibited under the laws of the jurisdiction to which such purchaser is subject. The underwriters and such other agents will not have any responsibility in respect of the validity or performance of such contracts. Such

153

contracts will be subject only to those conditions set forth in the prospectus supplement, and the prospectus supplement will set forth the commission payable for solicitation of such contracts.

The maximum commission or discount to be received by any member of the Financial Industry Regulatory Authority or independent broker-dealer will not be greater than 10% for the sale of any securities being registered and 0.5% for due diligence.

In order to comply with the securities laws of certain states, if applicable, shares of our common stock offered hereby will be sold in such jurisdictions only through registered or licensed brokers or dealers.

LEGAL MATTERS

The legality of shares of our common stock offered hereby will be passed upon for us by Sutherland Asbill & Brennan LLP, Washington, D.C. Certain legal matters will be passed upon for underwriters, if any, by the counsel named in the prospectus supplement.

CUSTODIANS, TRANSFER AND DIVIDEND PAYING AGENT

AND REGISTRAR

Certain of our securities are held in safekeeping by PNC Bank, N.A., 808 17th Street, N.W., Washington, D.C. 20006. Other securities are held in custody at Chevy Chase Bank, 7501 Wisconsin Avenue, 14th Floor, Bethesda, Maryland 20814, Bank of America, 8300 Greensboro Drive, Suite 620, McLean, Virginia 22102, Union Bank of California, 350 California Street, 6th Floor, San Francisco, CA 94104, M&T Investment Group, 25 South Charles Street MD2-CS57, Baltimore, MD 21201 and Branch Banking and Trust Company, 223 West Nash Street, Corporate Trust, 2nd Floor, Wilson, NC 27893. American Stock Transfer and Trust Company, 59 Maiden Lane, New York, New York 10038 acts as our transfer, dividend paying and reinvestment plan agent and registrar for our common stock. The Bank of New York, 101 Barclay St., New York, New York acts as our registrar, paying agent and transfer agent for our publicly issued debt securities.

BROKERAGE ALLOCATION AND OTHER PRACTICES

Since we generally acquire and dispose of our investments in privately negotiated transactions, we rarely use brokers in the normal course of business. In those cases where we do use a broker, we do not execute transactions through any particular broker or dealer, but will seek to obtain the best net results for Allied Capital, taking into account such factors as price (including the applicable brokerage commission or dealer spread), size of order, difficulty of execution, and operational facilities of the firm and the firm’s risk and skill in positioning blocks of securities. While we generally seek reasonably competitive execution costs, we may not necessarily pay the lowest spread or commission available. Subject to applicable legal requirements, we may select a broker based partly upon brokerage or research services provided to us. In return for such services, we may pay a higher commission than other brokers would charge if we determine in good faith that such commission is reasonable in relation to the services provided.

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INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The consolidated financial statements as of December 31, 2007 and 2006, and for each of the years in the three-year period ended December 31, 2007, the related financial statement schedule as of December 31, 2007, and the senior securities table as of December 31, 2007, have been included herein in reliance upon the reports of KPMG LLP (KPMG), independent registered public accounting firm, located at 2001 M Street, NW, Washington, DC 20036, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing. KPMG’s report on the consolidated financial statements refers to our adoption, effective January 1, 2006, of Statement of Accounting Standards No. 123 (Revised 2004), Share Based Payment.

With respect to the unaudited interim financial information as of March 31, 2008, and for the three-month periods ended March 31, 2008 and 2007, included herein, KPMG LLP has reported that they applied limited procedures in accordance with professional standards for a review of such information. However, their separate report included herein states that they did not audit and they do not express an opinion on that interim financial information. Accordingly, the degree of reliance on their report on such information should be restricted in light of the limited nature of the review procedures applied. The accountants are not subject to the liability provisions of Section 11 of the Securities Act of 1933 for their report on the unaudited interim financial information because that report is not a “report” or a “part” of the registration statement prepared or certified by the accountants within the meaning of Sections 7 and 11 of the Securities Act of 1933.

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ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED FINANCIAL STATEMENTS

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


	Page

Report of Independent Registered Public Accounting Firm		F-2
Consolidated Balance Sheet — December 31, 2007 and 2006		F-3
Consolidated Statement of Operations — For the Years Ended December 31, 2007, 2006, and 2005		F-4
Consolidated Statement of Changes in Net Assets — For the Years Ended December 31, 2007, 2006, and 2005		F-5
Consolidated Statement of Cash Flows — For the Years Ended December 31, 2007, 2006, and 2005		F-6
Consolidated Statement of Investments — December 31, 2007		F-7
Consolidated Statement of Investments — December 31, 2006		F-18
Notes to Consolidated Financial Statements		F-29
Report of Independent Registered Public Accounting Firm		F-66
Schedule 12-14 — Investments in and Advances to Affiliates for the Year Ended December 31, 2007		F-67
Report of Independent Registered Public Accounting Firm		F-71
Consolidated Balance Sheet as of March 31, 2008 (unaudited) and December 31, 2007		F-72
Consolidated Statement of Operations (unaudited) — For the Three Months Ended March 31, 2008 and 2007		F-73
Consolidated Statement of Changes in Net Assets (unaudited) — For the Three Months Ended March 31, 2008 and 2007		F-74
Consolidated Statement of Cash Flows (unaudited) — For the Three Months Ended March 31, 2008 and 2007		F-75
Consolidated Statement of Investments as of March 31, 2008 (unaudited)		F-76
Consolidated Statement of Investments as of December 31, 2007		F-93
Notes to Consolidated Financial Statements		F-108
Schedule 12-14 — Investments in and Advances to Affiliates for the Three Months Ended March 31, 2008		F-140

F-1

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders
Allied Capital Corporation:

We have audited the accompanying consolidated balance sheet of Allied Capital Corporation and subsidiaries (the Company) as of December 31, 2007 and 2006, including the consolidated statements of investments as of December 31, 2007 and 2006, and the related consolidated statements of operations, changes in net assets and cash flows, and the financial highlights (included in Note 13), for each of the years in the three-year period ended December 31, 2007. These consolidated financial statements and financial highlights are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial highlights based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included physical inspection or confirmation of securities owned as of December 31, 2007 and 2006. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of Allied Capital Corporation and subsidiaries as of December 31, 2007 and 2006, and the results of their operations, their cash flows, changes in their net assets, and financial highlights for each of the years in the three-year period ended December 31, 2007, in conformity with U.S. generally accepted accounting principles.

As discussed in Note 2 to the consolidated financial statements, effective January 1, 2006, the Company adopted the provisions of Statement of Financial Accounting Standards No. 123 (Revised 2004), Share Based Payment.

Washington, D.C.

February 28, 2008

F-2

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

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

F-3

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

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

F-4

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

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

F-5

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

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

F-6

ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

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.

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

F-7

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.

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

F-8

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

10^thStreet, 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.

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

F-9

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.

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

F-10

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.

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

F-11

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
	(Consumer Products)	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.

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

F-12

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.

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

F-13

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.

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

F-14

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.

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

F-15

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.

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

F-16

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.

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

F-17

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.

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

F-18

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.

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

F-19

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.

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

F-20

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.

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

F-21

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.

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

F-22

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.

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

F-23

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.

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

F-24

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.

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

F-25

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.

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

F-26

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.

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

F-27

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

⁽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.

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

F-28

ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Organization

Allied Capital Corporation, a Maryland corporation, is a closed-end, non-diversified management investment company that has elected to be regulated as a business development company (“BDC”) under the Investment Company Act of 1940 (“1940 Act”). Allied Capital Corporation (“ACC”) has a real estate investment trust subsidiary, Allied Capital REIT, Inc. (“Allied REIT”), and several subsidiaries that are single member limited liability companies established for specific purposes including holding real estate properties. ACC also has a subsidiary, A.C. Corporation (“AC Corp”), that generally provides diligence and structuring services, as well as transaction, management, consulting, and other services, including underwriting and arranging senior loans, to the Company and its portfolio companies.

ACC and its subsidiaries, collectively, are referred to as the “Company.” The Company consolidates the results of its subsidiaries for financial reporting purposes.

Pursuant to Article 6 of Regulation S-X, the financial results of the Company’s portfolio investments are not consolidated in the Company’s financial statements. Portfolio investments are held for purposes of deriving investment income and future capital gains.

The investment objective of the Company is to achieve current income and capital gains. In order to achieve this objective, the Company has primarily invested in debt and equity securities of private companies in a variety of industries.

Note 2. Summary of Significant Accounting Policies

Basis of Presentation

The consolidated financial statements include the accounts of ACC and its subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. Certain reclassifications have been made to the 2006 and 2005 balances to conform with the 2007 financial statement presentation.

The private finance portfolio and the interest and related portfolio income and net realized gains (losses) on the private finance portfolio are presented in three categories: companies more than 25% owned, which represent portfolio companies where the Company directly or indirectly owns more than 25% of the outstanding voting securities of such portfolio company or where the Company controls the portfolio company’s board of directors and, therefore, are deemed controlled by the Company under the 1940 Act; companies owned 5% to 25%, which represent portfolio companies where the Company directly or indirectly owns 5% to 25% of the outstanding voting securities of such portfolio company or where the Company holds one or more seats on the portfolio company’s board of directors and, therefore, are deemed to be an affiliated person under the 1940 Act; and companies less than 5% owned which represent portfolio companies where the Company directly or indirectly owns less than 5% of the outstanding voting securities of such portfolio company and where the Company has no other affiliations with such portfolio company. The interest and related portfolio income and net realized gains (losses) from the commercial real estate finance portfolio and other sources, including investments in money market and other securities, are included in the companies less than 5% owned category on the consolidated statement of operations.

In the ordinary course of business, the Company enters into transactions with portfolio companies that may be considered related party transactions.

F-29

ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 2. Summary of Significant Accounting Policies, continued


	*Valuation Of Portfolio Investments*

The Company, as a BDC, has invested in illiquid securities including debt and equity securities of companies, CLO bonds and preferred shares/income notes, and CDO bonds. The Company’s investments may be subject to certain restrictions on resale and generally have no established trading market. The Company values substantially all of its investments at fair value as determined in good faith by the Board of Directors in accordance with the Company’s valuation policy. The Company determines fair value to be the amount for which an investment could be exchanged in an orderly disposition over a reasonable period of time between willing parties other than in a forced or liquidation sale. The Company’s valuation policy considers the fact that no ready market exists for substantially all of the securities in which it invests. The Company’s valuation policy is intended to provide a consistent basis for determining the fair value of the portfolio. The Company will record unrealized depreciation on investments when it believes that an investment has become impaired, including where collection of a loan or realization of an equity security is doubtful, or when the enterprise value of the portfolio company does not currently support the cost of the Company’s debt or equity investments. Enterprise value means the entire value of the company to a potential buyer, including the sum of the values of debt and equity securities used to capitalize the enterprise at a point in time. The Company will record unrealized appreciation if it believes that the underlying portfolio company has appreciated in value and/or the Company’s equity security has also appreciated in value. The value of investments in publicly traded securities is determined using quoted market prices discounted for restrictions on resale, if any.


	*Loans and Debt Securities*

The Company’s loans and debt securities generally do not trade. The Company typically exits its loans and debt securities upon the sale or recapitalization of the portfolio company. Therefore, the Company generally determines the enterprise value of the portfolio company and then allocates that value to the loans and debt securities in order of the legal priority of contractual obligations, with the remaining value, if any, going to the portfolio company’s outstanding equity securities. For loans and debt securities, fair value generally approximates cost unless the borrower’s enterprise value, overall financial condition or other factors lead to a determination of fair value at a different amount. The value of loan and debt securities may be greater than the Company’s cost basis if the amount that would be repaid on the loan or debt security upon the sale or recapitalization of the portfolio company is greater than the Company’s cost basis.

Interest income is recorded on an accrual basis to the extent that such amounts are expected to be collected. For loans and debt securities with contractual payment-in-kind interest, which represents contractual interest accrued and added to the loan balance that generally becomes due at maturity, the Company will not accrue payment-in-kind interest if the portfolio company valuation indicates that the payment-in-kind interest is not collectible. In general, interest is not accrued on loans and debt securities if the Company has doubt about interest collection or where the enterprise value of the portfolio company may not support further accrual. Loans in workout status do not accrue interest. In addition, interest may not accrue on loans or debt securities to portfolio companies that are more than 50% owned by the

F-30

ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 2. Summary of Significant Accounting Policies, continued

Company depending on such company’s capital requirements. Loan origination fees, original issue discount, and market discount are capitalized and then amortized into interest income using a method that approximates the effective interest method. Upon the prepayment of a loan or debt security, any unamortized loan origination fees are recorded as interest income and any unamortized original issue discount or market discount is recorded as a realized gain.


	*Equity Securities*

The Company’s equity securities in portfolio companies for which there is no liquid public market are valued at fair value based on the enterprise value of the portfolio company, which is determined using various factors, including cash flow from operations of the portfolio company, multiples at which private companies are bought and sold, and other pertinent factors, such as recent offers to purchase a portfolio company, recent transactions involving the purchase or sale of the portfolio company’s equity securities, liquidation events, or other events. The determined equity values are generally discounted when the company has a minority ownership position, restrictions on resale, specific concerns about the receptivity of the capital markets to a specific company at a certain time, or other factors.

The value of the Company’s equity investments in private debt and equity funds are generally valued at the fund’s net asset value. The value of the Company’s equity securities in public companies for which market quotations are readily available is based on the closing public market price on the balance sheet date. Securities that carry certain restrictions on sale are typically valued at a discount from the public market value of the security.

Dividend income on preferred equity securities is recorded as dividend income on an accrual basis to the extent that such amounts are expected to be collected and to the extent that the Company has the option to receive the dividend in cash. Dividend income on common equity securities is recorded on the record date for private companies or on the ex-dividend date for publicly traded companies.

Collateralized Loan Obligations (“CLO”) and Collateralized Debt Obligations (“CDO”)

CLO bonds and preferred shares/ income notes and CDO bonds (“CLO/ CDO Assets”) are carried at fair value, which is based on a discounted cash flow model that utilizes prepayment, re-investment and loss assumptions based on historical experience and projected performance, economic factors, the characteristics of the underlying cash flow, and comparable yields for similar bonds and preferred shares/income notes, when available. The Company recognizes unrealized appreciation or depreciation on its CLO/ CDO Assets as comparable yields in the market change and/or based on changes in estimated cash flows resulting from changes in prepayment, re-investment or loss assumptions in the underlying collateral pool. The Company determines the fair value of its CLO/CDO Assets on an individual security-by-security basis.

The Company recognizes interest income on the preferred shares/income notes using the effective interest method, based on the anticipated yield and the estimated cash flows over the projected life of the investment. Yields are revised when there are changes in actual or estimated cash flows due to changes in

F-31

ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 2. Summary of Significant Accounting Policies, continued

prepayments and/or re-investments, credit losses or asset pricing. Changes in estimated yield are recognized as an adjustment to the estimated yield over the remaining life of the preferred shares/income notes from the date the estimated yield was changed. CLO and CDO bonds have stated interest rates. The weighted average yield on the CLO/CDO Assets is calculated as the (a) annual stated interest or the effective interest yield on the accruing bonds or the effective yield on the preferred shares/income notes, divided by (b) CLO/CDO Assets at value. The weighted average yields are computed as of the balance sheet date.


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

Realized gains or losses are measured by the difference between the net proceeds from the repayment or sale and the cost basis of the investment without regard to unrealized appreciation or depreciation previously recognized, and include investments charged off during the year, net of recoveries. Net change in unrealized appreciation or depreciation primarily reflects the change in portfolio investment values during the reporting period, including the reversal of previously recorded unrealized appreciation or depreciation when gains or losses are realized. Net change in unrealized appreciation or depreciation also reflects the change in the value of U.S. Treasury bills and deposits of proceeds from sales of borrowed Treasury securities, if any, and depreciation on accrued interest and dividends receivable and other assets where collection is doubtful.


	*Fee Income*

Fee income includes fees for loan prepayment premiums, guarantees, commitments, and services rendered by the Company to portfolio companies and other third parties such as diligence, structuring, transaction services, management and consulting services, and other services. Loan prepayment premiums are recognized at the time of prepayment. Guaranty and commitment fees are generally recognized as income over the related period of the guaranty or commitment, respectively. Diligence, structuring, and transaction services fees are generally recognized as income when services are rendered or when the related transactions are completed. Management, consulting and other services fees are generally recognized as income as the services are rendered.


	*Guarantees*

Guarantees meeting the characteristics described in FASB Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others and issued or modified after December 31, 2002, are recognized at fair value at inception. Guarantees made on behalf of portfolio companies are considered in determining the fair value of the Company’s investments. See Note 5.


	*Financing Costs*

Debt financing costs are based on actual costs incurred in obtaining debt financing and are deferred and amortized as part of interest expense over the term of the related debt instrument using a method that approximates the effective interest method. Costs associated with the issuance of common stock are recorded as a reduction to the proceeds from the sale of common stock. Financing costs generally include underwriting, accounting and legal fees, and printing costs.

F-32

ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 2. Summary of Significant Accounting Policies, continued


	*Dividends to Shareholders*

Dividends to shareholders are recorded on the record date.


	*Stock Compensation Plans*

The Company has a stock-based employee compensation plan. See Note 9. Effective January 1, 2006, the Company adopted the provisions of FASB Statement No. 123 (Revised 2004), Share-Based Payment (“SFAS 123R”). SFAS 123R was adopted using the modified prospective method of application, which required the Company to recognize compensation costs on a prospective basis beginning January 1, 2006. Accordingly, the Company did not restate prior year financial statements. Under this method, the unamortized cost of previously awarded options that were unvested as of January 1, 2006, is recognized over the remaining service period in the statement of operations beginning in 2006, using the fair value amounts determined for pro forma disclosure under SFAS 123R. With respect to options granted on or after January 1, 2006, compensation cost based on estimated grant date fair value is recognized over the related service period in the consolidated statement of operations. The stock option expense for the years ended December 31, 2007 and 2006, was as follows:


				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

In addition to the employee stock option expense for options granted, for both the years ended December 31, 2007 and 2006, administrative expense included $0.2 million of expense related to options granted to directors during each year. Options were granted to non-officer directors in the second quarters of 2007 and 2006. Options granted to non-officer directors vest on the grant date and therefore, the full expense is recorded on the grant date.

Prior to January 1, 2006, the Company accounted for this plan under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. Prior to January 1, 2006, no stock-based compensation cost was reflected in net increase in net assets resulting from operations, as all options granted under this plan had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net increase in net assets resulting from operations and earnings per share if the Company had

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ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 2. Summary of Significant Accounting Policies, continued

applied the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, to stock-based compensation for the year ended December 31, 2005.


		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. The stock option expense for options granted for 2007 and 2006, and the pro forma expense for 2005 shown in the tables above were based on the underlying value of the options granted by the Company. The fair value of each option grant was estimated on the date of grant using the Black-Scholes option pricing model and expensed over the vesting period. The following weighted average assumptions were used to calculate the fair value of options granted during the years ended December 31, 2007, 2006, and 2005:


	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

The expected term of the options granted represents the period of time that such options are expected to be outstanding. To determine the expected term of the options, the Company used historical data to estimate option exercise time frames, including considering employee terminations. The risk free rate was based on the U.S. Treasury bond yield curve at the date of grant consistent with the expected term. Expected volatilities were determined based on the historical volatility of the Company’s common stock over a historical time period consistent with the expected term. The dividend yield was determined based on the Company’s historical dividend yield over a historical time period consistent with the expected term.

To determine the stock options expense for options granted, the calculated fair value of the options granted is applied to the options granted, net of assumed future option forfeitures. The Company estimates that the employee-related stock option expense for outstanding unvested options as of December 31, 2007, will be approximately $9.7 million and $2.8 million for the years ended December 31, 2008 and 2009, respectively. This estimate may change if the Company’s assumptions related to future option forfeitures change. This estimate does not include any expense related to stock option grants after December 31,

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ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 2. Summary of Significant Accounting Policies, continued

2007, as the fair value of those stock options will be determined at the time of grant. The aggregate total stock option expense remaining as of December 31, 2007, is expected to be recognized over an estimated weighted-average period of 1.0 year.

Options Cancelled in Connection with Tender Offer. As discussed in Note 9, the Company completed a tender offer in July 2007, whereby the Company accepted for cancellation 10.3 million vested options held by employees and non-officer directors of the Company in exchange for an option cancellation payment (“OCP”). The OCP was equal to the “in-the-money” value of the stock options cancelled, determined using the Weighted Average Market Price of $31.75, and was paid one-half in cash and one-half in unregistered shares of the Company’s common stock. In accordance with the terms of the tender offer, the Weighted Average Market Price represented the volume weighted average price of the Company’s common stock over the fifteen trading days preceding the first day of the offer period, or June 20, 2007. Because the Weighted Average Market Price at the commencement of the tender offer on June 20, 2007, was higher than the market price of the Company’s common stock at the close of the offer on July 18, 2007, SFAS 123R required the Company to record a non-cash employee-related stock option expense of $14.4 million and administrative expense related to stock options cancelled that were held by non-officer directors of $0.4 million. The same amounts were recorded as an increase to additional paid-in capital and, therefore, had no effect on the Company’s net asset value. The portion of the OCP paid in cash of $52.8 million reduced the Company’s additional paid-in capital and therefore reduced the Company’s net asset value. For income tax purposes, the Company’s tax deduction resulting from the OCP will be similar to the tax deduction that would have resulted from an exercise of stock options in the market. Any tax deduction for the Company resulting from the OCP or an exercise of stock options in the market is limited by Section 162(m) of the Internal Revenue Code (“Code”).


	*Federal and State Income Taxes and Excise Tax*

The Company intends to comply with the requirements of the Code that are applicable to regulated investment companies (“RIC”) and real estate investment trusts (“REIT”). ACC and any subsidiaries that qualify as a RIC or a REIT intend to distribute or retain through a deemed distribution all of their annual taxable income to shareholders; therefore, the Company has made no provision for income taxes exclusive of excise taxes for these entities.

If the Company does not distribute at least 98% of its annual taxable income in the year earned, the Company will generally be required to pay an excise tax equal to 4% of the amount by which 98% of the Company’s annual taxable income exceeds the distributions from such taxable income during the year earned. To the extent that the Company determines that its estimated current year annual taxable income will be in excess of estimated current year dividend distributions from such taxable income, the Company accrues excise taxes on estimated excess taxable income as taxable income is earned using an annual effective excise tax rate. The annual effective excise tax rate is determined by dividing the estimated annual excise tax by the estimated annual taxable income.

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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*

Basic earnings per common share is calculated using the weighted average number of common shares outstanding for the year presented. Diluted earnings per common share reflects the potential dilution that could occur if options to issue common stock were exercised into common stock. Earnings per share is computed after subtracting dividends on preferred shares, if any.


	*Use of Estimates in the Preparation of Financial Statements*

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from these estimates.

The consolidated financial statements include portfolio investments at value of $4.8 billion and $4.5 billion at December 31, 2007 and 2006, respectively. At both December 31, 2007 and 2006, 92% of the Company’s total assets represented portfolio investments whose fair values have been determined by the Board of Directors in good faith in the absence of readily available market values. Because of the inherent uncertainty of valuation, the Board of Directors’ determined values may differ significantly from the values that would have been used had a ready market existed for the investments, and the differences could be material.


	*Recent Accounting Pronouncements*

In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes, which clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. This interpretation is effective for fiscal years beginning after December 15, 2006. The adoption of this interpretation did not have a significant effect on the Company’s consolidated financial position or its results of operations.

In September 2006, the FASB issued Statement No. 157, Fair Value Measurements. This statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. This statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company is currently analyzing the effect of adoption of this statement on its consolidated financial position, including its net asset value, and results of operations. The Company will adopt this statement on a prospective basis beginning in the quarter ending March 31, 2008. Adoption of this statement could have a material effect on the Company’s consolidated financial statements, including the Company’s net asset value. However, the actual impact on its consolidated financial statements in the period of adoption and subsequent to the period of adoption cannot be determined at this time as it will be influenced by the estimates of fair value for that period and the number and amount of investments the Company originates, acquires or exits.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 2. Summary of Significant Accounting Policies, continued

requirements for assets and liabilities reported at fair value as a consequence of the election. This statement is effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company does not intend to elect fair value measurement for assets or liabilities other than portfolio investments, which are already measured at fair value, therefore, the Company does not believe the adoption of this statement will have a significant effect on the Company’s consolidated financial position or its results of operations.

Note 3. Portfolio


	*Private Finance*

At December 31, 2007 and 2006, the private finance portfolio consisted of the following:


			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.

The Company’s private finance investment activity principally involves providing financing through privately negotiated long-term debt and equity investments. The Company’s private finance debt and equity investments are generally issued by private companies and are generally illiquid and may be subject to certain restrictions on resale.

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ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 3. Portfolio, continued

The Company’s private finance debt investments are generally structured as loans and debt securities that carry a relatively high fixed rate of interest, which may be combined with equity features, such as conversion privileges, or warrants or options to purchase a portion of the portfolio company’s equity at a pre-determined strike price, which is generally a nominal price for warrants or options in a private company. The annual stated interest rate is only one factor in pricing the investment relative to the Company’s rights and priority in the portfolio company’s capital structure, and will vary depending on many factors, including if the Company has received nominal cost equity or other components of investment return, such as loan origination fees or market discount. The stated interest rate may include some component of contractual payment-in-kind interest, which represents contractual interest accrued and added to the loan balance that generally becomes due at maturity.

At both December 31, 2007 and 2006, 86% of the private finance loans and debt securities had a fixed rate of interest and 14% had a floating rate of interest. Senior loans may carry a fixed rate of interest or a floating rate of interest, usually set as a spread over LIBOR, and may require payments of both principal and interest throughout the life of the loan. Senior loans generally have contractual maturities of three to six years and interest is generally paid to the Company monthly or quarterly. Unitranche debt generally carries a fixed rate of interest. Unitranche debt generally requires payments of both principal and interest throughout the life of the loan. Unitranche debt generally has contractual maturities of five to six years and interest is generally paid to the Company quarterly. Subordinated debt generally carries a fixed rate of interest generally with contractual maturities of five to ten years and generally has interest-only payments in the early years and payments of both principal and interest in the later years, although maturities and principal amortization schedules may vary. Interest on subordinated debt is generally paid to the Company quarterly.

Equity securities consist primarily of securities issued by private companies and may be subject to certain restrictions on their resale and are generally illiquid. The Company may make equity investments for minority stakes in portfolio companies or may receive equity features, such as nominal cost warrants, in conjunction with its debt investments. The Company may also invest in the equity (preferred and/or voting or non-voting common) of a portfolio company where the Company’s equity ownership may represent a significant portion of the equity, but may or may not represent a controlling interest. If the Company invests in non-voting equity in a buyout investment, the Company generally has the option to acquire a controlling stake in the voting securities of the portfolio company at fair market value. The Company may incur costs associated with making buyout investments that will be included in the cost basis of the Company’s equity investment. These include costs such as legal, accounting and other professional fees associated with diligence, referral and investment banking fees, and other costs. Equity securities generally do not produce a current return, but are held with the potential for investment appreciation and ultimate gain on sale.

Ciena Capital LLC. Ciena Capital LLC (f/k/a Business Loan Express, LLC) (Ciena) focuses on loan products that provide financing to commercial real estate owners and operators. Ciena is also a participant in the Small Business Administration’s 7(a) Guaranteed Loan Program and its wholly-owned subsidiary is licensed by the SBA as a Small Business Lending Company (SBLC). Ciena is headquartered in New York, NY.

At December 31, 2007, the Company’s investment in Ciena totaled $327.8 million at cost and $68.6 million at value, after the effect of unrealized depreciation of $259.2 million. At December 31, 2006, the Company’s investment in Ciena totaled $295.3 million at cost and $210.7 million at value, after the effect of unrealized depreciation of $84.6 million. In 2007, the Company increased its investment in Ciena by $32.4 million. The Company acquired $29.2 million in additional Class A equity interests to fund payments to

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ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 3. Portfolio, continued

the SBA discussed below and to provide additional capital to Ciena. In addition, the Company purchased $3.2 million in Class A equity interests from Ciena’s former Chief Executive Officer.

Net change in unrealized appreciation or depreciation included a net decrease in the Company’s investment in Ciena of $174.5 million and $142.3 million for the years ended December 31, 2007 and 2006, respectively, and a net increase of $2.9 million for the year ended December 31, 2005.

Total interest and related portfolio income earned from the Company’s investment in Ciena for the years ended December 31, 2007, 2006, and 2005, was as follows:


		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.

In the fourth quarter of 2006, the Company placed its investment in Ciena’s 25% Class A equity interests on non-accrual status. As a result, there was no interest income from the Company’s investment in Ciena for the year ended December 31, 2007, and interest income for 2006 was lower as compared to 2005. In consideration for providing a guaranty on Ciena’s revolving credit facility and standby letters of credit (discussed below), the Company earned fees of $5.4 million, $6.1 million, and $6.3 million for the years ended December 31, 2007, 2006, and 2005, respectively, which were included in fees and other income. Ciena has not yet paid the $5.4 million in such fees earned by the Company in 2007. At December 31, 2007, such fees were included as a receivable in other assets. The Company considered this outstanding receivable in its valuation of Ciena at December 31, 2007. The remaining fees and other income in 2006 and 2005 relate to management fees from Ciena. The Company did not charge Ciena management fees in 2007 or in the fourth quarter of 2006.

The Company guarantees Ciena’s revolving credit facility that matures in March 2009. On January 30, 2008, Ciena completed an amendment of the terms of its revolving credit facility. The amendment reduced the commitments from the lenders under the facility from $500 million to $450 million at the effective date of the amendment, with further periodic reductions in total commitments to $325 million by December 31, 2008. In addition, certain financial and other covenants were amended. In connection with this amendment, the Company increased its unconditional guarantee from 60% to 100% of the total obligations under this facility (consisting of principal, letters of credit issued under the facility, accrued interest, and other fees) and agreed to replace $42.5 million in letters of credit issued under the Ciena credit facility with new letters of credit under the Company’s revolving line of credit. The guaranty of the Ciena revolving credit facility can be called by the lenders in the event of a default, which includes the occurrence of any event of default under the Company’s revolving credit facility, subject to grace periods in certain cases. The amendment also prohibits cash payments from Ciena to the Company for interest, guarantee fees, management fees, and dividends. On January 30, 2008, the principal amount outstanding on Ciena’s revolving credit facility was $351.9 million and letters of credit issued under the

F-39

ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 3. Portfolio, continued

facility were $89.1 million, of which the Company replaced $42.5 million on January 31, 2008. Following the amendment of the revolving credit facility and the replacement of certain letters of credit by the Company, at January 31, 2008, amounts guaranteed under Ciena’s line of credit by the Company were $399.0 million, including $46.6 million of letters of credit issued under the facility. At December 31, 2007, the total obligation guaranteed by the Company was $258.7 million, and the Company had provided four standby letters of credit totaling $18.0 million in connection with four term securitization transactions completed by Ciena.

Ciena relies on the asset-backed securitization market to finance its loan origination activity. That financing source is an unreliable one in the current capital markets, and as a result, Ciena has significantly curtailed loan origination activity, including loan originations under the SBA’s 7(a) Guaranteed Loan Program. Ciena continues to reposition its business. However, there is an inherent risk in this repositioning and the Company continues to work with Ciena on restructuring. Ciena maintains two non-recourse securitization warehouse facilities, and there is no assurance that Ciena will be able to refinance these facilities in the term securitization market. The Company has issued performance guaranties whereby the Company agreed to indemnify the warehouse providers for any damages, losses, liabilities and related costs and expenses that they may incur as a result of Ciena’s failure to perform any of its obligations as loan originator, loan seller or loan servicer under the warehouse securitizations.

The Office of the Inspector General of the SBA (OIG) and the United States Secret Service are conducting ongoing investigations of allegedly fraudulently obtained SBA-guaranteed loans issued by Ciena. Specifically, on or about January 9, 2007, Ciena became aware of an indictment captioned as the United States v. Harrington, No. 2:06-CR-20662 pending in the United States District Court for the Eastern District of Michigan. The indictment alleged that a former Ciena employee in the Detroit office engaged in the fraudulent origination of loans guaranteed, in substantial part, by the SBA. The Company understands that Ciena is working cooperatively with the U.S. Attorney’s Office and the investigating agencies with respect to this matter. On October 1, 2007, the former Ciena employee pled guilty to one count of conspiracy to fraudulently originate SBA-guaranteed loans and one count of making a false statement before a grand jury. The OIG and the U.S. Department of Justice are also conducting a civil investigation of Ciena’s lending practices in various jurisdictions. As an SBA lender, Ciena is also subject to other SBA and OIG audits, investigations, and reviews. In addition, the Office of the Inspector General of the U.S. Department of Agriculture is conducting an investigation of Ciena’s lending practices under the Business and Industry Loan (B&I) program. These investigations, audits and reviews are ongoing.

On March 6, 2007, Ciena entered into an agreement with the SBA. According to the agreement, Ciena remains a preferred lender in the SBA 7(a) Guaranteed Loan Program and retains the ability to sell loans into the secondary market. As part of this agreement, Ciena agreed to the immediate payment of approximately $10 million to the SBA to cover amounts paid by the SBA with respect to some of the SBA-guaranteed loans that have been the subject of the charges by the U.S. Attorney’s Office for the Eastern District of Michigan against Mr. Harrington. As part of the SBA’s increased oversight, the agreement provides that any loans originated and closed by Ciena during the term of the agreement will be reviewed by an independent third party selected by the SBA prior to the sale of such loans into the secondary market. The agreement also requires Ciena to repurchase the guaranteed portion of certain loans that default after having been sold into the secondary market, and subjects such loans to a similar third party review prior to any reimbursement of Ciena by the SBA. In connection with this agreement, Ciena also entered into an escrow agreement with the SBA and an escrow agent in which Ciena agreed to deposit $10 million with the escrow agent for any additional payments Ciena may be obligated to pay to the SBA in the future. Ciena remains subject to SBA rules and regulations and as a result may be required to make additional payments to the SBA in the ordinary course of business.

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ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 3. Portfolio, continued

These investigations, audits, reviews, and litigation have had and may continue to have a material adverse impact on Ciena and, as a result, could continue to negatively affect the Company’s financial results. The Company has considered Ciena’s current regulatory issues, ongoing investigations, litigation, and the repositioning of its business in performing the valuation of Ciena at December 31, 2007. The Company is monitoring the situation.

At December 31, 2007 and 2006, the Company held all of the Class A equity interests, all of the Class B equity interests and 94.9% of the Class C equity interests.

At the time of the corporate reorganization of Business Loan Express, Inc. from a C corporation to a limited liability company in 2003, for tax purposes Ciena had a “built-in gain” representing the aggregate fair market value of its assets in excess of the tax basis of its assets. As a RIC, the Company will be subject to special built-in gain rules on the assets of Ciena. Under these rules, taxes will be payable by the Company at the time and to the extent that the built-in gains on Ciena’s assets at the date of reorganization are recognized in a taxable disposition of such assets in the 10-year period following the date of the reorganization. At such time, the built-in gains, if any, realized upon the disposition of these assets will be included in the Company’s taxable income, net of the corporate level taxes paid by the Company on the built-in gains. At the date of Ciena’s reorganization, the Company estimated that its future tax liability resulting from the built-in gains may total up to a maximum of $40 million. However, if these assets are disposed of after the 10-year period, there will be no corporate level taxes on these built-in gains. The Company has no obligation to pay the built-in gains tax until these assets or its interests in Ciena are disposed of in the future, within the 10-year period, at a value that would result in a tax liability. At December 31, 2006, the Company considered the impact on the fair value of its investment in Ciena due to Ciena’s tax attributes as an LLC and has also considered the impact on the fair value of its investment due to estimated built-in gain taxes, if any, in determining the fair value of its investment in Ciena. At December 31, 2007, there would be no built-in gain tax liability if the assets or the Company’s interests in Ciena were sold at the current valuation.

Mercury Air Centers, Inc. In April 2004, the Company completed the purchase of a majority ownership in Mercury Air Centers, Inc. (“Mercury”). At December 31, 2006, the Company’s investment in Mercury totaled $84.3 million at cost and $244.2 million at value, which included unrealized appreciation of $159.9 million.

In August 2007, the Company completed the sale of its majority equity interest in Mercury. For the year ended December 31, 2007, the Company realized a gain of $262.4 million, subject to post-closing adjustments. In addition, the Company was repaid approximately $51 million of subordinated debt outstanding to Mercury at closing.

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ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 3. Portfolio, continued

Total interest and related portfolio income earned from the Company’s investment in Mercury for the years ended December 31, 2007, 2006, and 2005, was as follows:


		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

Net change in unrealized appreciation or depreciation for the year ended December 31, 2007, included an increase in unrealized appreciation totaling $74.9 million for the first half of 2007 and the reversal of $234.8 million associated with the sale of the Company’s majority equity interest in the third quarter of 2007. Net change in unrealized appreciation or depreciation for the years ended December 31, 2006 and 2005, included an increase in unrealized appreciation of $106.1 million and $53.8 million, respectively, related to the Company’s investment in Mercury.

Advantage Sales and Marketing, Inc. In June 2004, the Company completed the purchase of a majority voting ownership in Advantage. Advantage is a sales and marketing agency providing outsourced sales, merchandising, and marketing services to the consumer packaged goods industry. Advantage has offices across the United States and is headquartered in Irvine, CA.

On March 29, 2006, the Company sold its majority equity interest in Advantage. The Company was repaid its $184 million in subordinated debt outstanding at closing. For the year ended December 31, 2006, the Company realized a gain on the sale of its equity investment of $434.4 million, subject to post-closing adjustments and excluding any earn-out amounts. The Company realized additional gains in 2007 resulting from post-closing adjustments and an earn-out payment totaling $3.4 million, subject to additional post-closing adjustments.

As consideration for the common stock sold in the transaction, the Company received a $150 million subordinated note, with the balance of the consideration paid in cash. In addition, a portion of the Company’s cash proceeds from the sale of the common stock were placed in escrow, subject to certain holdback provisions. At December 31, 2007, the amount of the escrow included in other assets in the accompanying consolidated balance sheet was approximately $25 million.

Total interest and related portfolio income earned from the Company’s investment in Advantage while the Company held a majority equity interest for the years ended December 31, 2006 and 2005, was $14.1 million and $37.4 million, respectively. Net change in unrealized appreciation or depreciation for the year ended December 31, 2006, included the reversal of $389.7 million of previously recorded unrealized appreciation associated with the realization of a gain on the sale of the Company’s majority equity interest in Advantage and for the year ended December 31, 2005, included an increase in unrealized appreciation of $378.4 million related to the Company’s majority equity interest investment in Advantage.

In connection with the sale transaction, the Company retained an equity investment in the business valued at $15 million at closing as a minority shareholder. During the fourth quarter of 2006, Advantage

F-42

ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 3. Portfolio, continued

made a distribution on this minority equity investment, which reduced the Company’s cost basis to zero and resulted in a realized gain of $4.8 million.

The Company’s investment in Advantage at December 31, 2007, which was composed of subordinated debt and a minority equity interest, totaled $154.8 million at cost and $165.8 million at value. This investment was included in companies 5% to 25% owned in the consolidated financial statements as the Company continues to hold a seat on Advantage’s board of directors.

Collateralized Loan Obligations (“CLOs”) and Collateralized Debt Obligations (“CDOs”). At December 31, 2007 and 2006, the Company owned bonds and preferred shares/income notes in CLOs and bonds in a CDO as follows:


			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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ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 3. Portfolio, continued

The bonds, preferred shares and income notes of the CLOs and CDO in which the Company has invested are junior in priority for payment of interest and principal to the more senior notes issued by the CLOs and CDO. Cash flow from the underlying collateral assets in the CLOs and CDO is generally allocated first to the senior bonds in order of priority, then any remaining cash flow is generally distributed to the preferred shareholders and income note holders. To the extent there are defaults and unrecoverable losses on the underlying collateral assets that result in reduced cash flows, the preferred shares/income notes will bear this loss first and then the subordinated bonds would bear any loss after the preferred shares/income notes. At December 31, 2007 and 2006, the face value of the CLO and CDO assets held by the Company was subordinate to as much as 94% and 92%, respectively, of the face value of the securities outstanding in these CLOs and CDO.

At December 31, 2007 and 2006, the underlying collateral assets of these CLO and CDO issuances, consisting primarily of senior corporate loans, were issued by 671 issuers and 465 issuers, respectively, and had balances as follows:


		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. At December 31, 2007 and 2006, private finance loans and debt securities at value not accruing interest were as follows:


			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

F-44

ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 3. Portfolio, continued

Industry and Geographic Compositions. The industry and geographic compositions of the private finance portfolio at value at December 31, 2007 and 2006, were as follows:


		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*

At December 31, 2007 and 2006, the commercial real estate finance portfolio consisted of the following:


		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.

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ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 3. Portfolio, continued

approximately 85% and 15% of the Company’s commercial mortgage loan portfolio was composed of fixed and adjustable interest rate loans, respectively. At December 31, 2006, approximately 96% and 4% of the Company’s commercial mortgage loan portfolio was composed of fixed and adjustable interest rate loans, respectively. At December 31, 2007 and 2006, loans with a value of $14.3 million and $18.9 million, respectively, were not accruing interest. Loans greater than 120 days delinquent generally do not accrue interest.

Equity interests consist primarily of equity securities issued by privately owned companies that invest in single real estate properties. These equity interests may be subject to certain restrictions on their resale and are generally illiquid. Equity interests generally do not produce a current return, but are generally held in anticipation of investment appreciation and ultimate realized gain on sale.

The property types and the geographic composition securing the commercial mortgage loans and equity interests at value at December 31, 2007 and 2006, were as follows:


		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”). On May 3, 2005, the Company completed the sale of its portfolio of CMBS bonds and CDO bonds and preferred shares to affiliates of Caisse de dépôt et placement du Québec (the Caisse) for cash proceeds of $976.0 million and realized a net gain of $227.7 million, after transaction and other costs of $7.8 million. Transaction costs included investment banking fees, legal and other professional fees, and other transaction costs. Upon the closing of the sale, the Company settled all the hedge positions relating to these assets, which resulted in a net realized loss of $0.7 million, which has been included in the net realized gain on the sale. The value of 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. Simultaneous with the sale of the Company’s CMBS and CDO portfolio, the Company entered into certain agreements with affiliates of the Caisse, including a platform assets purchase agreement, pursuant to which the Company agreed to sell certain additional commercial real estate-related assets to the Caisse, subject to certain adjustments and closing conditions.

The platform assets purchase agreement was completed on July 13, 2005, and the Company received total cash proceeds from the sale of the platform assets of approximately $5.3 million. No gain or loss

F-46

ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 3. Portfolio, continued

resulted from the transaction. Under this agreement, the Company agreed not to primarily invest in non-investment grade CMBS and real estate-related CDOs and refrain from certain other real estate-related investing or servicing activities for a period of three years or through May 2008 subject to certain limitations and excluding the Company’s existing portfolio and related activities.

Managed Funds

The Company manages funds that invest in the debt and equity of primarily private middle market companies in a variety of industries. As of December 31, 2007, the funds that the Company manages had total assets of approximately $400 million. During 2007, the Company launched the Allied Capital Senior Debt Fund, L.P. and the Unitranche Fund LLC, and in early 2008, the Company formed the AGILE Fund I, LLC, all discussed below (together, the “Managed Funds”). The Company’s responsibilities to the Managed Funds may include deal origination, underwriting, and portfolio monitoring and development services consistent with the activities that the Company performs for its portfolio. Each of the Managed Funds may separately invest in the debt or equity of a portfolio company. The Company’s portfolio may include debt or equity investments issued by the same portfolio company as investments held by one or more Managed Funds, and these investments may be senior, pari passu or junior to the debt and equity investments held by the Company.

The Company accounts for the sale of securities to funds with which it has continuing involvement as sales pursuant to SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, a replacement of FASB Statement 125, when the securities have been legally isolated from the Company, the Company has no ability to restrict or constrain the ability of the funds to pledge or exchange the transferred securities, and the Company does not have either the entitlement and the obligation to repurchase the securities or the ability to unilaterally cause the fund to put the securities back to the Company.

Allied Capital Senior Debt Fund, L.P. The Company is a special limited partner in the Allied Capital Senior Debt Fund, L.P. (“ACSDF”), a private fund that generally invests in senior, unitranche and second lien debt. The Company has committed and funded $31.8 million to ACSDF, which is a portfolio company. At December 31, 2007, the Company’s investment in ACSDF totaled $31.8 million at cost and $32.8 million at value. ACSDF has closed on $125 million in equity capital commitments and had total assets of approximately $400 million. As a special limited partner, the Company expects to earn an incentive allocation of 20% of the annual net income of ACSDF, subject to certain performance benchmarks. The value of the Company’s investment in ACSDF is based on the net asset value of ACSDF, which reflects the capital invested plus its allocation of the net earnings of ACSDF, including the incentive allocation.

AC Corp is the investment manager to ACSDF. Callidus Capital Corporation, a portfolio investment controlled by the Company, acts as special manager to ACSDF. An affiliate of the Company is the general partner of ACSDF, and AC Corp serves as collateral manager to a warehouse financing vehicle associated with ACSDF. AC Corp will earn a management fee of up to 2% per annum of the net asset value of ACSDF and will pay Callidus 25% of that management fee to compensate Callidus for its role as special manager.

In connection with ACSDF’s formation in June 2007, the Company sold an initial portfolio of approximately $183 million of seasoned assets with a weighted average yield of 10.3% to a warehouse financing vehicle associated with ACSDF. In the second half of 2007, the Company sold $41.7 million of seasoned assets with a weighted average yield of 8.5% to the warehouse financing vehicle. The Company

F-47

ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 3. Portfolio, continued

may offer to sell additional loans to ACSDF or the warehouse financing vehicle. ACSDF or the warehouse financing vehicle may purchase loans from the Company. ACSDF also purchases loans from other third parties. In addition, during the second half of 2007, the Company repurchased one asset totaling $12.0 million from ACSDF, which the Company had sold to ACSDF in June 2007.

Unitranche Fund LLC. In December 2007, the Company formed the Unitranche Fund LLC (“Unitranche Fund”), which the Company co-manages with an affiliate of General Electric Capital Corporation (GE). The Unitranche Fund is a private fund that generally focuses on making first lien unitranche loans to middle market companies with Earning before Interest, Taxes, Depreciation, and Amortization of at least $15 million. GE has committed $3.075 billion to the Unitranche Fund consisting of $3.0 billion of senior notes and $0.075 billion of subordinated certificates and the Company has committed $525.0 million of subordinated certificates. The Unitranche Fund will be capitalized as transactions are completed. At December 31, 2007, the Company’s investment in the Unitranche Fund totaled $0.7 million at cost and at value. The Company will earn a management and sourcing fee totaling 0.375% per annum of managed assets.

AGILE Fund I, LLC. In January 2008, the Company entered into an investment agreement with the Goldman Sachs Private Equity Group, part of Goldman Sachs Asset Management (“Goldman Sachs”). As part of the investment agreement, the Company agreed to sell a pro-rata strip of private equity and debt investments to AGILE Fund I, LLC (“AGILE”), a private fund in which a fund managed by Goldman Sachs owns substantially all of the interests, for a total transaction value of $169 million. The majority of the investment sale closed simultaneously with the execution of the investment agreement. The sales of the remaining assets are expected to close by the end of the first quarter of 2008, subject to certain terms and conditions.

The sale to AGILE included 13.7% of the Company’s equity investments in 23 of its buyout portfolio companies and 36 of its minority equity portfolio companies for a total purchase price of $109 million. In addition, the Company sold approximately $60 million in debt investments, which represented 7.3% of its unitranche, second lien and subordinated debt investments in the buyout investments included in the equity sale. AGILE generally has the right to co-invest in its proportional share of any future follow-on investment opportunities presented by the companies in its portfolio.

The Company is the managing member of AGILE, and will be entitled to an incentive allocation subject to certain performance benchmarks. The Company owns the remaining interests in AGILE not held by Goldman Sachs.

In addition, pursuant to the investment agreement Goldman Sachs has committed to invest at least $125 million in future investment vehicles managed by the Company and will have future opportunities to invest in the Company’s affiliates, or vehicles managed by them, and to coinvest alongside the Company in the future, subject to various terms and conditions. As part of this transaction, the Company has also agreed to sell 11 venture capital and private equity limited partnership investments for approximately $28 million to a fund managed by Goldman Sachs, which will assume the $6.5 million of unfunded commitments related to these limited partnership investments. The sales of these limited partnership investments are expected to be completed by May 2008.

F-48

ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 4. Debt

At December 31, 2007 and 2006, the Company had the following 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. The Company has privately issued unsecured long-term notes to institutional investors. The notes have five- or seven-year maturities and have fixed rates of interest. The notes generally require payment of interest only semi-annually, and all principal is due upon maturity. At December 31, 2007, the notes had maturities from May 2008 to May 2013. The notes may be prepaid in whole or in part, together with an interest premium, as stipulated in the note agreements.

The Company has issued five-year unsecured long-term notes denominated in Euros and Sterling for a total U.S. dollar equivalent of $15.2 million. The notes have fixed interest rates and have substantially the same terms as the Company’s other unsecured notes. The Euro notes require annual interest payments and the Sterling notes require semi-annual interest payments until maturity. Simultaneous with issuing the notes, the Company entered into a cross currency swap with a financial institution which fixed the Company’s interest and principal payments in U.S. dollars for the life of the debt.

On October 16, 2006, the Company repaid $150.0 million of unsecured long-term debt that matured. This debt had a fixed interest rate of 7.2%.

On May 1, 2006, the Company issued $50.0 million of seven-year, unsecured notes with a fixed interest rate of 6.8%. This debt matures in May 2013. The proceeds from the issuance of the notes were used in part to repay $25 million of 7.5% unsecured long-term notes that matured on May 1, 2006.

F-49

ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 4. Debt, continued

Publicly Issued Unsecured Notes Payable. At December 31, 2007, the Company had outstanding publicly issued unsecured notes as follows:


		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

The 6.625% Notes due 2011 and the 6.000% Notes due 2012 require payment of interest only semi-annually, and all principal is due upon maturity. The Company has the option to redeem these notes in whole or in part, together with a redemption premium, as stipulated in the notes.

On March 28, 2007, the Company completed the issuance of $200.0 million of 6.875% Notes due 2047 for net proceeds of $193.0 million. In April 2007, the Company issued additional notes, through an over-allotment option, totaling $30.0 million for net proceeds of $29.1 million. Net proceeds are net of underwriting discounts and estimated offering expenses.

The 6.875% Notes due 2047 require payment of interest only quarterly, and all principal is due upon maturity. The Company may redeem these notes in whole or in part at any time or from time to time on or after April 15, 2012, at par and upon the occurrence of certain tax events as stipulated in the notes.

Scheduled Maturities. Scheduled future maturities of notes payable at December 31, 2007, were as follows:


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*

At December 31, 2007 and 2006, the Company had an unsecured revolving line of credit with a committed amount of $922.5 million that expires on September 30, 2008. At the Company’s option, borrowings under the revolving line of credit generally bear interest at a rate equal to (i) LIBOR (for the period the Company selects) plus 1.05% or (ii) the higher of the Federal Funds rate plus 0.50% or the Bank of America, N.A. prime rate. The revolving line of credit requires the payment of an annual commitment fee equal to 0.20% of the committed amount (whether used or unused). The revolving line of credit generally requires payments of interest at the end of each LIBOR interest period, but no less frequently than quarterly, on LIBOR based loans and monthly payments of interest on other loans. All principal is due upon maturity.

F-50

ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 4. Debt, continued

The annual cost of commitment fees, other facility fees and amortization of debt financing costs was $3.7 million and $3.9 million at December 31, 2007 and 2006, respectively.

The revolving credit facility provides for a sub-facility for the issuance of letters of credit for up to an amount equal to 16.66% of the committed facility or $153.7 million. The letter of credit fee is 1.05% per annum on letters of credit issued, which is payable quarterly.

The average debt outstanding on the revolving line of credit was $58.5 million and $142.1 million, respectively, for the years ended December 31, 2007 and 2006. The maximum amount borrowed under this facility and the weighted average stated interest rate for the years ended December 31, 2007 and 2006, were $381.3 million and 6.3%, respectively, and $540.3 million and 6.3%, respectively. At December 31, 2007, the amount available under the revolving line of credit was $496.7 million, net of amounts committed for standby letters of credit of $58.5 million issued under the credit facility.


	*Fair Value of Debt*

The Company records debt at cost. The fair value of the Company’s outstanding debt was approximately $2.2 billion and $1.9 billion at December 31, 2007 and 2006, respectively. The fair value of the Company’s publicly issued 6.875% Notes due 2047 was determined using the market price of the retail notes at December 31, 2007. The fair value of the Company’s other debt was determined using market interest rates as of the balance sheet date for similar instruments.


	*Covenant Compliance*

The Company has various financial and operating covenants required by the revolving line of credit and the privately issued unsecured notes payable outstanding at December 31, 2007 and 2006. These covenants require the Company to maintain certain financial ratios, including asset coverage, debt to equity and interest coverage, and a minimum net worth. These credit facilities provide for customary events of default, including, but not limited to, payment defaults, breach of representations or covenants, cross-defaults, bankruptcy events, failure to pay judgments, attachment of the Company’s assets, change of control and the issuance of an order of dissolution. Certain of these events of default are subject to notice and cure periods or materiality thresholds. The Company’s credit facilities limit its ability to declare dividends if the Company defaults under certain provisions. As of December 31, 2007 and 2006, the Company was in compliance with these covenants.

The Company has certain financial and operating covenants that are required by the publicly issued unsecured notes payable, including that the Company will maintain a minimum ratio of 200% of total assets to total borrowings, as required by the Investment Company Act of 1940, as amended, while these notes are outstanding. As of December 31, 2007 and 2006, the Company was in compliance with these covenants.

Note 5. Guarantees and Commitments

In the ordinary course of business, the Company has issued guarantees and has extended standby letters of credit through financial intermediaries on behalf of certain portfolio companies. All standby letters of credit have been issued through Bank of America, N.A. As of December 31, 2007 and 2006, the Company had issued guarantees of debt and rental obligations aggregating $270.6 million and $202.1 million, respectively, and had extended standby letters of credit aggregating $58.5 million and

F-51

ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 5. Guarantees and Commitments, continued

$41.0 million, respectively. Under these arrangements, the Company would be required to make payments to third-party beneficiaries if the portfolio companies were to default on their related payment obligations. The maximum amount of potential future payments was $329.1 million and $243.1 million at December 31, 2007 and 2006, respectively.

As of December 31, 2007, the guarantees and standby letters of credit expired as follows:


		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.

In the ordinary course of business, the Company enters into agreements with service providers and other parties that may contain provisions for the Company to indemnify and guaranty certain minimum fees to such parties under certain circumstances.

At December 31, 2007, the Company had outstanding commitments to fund investments totaling $923.6 million, including $882.4 million related to private finance investments and $41.2 million related to commercial real estate finance investments. Total outstanding commitments related to private finance investments included $524.3 million to the Unitranche Fund LLC, which the Company estimates will be funded over a two to three year period as investments are funded by the Unitranche Fund. See Note 3.

Note 6. Shareholders’ Equity

Sales of common stock for the years ended December 31, 2007, 2006, and 2005, were as follows:


		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.

The Company issued 0.6 million shares, 0.5 million shares, and 3.0 million shares of common stock upon the exercise of stock options during the years ended December 31, 2007, 2006, and 2005,

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ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 6. Shareholders’ Equity, continued

respectively. In addition, in July 2007, the Company issued 1.7 million unregistered shares of common stock upon the cancellation of stock options pursuant to a tender offer. See Note 9.

The Company issued 0.3 million shares of common stock with a value of $7.2 million as consideration for an additional investment in Mercury Air Centers, Inc. during the year ended December 31, 2005.

The Company has a dividend reinvestment plan, whereby the Company may buy shares of its common stock in the open market or issue new shares in order to satisfy dividend reinvestment requests. If the Company issues new shares, the issue price is equal to the average of the closing sale prices reported for the Company’s common stock for the five consecutive trading days immediately prior to the dividend payment date. For the years ended December 31, 2007, 2006, and 2005, the Company issued new shares in order to satisfy dividend reinvestment requests. Dividend reinvestment plan activity for the years ended December 31, 2007, 2006, and 2005, was as follows:


	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

Earnings per common share for the years ended December 31, 2007, 2006, and 2005, were as follows:


	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. Prior to the 2008 Plan Year, the Company’s 401(k) retirement investment plan was open to all of its full-time employees who were at least 21 years of age. The employees could elect voluntary pre-tax wage deferrals ranging from 0% to 100% of eligible compensation for the year up to $15.5 thousand annually for the 2007 plan year. Plan participants who were age 50 or older during the 2007 plan year were eligible to defer an additional $5 thousand during the year. For the years ended December 31, 2007, 2006, and 2005, the Company made contributions to the 401(k) plan of up to 5% of each participant’s eligible compensation for the year up to a maximum compensation permitted by the IRS, which fully vests at the time of contribution. For the year ended December 31, 2007, the maximum compensation was $0.2 million. Employer contributions that exceed the IRS limitation (excess contributions) were directed to the participant’s deferred compensation plan account as discussed below for the 2006 and 2005 plan years. Excess contributions for the 2007 plan year totaled $2.0 million and will be

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ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 8. Employee Compensation Plans, continued

paid to participants in cash as a result of the planned termination of the deferred compensation arrangements in the first quarter of 2008 as discussed below. Total 401(k) contribution expense for the years ended December 31, 2007, 2006, and 2005, was $1.4 million, $1.2 million, and $1.0 million, respectively.

For the 2008 plan year, the Company amended its 401(k) plan to amend certain plan features, and to provide that the Company will match 100% of the first 4% of deferral contributions made by each participant on up to $0.2 million of eligible compensation. There will be no excess contributions.

Deferred Compensation Plans. The Company also has deferred compensation plans. The Company’s deferred compensation arrangements will be terminated effective March 18, 2008, as discussed below, and no further contributions were accepted into the plans after December 31, 2007.

Through December 31, 2007, eligible participants in the deferred compensation plan (“DCP I”) could elect to defer some of their compensation and have such compensation credited to a participant account. In addition, the Company made contributions to the deferred compensation plan on compensation deemed ineligible for a 401(k) contribution for 2006 and 2005. Contribution expense for the deferred compensation plan for the years ended December 31, 2006 and 2005, was $1.5 million and $0.7 million, respectively. All amounts credited to a participant’s account were credited solely for purposes of accounting and computation and remain assets of the Company and subject to the claims of the Company’s general creditors until distributed. Amounts credited to participants under the deferred compensation plan are at all times 100% vested and non-forfeitable. Amounts deferred by participants under the deferred compensation plan were funded to a trust, which is administered by a third-party trustee. The accounts of the deferred compensation trust are consolidated with the Company’s accounts. The assets of the trust are classified as other assets and the liability to the plan participants is included in other liabilities in the accompanying financial statements. The deferred compensation plan accounts at December 31, 2007 and 2006, totaled $21.1 million and $18.6 million, respectively.

The Company has an Individual Performance Award (“IPA”), which was established as a long-term incentive compensation program for certain officers. In conjunction with the program, the Board of Directors approved non-qualified deferred compensation plans (“DCP II”), which are administered through a trust by a third-party trustee. The administrator of the DCP II is the Compensation Committee of the Company’s Board of Directors.

The IPA is generally determined annually at the beginning of each year but may be adjusted throughout the year. Through December 31, 2007, the IPA was deposited in the trust in four equal installments, generally on a quarterly basis, in the form of cash. The Compensation Committee of the Board of Directors designed the DCP II to require the trustee to use the cash to purchase shares of the Company’s common stock in the open market. During the years ended December 31, 2007, 2006, and 2005, 0.4 million shares, 0.3 million shares, and 0.3 million shares, respectively, were purchased in the DCP II.

All amounts deposited and then credited to a participant’s account in the trust, based on the amount of the IPA received by such participant, were credited solely for purposes of accounting and computation and remain assets of the Company and subject to the claims of the Company’s general creditors until distributed. Amounts credited to participants under the DCP II are immediately vested and generally non-forfeitable once deposited by the Company into the trust.

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ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 8. Employee Compensation Plans, continued

During any period of time in which a participant has an account in the DCP II, any dividends declared and paid on shares of the Company’s common stock allocated to the participant’s account were reinvested in shares of the Company’s common stock.

Through December 31, 2007, the IPA amounts were contributed into the DCP II trust and invested in the Company’s common stock. The accounts of the DCP II are consolidated with the Company’s accounts. The common stock is classified as common stock held in deferred compensation trust in the accompanying financial statements and the deferred compensation obligation, which represents the amount owed to the employees, is included in other liabilities. Changes in the value of the Company’s common stock held in the deferred compensation trust are not recognized. However, the liability is marked to market with a corresponding charge or credit to employee compensation expense. At December 31, 2007 and 2006, common stock held in DCP II was $39.9 million and $28.3 million, respectively, and the IPA liability was $31.4 million and $33.9 million, respectively. At December 31, 2007 and 2006, the DCP II held 1.4 million shares and 1.0 million shares, respectively, of the Company’s common stock.

The IPA expense for the years ended December 31, 2007, 2006, and 2005, was as follows:


		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

The Company also has an individual performance bonus (“IPB”) which is distributed in cash to award recipients throughout the year (beginning in February of each year) as long as the recipient remains employed by the Company. If a recipient terminates employment during the year, any remaining cash payments under the IPB would be forfeited. For the years ended December 31, 2007, 2006, and 2005, the IPB expense was $9.5 million, $8.1 million, and $6.9 million, respectively. The IPA and IPB expenses are included in employee expenses.

Termination of Deferred Compensation Plans. On December 14, 2007, the Company’s Board of Directors made a determination that it is in the Company’s best interest to terminate its deferred compensation plans. The Board of Directors’ decision was primarily in response to increased complexity resulting from recent changes in the regulation of deferred compensation arrangements. The accounts under these plans will be distributed to participants in full on March 18, 2008, the termination and distribution date, or as soon as is reasonably practicable thereafter, in accordance with the transition rule for payment elections under Section 409A of the Code. Distributions from the plans will be made in cash or shares of the Company’s common stock, net of required withholding taxes.

For 2008, the Compensation Committee has determined that the IPA will be paid in cash in two equal installments during the year to eligible officers, as long as the recipient remains employed by the Company.

Note 9. Stock Option Plan

The purpose of the stock option plan (“Option Plan”) is to provide officers and non-officer directors of the Company with additional incentives. Options are exercisable at a price equal to the fair market value of the shares on the day the option is granted. Each option states the period or periods of time within which the option may be exercised by the optionee, which may not exceed ten years from the date

F-55

ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 9. Stock Option Plan, continued

the option is granted. The options granted to officers generally vest ratably over up to a three year period. Options granted to non-officer directors vest on the grant date.

At December 31, 2006, there were 32.2 million shares authorized under the Option Plan. On May 15, 2007, the Company’s stockholders voted to increase the number of shares of common stock authorized for issuance to 37.2 million shares. At December 31, 2007, there were 37.2 million shares authorized under the Option Plan.

On July 18, 2007, the Company completed a tender offer related to the Company’s offer to all optionees who held vested “in-the-money” stock options as of June 20, 2007, the opportunity to receive an option cancellation payment (“OCP”) equal to the “in-the-money” value of the stock options cancelled, determined using the Weighted Average Market Price of $31.75, which would be paid one-half in cash and one-half in unregistered shares of the Company’s common stock. The Company accepted for cancellation 10.3 million vested options, which in the aggregate had a weighted average exercise price of $21.50. This resulted in a total option cancellation payment of approximately $105.6 million, of which $52.8 million was paid in cash and $52.8 million was paid through the issuance of 1.7 million unregistered shares of the Company’s common stock, determined using the Weighted Average Market Price of $31.75. The Weighted Average Market Price represented the volume weighted average price of the Company’s common stock over the fifteen trading days preceding the first day of the offer period, or June 20, 2007. See Note 2 — Stock Compensation Plans.

At December 31, 2007 and 2006, the number of shares available to be granted under the Option Plan was 10.7 million and 1.6 million, respectively.

F-56

ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 9. Stock Option Plan, continued

Information with respect to options granted, exercised and forfeited under the Option Plan for the years ended December 31, 2007, 2006, and 2005, was as follows:


				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.

The fair value of the shares vested during the years ended December 31, 2007, 2006, and 2005, was $21.6 million, $16.1 million, and $16.2 million, respectively. The total intrinsic value of the options exercised during the years ended December 31, 2007, 2006, and 2005, was $2.7 million, $3.6 million, and $18.4 million, respectively.

F-57

ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 9. Stock Option Plan, continued

The following table summarizes information about stock options outstanding at December 31, 2007:


	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

On February 1, 2008, the Company granted 7.1 million options with an exercise price of $22.96. The options vest ratably over a three-year term beginning on June 30, 2009.

Notes Receivable from the Sale of Common Stock

As a business development company under the 1940 Act, the Company is entitled to provide and has provided loans to the Company’s officers in connection with the exercise of options. However, as a result of provisions of the Sarbanes-Oxley Act of 2002, the Company is prohibited from making new loans to its executive officers. The outstanding loans are full recourse, have varying terms not exceeding ten years, bear interest at the applicable federal interest rate in effect at the date of issue and have been recorded as a reduction to shareholders’ equity. At December 31, 2007 and 2006, the Company had outstanding loans to officers of $2.7 million and $2.9 million, respectively. Officers with outstanding loans repaid principal of $0.2 million, $1.0 million, and $1.6 million, for the years ended December 31, 2007, 2006, and 2005, respectively. The Company recognized interest income from these loans of $0.1 million, $0.2 million, and $0.2 million, respectively, during these same periods. This interest income is included in interest and dividends for companies less than 5% owned.

F-58

ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 10. Dividends and Distributions and Taxes

For the years ended December 31, 2007, 2006, and 2005, the Company’s Board of Directors declared the following distributions:


		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

For income tax purposes, distributions for 2007, 2006, and 2005, were composed of the following:


		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.

The Company’s Board of Directors also declared a dividend of $0.65 per common share for the first quarter of 2008.

F-59

ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 10. Dividends and Distributions and Taxes, continued

The following table summarizes the differences between financial statement net increase in net assets resulting from operations and taxable income available for distribution to shareholders for the years ended December 31, 2007, 2006, and 2005:


			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.

F-60

ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 10. Dividends and Distributions and Taxes, continued

The Company must distribute at least 90% of its investment company taxable income to qualify for pass-through tax treatment and maintain its RIC status. The Company has distributed and currently intends to distribute or retain through a deemed distribution sufficient dividends to eliminate taxable income. Dividends declared and paid by the Company in a year generally differ from taxable income for that year as such dividends may include the distribution of current year taxable income, less amounts carried over into the following year, and the distribution of prior year taxable income carried over into and distributed in the current year. For income tax purposes, distributions for 2007, 2006, and 2005, were made from taxable income as follows:


		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.

The Company will generally be required to pay an excise tax equal to 4% of the amount by which 98% of the Company’s annual taxable income exceeds the distributions for the year. The Company’s 2007 (estimated), 2006, and 2005, annual taxable income were in excess of its dividend distributions from such taxable income in those respective years, and accordingly, the Company had an excise tax expense of $16.3 million, $15.1 million, and $6.2 million, respectively, on the excess taxable income carried forward.

In addition to excess taxable income carried forward, the Company currently estimates that it has cumulative deferred taxable income related to installment sale gains of approximately $234.5 million as of December 31, 2007, which is composed of cumulative deferred taxable income of $211.5 million as of December 31, 2006, and approximately $23.0 million for the year ended December 31, 2007. These gains have been recognized for financial reporting purposes in the respective years they were realized, but are generally deferred for tax purposes until the notes or other amounts received from the sale of the related investments are collected in cash. The realized gains deferred through installment treatment for 2007 are estimates and will not be finally determined until the Company files its 2007 tax return in September 2008.

The Company’s undistributed book earnings of $535.9 million as of December 31, 2007, resulted from undistributed ordinary income and long-term capital gains. The difference between undistributed book earnings at the end of the year and taxable income carried over from the current year into the next year relates to a variety of timing and permanent differences in the recognition of income and expenses for book and tax purposes as discussed above.

At December 31, 2007 and 2006, the aggregate gross unrealized appreciation of the Company’s investments above cost for federal income tax purposes was $609.8 million (estimated) and $618.2 million,

F-61

ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 10. Dividends and Distributions and Taxes, continued

respectively. At December 31, 2007 and 2006, the aggregate gross unrealized depreciation of the Company’s investments below cost for federal income tax purposes was $633.1 million (estimated) and $425.0 million, respectively. The Company’s investments as compared to cost for federal income tax purposes was net unrealized depreciation of $23.3 million (estimated) and net unrealized appreciation of $193.2 million at December 31, 2007 and 2006, respectively. At December 31, 2007 and 2006, the aggregate cost of securities, for federal income tax purposes was $4.8 billion (estimated) and $4.3 billion, respectively.

The Company’s consolidated subsidiary, AC Corp, is subject to federal and state income taxes. For the years ended December 31, 2007, 2006, and 2005, AC Corp’s income tax expense (benefit) was $(2.7) million, $(0.1) million, and $5.3 million, respectively. For the years ended December 31, 2007 and 2005, paid in capital was increased for the tax benefit of amounts deducted for tax purposes but not for financial reporting purposes primarily related to stock-based compensation by $10.9 million and $3.7 million, respectively.

The net deferred tax asset at December 31, 2007, was $18.4 million, consisting of deferred tax assets of $26.5 million and deferred tax liabilities of $8.1 million. The net deferred tax asset at December 31, 2006, was $6.9 million, consisting of deferred tax assets of $13.7 million and deferred tax liabilities of $6.8 million. At December 31, 2007, the deferred tax assets primarily related to compensation-related items and the deferred tax liabilities primarily related to depreciation. Management believes that the realization of the net deferred tax asset is more likely than not based on expectations as to future taxable income and scheduled reversals of temporary differences. Accordingly, the Company did not record a valuation allowance at December 31, 2007, 2006, or 2005.

Note 11. Cash

The Company places its cash with financial institutions and, at times, cash held in checking accounts in financial institutions may be in excess of the Federal Deposit Insurance Corporation insured limit.

At December 31, 2007 and 2006, cash consisted of the following:


		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

The Company paid interest of $123.5 million, $90.6 million, and $75.2 million, respectively, for the years ended December 31, 2007, 2006, and 2005.

Non-cash operating activities for the years ended December 31, 2007, 2006 and 2005, totaled $142.2 million, $315.9 million, and $120.7 million, respectively. Non-cash operating activities for the year ended December 31, 2006, included a note received as consideration from the sale of the Company’s equity investment in Advantage of $150.0 million and a note received as consideration from the sale of the Company’s equity investment in STS Operating, Inc. of $30.0 million. Non-cash operating activities for the year ended December 31, 2005, included the exchange of existing subordinated debt securities and accrued interest of Ciena with a cost basis of $44.8 million for additional Class B equity interests.

F-62

ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 12. Supplemental Disclosure of Cash Flow Information, continued

Non-cash financing activities included the issuance of common stock in lieu of cash distributions totaling $17.1 million, $15.0 million, and $9.3 million, for the years ended December 31, 2007, 2006, and 2005, respectively. Non-cash financing activities for the year ended December 31, 2007, also included the payment of one-half of the value of the option cancellation payment in connection with the tender offer, or $52.8 million, through the issuance of 1.7 million unregistered shares of the Company’s common stock. See Notes 2 and 9. Non-cash financing activities for the year ended December 31, 2005, included the issuance of $7.2 million of the Company’s common stock as consideration for an additional investment in Mercury Air Centers, Inc.

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.

F-63

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	$	(0.63	)	$	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

On June 23, 2004, the Company was notified by the SEC that the SEC was conducting an informal investigation of the Company. The investigation related to the valuation of securities in the Company’s private finance portfolio and other matters. On June 20, 2007, the Company announced that it entered into a settlement with the SEC that resolved the SEC’s informal investigation. As part of the settlement and without admitting or denying the SEC’s allegations, the Company agreed to the entry of an administrative order. In the order the SEC alleged that, between June 30, 2001, and March 31, 2003, the Company did not maintain books, records and accounts which, in reasonable detail, supported or accurately and fairly reflected valuations of certain securities in the Company’s private finance portfolio and, as a result, did not meet certain recordkeeping and internal controls provisions of the federal securities laws. In the administrative order, the SEC ordered the Company to continue to maintain certain of its current valuation-related controls. Specifically, for a period of two years, the Company has undertaken to: (1) continue to employ a Chief Valuation Officer, or a similarly structured officer-level employee, to oversee its quarterly valuation processes; and (2) continue to employ third-party valuation consultants to assist in its quarterly valuation processes.

On December 22, 2004, the Company received letters from the U.S. Attorney for the District of Columbia requesting the preservation and production of information regarding the Company and Business Loan Express, LLC (currently known as Ciena Capital LLC) in connection with a criminal investigation relating to matters similar to those investigated by and settled with the SEC as discussed above. The Company produced materials in response to the requests from the U.S. Attorney’s office and certain current and former employees were interviewed by the U.S. Attorney’s Office. The Company has voluntarily cooperated with the investigation.

F-64

ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 15. Litigation, continued

Company became aware that an agent of the Company obtained what were represented to be telephone records of David Einhorn and which purport to be records of calls from Greenlight Capital during a period of time in 2005. Also, while the Company was gathering documents responsive to the subpoena, allegations were made that the Company’s management had authorized the acquisition of these records and that management was subsequently advised that these records had been obtained. The Company’s management has stated that these allegations are not true. The Company has cooperated fully with the inquiry by the U.S. Attorney’s Office.

On February 13, 2007, Rena Nadoff filed a shareholder derivative action in the Superior Court of the District of Columbia, captioned Rena Nadoff v. Walton, et al., CA 001060-07, seeking unspecified compensatory and other damages, as well as equitable relief on behalf of Allied Capital Corporation. The complaint was summarily dismissed in July 2007. The complaint alleged breach of fiduciary duty by the Board of Directors arising from internal control failures and mismanagement of Business Loan Express, LLC, an Allied Capital portfolio company. On October 5, 2007, Rena Nadoff sent a letter to the Company’s Board of Directors with substantially the same claims and a request that the Board of Directors investigate the claims and take appropriate action. The Board of Directors has established a committee, which is advised by its own counsel, to review the matter.

On February 26, 2007, Dana Ross filed a class action complaint in the U.S. District Court for the District of Columbia in which she alleges that Allied Capital Corporation and certain members of management violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. Thereafter, the court appointed new lead counsel and approved new lead plaintiffs. On July 30, 2007, plaintiffs served an amended complaint. Plaintiffs claim that, between November 7, 2005, and January 22, 2007, Allied Capital either failed to disclose or misrepresented information about its portfolio company, Business Loan Express, LLC. Plaintiffs seek unspecified compensatory and other damages, as well as other relief. The Company believes the lawsuit is without merit, and intends to defend the lawsuit vigorously. On September 13, 2007, the Company filed a motion to dismiss the lawsuit. The motion is pending.

In addition, the Company is party to certain lawsuits in the normal course of business.

While the outcome of any of the open legal proceedings described above cannot at this time be predicted with certainty, the Company does not expect these matters will materially affect its financial condition or results of operations.

F-65

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders
Allied Capital Corporation:

Under date of February 28, 2008, we reported on the consolidated balance sheet of Allied Capital Corporation and subsidiaries as of December 31, 2007 and 2006, including the consolidated statements of investments as of December 31, 2007 and 2006, and the related consolidated statements of operations, changes in net assets and cash flows, and the financial highlights (included in Note 13), for each of the years in the three-year period ended December 31, 2007, which are included in this registration statement. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related financial statement schedule as of and for the year ended December 31, 2007. This financial statement schedule is the responsibility of the Company’s management. Our responsibility is to express an opinion on this financial statement schedule based on our audit.

In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects the information set forth therein.

Washington, D.C.

February 28, 2008

F-66

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	)		—

See related footnotes at the end of this schedule.

F-67


			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

See related footnotes at the end of this schedule.

F-68


			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

This schedule should be read in conjunction with the Company’s consolidated financial statements, including the consolidated statement of investments and Note 3 to the consolidated financial statements. Note 3 includes additional information regarding activities in the private finance portfolio.


⁽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.

F-69


⁽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.

F-70

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders
Allied Capital Corporation:

We have reviewed the accompanying consolidated balance sheet of Allied Capital Corporation and subsidiaries (the Company), including the consolidated statement of investments, as of March 31, 2008, the related consolidated statements of operations, changes in net assets and cash flows and the financial highlights (included in Note 12) for the three-month periods ended March 31, 2008 and 2007. These consolidated financial statements and financial highlights are the responsibility of the Company’s management.

We conducted our reviews in accordance with standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should be made to the consolidated financial statements and financial highlights referred to above for them to be in conformity with U.S. generally accepted accounting principles.

We have previously audited, in accordance with standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Allied Capital Corporation and subsidiaries, including the consolidated statement of investments, as of December 31, 2007, and the related consolidated statements of operations, changes in net assets and cash flows (not presented herein), and the financial highlights, for the year then ended; and in our report dated February 28, 2008, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet including the consolidated statement of investments as of December 31, 2007, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

Washington, D.C.
May 9, 2008

F-71

ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET


				March 31,			December 31,
				2008			2007

(in thousands, except per share amounts)				(unaudited)
ASSETS
Portfolio at value:
	Private finance
		Companies more than 25% owned (cost: 2008-$1,656,009; 2007-$1,622,094)		$	1,157,473		$	1,279,080
		Companies 5% to 25% owned (cost: 2008-$361,410; 2007-$426,908)			381,758			389,509
		Companies less than 5% owned (cost: 2008-$3,001,894; 2007-$2,994,880)			2,980,548			2,990,732

			Total private finance (cost: 2008-$5,019,313; 2007-$5,043,882)		4,519,779			4,659,321
	Commercial real estate finance (cost: 2008-$89,707; 2007-$96,942)				115,854			121,200

	Total portfolio at value (cost: 2008-$5,109,020; 2007-$5,140,824)				4,635,633			4,780,521
Investments in U.S. Treasury bills, money market and other securities					120,406			201,222
Accrued interest and dividends receivable					73,709			71,429
Other assets					171,327			157,864
Cash					81,167			3,540

			Total assets	$	5,082,242		$	5,214,576


LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
	Notes payable and debentures (maturing within one year: 2008-$170,813; 2007-$153,000)			$	1,922,813		$	1,922,220
	Revolving line of credit				268,750			367,250
	Accounts payable and other liabilities				62,261			153,259

			Total liabilities		2,253,824			2,442,729

Commitments and contingencies
Shareholders’ equity:
	Common stock, $0.0001 par value, 400,000 shares authorized; 166,472 and 158,002 shares issued and outstanding at March 31, 2008, and December 31, 2007, respectively				16			16
	Additional paid-in capital				2,823,218			2,657,939
	Common stock held in deferred compensation trusts				—			(39,942	)
	Notes receivable from sale of common stock				(2,549	)		(2,692	)
	Net unrealized appreciation (depreciation)				(492,731	)		(379,327	)
	Undistributed earnings				500,464			535,853

	Total shareholders’ equity				2,828,418			2,771,847

	Total liabilities and shareholders’ equity			$	5,082,242		$	5,214,576

Net asset value per common share				$	16.99		$	17.54

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

F-72

ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF OPERATIONS


				For the Three
				Months Ended
				March 31,

				2008			2007
(in thousands, except per share amounts)
				(unaudited)
Interest and Related Portfolio Income:
	Interest and dividends
		Companies more than 25% owned		$	28,624		$	27,157
		Companies 5% to 25% owned			12,674			11,861
		Companies less than 5% owned			93,362			62,965

			Total interest and dividends		134,660			101,983

	Fees and other income
		Companies more than 25% owned			5,465			3,989
		Companies 5% to 25% owned			53			28
		Companies less than 5% owned			4,766			1,952

			Total fees and other income		10,284			5,969

			Total interest and related portfolio income		144,944			107,952

Expenses:
	Interest				37,560			30,288
	Employee				22,652			21,928
	Employee stock options				4,195			3,661
	Administrative				9,019			13,224

			Total operating expenses		73,426			69,101

Net investment income before income taxes					71,518			38,851
Income tax expense (benefit), including excise tax					1,969			(649	)

Net investment income					69,549			39,500

Net Realized and Unrealized Gains (Losses):
	Net realized gains (losses)
		Companies more than 25% owned			(303	)		(1,350	)
		Companies 5% to 25% owned			1,243			166
		Companies less than 5% owned			2,203			28,850

			Total net realized gains		3,143			27,666
	Net change in unrealized appreciation or depreciation				(113,404	)		65,920

			Total net gains (losses)		(110,261	)		93,586

Net increase (decrease) in net assets resulting from operations				$	(40,712	)	$	133,086

Basic earnings (loss) per common share				$	(0.25	)	$	0.89

Diluted earnings (loss) per common share				$	(0.25	)	$	0.87

Weighted average common shares outstanding — basic					161,507			149,503

Weighted average common shares outstanding — diluted					161,507			152,827

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

F-73

ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN NET ASSETS


			For the Three Months
			Ended March 31,

			2008			2007
(in thousands, except per share amounts)
			(unaudited)
Operations:
	Net investment income		$	69,549		$	39,500
	Net realized gains			3,143			27,666
	Net change in unrealized appreciation or depreciation			(113,404	)		65,920

		Net increase (decrease) in net assets resulting from operations		(40,712	)		133,086

Shareholder distributions:
	Common stock dividends			(108,081	)		(95,753	)

		Net decrease in net assets resulting from shareholder distributions		(108,081	)		(95,753	)

Capital share transactions:
	Sale of common stock			170,883			93,784
	Issuance of common stock in lieu of cash distributions			3,751			4,266
	Issuance of common stock upon the exercise of stock options			—			1,366
	Stock option expense			4,195			3,661
	Net decrease in notes receivable from sale of common stock			143			135
	Purchase of common stock held in deferred compensation trusts			(943	)		(3,089	)
	Distribution of common stock held in deferred compensation trusts			27,335			53
	Other			—			(476	)

		Net increase in net assets resulting from capital share transactions		205,364			99,700

		Total increase in net assets		56,571			137,033
Net assets at beginning of period				2,771,847			2,841,244

Net assets at end of period			$	2,828,418		$	2,978,277

Net asset value per common share			$	16.99		$	19.58

Common shares outstanding at end of period				166,472			152,124

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

F-74

ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS


				For the Three Months
				Ended March 31,

				2008			2007
(in thousands)
				(unaudited)
Cash flows from operating activities:
	Net increase (decrease) in net assets resulting from operations			$	(40,712	)	$	133,086
	Adjustments:
		Portfolio investments			(275,130	)		(170,216	)
		Principal collections related to investment repayments or sales			264,777			235,509
		Payment-in-kind interest and dividends, net of cash collections			(13,392	)		(8,143	)
		Change in accrued interest and dividends			(2,280	)		(3,124	)
		Net collection (amortization) of discounts and fees			(3,748	)		(1,844	)
		Redemption of (investments in) U.S. Treasury bills, money market and other securities			80,834			(66,335	)
		Stock option expense			4,195			3,661
		Changes in other assets and liabilities			(46,218	)		(40,453	)
		Depreciation and amortization			528			507
		Realized gains from the receipt of notes and other consideration from sale of investments, net of collections			(565	)		(2,814	)
		Realized losses			29,597			5,515
		Net change in unrealized (appreciation) or depreciation			113,404			(65,920	)

			Net cash provided by operating activities		111,290			19,429

Cash flows from financing activities:
	Sale of common stock				170,883			93,784
	Sale of common stock upon the exercise of stock options				—			1,366
	Collections of notes receivable from sale of common stock				143			135
	Borrowings under notes payable				—			200,000
	Net borrowings under (repayments on) revolving line of credit				(98,500	)		(207,750	)
	Purchase of common stock held in deferred compensation trusts				(943	)		(3,089	)
	Other financing activities				(916	)		(6,325	)
	Common stock dividends and distributions paid				(104,330	)		(98,910	)

			Net cash provided by (used in) financing activities		(33,663	)		(20,789	)

Net increase (decrease) in cash					77,627			(1,360	)
Cash at beginning of period					3,540			1,687

Cash at end of period				$	81,167		$	327

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

F-75

ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF INVESTMENTS

March 31, 2008

(unaudited)

Private Finance

Portfolio Company

(in thousands, except number of shares)

Investment⁽¹⁾⁽²⁾

Principal

Cost

Value

Companies More Than 25% Owned

AGILE Fund I, LLC⁽⁵⁾

Equity Interests

860

(Private Equity Fund)

Total Investment

860

Alaris Consulting, LLC

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

27,055

26,986

—

(Business Services)

Equity Interests

6,400

—

Total Investment

33,386

—

Guaranty ($1,100)

Standby Letters of Credit ($231)

AllBridge Financial, LLC

Equity Interests

21,744

15,470

(Asset Management)

Total Investment

21,744

15,470

Standby Letter of Credit ($30,000)

Allied Capital Senior Debt Fund, L.P. ⁽⁵⁾

Equity Interests (See Note 3)

31,800

32,605

(Private Debt Fund)

Total Investment

31,800

32,605

Avborne, Inc.⁽⁷⁾

Preferred Stock (12,500 shares)

611

1,684

(Business Services)

Common Stock (27,500 shares)

—

Total Investment

611

1,684

Avborne Heavy Maintenance, Inc.⁽⁷⁾

Preferred Stock (1,568 shares)

—

157

(Business Services)

Common Stock (2,750 shares)

—

1,037

Total Investment

—

1,194

Aviation Properties Corporation

Common Stock (100 shares)

—

(Business Services)

Total Investment

—

Standby Letters of Credit ($1,000)

Border Foods, Inc.

Preferred Stock (100,000 shares)

12,721

3,141

(Consumer Products)

Common Stock (148,838 shares)

3,847

—

Total Investment

16,568

3,141

Calder Capital Partners, LLC⁽⁵⁾

Senior Loan (9.4%, Due 5/09)⁽⁶⁾

2,880

3,073

(Asset Management)

Equity Interests

2,397

3,534

Total Investment

5,277

6,607

Callidus Capital Corporation

Senior Loan (12.0%, Due 12/08)

1,500

(Asset Management)

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

11,180

Common Stock (100 shares)

2,067

40,022

Total Investment

14,747

52,702


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

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

F-76

ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF INVESTMENTS — (Continued)


				March 31, 2008

				(unaudited)
Private Finance
Portfolio Company
(in thousands, except number of shares)		Investment⁽¹⁾⁽²⁾		Principal		Cost		Value

Ciena Capital LLC (Financial Services)		Class A Equity Interests (25.0% – See Note 3)⁽⁶⁾		$	99,044	$	99,044	$	29,291
		Class B Equity Interests					119,436		—
		Class C Equity Interests					109,301		—

			Total Investment				327,781		29,291

		Guaranty ($384,819 – See Note 3)
		Standby Letters of Credit ($59,500 – See Note 3)

CitiPostal Inc.		Senior Loan (6.1%, Due 12/13)			691		680		680
	(Business Services)	Unitranche Debt (12.0%, Due 12/13)			51,369		51,126		51,126
		Subordinated Debt (16.0%, Due 12/15)			8,092		8,092		8,092
		Common Stock (37,024 shares)					12,726		16,777

			Total Investment				72,624		76,675


Coverall North America, Inc.		Unitranche Debt (12.0%, Due 7/11)			32,035		31,923		31,923
	(Business Services)	Subordinated Debt (15.0%, Due 7/11)			5,563		5,545		5,545
		Common Stock (763,333 shares)					14,362		28,008

			Total Investment				51,830		65,476


CR Holding, Inc.		Subordinated Debt (16.6%, Due 2/13)			38,306		38,180		38,180
	(Consumer Products)	Common Stock (32,090,696 shares)					28,744		27,482

			Total Investment				66,924		65,662


Crescent Equity Corp.⁽⁸⁾		Senior Loan (10.0%, Due 12/07)			433		433		433
	(Business Services/	Subordinated Debt (11.0%, Due 1/10 – 6/17)			31,095		30,979		30,979
	Broadcasting & Cable)	Subordinated Debt (12.5%, Due 11/07 – 3/08) ⁽⁶⁾			1,450		1,450		1,683
		Common Stock (174 shares)					80,571		24,313

			Total Investment				113,433		57,408

		Guaranty ($900)
		Standby Letters of Credit ($200)

Direct Capital Corporation		Subordinated Debt (16.0%, Due 3/13)			49,841		49,706		49,706
	(Financial Services)	Common Stock (1,809,159 shares)					22,644		11,006

			Total Investment				72,350		60,712


Financial Pacific Company		Subordinated Debt (17.4%, Due 2/12 – 8/12)			68,056		67,898		67,898
	(Financial Services)	Preferred Stock (9,458 shares)					8,865		17,551
		Common Stock (12,711 shares)					12,783		24,021

			Total Investment				89,546		109,470


⁽¹⁾		Interest rates represent the weighted average annual stated interest rate on loans and debt securities, which are presented by nature of indebtedness for a single issuer. The maturity dates represent the earliest and the latest maturity dates.
⁽²⁾		Common stock, preferred stock, warrants, options, and equity interests are generally non-income producing and restricted.
⁽⁶⁾		Loan or debt security is on non-accrual status and therefore is considered non-income producing.
⁽⁸⁾		Crescent Equity Corp. had a cost basis of $113.4 million and holds investments in Crescent Hotels & Resorts, LLC and affiliates (Business Services) with a value of $54.9 million, and Longview Cable & Data, LLC (Broadcasting & Cable) with a value of $2.6 million, for a total value of $57.4 million.

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

F-77

ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF INVESTMENTS — (Continued)


				March 31, 2008

				(unaudited)
Private Finance
Portfolio Company
(in thousands, except number of shares)		Investment⁽¹⁾⁽²⁾		Principal		Cost		Value

ForeSite Towers, LLC		Equity Interest				$	—	$	803

	(Tower Leasing)		Total Investment				—		803


Global Communications, LLC		Senior Loan (10.0%, Due 9/02)⁽⁶⁾		$	1,350		1,350		1,350

	(Business Services)		Total Investment				1,350		1,350


Hot Light Brands, Inc.		Senior Loan (9.0%, Due 2/11)⁽⁶⁾			29,277		29,277		29,628
	(Retail)	Common Stock (93,500 shares)					5,151		1,150

			Total Investment				34,428		30,778


Hot Stuff Foods, LLC		Senior Loan (6.2%, Due 2/11-2/12)			52,414		52,238		52,238
	(Consumer Products)	Subordinated Debt (9.9%, Due 8/12)			30,540		30,452		20,399
		Subordinated Debt (15.4%, Due 2/13)⁽⁶⁾			52,373		52,151		—
		Common Stock (1,147,453 shares)					56,187		—

			Total Investment				191,028		72,637


Huddle House, Inc.		Subordinated Debt (15.0%, Due 12/12)			55,927		55,717		55,717
	(Retail)	Common Stock (358,428 shares)					35,828		36,824

			Total Investment				91,545		92,541


Impact Innovations Group, LLC		Equity Interests in Affiliate					—		321

	(Business Services)		Total Investment				—		321


Insight Pharmaceuticals Corporation		Subordinated Debt (15.0%, Due 9/12)			45,554		45,441		45,441
	(Consumer Products)	Subordinated Debt (19.0%, Due 9/12)⁽⁶⁾			16,181		16,130		16,967
		Preferred Stock (25,000 shares)					25,000		10,561
		Common Stock (620,000 shares)					6,325		—

			Total Investment				92,896		72,969


Jakel, Inc.		Subordinated Debt (15.5%, Due 3/08)⁽⁶⁾			748		748		748

	(Industrial Products)		Total Investment				748		748


Legacy Partners Group, Inc.		Senior Loan (14.0%, Due 5/09)⁽⁶⁾			843		843		843
	(Financial Services)	Equity Interests					4,261		1,145

			Total Investment				5,104		1,988


Litterer Beteiligungs-GmbH⁽⁴⁾		Subordinated Debt (8.0%, Due 3/07)			828		828		828
	(Business Services)	Equity Interest					1,809		850

			Total Investment				2,637		1,678


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

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

F-78

ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF INVESTMENTS — (Continued)


				March 31, 2008

				(unaudited)
Private Finance
Portfolio Company
(in thousands, except number of shares)		Investment⁽¹⁾⁽²⁾		Principal		Cost		Value

MHF Logistical Solutions, Inc. (Business Services)		Subordinated Debt (13.0%, Due 6/12 – 6/13) ⁽⁶⁾		$	49,841	$	49,613	$	9,319
		Preferred Stock (10,000 shares)					—		—
		Common Stock (20,934 shares)					20,942		—

			Total Investment				70,555		9,319


MVL Group, Inc.		Senior Loan (12.0%, Due 6/09 – 7/09)			30,674		30,645		30,645
	(Business Services)	Subordinated Debt (14.5%, Due 6/09 – 7/09)			40,447		40,239		40,239
		Common Stock (559,377 shares)					555		4,373

		Total Investment					71,439		75,257


Old Orchard Brands, LLC		Subordinated Debt (18.0%, Due 7/14)			18,402		18,325		18,325
	(Consumer Products)	Equity Interests					15,857		25,302

			Total Investment				34,182		43,627


Penn Detroit Diesel Allison, LLC		Subordinated Debt (15.5%, Due 8/13)			37,145		37,011		37,011
	(Business Services)	Equity Interests					18,850		33,522

			Total Investment				55,861		70,533


Service Champ, Inc.		Subordinated Debt (15.5%, Due 4/12)			26,542		26,461		26,461
	(Business Services)	Common Stock (55,112 shares)					11,785		23,751

			Total Investment				38,246		50,212


Startec Equity, LLC		Equity Interests					191		397

	(Telecommunications)		Total Investment				191		397


Sweet Traditions, Inc.		Senior Loan (10.0%, Due 9/08)⁽⁶⁾			694		694		427

	(Retail)	Total Investment					694		427


Unitranche Fund LLC		Subordinated Certificates (12.4)%					31,491		31,491
	(Private Debt Fund)	Equity Interests					1		1

			Total Investment				31,492		31,492


Worldwide Express Operations, LLC		Subordinated Debt (14.0%, Due 2/14)			2,695		2,539		2,539
	(Business Services)	Equity Interests					11,384		18,664
		Warrants					144		236

			Total Investment				14,067		21,439


Total companies more than 25% owned						$	1,656,009	$	1,157,473


⁽¹⁾		Interest rates represent the weighted average annual stated interest rate on loans and debt securities, which are presented by nature of indebtedness for a single issuer. The maturity dates represent the earliest and the latest maturity dates.
⁽²⁾		Common stock, preferred stock, warrants, options, and equity interests are generally non-income producing and restricted.
⁽⁶⁾		Loan or debt security is on non-accrual status and therefore is considered non-income producing.

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

F-79

ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF INVESTMENTS — (Continued)

March 31, 2008

(unaudited)

Private Finance

Portfolio Company

(in thousands, except number of shares)

Investment⁽¹⁾⁽²⁾

Principal

Cost

Value

Companies 5% to 25% Owned

10(th) Street, LLC

Subordinated Debt (13.0%, Due 11/14)

20,774

20,650

20,774

(Business Services)

Equity Interests

421

1,075

Option

Total Investment

21,096

21,874

Advantage Sales & Marketing, Inc.

Subordinated Debt (12.0%, Due 3/14)

156,218

155,663

157,443

(Business Services)

Equity Interests

—

10,200

Total Investment

155,663

167,643

Air Medical Group Holdings LLC

Senior Loan (5.2%, Due 3/11)

4,023

3,977

3,865

(Healthcare Services)

Equity Interests

2,993

9,900

Total Investment

6,970

13,765

Alpine ESP Holdings, Inc.

Preferred Stock (536 shares)

536

622

(Business Services)

Common Stock (11,657 shares)

—

Total Investment

548

622

Amerex Group, LLC

Subordinated Debt (12.0%, Due 1/13)

7,789

(Consumer Products)

Equity Interests

3,509

12,772

Total Investment

11,298

20,561

BB&T Capital Partners/ Windsor Mezzanine Fund, LLC⁽⁵⁾

Equity Interests

11,739

11,475

(Private Equity Fund)

Total Investment

11,739

11,475

Becker Underwood, Inc.

Subordinated Debt (14.5%, Due 8/12)

25,023

24,960

25,524

(Industrial Products)

Common Stock (4,376 shares)

5,014

4,000

Total Investment

29,974

29,524

BI Incorporated

Subordinated Debt (13.5%, Due 2/14)

30,615

30,504

30,921

(Business Services)

Common Stock (34,506 shares)

3,451

6,200

Total Investment

33,955

37,121

Creative Group, Inc.

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

15,000

13,686

5,185

(Business Services)

Common Stock (20,000 shares)

—

Warrant

1,387

—

Total Investment

15,073

5,185

Drew Foam Companies, Inc.

Preferred Stock (622,555 shares)

623

270

(Business Services)

Common Stock (6,286 shares)

—

Total Investment

629

270


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

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

F-80

ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF INVESTMENTS — (Continued)


				March 31, 2008

				(unaudited)
Private Finance
Portfolio Company
(in thousands, except number of shares)		Investment⁽¹⁾⁽²⁾		Principal		Cost		Value

Hilden America, Inc.		Common Stock (19 shares)				$	454	$	445

	(Consumer Products)		Total Investment				454		445


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		2,601
		Convertible Subordinated Debt (2.0%, Due 8/14) ⁽⁶⁾			2,970		984		—
		Equity Interests					1,416		—

			Total Investment				14,748		9,765


Multi-Ad Services, Inc.		Unitranche Debt (11.3%, Due 11/11)			19,750		19,660		19,732
	(Business Services)	Equity Interests					1,725		1,014

			Total Investment				21,385		20,746


Progressive International Corporation		Subordinated Debt (16.0%, Due 12/09)			1,576		1,565		1,576
	(Consumer Products)	Preferred Stock (500 shares)					500		1,059
		Common Stock (197 shares)					13		5,800
		Warrants					—		—

			Total Investment				2,078		8,435


Regency Healthcare Group, LLC		Unitranche Debt (11.1%, Due 6/12)			12,000		11,944		12,297
	(Healthcare Services)	Equity Interests					1,294		1,497

			Total Investment				13,238		13,794


SGT India Private Limited⁽⁴⁾		Common Stock (150,596 shares)					4,099		2,580

	(Business Services)		Total Investment				4,099		2,580


Soteria Imaging Services, LLC		Subordinated Debt (11.9%, Due 11/10)			15,750		15,029		15,750
	(Healthcare Services)	Equity Interests					1,872		2,203

			Total Investment				16,901		17,953


Universal Environmental Services, LLC		Equity Interests					1,562		—

	(Business Services)		Total Investment				1,562		—


Total companies 5% to 25% owned						$	361,410	$	381,758

Companies Less Than 5% Owned

3SI Security Systems, Inc.		Subordinated Debt (14.5%, Due 8/13)		$	28,234	$	28,139	$	27,836

	(Consumer Products)		Total Investment				28,139		27,836


AgData, L.P.		Senior Loan (10.3%, Due 7/12)			1,843		1,836		1,862
	(Consumer Services)	Unitranche Debt (10.3%, Due 7/12)			4,120		4,080		4,161

			Total Investment				5,916		6,023


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

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

F-81

ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF INVESTMENTS — (Continued)

March 31, 2008

(unaudited)

Private Finance

Portfolio Company

(in thousands, except number of shares)

Investment⁽¹⁾⁽²⁾

Principal

Cost

Value

Augusta Sportswear Group, Inc.

Subordinated Debt (13.0%, Due 1/15)

53,000

52,807

(Consumer Products)

Common Stock (2,500 shares)

2,500

2,227

Total Investment

55,307

55,034

Axium Healthcare Pharmacy, Inc.

Senior Loan (14.0%, Due 12/12)

3,750

3,719

3,750

(Healthcare Services)

Unitranche Debt (14.0%, Due 12/12)

8,500

8,465

8,500

Common Stock (22,860 shares)

2,286

800

Total Investment

14,470

13,050

Baird Capital Partners IV Limited⁽⁵⁾

Limited Partnership Interest

2,630

2,492

(Private Equity Fund)

Total Investment

2,630

2,492

BenefitMall, Inc.

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

76,189

75,978

(Business Services)

Common Stock (39,274,290 shares)⁽¹²⁾

39,274

82,250

Warrants⁽¹²⁾

—

Total Investment

115,252

158,228

Broadcast Electronics, Inc.

Senior Loan (8.0%, Due 7/12)⁽⁶⁾

4,913

4,884

2,781

(Business Services)

Total Investment

4,884

2,781

Bushnell, Inc.

Subordinated Debt (9.2%, Due 2/14)

41,325

39,862

38,206

(Consumer Products)

Total Investment

39,862

38,206

Callidus Debt Partners

CDO Fund I, Ltd.^(4)(10)

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

18,800

18,924

18,988

(CDO)

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

9,400

9,462

9,494

Total Investment

28,386

28,482

Callidus Debt Partners

CLO Fund III, Ltd.^(4)(10)

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

21,435

20,029

(CLO)

Total Investment

21,435

20,029

Callidus Debt Partners

CLO Fund IV, Ltd.^(4)(10)

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

3,000

1,953

2,627

(CLO)

Income Notes (18.6%)⁽¹¹⁾

15,192

14,929

Total Investment

17,145

17,556


⁽¹⁾		Interest rates represent the weighted average annual stated interest rate on loans and debt securities, which are presented by nature of indebtedness for a single issuer. The maturity dates represent the earliest and the latest maturity dates.
⁽²⁾		Common stock, preferred stock, warrants, options, and equity interests are generally non-income producing and restricted.
⁽⁴⁾		Non-U.S. company or principal place of business outside the U.S.
⁽⁵⁾		Non-registered investment company.
⁽⁶⁾		Loan or debt security is on non-accrual status and therefore is considered non-income producing.
⁽¹⁰⁾		The fund is managed by Callidus Capital, a portfolio company of Allied Capital.
⁽¹¹⁾		Represents the effective interest yield earned on the cost basis of these preferred equity investments and income notes. The yield is included in interest income from companies less than 5% owned in the consolidated statement of operations.
⁽¹²⁾		Common stock is non-voting. In addition to non-voting stock ownership, the Company has an option to acquire a majority of the voting securities of the portfolio company at fair market value.

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

F-82

ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF INVESTMENTS — (Continued)

March 31, 2008

(unaudited)

Private Finance

Portfolio Company

(in thousands, except number of shares)

Investment⁽¹⁾⁽²⁾

Principal

Cost

Value

Callidus Debt Partners

CLO Fund V, Ltd.^(4)(10)

Income Notes (20.3%)⁽¹¹⁾

13,838

13,818

(CLO)

Total Investment

13,838

13,818

Callidus Debt Partners

CLO Fund VI, Ltd.^(4)(10)

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

5,000

4,341

4,487

(CLO)

Income Notes (18.0%)⁽¹¹⁾

28,308

26,540

Total Investment

32,649

31,027

Callidus Debt Partners

CLO Fund VII, Ltd.^(4)(10)

Income Notes (16.6%)⁽¹¹⁾

23,041

(CLO)

Total Investment

23,041

Callidus MAPS CLO Fund I LLC⁽¹⁰⁾

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

17,000

15,497

(CLO)

Income Notes (3.7%)⁽¹¹⁾

48,422

31,530

Total Investment

65,422

47,027

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

Income Notes (15.7%)⁽¹¹⁾

18,755

16,741

(CLO)

Total Investment

18,755

16,741

Carlisle Wide Plank Floors, Inc.

Senior Loan (7.8%, Due 6/11)

500

497

496

(Consumer Products)

Unitranche Debt (10.0%, Due 6/11)

3,161

3,132

3,161

Preferred Stock (345,056 Shares)

345

362

Total Investment

3,974

4,019

Catterton Partners VI, L.P.⁽⁵⁾

Limited Partnership Interest

2,536

2,477

(Private Equity Fund)

Total Investment

2,536

2,477

Centre Capital Investors V, L.P.⁽⁵⁾

Limited Partnership Interest

720

(Private Equity Fund)

Total Investment

720


⁽¹⁾		Interest rates represent the weighted average annual stated interest rate on loans and debt securities, which are presented by nature of indebtedness for a single issuer. The maturity dates represent the earliest and the latest maturity dates.
⁽²⁾		Common stock, preferred stock, warrants, options, and equity interests are generally non-income producing and restricted.
⁽⁴⁾		Non-U.S. company or principal place of business outside the U.S.
⁽⁵⁾		Non-registered investment company.
⁽¹⁰⁾		The fund is managed by Callidus Capital, a portfolio company of Allied Capital.
⁽¹¹⁾		Represents the effective interest yield earned on the cost basis of these preferred equity investments and income notes. The yield is included in interest income from companies less than 5% owned in the consolidated statement of operations.

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

F-83

ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF INVESTMENTS — (Continued)


				March 31, 2008

				(unaudited)
Private Finance
Portfolio Company
(in thousands, except number of shares)		Investment⁽¹⁾⁽²⁾		Principal		Cost		Value

CK Franchising, Inc.		Senior Loan (5.9%, Due 7/12)		$	8,150	$	8,066	$	8,066
	(Consumer Services)	Subordinated Debt (12.3%, Due 7/12 – 7/17)			21,038		20,951		20,951
		Preferred Stock (1,281,887 shares)					1,282		1,422
		Common Stock (7,585,549 shares)					7,586		7,600

			Total Investment				37,885		38,039


Commercial Credit Group, Inc.		Subordinated Debt (14.8%, Due 2/11)			12,000		12,021		12,021
	(Financial Services)	Preferred Stock (64,679 shares)					15,543		9,073
		Warrants					—		—

			Total Investment				27,564		21,094


Community Education Centers, Inc.		Subordinated Debt (13.5%, Due 11/13)			35,145		35,074		34,211

	(Education Services)		Total Investment				35,074		34,211


Component Hardware Group, Inc.		Subordinated Debt (13.5%, Due 1/13)			18,501		18,435		18,666

	(Industrial Products)		Total Investment				18,435		18,666


Cook Inlet Alternative Risk, LLC		Unitranche Debt (10.8%, Due 4/13)			90,000		89,552		90,954
	(Business Services)	Equity Interests					552		700

			Total Investment				90,104		91,654


Cortec Group Fund IV, L.P.⁽⁵⁾		Limited Partnership Interest					3,470		2,998

	(Private Equity)		Total Investment				3,470		2,998


Diversified Mercury		Senior Loan (6.1%, Due 3/13)			233		218		220
Communications, LLC

	(Business Services)		Total Investment				218		220


Digital VideoStream, LLC		Unitranche Debt (11.0%, Due 2/12)			17,257		17,177		17,528
	(Business Services)	Convertible Subordinated Debt
		(10.0%, Due 2/16)			4,220		4,207		5,894

			Total Investment				21,384		23,422


DirectBuy Holdings, Inc.		Subordinated Debt (14.5%, Due 5/13)			75,000		74,648		72,744
	(Consumer Products)	Equity Interests					8,000		5,400

			Total Investment				82,648		78,144


Distant Lands Trading Co.		Senior Loan (10.3%, Due 11/11)			9,000		8,968		8,736
	(Consumer Products)	Unitranche Debt (13.0%, Due 11/11)			42,375		42,235		42,423
		Common Stock (3,451 shares)					3,451		905

			Total Investment				54,654		52,064


Driven Brands, Inc.		Senior Loan (8.2%, Due 6/11)			40,270		40,148		40,148
	d/b/a Meineke and Econo Lube	Subordinated Debt (12.1%, Due 6/12 – 6/13)			82,960		82,715		82,715
	(Consumer Services)	Common Stock (10,463,473 shares)⁽¹²⁾					26,398		6,079
		Warrants⁽¹²⁾					—		—

			Total Investment				149,261		128,942


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

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

F-84

ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF INVESTMENTS — (Continued)

March 31, 2008

(unaudited)

Private Finance

Portfolio Company

(in thousands, except number of shares)

Investment⁽¹⁾⁽²⁾

Principal

Cost

Value

Dryden XVIII Leveraged

Loan 2007 Limited⁽⁴⁾

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

9,000

7,420

8,257

(CLO)

Income Notes (12.7%)⁽¹¹⁾

22,727

19,803

Total Investment

30,147

28,060

Dynamic India Fund IV⁽⁴⁾⁽⁵⁾

Equity Interests

9,350

11,524

(Private Equity Fund)

Total Investment

9,350

11,524

EarthColor, Inc.

Subordinated Debt (15.0%, Due 11/13)

117,759

117,284

(Business Services)

Common Stock (63,438 shares)⁽¹²⁾

63,438

66,434

Warrants⁽¹²⁾

—

Total Investment

180,722

183,718

eCentury Capital Partners, L.P.⁽⁵⁾

Limited Partnership Interest

7,274

2,076

(Private Equity Fund)

Total Investment

7,274

2,076

eInstruction Corporation

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

47,000

46,774

45,738

(Education Services)

Common Stock (2,406 shares)

2,500

2,700

Total Investment

49,274

48,438

Farley’s & Sathers Candy Company, Inc.

Subordinated Debt (12.7%, Due 3/11)

18,000

17,937

17,100

(Consumer Products)

Total Investment

17,937

17,100

FCP-BHI Holdings, LLC

Subordinated Debt (12.5%, Due 9/13)

24,939

24,831

24,241

d/b/a Bojangles’

Equity Interests

863

1,400

(Retail)

Total Investment

25,694

25,641

Fidus Mezzanine Capital, L.P.⁽⁵⁾

Limited Partnership Interest

6,357

(Private Equity Fund)

Total Investment

6,357

Freedom Financial Network, LLC

Senior Loan (6.8%, Due 2/13)

12,968

(Financial Services)

Subordinated Debt (13.5%, Due 2/14)

13,000

12,936

Total Investment

25,904

Frozen Specialties, Inc.

Warrants

375

—

(Consumer Products)

Total Investment

375

—

Garden Ridge Corporation

Subordinated Debt (7.0%, Due 5/12)⁽⁶⁾

20,500

(Retail)

Total Investment

20,500

Geotrace Technologies, Inc.

Subordinated Debt (10.0%, Due 6/09)

6,198

6,068

6,260

(Energy Services)

Warrants

2,027

2,700

Total Investment

8,095

8,960


⁽¹⁾		Interest rates represent the weighted average annual stated interest rate on loans and debt securities, which are presented by nature of indebtedness for a single issuer. The maturity dates represent the earliest and the latest maturity dates.
⁽²⁾		Common stock, preferred stock, warrants, options, and equity interests are generally non-income producing and restricted.
⁽⁴⁾		Non-U.S. company or principal place of business outside the U.S.
⁽⁵⁾		Non-registered investment company.
⁽⁶⁾		Loan or debt security is on non-accrual status and therefore is considered non-income producing.
⁽¹¹⁾		Represents the effective interest yield earned on the cost basis of these preferred equity investments and income notes. The yield is included in interest income from companies less than 5% owned in the consolidated statement of operations.
⁽¹²⁾		Common stock is non-voting. In addition to non-voting stock ownership, the Company has an option to acquire a majority of the voting securities of the portfolio company at fair market value.

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

F-85

ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF INVESTMENTS — (Continued)


				March 31, 2008

				(unaudited)
Private Finance
Portfolio Company
(in thousands, except number of shares)		Investment⁽¹⁾⁽²⁾		Principal		Cost		Value

Gilchrist & Soames, Inc.		Senior Loan (8.4%, Due 10/13)		$	5,000	$	4,956	$	4,756
	(Consumer Products)	Subordinated Debt (13.4%, Due 10/13)			25,800		25,682		25,342

			Total Investment				30,638		30,098


Havco Wood Products LLC		Unitranche Debt (11.5%, Due 8/11)			5,100		4,293		5,208
	(Industrial Products)	Equity Interests					910		2,900

			Total Investment				5,203		8,108


Haven Eldercare of New England, LLC		Subordinated Debt (12.0%, Due 8/09)⁽⁶⁾			1,439		1,439		—

	(Healthcare Services)		Total Investment				1,439		—


Higginbotham Insurance Agency, Inc.		Senior Loan (7.2%, Due 8/12)			17,546		17,459		17,459
	(Business Services)	Subordinated Debt (13.6%, Due 8/13 – 8/14)			46,883		46,669		46,669
		Common Stock (22,020 shares)⁽¹²⁾					22,020		22,887
		Warrant⁽¹²⁾					—		—

			Total Investment				86,148		87,015


The Hillman Companies, Inc.⁽³⁾		Subordinated Debt (10.0%, Due 9/11)			44,580		44,466		44,580

	(Consumer Products)		Total Investment				44,466		44,580


The Homax Group, Inc.		Senior Loan (8.7%, Due 10/12)			10,940		10,940		10,508
	(Consumer Products)	Subordinated Debt (12.0%, Due 4/14)			14,000		13,283		13,571
		Preferred Stock (76 shares)					76		5
		Common Stock (24 shares)					5		—
		Warrants					954		80

			Total Investment				25,258		24,164


Ideal Snacks Corporation		Senior Loan (7.0%, Due 6/10)			545		545		535

	(Consumer Products)		Total Investment				545		535


Integrity Interactive Corporation		Unitranche Debt (10.5%, Due 2/12)			11,952		11,860		12,175

	(Business Services)		Total Investment				11,860		12,175


International Fiber Corporation		Subordinated Debt (14.0%, Due 6/12)			24,697		24,607		25,438
	(Industrial Products)	Preferred Stock (21,566 shares)					2,157		2,157

			Total Investment				26,764		27,595


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

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

F-86

ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF INVESTMENTS — (Continued)

March 31, 2008

(unaudited)

Private Finance

Portfolio Company

(in thousands, except number of shares)

Investment⁽¹⁾⁽²⁾

Principal

Cost

Value

Jones Stephens Corporation

Senior Loan (7.5%, Due 9/12)

5,516

5,505

5,272

(Consumer Products)

Total Investment

5,505

5,272

Knightsbridge CLO 2007-1 Limited⁽⁴⁾

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

22,000

21,983

(CLO)

Income Notes (18.5%)⁽¹¹⁾

32,413

30,985

Total Investment

54,413

52,968

Kodiak Fund LP⁽⁵⁾

Equity Interests

9,423

2,835

(Private Equity Fund)

Total Investment

9,423

2,835

Line-X, Inc.

Senior Loan (15.0%, Due 8/11)

900

886

(Consumer Products)

Unitranche Debt (15.0% Due 8/11)

48,204

48,055

42,810

Total Investment

48,941

43,696

Standby Letter of Credit ($1,500)

MedAssets, Inc.⁽³⁾

Common Stock (224,817 shares)

2,289

3,332

(Business Services)

Total Investment

2,289

3,332

Milestone AV Technologies, Inc.

Subordinated Debt (9.2%, Due 6/13)

37,500

(Business Services)

Total Investment

37,500

NetShape Technologies, Inc.

Senior Loan (6.5%, Due 2/13)

5,820

5,792

5,282

(Industrial Products)

Total Investment

5,792

5,282

Network Hardware Resale, Inc.

Unitranche Debt (10.5%, Due 12/11)

20,219

20,314

20,624

(Business Services)

Convertible Subordinated Debt (9.8%,

14,533

14,591

16,560

Due 12/15)

Total Investment

34,905

37,184

Norwesco, Inc.

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

61,866

61,558

(Industrial Products)

Common Stock (482,736 shares)⁽¹²⁾

3,676

64,854

Warrants⁽¹²⁾

—

Total Investment

65,234

126,412

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

Limited Partnership Interest

1,910

1,496

(Private Equity Fund)

Total Investment

1,910

1,496


⁽¹⁾		Interest rates represent the weighted average annual stated interest rate on loans and debt securities, which are presented by nature of indebtedness for a single issuer. The maturity dates represent the earliest and the latest maturity dates.
⁽²⁾		Common stock, preferred stock, warrants, options, and equity interests are generally non-income producing and restricted.
⁽³⁾		Public company.
⁽⁴⁾		Non-U.S. company or principal place of business outside the U.S.
⁽⁵⁾		Non-registered investment company.
⁽¹¹⁾		Represents the effective interest yield earned on the cost basis of these preferred equity investments and income notes. The yield is included in interest income from companies less than 5% owned in the consolidated statement of operations.
⁽¹²⁾		Common stock is non-voting. In addition to non-voting stock ownership, the Company has an option to acquire a majority of the voting securities of the portfolio company at fair market value.

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

F-87

ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF INVESTMENTS — (Continued)

March 31, 2008

(unaudited)

Private Finance

Portfolio Company

(in thousands, except number of shares)

Investment⁽¹⁾⁽²⁾

Principal

Cost

Value

Oahu Waste Services, Inc.

Stock Appreciation Rights

206

1,000

(Business Services)

Total Investment

206

1,000

Pangaea CLO 2007-1 Ltd.⁽⁴⁾

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

15,000

11,594

10,760

(CLO)

Total Investment

11,594

10,760

Passport Health Communications, Inc.

Preferred Stock (561,908 shares)

1,725

2,207

(Healthcare Services)

Common Stock (16,977 shares)

Total Investment

1,767

2,261

PC Helps Support, LLC

Senior Loan (6.6%, Due 12/13)

19,214

19,206

18,732

(Business Services)

Subordinated Debt (13.3%, Due 12/13)

29,681

29,535

29,196

Total Investment

48,741

47,928

Pendum, Inc.

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

34,028

—

(Business Services)

Preferred Stock (82,715 shares)

—

Warrants

—

Total Investment

34,028

—

Performant Financial Corporation

Common Stock (478,816 shares)

734

—

(Business Services)

Total Investment

734

—

Peter Brasseler Holdings, LLC

Equity Interests

2,500

2,279

(Business Services)

Total Investment

2,500

2,279

PharMEDium Healthcare Corporation

Senior Loan (6.6%, Due 10/13)

20,042

19,356

(Healthcare Services)

Total Investment

20,042

19,356

Postle Aluminum Company, LLC

Unitranche Debt (11.0%, Due 10/12)

61,250

61,015

60,104

(Industrial Products)

Equity Interests

2,157

2,202

Total Investment

63,172

62,306


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

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

F-88

ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF INVESTMENTS — (Continued)

March 31, 2008

(unaudited)

Private Finance

Portfolio Company

(in thousands, except number of shares)

Investment⁽¹⁾⁽²⁾

Principal

Cost

Value

Pro Mach, Inc.

Subordinated Debt (13.0%, Due 6/12)

14,598

14,545

14,781

(Industrial Products)

Equity Interests

1,294

1,600

Total Investment

15,839

16,381

Promo Works, LLC

Unitranche Debt (10.3%, Due 12/11)

25,899

25,702

25,985

(Business Services)

Total Investment

25,702

25,985

Guaranty ($300)

Reed Group, Ltd.

Senior Loan (8.5%, Due 12/13)

21,000

20,970

20,044

(Healthcare Services)

Subordinated Debt (13.8%, Due 12/13)

18,000

17,914

17,258

Equity Interests

1,800

900

Total Investment

40,684

38,202

S.B. Restaurant Company

Unitranche Debt (9.8%, Due 4/11)

38,501

38,232

38,127

(Retail)

Preferred Stock (46,690 shares)

117

Warrants

534

1,000

Total Investment

38,883

39,244

Standby Letters of Credit ($2,540)

Service Center Metals, LLC

Subordinated Debt (15.5%, Due 9/11)

5,000

4,982

4,948

(Industrial Products)

Equity Interests

270

302

Total Investment

5,252

5,250

Snow Phipps Group, L.P.⁽⁵⁾

Limited Partnership Interest

2,329

(Private Equity Fund)

Total Investment

2,329

SPP Mezzanine Funding II, L.P.⁽⁵⁾

Limited Partnership Interest

5,223

4,897

(Private Equity Fund)

Total Investment

5,223

4,897

Stag-Parkway, Inc.

Unitranche Debt (10.8%, Due 7/12)

50,096

49,916

50,096

(Business Services)

Total Investment

49,916

50,096

STS Operating, Inc.

Subordinated Debt (11.0%, Due 1/13)

30,386

30,279

30,994

(Industrial Products)

Total Investment

30,279

30,994

Summit Energy Services, Inc.

Senior Loan (8.0%, Due 8/13)

9,179

8,903

(Business Services)

Subordinated Debt (11.6%, Due 8/13)

35,765

35,603

36,029

Common Stock (385,626 shares)

1,725

1,600

Total Investment

46,507

46,532


⁽¹⁾		Interest rates represent the weighted average annual stated interest rate on loans and debt securities, which are presented by nature of indebtedness for a single issuer. The maturity dates represent the earliest and the latest maturity dates.
⁽²⁾		Common stock, preferred stock, warrants, options, and equity interests are generally non-income producing and restricted.
⁽⁵⁾		Non-registered investment company.

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

F-89

ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF INVESTMENTS — (Continued)

March 31, 2008

(unaudited)

Private Finance

Portfolio Company

(in thousands, except number of shares)

Investment⁽¹⁾⁽²⁾

Principal

Cost

Value

Tappan Wire and Cable Inc.

Unitranche Debt (15.0%, Due 8/14)

22,346

22,235

(Business Services)

Common Stock (12,940 shares)⁽¹²⁾

1,941

6,201

Warrant⁽¹²⁾

—

Total Investment

24,176

28,436

The Step2 Company, LLC

Unitranche Debt (11.0%, Due 4/12)

95,801

95,473

96,465

(Consumer Products)

Equity Interests

2,142

2,419

Total Investment

97,615

98,884

Tradesmen International, Inc.

Subordinated Debt (12.0%, Due 12/12)

49,124

48,489

47,820

(Business Services)

Total Investment

48,489

47,820

TransAmerican Auto Parts, LLC

Subordinated Debt (14.0%, Due 11/12)

24,195

24,035

23,235

(Consumer Products)

Equity Interests

1,034

576

Total Investment

25,069

23,811

Triax Holdings, LLC

Subordinated Debt (19.0%, Due 2/12)

10,193

10,150

10,334

(Consumer Products)

Equity Interests

16,528

41,093

Total Investment

26,678

51,427

Trover Solutions, Inc.

Subordinated Debt (12.0%, Due 11/12)

60,230

59,983

59,987

(Business Services)

Total Investment

59,983

59,987

Universal Air Filter Company

Subordinated Debt (12.0%, Due 11/12)

14,625

14,566

14,728

(Industrial Products)

Total Investment

14,566

14,728

United Road Towing, Inc.

Subordinated Debt (10.4%, Due 1/14)

44,000

43,787

(Consumer Services)

Total Investment

43,787

Venturehouse-Cibernet Investors, LLC

Equity Interest

—

(Business Services)

Total Investment

—

VICORP Restaurants, Inc.

Warrants

—

(Retail)

Total Investment

—

Walker Investment Fund II, LLLP⁽⁵⁾

Limited Partnership Interest

1,330

333

(Private Equity Fund)

Total Investment

1,330

333

WMA Equity Corporation and Affiliates

Subordinated Debt (14.0%, Due 4/13)

125,323

124,380

121,395

d/b/a Wear Me Apparel

Subordinated Debt (9.0%, Due 4/14)⁽⁶⁾

11,151

11,749

(Consumer Products)

Common Stock (86 shares)

39,721

5,349

Total Investment

175,252

138,493


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

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

F-90

ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF INVESTMENTS — (Continued)

March 31, 2008

(unaudited)

Private Finance

Portfolio Company

(in thousands, except number of shares)

Investment⁽¹⁾⁽²⁾

Principal

Cost

Value

Webster Capital II, L.P.(5)

Limited Partnership Interest

897

(Private Equity Fund)

Total Investment

897

Woodstream Corporation

Subordinated Debt (12.0%, Due 2/15)

90,000

89,588

85,374

(Consumer Products)

Common Stock (6,470 shares)

6,470

4,200

Total Investment

96,058

89,574

York Insurance Services Group, Inc.

Subordinated Debt (14.5%, Due 1/14)

45,367

45,199

45,236

(Business Services)

Common Stock (12,939 shares)

1,294

1,600

Total Investment

46,493

46,836

Other companies

Other debt investments

3,236

3,142

3,169

Other equity investments

—

Total Investment

3,150

3,169

Total companies less than 5% owned

3,001,894

2,980,548

Total private finance (152 portfolio investments)

5,019,313

4,519,779


⁽¹⁾		Interest rates represent the weighted average annual stated interest rate on loans and debt securities, which are presented by nature of indebtedness for a single issuer. The maturity dates represent the earliest and the latest maturity dates.
⁽²⁾		Common stock, preferred stock, warrants, options, and equity interests are generally non-income producing and restricted.
⁽⁵⁾		Non-registered investment company.

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

F-91

ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF INVESTMENTS — (Continued)

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


							March 31, 2008

			Stated Interest		Number of		(unaudited)
			Rate Ranges		Loans		Cost		Value

Commercial Mortgage Loans
				Up to 6.99%		1	$	13,702	$	13,702
				7.00%–8.99%		7		17,411		16,763
				9.00%–10.99%		1		6,455		6,455
				11.00%–12.99%		1		10,459		10,459
				15.00% and above		2		3,970		6,109

		Total commercial mortgage loans⁽¹³⁾					$	51,997	$	53,488

Real Estate Owned							$	23,531	$	30,220

Equity Interests⁽²⁾ — Companies more than 25% owned							$	14,179	$	32,146
	Guarantees ($6,871)
	Standby Letter of Credit ($1,295)

		Total commercial real estate finance					$	89,707	$	115,854

Total portfolio							$	5,109,020	$	4,635,633


			Yield			Cost		Value

Investments in U.S. Treasury Bills, Money Market and Other Securities
	U.S. Treasury bills (Due April 2008)			1.6	%	$	119,842	$	119,976
	Blackrock Liquidity Funds			3.3	%		344		344
	SEI Daily Income Tr Prime Obligation Money Market Fund			3.1	%		59		59
	American Beacon Money Market Fund			3.1	%		20		20
	Columbia Treasury Reserves Money Market Fund			3.2	%		7		7

		Total				$	120,272	$	120,406


⁽²⁾		Common stock, preferred stock, warrants, options, and equity interests are generally non-income producing and restricted.
⁽¹³⁾		Commercial mortgage loans totaling $7.4 million at value were on non-accrual status and therefore were considered non-income producing.

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

F-92

ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

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

—

Total Investment

32,176

—

Guaranty ($1,100)

AllBridge Financial, LLC

Equity Interests

7,800

(Asset Management)

Total Investment

7,800

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)

Total Investment

31,800

32,811

Avborne, Inc.⁽⁷⁾

Preferred Stock (12,500 shares)

611

1,633

(Business Services)

Common Stock (27,500 shares)

—

Total Investment

611

1,633

Avborne Heavy Maintenance, Inc.⁽⁷⁾

Preferred Stock (1,568 shares)

2,401

2,557

(Business Services)

Common Stock (2,750 shares)

—

370

Total Investment

2,401

2,927

Guaranty ($2,401)

Aviation Properties Corporation

Common Stock (100 shares)

—

(Business Services)

Total Investment

—

Standby Letters of Credit ($1,000)

Border Foods, Inc.

Preferred Stock (100,000 shares)

12,721

4,648

(Consumer Products)

Common Stock (148,838 shares)

3,847

—

Total Investment

16,568

4,648

Calder Capital Partners, LLC⁽⁵⁾

Senior Loan (9.4%, Due 5/09)⁽⁶⁾

2,907

3,035

(Asset Management)

Equity Interests

2,396

3,559

Total Investment

5,303

6,594

Callidus Capital Corporation

Subordinated Debt (18.0%, Due 10/08)

6,871

(Asset Management)

Common Stock (100 shares)

2,067

44,587

Total Investment

8,938

51,458

Ciena Capital LLC

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

99,044

68,609

(Financial Services)

Class B Equity Interests

119,436

—

Class C Equity Interests

109,301

—

Total Investment

327,781

68,609

Guaranty ($258,707 — See Note 3)

Standby Letters of Credit ($18,000 — See Note 3)


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

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

F-93

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

	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

			Total Investment				72,051		72,051


	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

			Total Investment				57,550		68,499


	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

			Total Investment				74,133		81,746


	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

			Total Investment				58,280		45,936


	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

			Total Investment				97,945		130,724


	ForeSite Towers, LLC	Equity Interest					—		878
	(Tower Leasing)

			Total Investment				—		878


	Global Communications, LLC	Senior Loan (10.0%, Due 9/02)⁽⁶⁾			1,822		1,822		1,822

	(Business Services)		Total Investment				1,822		1,822


	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		—

			Total Investment				188,996		81,996


	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

			Total Investment				101,151		103,772


	Impact Innovations Group, LLC	Equity Interests in Affiliate					—		320

	(Business Services)		Total Investment				—		320


⁽¹⁾	Interest rates represent the weighted average annual stated interest rate on loans and debt securities, which are presented by nature of indebtedness for a single issuer. The maturity dates represent the earliest and the latest maturity dates.
⁽²⁾	Common stock, preferred stock, warrants, options, and equity interests are generally non-income producing and restricted.
⁽⁶⁾	Loan or debt security is on non-accrual status and therefore is considered non-income producing.

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

F-94

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

	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		—

			Total Investment				91,591		63,299


	Jakel, Inc.	Subordinated Debt (15.5%, Due 3/08)⁽⁶⁾			1,563		1,563		1,563

	(Industrial Products)		Total Investment				1,563		1,563


	Legacy Partners Group, Inc.	Senior Loan (14.0%, Due 5/09)⁽⁶⁾			3,843		3,843		3,843
	(Business Services)	Equity Interests					4,261		1,332

			Total Investment				8,104		5,175


	Litterer Beteiligungs-GmbH⁽⁴⁾	Subordinated Debt (8.0%, Due 12/08)			772		772		772
	(Business Services)	Equity Interest					1,809		700

			Total Investment				2,581		1,472


	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

			Total Investment				71,225		75,531


	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

			Total Investment				38,311		44,963


	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

			Total Investment				60,308		77,145


	Powell Plant Farms, Inc.	Senior Loan (15.0%, Due 12/07)⁽⁶⁾			1,350		1,350		1,534

	(Consumer Products)		Total Investment				1,350		1,534


	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

			Total Investment				42,013		54,643


	Staffing Partners Holding
	Company, Inc.	Subordinated Debt (13.5%, Due 1/07)⁽⁶⁾			509		509		223

	(Business Services)		Total Investment				509		223


	Startec Equity, LLC	Equity Interests					190		430

	(Telecommunications)		Total Investment				190		430


	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		—

			Total Investment				37,052		35,229


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

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

F-95

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

	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

			Total Investment				165,448		128,446

		Guaranty ($900)
		Standby Letter of Credit ($200)

	Unitranche Fund LLC	Subordinated Certificates					744		744
	(Private Debt Fund)	Equity Interests					1		1

			Total Investment				745		745


	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 Investment				15,733		24,458


Total companies more than 25% owned						$	1,622,094	$	1,279,080

Companies 5% to 25% Owned

	10^thStreet, LLC	Subordinated Debt (13.0%, Due 12/14)		$	20,774	$	20,645	$	20,645
	(Business Services)	Equity Interests					446		1,100

			Total Investment				21,091		21,745


	Advantage Sales & Marketing, Inc.	Subordinated Debt (12.0%, Due 3/14)			155,432		154,854		154,854
	(Business Services)	Equity Interests					—		10,973

			Total Investment				154,854		165,827


	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

			Total Investment				6,450		13,780


	Alpine ESP Holdings, Inc.	Preferred Stock (622 shares)					622		749
	(Business Services)	Common Stock (13,513 shares)					14		262

			Total Investment				636		1,011


	Amerex Group, LLC	Subordinated Debt (12.0%, Due 1/13)			8,400		8,400		8,400
	(Consumer Products)	Equity Interests					3,509		13,713

			Total Investment				11,909		22,113


	BB&T Capital Partners/Windsor
	Mezzanine Fund, LLC⁽⁵⁾	Equity Interests					11,739		11,467

	(Private Equity Fund)		Total Investment				11,739		11,467


⁽¹⁾	Interest rates represent the weighted average annual stated interest rate on loans and debt securities, which are presented by nature of indebtedness for a single issuer. The maturity dates represent the earliest and the latest maturity dates.
⁽²⁾	Common stock, preferred stock, warrants, options, and equity interests are generally non-income producing and restricted.
⁽⁵⁾	Non-registered investment company.
⁽⁶⁾	Loan or debt security is on non-accrual status and therefore is considered non-income producing.
⁽⁸⁾	Triview Investments, Inc. had a cost basis of $165.4 million and holds investments in Longview Cable & Data, LLC (Broadcasting & Cable) with a value of $7.0 million, Triax Holdings, LLC (Consumer Products) with a value of $62.0 million, and Crescent Hotels & Resorts, LLC and affiliates (Business Services) with a value of $59.4 million, for a total value of $128.4 million.

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

F-96

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

	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

			Total Investment				30,611		28,988


	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

			Total Investment				34,499		37,881


	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		—

			Total Investment				15,073		6,197


	Drew Foam Companies, Inc.	Preferred Stock (722 shares)					722		396
	(Business Services)	Common Stock (7,287 shares)					7		—

			Total Investment				729		396


	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		—

			Total Investment				14,748		9,570


	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⁾					—		—

			Total Investment				65,544		9,280


	Multi-Ad Services, Inc.	Unitranche Debt (11.3%, Due 11/11)			19,800		19,704		19,704
	(Business Services)	Equity Interests					2,000		940

			Total Investment				21,704		20,644


	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					—		—

			Total Investment				2,058		7,483


	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

			Total Investment				13,441		13,622


⁽¹⁾	Interest rates represent the weighted average annual stated interest rate on loans and debt securities, which are presented by nature of indebtedness for a single issuer. The maturity dates represent the earliest and the latest maturity dates.
⁽²⁾	Common stock, preferred stock, warrants, options, and equity interests are generally non-income producing and restricted.
⁽⁶⁾	Loan or debt security is on non-accrual status and therefore is considered non-income producing.


⁽¹²⁾	Common stock is non-voting. In addition to non-voting stock ownership, the Company has an option to acquire a majority of the voting securities of the portfolio company at fair market value.

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

F-97

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

SGT India Private Limited⁽⁴⁾

Common Stock (150,596 shares)

4,098

3,075

(Business Services)

Total Investment

4,098

3,075

Soteria Imaging Services, LLC

Subordinated Debt (12.0%, Due 11/10)

14,500

13,744

(Healthcare Services)

Equity Interests

2,170

2,686

Total Investment

15,914

16,430

Universal Environmental Services, LLC

Equity Interests

1,810

—

(Business Services)

Total Investment

1,810

—

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

(Consumer Products)

Total Investment

27,837

AgData, L.P.

Senior Loan (10.3%, Due 7/12)

843

815

(Consumer Services)

Total Investment

815

Axium Healthcare Pharmacy, Inc.

Senior Loan (12.5%, Due 12/12)

2,600

2,567

(Healthcare Services)

Unitranche Debt (12.5%, Due 12/12)

8,500

8,463

Common Stock (26,500 shares)

2,650

1,097

Total Investment

13,680

12,127

Baird Capital Partners IV Limited Partnership⁽⁵⁾

Limited Partnership Interest

2,234

2,114

(Private Equity Fund)

Total Investment

2,234

2,114

BenefitMall, Inc.

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

82,167

81,930

(Business Services)

Common Stock (45,528,000 shares)⁽¹²⁾

45,528

82,404

Warrants⁽¹²⁾

—

Standby Letters of Credit ($3,961)

Total Investment

127,458

164,334

Broadcast Electronics, Inc.

Senior Loan (9.0%, Due 7/12)⁽⁶⁾

4,913

4,884

3,273

(Business Services)

Total Investment

4,884

3,273

Bushnell, Inc.

Subordinated Debt (11.3%, Due 2/14)

41,325

39,821

(Consumer Products)

Total Investment

39,821


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

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

F-98

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

Callidus Debt Partners CDO Fund I, Ltd.^(4)(10)

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

18,800

18,929

18,988

(CDO)

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

9,400

9,465

9,494

Total Investment

28,394

28,482

Callidus Debt Partners CLO Fund III, Ltd.^(4)(10)

Preferred Shares (23,600,000 shares, 12.9%)⁽¹¹⁾

21,783

19,999

(CLO)

Total Investment

21,783

19,999

Callidus Debt Partners CLO Fund IV, Ltd.^(4)(10)

Income Notes (14.8%)⁽¹¹⁾

12,298

11,290

(CLO)

Total Investment

12,298

11,290

Callidus Debt Partners CLO Fund V, Ltd.^(4)(10)

Income Notes (20.3%)⁽¹¹⁾

13,977

14,658

(CLO)

Total Investment

13,977

14,658

Callidus Debt Partners CLO Fund VI, Ltd.^(4)(10)

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

5,000

4,329

(CLO)

Income Notes (19.3%)⁽¹¹⁾

26,985

Total Investment

31,314

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

Income Notes (16.6%)⁽¹¹⁾

22,113

(CLO)

Total Investment

22,113

Callidus MAPS CLO Fund I LLC⁽¹⁰⁾

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

17,000

16,119

(CLO)

Income Notes (5.6%)⁽¹¹⁾

49,252

36,085

Total Investment

66,252

52,204

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

Income Notes (14.7%)⁽¹¹⁾

18,753

(CLO)

Total Investment

18,753

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

Limited Partnership Interest

997

1,350

(Private Equity Fund)

Total Investment

997

1,350

Carlisle Wide Plank Floors, Inc.

Senior Loan (9.8%, Due 6/11)

500

497

(Consumer Products)

Unitranche Debt (10.0%, Due 6/11)

3,161

3,129

Preferred Stock (400,000 Shares)

400

507

Total Investment

4,026

4,133

Catterton Partners V, L.P.⁽⁵⁾

Limited Partnership Interest

3,624

2,952

(Private Equity Fund)

Total Investment

3,624

2,952


⁽¹⁾	Interest rates represent the weighted average annual stated interest rate on loans and debt securities, which are presented by nature of indebtedness for a single issuer. The maturity dates represent the earliest and the latest maturity dates.
⁽²⁾	Common stock, preferred stock, warrants, options, and equity interests are generally non-income producing and restricted.
⁽⁴⁾	Non-U.S. company or principal place of business outside the U.S.
⁽⁵⁾	Non-registered investment company.
⁽¹⁰⁾	The fund is managed by Callidus Capital, a portfolio company of Allied Capital.
⁽¹¹⁾	Represents the effective interest yield earned on the cost basis of these preferred equity investments and income notes. The yield is included in interest income from companies less than 5% owned in the consolidated statement of operations.

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

F-99

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

Catterton Partners VI, L.P.⁽⁵⁾

Limited Partnership Interest

2,259

2,103

(Private Equity Fund)

Total Investment

2,259

2,103

Centre Capital Investors IV, L.P.⁽⁵⁾

Limited Partnership Interest

2,215

2,276

(Private Equity Fund)

Total Investment

2,215

2,276

Centre Capital Investors V, L.P.⁽⁵⁾

Limited Partnership Interest

628

(Private Equity Fund)

Total Investment

628

CK Franchising, Inc.

Senior Loan (8.7%, Due 7/12)

9,000

8,911

(Consumer Services)

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

21,000

20,908

Preferred Stock (1,486,004 shares)

1,486

1,586

Common Stock (8,793,408 shares)

8,793

8,654

Total Investment

40,098

40,059

Commercial Credit Group, Inc.

Subordinated Debt (14.8%, Due 2/11)

12,000

12,023

(Financial Services)

Preferred Stock (74,978 shares)

18,018

19,421

Warrants

—

Total Investment

30,041

31,444

Community Education Centers, Inc.

Subordinated Debt (13.5%, Due 11/13)

35,011

34,936

(Education Services)

Total Investment

34,936

Component Hardware Group, Inc.

Subordinated Debt (13.5%, Due 1/13)

18,432

18,363

(Industrial Products)

Total Investment

18,363

Cook Inlet Alternative Risk, LLC

Unitranche Debt (10.8%, Due 4/13)

95,000

94,530

(Business Services)

Equity Interests

640

1,696

Total Investment

95,170

96,226

Cortec Group Fund IV, L.P.⁽⁵⁾

Limited Partnership Interest

3,383

2,922

(Private Equity)

Total Investment

3,383

2,922

Diversified Mercury Communications, LLC

Senior Loan (8.5%, Due 3/13)

233

217

(Business Services)

Total Investment

217

Digital VideoStream, LLC

Unitranche Debt (11.0%, Due 2/12)

17,213

17,128

(Business Services)

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

4,118

4,103

5,397

Total Investment

21,231

22,525

DirectBuy Holdings, Inc.

Subordinated Debt (14.5%, Due 5/13)

75,000

74,631

(Consumer Products)

Equity Interests

8,000

Total Investment

82,631


⁽¹⁾	Interest rates represent the weighted average annual stated interest rate on loans and debt securities, which are presented by nature of indebtedness for a single issuer. The maturity dates represent the earliest and the latest maturity dates.
⁽²⁾	Common stock, preferred stock, warrants, options, and equity interests are generally non-income producing and restricted.
⁽⁵⁾	Non-registered investment company.

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

F-100

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

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

Common Stock (4,000 shares)

4,000

2,645

Total Investment

56,192

54,837

Driven Brands, Inc.

Senior Loan (8.7%, Due 6/11)

37,070

36,951

d/b/a Meineke and Econo Lube

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

83,000

82,754

(Consumer Services)

Common Stock (11,675,331 shares)⁽¹²⁾

29,455

15,977

Warrants⁽¹²⁾

—

Total Investment

149,160

135,682

Dryden XVIII Leveraged Loan 2007 Limited⁽⁴⁾

Subordinated Debt (9.7%, Due 10/19)

9,000

7,406

(CLO)

Income Notes (14.2%)⁽¹¹⁾

21,940

Total Investment

29,346

Dynamic India Fund IV⁽⁴⁾⁽⁵⁾

Equity Interests

6,050

6,215

(Private Equity Fund)

Total Investment

6,050

6,215

EarthColor, Inc.

Subordinated Debt (15.0%, Due 11/13)

127,000

126,463

(Business Services)

Common Stock (73,540 shares)⁽¹²⁾

73,540

62,675

Warrants⁽¹²⁾

—

Total Investment

200,003

189,138

eCentury Capital Partners, L.P.⁽⁵⁾

Limited Partnership Interest

6,899

2,176

(Private Equity Fund)

Total Investment

6,899

2,176

eInstruction Corporation

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

47,000

46,765

(Education Services)

Common Stock (2,406 shares)

2,500

Total Investment

49,265

Farley’s & Sathers Candy Company, Inc.

Subordinated Debt (13.7%, Due 3/11)

18,000

17,932

(Consumer Products)

Total Investment

17,932

FCP-BHI Holdings, LLC

Subordinated Debt (12.8%, Due 9/13)

24,000

23,887

d/b/a Bojangles’

Equity Interests

1,000

998

(Retail)

Total Investment

24,887

24,885

Fidus Mezzanine Capital, L.P.⁽⁵⁾

Limited Partnership Interest

6,357

(Private Equity Fund)

Total Investment

6,357

Frozen Specialties, Inc.

Warrants

435

229

(Consumer Products)

Total Investment

435

229

Garden Ridge Corporation

Subordinated Debt (7.0%, Due 5/12)⁽⁶⁾

20,500

(Retail)

Total Investment

20,500


⁽¹⁾	Interest rates represent the weighted average annual stated interest rate on loans and debt securities, which are presented by nature of indebtedness for a single issuer. The maturity dates represent the earliest and the latest maturity dates.
⁽²⁾	Common stock, preferred stock, warrants, options, and equity interests are generally non-income producing and restricted.
⁽⁴⁾	Non-U.S. company or principal place of business outside the U.S.
⁽⁵⁾	Non-registered investment company.
⁽⁶⁾	Loan or debt security is on non-accrual status and therefore is considered non-income producing.
⁽¹¹⁾	Represents the effective interest yield earned on the cost basis of these preferred equity investments and income notes. The yield is included in interest income from companies less than 5% owned in the consolidated statement of operations.
⁽¹²⁾	Common stock is non-voting. In addition to non-voting stock ownership, the Company has an option to acquire a majority of the voting securities of the portfolio company at fair market value.

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

F-101

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

	Geotrace Technologies, Inc.	Subordinated Debt (10.0%, Due 6/09)		$	6,772	$	6,616	$	6,616
	(Energy Services)	Warrants					2,350		2,993

			Total Investment				8,966		9,609


	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

			Total Investment				45,630		45,630


	Grotech Partners, VI, L.P.⁽⁵⁾	Limited Partnership Interest					8,808		8,252

	(Private Equity Fund)		Total Investment				8,808		8,252


	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

			Total Investment				5,888		8,025


	Haven Eldercare of New England, LLC	Subordinated Debt (12.0%, Due 8/09)⁽⁶⁾			1,927		1,927		—

	(Healthcare Services)		Total Investment				1,927		—


	Higginbotham Insurance Agency, Inc.	Senior Loan (7.7%, Due 8/12)			15,033		14,942		14,942
	(Business Services)	Subordinated Debt (13.5%,
		Due 8/13 – 8/14)			46,356		46,136		46,136
		Common Stock (23,926 shares)⁽¹²⁾					23,926		23,868
		Warrant⁽¹²⁾					—		—

			Total Investment				85,004		84,946


	The Hillman Companies, Inc.⁽³⁾	Subordinated Debt (10.0%, Due 9/11)			44,580		44,458		44,458

	(Consumer Products)		Total Investment				44,458		44,458


	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

			Total Investment				25,414		24,420


	Ideal Snacks Corporation	Senior Loan (9.0%, Due 6/10)			288		288		288

	(Consumer Products)		Total Investment				288		288


	Integrity Interactive Corporation	Unitranche Debt (10.5%, Due 2/12)			12,193		12,095		12,095

	(Business Services)		Total Investment				12,095		12,095


	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

			Total Investment				26,976		26,670


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


⁽¹²⁾	Common stock is non-voting. In addition to non-voting stock ownership, the Company has an option to acquire a majority of the voting securities of the portfolio company at fair market value.

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

F-102

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

(Consumer Products)

Total Investment

5,525

Knightsbridge CLO 2007-1 Limited⁽⁴⁾

Subordinated Debt (14.1%, Due 1/22)

22,000

(CLO)

Income Notes (15.2%)⁽¹¹⁾

31,211

Total Investment

53,211

Kodiak Fund LP⁽⁵⁾

Equity Interests

9,423

2,853

(Private Equity Fund)

Total Investment

9,423

2,853

Line-X, Inc.

Senior Loan (12.0%, Due 8/11)

900

885

(Consumer Products)

Unitranche Debt (12.0% Due 8/11)

48,198

48,039

42,784

Total Investment

48,924

43,669

Standby Letter of Credit ($1,500)

MedAssets, Inc.⁽³⁾

Common Stock (224,817 shares)

2,049

6,652

(Business Services)

Total Investment

2,049

6,652

Mid-Atlantic Venture Fund IV, L.P.⁽⁵⁾

Limited Partnership Interest

6,975

1,791

(Private Equity Fund)

Total Investment

6,975

1,791

Milestone AV Technologies, Inc.

Subordinated Debt (11.3%, Due 6/13)

37,500

36,750

(Business Services)

Total Investment

37,500

36,750

NetShape Technologies, Inc.

Senior Loan (8.6%, Due 2/13)

5,802

5,773

(Industrial Products)

Total Investment

5,773

Network Hardware Resale, Inc.

Unitranche Debt (10.5%, Due 12/11)

20,512

20,614

(Business Services)

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

13,242

13,302

15,586

Total Investment

33,916

36,200

Norwesco, Inc.

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

82,924

82,674

(Industrial Products)

Common Stock (559,603 shares)⁽¹²⁾

38,313

117,831

Warrants⁽¹²⁾

—

Total Investment

120,987

200,505

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

Limited Partnership Interest

1,910

1,256

(Private Equity Fund)

Total Investment

1,910

1,256

Oahu Waste Services, Inc.

Stock Appreciation Rights

239

998

(Business Services)

Total Investment

239

998


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


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

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

F-103

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

Odyssey Investment Partners Fund III, LP⁽⁵⁾

Limited Partnership Interest

2,276

2,567

(Private Equity Fund)

Total Investment

2,276

2,567

Pangaea CLO 2007-1 Ltd.⁽⁴⁾

Subordinated Debt (10.2%, Due 10/21)

15,000

11,570

(CLO)

Total Investment

11,570

Passport Health

Communications, Inc.

Preferred Stock (651,381 shares)

2,000

2,433

(Healthcare Services)

Common Stock (19,680 shares)

Total Investment

2,048

2,440

PC Helps Support, LLC

Senior Loan (8.9%, Due 12/13)

20,000

(Business Services)

Subordinated Debt (13.3%, Due 12/13)

30,895

30,743

Total Investment

50,743

Pendum, Inc.

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

34,028

—

(Business Services)

Preferred Stock (82,715 shares)

—

Warrants

—

Total Investment

34,028

—

Performant Financial Corporation

Common Stock (478,816 shares)

734

—

(Business Services)

Total Investment

734

—

PharMEDium Healthcare Corporation

Senior Loan (8.6%, Due 10/13)

19,577

(Healthcare Services)

Total Investment

19,577

Postle Aluminum Company, LLC

Unitranche Debt (11.0%, Due 10/12)

61,500

61,252

(Industrial Products)

Equity Interests

2,500

3,092

Total Investment

63,752

64,344

Pro Mach, Inc.

Subordinated Debt (13.0%, Due 6/12)

14,562

14,506

(Industrial Products)

Equity Interests

1,500

1,596

Total Investment

16,006

16,102

Promo Works, LLC

Unitranche Debt (10.3%, Due 12/11)

26,215

26,006

(Business Services)

Guaranty ($600)

Total Investment

26,006

Reed Group, Ltd.

Senior Loan (8.7%, Due 12/13)

21,000

20,970

(Healthcare Services)

Subordinated Debt (13.8%, Due 12/13)

18,000

17,910

Equity Interests

1,800

Total Investment

40,680

S.B. Restaurant Company

Unitranche Debt (9.8%, Due 4/11)

34,001

33,733

(Retail)

Preferred Stock (54,125 shares)

135

Warrants

619

2,095

Standby Letters of Credit ($2,540)

Total Investment

34,487

35,963


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

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

F-104

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

SBBUT, LLC

Equity Interests

—

(Consumer Products)

Total Investment

—

Service Center Metals, LLC

Subordinated Debt (15.5%, Due 9/11)

5,000

4,981

(Industrial Products)

Equity Interests

313

343

Total Investment

5,294

5,324

Snow Phipps Group, L.P.⁽⁵⁾

Limited Partnership Interest

2,288

(Private Equity Fund)

Total Investment

2,288

SPP Mezzanine Funding, L.P.⁽⁵⁾

Limited Partnership Interest

2,268

1,942

(Private Equity Fund)

Total Investment

2,268

1,942

SPP Mezzanine Funding II, L.P.⁽⁵⁾

Limited Partnership Interest

4,077

3,731

(Private Equity Fund)

Total Investment

4,077

3,731

Stag-Parkway, Inc.

Unitranche Debt (10.8%, Due 7/12)

51,000

50,810

(Business Services)

Total Investment

50,810

STS Operating, Inc.

Subordinated Debt (11.0%, Due 1/13)

30,386

30,273

(Industrial Products)

Total Investment

30,273

Summit Energy Services, Inc.

Senior Loan (8.5%, Due 8/13)

24,239

23,512

(Business Services)

Subordinated Debt (11.6%, Due 8/13)

35,765

35,596

Common Stock (89,406 shares)

2,000

1,995

Total Investment

61,835

61,103

Tappan Wire and Cable Inc.

Unitranche Debt (15.0%, Due 8/14)

24,100

23,975

(Business Services)

Common Stock (15,000 shares)⁽¹²⁾

2,250

5,810

Warrant⁽¹²⁾

—

Total Investment

26,225

29,785

The Step2 Company, LLC

Unitranche Debt (11.0%, Due 4/12)

96,041

95,693

(Consumer Products)

Equity Interests

2,483

2,987

Total Investment

98,176

98,680

Tradesmen International, Inc.

Subordinated Debt (12.0%, Due 12/12)

49,124

48,431

(Business Services)

Total Investment

48,431

TransAmerican Auto Parts, LLC

Subordinated Debt (14.0%, Due 11/12)

24,076

23,907

(Consumer Products)

Equity Interests

1,198

1,014

Total Investment

25,105

24,921

Trover Solutions, Inc.

Subordinated Debt (12.0%, Due 11/12)

60,000

59,740

(Business Services)

Total Investment

59,740

Universal Air Filter Company

Subordinated Debt (12.0%, Due 11/12)

14,750

14,688

(Industrial Products)

Total Investment

14,688


⁽¹⁾	Interest rates represent the weighted average annual stated interest rate on loans and debt securities, which are presented by nature of indebtedness for a single issuer. The maturity dates represent the earliest and the latest maturity dates.
⁽²⁾	Common stock, preferred stock, warrants, options, and equity interests are generally non-income producing and restricted.
⁽⁵⁾	Non-registered investment company.


⁽¹²⁾	Common stock is non-voting. In addition to non-voting stock ownership, the Company has an option to acquire a majority of the voting securities of the portfolio company at fair market value.

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

F-105

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)		Total Investment				4,465		4,306


	Venturehouse-Cibernet Investors, LLC	Equity Interest					—		54

	(Business Services)		Total Investment				—		54


	Venturehouse Group, LLC⁽⁵⁾	Equity Interest					—		613

	(Private Equity Fund)		Total Investment				—		613


	VICORP Restaurants, Inc.	Warrants					33		—

	(Retail)		Total Investment				33		—


	Walker Investment Fund II, LLLP⁽⁵⁾	Limited Partnership Interest					1,330		—

	(Private Equity Fund)		Total Investment				1,330		—


	WMA Equity Corporation and Affiliates	Subordinated Debt (13.6%, Due 4/13)		$	125,000		124,010		124,010
	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

			Total Investment				183,089		151,038


	Webster Capital II, L.P.⁽⁵⁾	Limited Partnership Interest					897		897

	(Private Equity Fund)		Total Investment				897		897


	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

			Total Investment				97,074		97,056


	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

			Total Investment				46,466		46,961


	Other companies	Other debt investments			159		57		62
		Other equity investments					8		—

			Total Investment				65		62


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.
⁽⁵⁾	Non-registered investment company.
⁽⁶⁾	Loan or debt security is on non-accrual status and therefore is considered non-income producing.

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

F-106

ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF INVESTMENTS — (Continued)

Commercial Real Estate Finance

(in thousands, except number of loans)


						December 31, 2007
			Stated 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

Investments in U.S. Treasury Bills, Money Market and Other Securities
	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
	Columbia Treasury Reserves Money Market Fund			4.6%		6		6

		Total			$	201,222	$	201,222


⁽²⁾	Common stock, preferred stock, warrants, options, and equity interests are generally non-income producing and restricted.
⁽¹³⁾	Commercial mortgage loans totaling $14.3 million at value were on non-accrual status and therefore were considered non-income producing.

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

F-107

ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Information at and for the three months ended March 31, 2008 and 2007 is unaudited)


Note 1.	Organization

ACC and its subsidiaries, collectively, are referred to as the “Company.” The Company consolidates the results of its subsidiaries for financial reporting purposes.


Note 2.	Summary of Significant Accounting Policies


	*Basis of Presentation*

The consolidated financial statements include the accounts of ACC and its subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. Certain reclassifications have been made to the 2007 balances to conform with the 2008 financial statement presentation.

The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information. Accordingly, they do not include all of the information and footnotes required by GAAP for complete consolidated financial statements. In the opinion of management, the unaudited consolidated financial results of the Company included herein contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial position of the Company as of March 31, 2008, the results of operations for the three months ended March 31, 2008 and 2007, and changes in net assets and cash flows for the three months ended March 31, 2008 and 2007. The results of operations for the three months ended March 31, 2008, are not necessarily indicative of the operating results to be expected for the full year.

F-108

ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


Note 2.	Summary of Significant Accounting Policies, continued

to be an affiliated person under the 1940 Act; and companies less than 5% owned which represent portfolio companies where the Company directly or indirectly owns less than 5% of the outstanding voting securities of such portfolio company and where the Company has no other affiliations with such portfolio company. The interest and related portfolio income and net realized gains (losses) from the commercial real estate finance portfolio and other sources, including investments in U.S. treasury bills, money market and other securities, are included in the companies less than 5% owned category on the consolidated statement of operations.

In the ordinary course of business, the Company enters into transactions with portfolio companies that may be considered related party transactions.


	*Valuation Of Portfolio Investments*

The Company, as a BDC, has invested in illiquid securities including debt and equity securities of portfolio companies, CLO bonds and preferred shares/income notes, CDO bonds and investment funds. The Company’s investments may be subject to certain restrictions on resale and generally have no established trading market. The Company values substantially all of its investments at fair value as determined in good faith by the Board of Directors in accordance with the Company’s valuation policy and the provisions of the Investment Company Act of 1940 and FASB Statement No. 157, Fair Value Measurements (“SFAS 157” or the “Statement”). The Company determines fair value to be the price that would be received for an investment in a current sale, which assumes an orderly transaction between market participants on the measurement date. The Company’s valuation policy considers the fact that no ready market exists for substantially all of the securities in which it invests and that fair value for its investments must typically be determined using unobservable inputs. The Company’s valuation policy is intended to provide a consistent basis for determining the fair value of the portfolio.

The Company adopted SFAS 157 on a prospective basis in the first quarter of 2008. SFAS 157 requires the Company to assume that the portfolio investment is assumed to be sold in the principal market to market participants, or in the absence of a principal market, the most advantageous market, which may be a hypothetical market. Market participants are defined as buyers and sellers in the principal or most advantageous market that are independent, knowledgeable, and willing and able to transact. In accordance with the Statement, the Company has considered its principal market, or the market in which the Company exits its portfolio investments with the greatest volume and level of activity.

The Company has determined that for its buyout investments, where the Company has control or could gain control through an option or warrant security, both the debt and equity securities of the portfolio investment would exit in the merger and acquisition (“M&A”) market as the principal market generally through a sale or recapitalization of the portfolio company. The Company believes that the in-use premise of value (as defined in SFAS 157), which assumes the debt and equity securities are sold together, is appropriate as this would provide maximum proceeds to the seller. As a result, the Company will continue to use the enterprise value methodology to determine the fair value of these investments under SFAS 157. Enterprise value means the entire value of the company to a market participant, including the sum of the values of debt and equity securities used to capitalize the enterprise at a point in time. Enterprise value is determined using various factors, including cash flow from operations of the portfolio company, multiples at which private companies are bought and sold, and other pertinent factors, such as recent offers to purchase a portfolio company, recent transactions involving the purchase or sale of the portfolio company’s equity securities, liquidation events, or other events. The Company allocates the enterprise value to these securities in order of the legal priority of the securities.

F-109

ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


Note 2.	Summary of Significant Accounting Policies, continued

While the Company typically exits its securities upon the sale or recapitalization of the portfolio company in the M&A market, for investments in portfolio companies where the Company does not have control or the ability to gain control through an option or warrant security, the Company cannot typically control the exit of its investment into its principal market (the M&A market). As a result, in accordance with SFAS 157, the Company is required to determine the fair value of these investments assuming a sale of the individual investment in a hypothetical market to a hypothetical market participant (the in-exchange premise of value). The Company continues to perform an enterprise value analysis for the investments in this category to assess the credit risk of the loan or debt security and to determine the fair value of its equity investment in these portfolio companies. The determined equity values are generally discounted when the Company has a minority ownership position, restrictions on resale, specific concerns about the receptivity of the capital markets to a specific company at a certain time, or other factors. For loan and debt securities, the Company performs a yield analysis assuming a hypothetical current sale of the investment. The yield analysis requires the Company to estimate the expected repayment date of the instrument and a market participant’s required yield. The Company’s estimate of the expected repayment date of a loan or debt security is generally shorter than the legal maturity of the instruments as the Company’s loans have historically been repaid prior to the maturity date. The yield analysis considers changes in interest rates and changes in leverage levels of the loan or debt security as compared to market interest rates and leverage levels. Assuming the credit quality of the loan or debt security remains stable, the Company will use the value determined by the yield analysis as the fair value for that security. A change in the assumptions that the Company uses to estimate the fair value of its loans and debt securities using the yield analysis could have a material impact on the determination of fair value. If there is deterioration in credit quality or a loan or debt security is in workout status, the Company may consider other factors in determining the fair value of a loan or debt security, including the value attributable to the loan or debt security from the enterprise value of the portfolio company or the proceeds that would be received in a liquidation analysis.

The Company’s equity investments in private debt and equity funds are generally valued at the fund’s net asset value, unless other factors lead to a determination of fair value at a different amount. The value of the Company’s equity securities in public companies for which quoted prices in an active market are readily available is based on the closing public market price on the measurement date.

The fair value of the Company’s CLO bonds and preferred shares/income notes and CDO bonds (“CLO/ CDO Assets”) is generally based on a discounted cash flow model that utilizes prepayment, re-investment and loss assumptions based on historical experience and projected performance, economic factors, the characteristics of the underlying cash flow, and comparable yields for similar bonds and preferred shares/ income notes, when available. The Company recognizes unrealized appreciation or depreciation on its CLO/ CDO Assets as comparable yields in the market change and/or based on changes in estimated cash flows resulting from changes in prepayment, re-investment or loss assumptions in the underlying collateral pool. The Company determines the fair value of its CLO/ CDO Assets on an individual security-by-security basis.

The Company will record unrealized depreciation on investments when it determines that the fair value of a security is less than its cost basis, and will record unrealized appreciation when it determines that the fair value is greater than its cost basis. Because of the inherent uncertainty of valuation, the values determined at the measurement date may differ significantly from the values that would have been used had a ready market existed for the investments, and the differences could be material. Additionally, changes in the market environment and other events that may occur over the life of the investments may cause the gains or losses ultimately realized on these investments to be different than the values determined at the measurement date.

F-110

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*

Realized gains or losses are measured by the difference between the net proceeds from the repayment or sale and the cost basis of the investment without regard to unrealized appreciation or depreciation previously recognized, and include investments charged off during the period, net of recoveries. Net change in unrealized appreciation or depreciation primarily reflects the change in portfolio investment values during the reporting period, including the reversal of previously recorded unrealized appreciation or depreciation when gains or losses are realized. Net change in unrealized appreciation or depreciation also reflects the change in the value of U.S. Treasury bills and depreciation on accrued interest and dividends receivable and other assets where collection is doubtful.


	*Interest and Dividend Income*

When the Company receives nominal cost warrants or free equity securities (“nominal cost equity”), the Company allocates its cost basis in its investment between its debt securities and its nominal cost equity at the time of origination. At that time, the original issue discount basis of the nominal cost equity is recorded by increasing the cost basis in the equity and decreasing the cost basis in the related debt securities. Loan origination fees, original issue discount, and market discount are capitalized and then amortized into interest income using a method that approximates the effective interest method. Upon the prepayment of a loan or debt security, any unamortized loan origination fees are recorded as interest income and any unamortized original issue discount or market discount is recorded as a realized gain.

The Company recognizes interest income on the CLO preferred shares/income notes using the effective interest method, based on the anticipated yield that is determined using the estimated cash flows over the projected life of the investment. Yields are revised when there are changes in actual or estimated cash flows due to changes in prepayments and/or re-investments, credit losses or asset pricing. Changes in estimated yield are recognized as an adjustment to the estimated yield over the remaining life of the preferred shares/income notes from the date the estimated yield was changed. CLO and CDO bonds have stated interest rates. The weighted average yield on the CLO/ CDO Assets is calculated as the (a) annual stated interest or the effective interest yield on the accruing bonds or the effective yield on the preferred shares/income notes, divided by (b) CLO/ CDO Assets at value. The weighted average yields are computed as of the balance sheet date.

F-111

ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


Note 2.	Summary of Significant Accounting Policies, continued


	*Fee Income*

Fee income includes fees for loan prepayment premiums, guarantees, commitments, and services rendered by the Company to portfolio companies and other third parties such as diligence, structuring, transaction services, management and consulting services, and other services. Loan prepayment premiums are recognized at the time of prepayment. Guaranty and commitment fees are generally recognized as income over the related period of the guaranty or commitment, respectively. Diligence, structuring, and transaction services fees are generally recognized as income when services are rendered or when the related transactions are completed. Management, consulting and other services fees, including fund management fees, are generally recognized as income as the services are rendered. Fees are not accrued if the Company has doubt about collection of those fees.


	*Guarantees*


	*Financing Costs*


	*Dividends to Shareholders*

Dividends to shareholders are recorded on the record date.


	*Stock Compensation Plans*

F-112

ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


Note 2.	Summary of Significant Accounting Policies, continued

related service period in the statement of operations. The stock option expense for the three months ended March 31, 2008 and 2007, was as follows:


			2008		2007
($ in millions, except per share amounts)
Employee Stock Option Expense:
	Previously awarded, unvested options as of January 1, 2006		$	1.7	$	3.2
	Options granted on or after January 1, 2006			2.5		0.5

		Total employee stock option expense	$	4.2	$	3.7

		Per basic share	$	0.03	$	0.02
		Per diluted share	$	0.03	$	0.02

The stock option expense for options granted for 2008 and 2007 was based on the underlying value of the options granted by the Company. The fair value of each option grant was estimated on the date of grant using the Black-Scholes option pricing model and expensed over the vesting period. The following weighted average assumptions were used to calculate the fair value of options granted during the three months ended March 31, 2008 and 2007:


	2008			2007⁽¹⁾

Expected term (in years)		5.0			—
Risk-free interest rate		2.7	%		—	%
Expected volatility		27.6	%		—	%
Dividend yield		8.5	%		—	%
Weighted average fair value per option	$	2.19		$	—


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

To determine the stock options expense for the options granted, the calculated fair value of the options granted is applied to the options granted, net of assumed future option forfeitures. The Company estimates that the employee-related stock option expense for outstanding unvested options as of March 31, 2008, will be $13.2 million, $6.8 million, and $4.0 million for the years ended December 31, 2008, 2009, and 2010, respectively. This estimate may change if the Company’s assumptions related to future option forfeitures change. This estimate does not include any expense related to stock option grants after March 31, 2008, as the fair value of those stock options will be determined at the time of grant. The aggregate total stock option expense remaining as of March 31, 2008, is expected to be recognized over an estimated weighted-average period of 1.8 years.


	*Federal and State Income Taxes and Excise Tax*

F-113

ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


Note 2.	Summary of Significant Accounting Policies, continued

that qualify as a RIC or a REIT intend to distribute or retain through a deemed distribution all of their annual taxable income to shareholders; therefore, the Company has made no provision for income taxes exclusive of excise taxes for these entities.


	*Per Share Information*

Basic earnings per common share is calculated using the weighted average number of common shares outstanding for the period presented. Diluted earnings per common share reflects the potential dilution that could occur if options to issue common stock were exercised into common stock. Earnings per share is computed after subtracting dividends on preferred shares, if any.


	*Use of Estimates in the Preparation of Financial Statements*

The consolidated financial statements include portfolio investments at value of $4.6 billion and $4.8 billion at March 31, 2008, and December 31, 2007, respectively. At March 31, 2008, and December 31, 2007, 91% and 92%, respectively, of the Company’s total assets represented portfolio investments whose fair values have been determined by the Board of Directors in good faith in the absence of readily available market values. Because of the inherent uncertainty of valuation, the Board of Directors’ determined values may differ significantly from the values that would have been used had a ready market existed for the investments, and the differences could be material.


	*Recent Accounting Pronouncements*

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


Note 2.	Summary of Significant Accounting Policies, continued

fiscal years. The Company has adopted this statement on a prospective basis beginning in the quarter ended March 31, 2008. Adoption of this statement did not have a material effect on the Company’s consolidated financial statements for the period ended March 31, 2008. However, the impact on its consolidated financial statements for periods subsequent to the period of adoption cannot be determined at this time as it will be influenced by the estimates of fair value for those periods, the number and amount of investments the Company originates, acquires or exits, and the effect of any additional guidance or any changes in the interpretation of this statement.

In February 2007, the FASB issued Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities — Including an Amendment of FASB Statement No. 115. This statement permits an entity to choose to measure many financial instruments and certain other items at fair value. This statement applies to all reporting entities, and contains financial statement presentation and disclosure requirements for assets and liabilities reported at fair value as a consequence of the election. This statement is effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company did not elect fair value measurement for assets or liabilities other than portfolio investments, which are already measured at fair value, therefore, the adoption of this statement did not impact the Company’s consolidated financial position or its results of operations.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


Note 3.	Portfolio


	*Private Finance*

At March 31, 2008, and December 31, 2007, the private finance portfolio consisted of the following:


			2008							2007

($ in millions)			Cost		Value		Yield⁽¹⁾			Cost		Value		Yield⁽¹⁾

Loans and debt securities:
	Senior loans		$	358.5	$	325.7		7.0	%	$	374.1	$	344.3		7.7	%
	Unitranche debt⁽²⁾			656.5		655.7		11.8	%		659.2		653.9		11.5	%
	Subordinated debt			2,655.6		2,430.4		13.0	%		2,576.4		2,416.4		12.8	%

		Total loans and debt securities⁽³⁾		3,670.6		3,411.8		12.2	%		3,609.7		3,414.6		12.1	%
Equity securities:
	Preferred shares/income notes of CLOs⁽⁴⁾			224.1		197.4		15.8	%		218.3		203.0		14.6	%
	Subordinated certificates in Unitranche Fund LLC⁽⁴⁾			31.5		31.5		12.4	%		0.7		0.7		12.4	%
	Other equity securities			1,093.1		879.1					1,215.2		1,041.0

		Total equity securities		1,348.7		1,108.0					1,434.2		1,244.7

		Total	$	5,019.3	$	4,519.8				$	5,043.9	$	4,659.3

⁽¹⁾

The weighted average yield on loans and debt securities is computed as the (a) annual stated interest on accruing loans and debt securities plus the annual amortization of loan origination fees, original issue discount, and market discount on accruing loans and debt securities less the annual amortization of loan origination costs, divided by (b) total loans and debt securities at value. At March 31, 2008, and December 31, 2007, the cost and value of subordinated debt included the Class A equity interests in Ciena Capital LLC, which were placed on non-accrual status during the fourth quarter of 2006.

The weighted average yield on the subordinated certificates in the Unitranche Fund LLC is computed as the (a) annual stated interest (LIBOR plus 7.5%) divided by (b) total investment at value.


⁽²⁾	Unitranche debt is an investment that combines both senior and subordinated financing, generally in a first lien position.

⁽³⁾	The total principal balance outstanding on loans and debt securities was $3,697.4 million and $3,639.6 million at March 31, 2008, and December 31, 2007, respectively. The difference between principal and cost is represented by unamortized loan origination fees and costs, original issue discounts, and market discounts totaling $26.8 million and $29.9 million at March 31, 2008, and December 31, 2007, respectively.

⁽⁴⁾	Investments in the preferred shares/income notes of CLOs and the subordinated certificates in Unitranche Fund LLC earn a current return that is included in interest income in the accompanying consolidated statement of operations.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


Note 3.	Portfolio, continued

some component of contractual payment-in-kind interest, which represents contractual interest accrued and added to the loan balance that generally becomes due at maturity.

At March 31, 2008, 85% of the private finance loans and debt securities had a fixed rate of interest and 15% had a floating rate of interest. At December 31, 2007, 86% of the private finance loans and debt securities had a fixed rate of interest and 14% had a floating rate of interest. Senior loans may carry a fixed rate of interest or a floating rate of interest, usually set as a spread over LIBOR, and may require payments of both principal and interest throughout the life of the loan. Senior loans generally have contractual maturities of three to six years and interest is generally paid to the Company monthly or quarterly. Unitranche debt generally carries a fixed rate of interest and generally requires payments of both principal and interest throughout the life of the loan. Unitranche debt generally has contractual maturities of five to six years and interest is generally paid to the Company quarterly. Subordinated debt generally carries a fixed rate of interest generally with contractual maturities of five to ten years and generally has interest-only payments in the early years and payments of both principal and interest in the later years, although maturities and principal amortization schedules may vary. Interest on subordinated debt is generally paid to the Company quarterly.

Ciena Capital LLC. Ciena Capital LLC (“Ciena”) focuses on loan products that provide financing to commercial real estate owners and operators. Ciena is also a participant in the Small Business Administration’s 7(a) Guaranteed Loan Program and its wholly-owned subsidiary is licensed by the SBA as a Small Business Lending Company (SBLC). Ciena is headquartered in New York, NY.

At March 31, 2008, the Company’s investment in Ciena totaled $327.8 million at cost and $29.3 million at value, after the effect of unrealized depreciation of $298.5 million. At December 31, 2007, the Company’s investment in Ciena totaled $327.8 million at cost and $68.6 million at value, after the effect of unrealized depreciation of $259.2 million.

Net change in unrealized appreciation or depreciation included a net decrease in the Company’s investment in Ciena of $39.3 million for the three months ended March 31, 2008, and no change in the unrealized depreciation on the Company’s investment in Ciena for the three months ended March 31, 2007.

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Note 3.	Portfolio, continued

Total interest and related portfolio income earned from the Company’s investment in Ciena for the three months ended March 31, 2008 and 2007, was as follows:


		2008		2007
($ in millions)
Interest income on subordinated debt and Class A equity interests		$	—	$	—
Fees and other income			—		1.4

	Total interest and related portfolio income	$	—	$	1.4

In the fourth quarter of 2006, the Company placed its investment in Ciena’s 25% Class A equity interests on non-accrual status. As a result, there was no interest income from the Company’s investment in Ciena for the three months ended March 31, 2008 and 2007. In consideration for providing a guaranty on Ciena’s revolving credit facility and standby letters of credit (discussed below), the Company earned fees of $1.4 million for the three months ended March 31, 2007, and $5.4 million for the year ended December 31, 2007, which were included in fees and other income. Ciena has not yet paid the $5.4 million in such fees earned by the Company during 2007, and at March 31, 2008, such fees were included as a receivable in other assets. The Company considered this outstanding receivable in its valuation of Ciena at March 31, 2008. The Company did not accrue the fees earned from Ciena for providing the guaranty and standby letters of credit for the three months ended March 31, 2008.

The Company guarantees Ciena’s revolving credit facility that matures in March 2009. On January 30, 2008, Ciena completed an amendment of the terms of its revolving credit facility. The amendment reduced the commitments from the lenders under the facility from $500 million to $450 million at the effective date of the amendment, with further periodic reductions in total commitments to $325 million by December 31, 2008. In addition, certain financial and other covenants were amended. In connection with this amendment, the Company increased its unconditional guarantee from 60% to 100% of the total obligations under this facility (consisting of principal, letters of credit issued under the facility, accrued interest, and other fees) and replaced $42.5 million in letters of credit issued under the Ciena credit facility with new letters of credit under the Company’s revolving line of credit. The guaranty of the Ciena revolving credit facility can be called by the lenders in the event of a default, which includes the occurrence of any event of default under the Company’s revolving credit facility, subject to grace periods in certain cases. The amendment also prohibits cash payments from Ciena to the Company for interest, guarantee fees, management fees, and dividends. At March 31, 2008, the principal amount outstanding on Ciena’s revolving credit facility was $335.0 million and letters of credit issued under the facility were $46.9 million. The total obligation guaranteed by the Company at March 31, 2008, was $384.8 million. At March 31, 2008, the Company had provided standby letters of credit totaling $59.5 million in connection with term securitization transactions completed by Ciena.

Ciena relies on the asset-backed securitization market to finance its loan origination activity. That financing source continues to be unreliable in the current capital markets, and as a result, Ciena has substantially curtailed loan origination activity, including loan originations under the SBA’s 7(a) Guaranteed Loan Program. Ciena continues to reposition its business. However, there is an inherent risk in this repositioning and the Company continues to work with Ciena on restructuring. Ciena maintains two non-recourse securitization warehouse facilities, and there is no assurance that Ciena will be able to refinance these facilities in the loan securitization market. The Company has issued performance guaranties whereby the Company agreed to indemnify the warehouse providers for any damages, losses, liabilities and related costs and expenses that they may incur as a result of Ciena’s failure to perform any of its obligations as loan originator, loan seller or loan servicer under the warehouse securitizations.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


Note 3.	Portfolio, continued

On March 6, 2007, Ciena entered into an agreement with the SBA. According to the agreement, Ciena remains a preferred lender in the SBA 7(a) Guaranteed Loan Program and retains the ability to sell loans into the secondary market. As part of this agreement, Ciena agreed to the immediate payment of approximately $10 million to the SBA to cover amounts paid by the SBA with respect to some of the SBA-guaranteed loans that have been the subject of the charges by the U.S. Attorney’s Office for the Eastern District of Michigan against Mr. Harrington. Ciena also entered into an escrow agreement with the SBA and an escrow agent in which Ciena agreed to deposit $10 million with the escrow agent for any additional payments Ciena may be obligated to pay to the SBA in the future under the agreement. During the term of the agreement, any loans originated by Ciena that will be sold into the secondary market or loans that default after having been sold into the secondary market will be reviewed by an independent third party selected by the SBA prior to the sale of such loans into the secondary market or prior to reimbursement by the SBA. Ciena remains subject to SBA rules and regulations and as a result may be required to make additional payments to the SBA in the ordinary course of business.

On or about January 16, 2007, Ciena (f/k/a Business Loan Express, LLC) and its subsidiary Business Loan Center LLC (BLC) became aware of a lawsuit titled, United States, ex rel James R. Brickman and Greenlight Capital, Inc. v. Business Loan Express LLC f/k/a Business Loan Express, Inc.; Business Loan Center LLC f/k/a Business Loan Center, Inc.; Robert Tannenhauser; Matthew McGee; and George Harrigan, 05-CV-3147 (JEC). The complaint includes allegations arising under the False Claims Act and relating to alleged fraud in connection with SBA guarantees on shrimp vessel loans. On December 18, 2007, the United States District Court for the Northern District of Georgia dismissed all claims in this matter. The plaintiffs are appealing the dismissal.

These investigations, audits, reviews, and litigation have had and may continue to have a material adverse impact on Ciena and, as a result, could continue to negatively affect the Company’s financial results. The Company has considered Ciena’s current regulatory issues, ongoing investigations, litigation, and the repositioning of its business in performing the valuation of Ciena at March 31, 2008. The Company is monitoring the situation.

At both March 31, 2008, and December 31, 2007, the Company held all of the Class A equity interests, all of the Class B equity interests and 94.9% of the Class C equity interests.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


Note 3.	Portfolio, continued

Mercury Air Centers, Inc. In April 2004, the Company completed the purchase of a majority ownership in Mercury Air Centers, Inc. (“Mercury”). At March 31, 2007, the Company’s investment in Mercury totaled $84.8 million at cost and $301.4 million at value, which included unrealized appreciation of $216.6 million.

Total interest and related portfolio income earned from the Company’s investment in Mercury for the three months ended March 31, 2007, was as follows:


		2007
($ in millions)
Interest income		$	2.0
Fees and other income			0.1

	Total interest and related portfolio income	$	2.1

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Note 3.	Portfolio, continued

Collateralized Loan Obligations (“CLOs”) and Collateralized Debt Obligations (“CDOs”). At March 31, 2008, and December 31, 2007, the Company owned bonds and preferred shares/income notes in CLOs and bonds in a CDO as follows:


			2008							2007

			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	$	28.5		14.0	%
Callidus Debt Partners CLO Fund IV, Ltd.				2.0		2.6		10.1	%		—		—		—
Callidus Debt Partners CLO Fund VI, Ltd.				4.3		4.5		13.1	%		4.3		4.3		13.4	%
Callidus MAPS CLO Fund I LLC				17.0		15.5		8.9	%		17.0		16.1		11.0	%
Dryden XVIII Leveraged Loan 2007 Limited				7.4		8.2		11.4	%		7.4		7.4		12.7	%
Knightsbridge CLO 2007-1 Limited				22.0		22.0		14.1	%		22.0		22.0		14.1	%
Pangaea CLO 2007-1 Ltd.				11.6		10.8		13.1	%		11.6		11.6		13.9	%

	Total bonds			92.7		92.1		12.7	%		90.7		89.9		13.3	%
Preferred Shares/ Income Notes:
Callidus Debt Partners CLO Fund III, Ltd.				21.4		20.0		16.4	%		21.8		20.0		14.1	%
Callidus Debt Partners CLO Fund IV, Ltd.				15.2		14.9		17.5	%		12.3		11.3		16.1	%
Callidus Debt Partners CLO Fund V, Ltd.				13.8		13.8		20.3	%		14.0		14.7		19.3	%
Callidus Debt Partners CLO Fund VI, Ltd.				28.3		26.5		19.2	%		27.0		27.0		19.3	%
Callidus Debt Partners CLO Fund VII, Ltd.				23.1		23.1		16.6	%		22.1		22.1		16.6	%
Callidus MAPS CLO Fund I LLC				48.4		31.5		5.6	%		49.3		36.1		7.6	%
Callidus MAPS CLO Fund II, Ltd.				18.8		16.8		17.6	%		18.7		18.7		14.7	%
Dryden XVIII Leveraged Loan 2007 Limited				22.7		19.8		14.6	%		21.9		21.9		14.2	%
Knightsbridge CLO 2007-1 Limited				32.4		31.0		19.3	%		31.2		31.2		15.2	%

	Total preferred shares/income notes			224.1		197.4		15.8	%		218.3		203.0		14.6	%

		Total	$	316.8	$	289.5				$	309.0	$	292.9


⁽¹⁾	The weighted average yield is calculated as the (a) annual stated interest or the effective interest yield on the accruing bonds or the effective interest yield on the preferred shares/income notes, divided by (b) CLO and CDO assets at value. The yield on these debt and equity securities is included in interest income in the accompanying consolidated statement of operations.

The market yield used in the valuation of the CLO and CDO assets may be different than the interest yields shown above.


⁽²⁾	These securities are included in private finance subordinated debt.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


Note 3.	Portfolio, continued

shares/income notes. At both March 31, 2008, and December 31, 2007, the face value of the CLO and CDO assets held by the Company was subordinate to as much as 94% of the face value of the securities outstanding in these CLOs and CDO.

At March 31, 2008, and December 31, 2007, the underlying collateral assets of these CLO and CDO issuances, consisting primarily of senior corporate loans, were issued by 636 issuers and 671 issuers, respectively, and had balances as follows:


		2008		2007
($ in millions)
Bonds		$	286.1	$	288.5
Syndicated loans			4,206.5		4,122.7
Cash⁽¹⁾			101.4		104.4

	Total underlying collateral assets⁽²⁾	$	4,594.0	$	4,515.6


(1)	Includes undrawn liability amounts.

(2)	At March 31, 2008, and December 31, 2007, the total face value of defaulted obligations was $42.3 million and $18.4 million, respectively, or approximately 0.9% and 0.4% respectively, of the total underlying collateral assets.

Loans and Debt Securities on Non-Accrual Status. At March 31, 2008, and December 31, 2007, private finance loans and debt securities at value not accruing interest were as follows:


($ in millions)			2008		2007

Loans and debt securities in workout status
	Companies more than 25% owned		$	62.4	$	114.1
	Companies 5% to 25% owned			2.6		11.7
	Companies less than 5% owned			23.3		23.8
Loans and debt securities not in workout status
	Companies more than 25% owned			31.0		21.4
	Companies 5% to 25% owned			12.3		13.4
	Companies less than 5% owned			11.7		13.3

		Total	$	143.3	$	197.7

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


Note 3.	Portfolio, continued

Industry and Geographic Compositions. The industry and geographic compositions of the private finance portfolio at value at March 31, 2008, and December 31, 2007, were as follows:


		2008			2007

Industry
Business services			36	%		37	%
Consumer products			25			25
Industrial products			8			10
Financial services			5			6
CLO/ CDO⁽¹⁾			6			6
Retail			5			4
Consumer services			5			4
Healthcare services			3			3
Asset management			2			1
Other			5			4

	Total		100	%		100	%

Geographic Region⁽²⁾
Mid-Atlantic			35	%		36	%
Midwest			31			32
Southeast			18			17
West			14			14
Northeast			2			1

	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*

At March 31, 2008, and December 31, 2007, the commercial real estate finance portfolio consisted of the following:


		2008						2007

		Cost		Value		Yield⁽¹⁾		Cost		Value		Yield⁽¹⁾
($ in millions)
Commercial mortgage loans		$	52.0	$	53.5		7.9%	$	65.9	$	65.4		6.8%
Real estate owned			23.5		30.2				15.3		21.3
Equity interests			14.2		32.1				15.7		34.5

	Total	$	89.7	$	115.8			$	96.9	$	121.2

⁽¹⁾

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


Note 3.	Portfolio, continued

Commercial Mortgage Loans and Equity Interests. The commercial mortgage loan portfolio contains loans that were originated by the Company or were purchased from third-party sellers. At both March 31, 2008, and December 31, 2007, approximately 85% and 15% of the Company’s commercial mortgage loan portfolio was composed of fixed and adjustable interest rate loans, respectively. At March 31, 2008, and December 31, 2007, loans with a value of $7.4 million and $14.3 million, respectively, were not accruing interest. Loans greater than 120 days delinquent generally do not accrue interest.

The property types and the geographic composition securing the commercial real estate finance portfolio at value at March 31, 2008, and December 31, 2007, were as follows:


		2008			2007

Property Type
Hospitality			44	%		44	%
Office			20			21
Retail			18			18
Recreation			16			15
Other			2			2

	Total		100	%		100	%

Geographic Region
Southeast			44	%		40	%
Midwest			25			31
West			21			20
Northeast			8			7
Mid-Atlantic			2			2

	Total		100	%		100	%


	*Fair Value Measurements*

In September 2006, the FASB issued Statement No. 157, Fair Value Measurements (SFAS 157). This statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. This statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company has adopted this statement on a prospective basis beginning in the quarter ended March 31, 2008. Adoption of this statement did not have a material effect on the Company’s consolidated financial statements for the period ended March 31, 2008.

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Note 3.	Portfolio, continued

value to be the price that would be received for an investment in a current sale, which assumes an orderly transaction between market participants on the measurement date. The Company’s valuation policy considers the fact that no ready market exists for substantially all of the securities in which it invests and that fair value for its investments must typically be determined using unobservable inputs.

SFAS 157 establishes a fair value hierarchy that encourages and is based on the use of observable inputs, but allows for unobservable inputs when observable inputs do not exist. Inputs are classified into one of three categories:


	•	Level 1 — Quoted prices (unadjusted) in active markets for identical assets

	•	Level 2 — Inputs other than quoted prices that are observable to the market participant for the asset or quoted prices in a market that is not active

	•	Level 3 — Unobservable inputs

When there are multiple inputs for determining the fair value of an investment, the Company classifies the investment in total based on the lowest level input that is significant to the fair value measurement.

Assets measured at fair value on a recurring basis by level within the fair value hierarchy at March 31, 2008, were as follows:


			Fair Value		Quoted Prices in		Significant Other		Significant
			Measurement		Active Markets for		Observable		Unobservable
			as of March 31,		Identical Assets		Inputs		Inputs
($ in millions)			2008		(Level 1)		(Level 2)		(Level 3)

Assets at Fair Value:
U.S. Treasury Bills			$	120.0	$	120.0	$	—	$	—

Portfolio
	Private finance		$	4,519.8	$	3.3	$	—	$	4,516.5
	Commercial real estate finance			115.8		—		—		115.8

		Total portfolio	$	4,635.6	$	3.3	$	—	$	4,632.3

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


Note 3.	Portfolio, continued

The table below sets forth a summary of changes in the Company’s assets measured at fair value using level 3 inputs.


				Commercial
	Private			Real Estate
	Finance			Finance			Total
($ in millions)
Balance at December 31, 2007	$	4,652.7		$	121.2		$	4,773.9
Total gains or losses
Net realized gains (losses)⁽¹⁾		12.8			(0.2	)		12.5
Net change in unrealized appreciation or depreciation⁽²⁾		(111.4	)		1.9			(109.5	)
Purchases, issuances, repayments and exits, net⁽³⁾		(37.6	)		(7.1	)		(44.6	)
Transfers in and/or out of level 3		—			—			—

Balance at March 31, 2008	$	4,516.5		$	115.8		$	4,632.3

Net unrealized appreciation (depreciation) during the period relating to assets still held at the reporting date ⁽²⁾	$	(93.5	)	$	1.5		$	(92.0	)


⁽¹⁾	Includes net realized gains (losses) (recorded as realized gains or losses in the accompanying consolidated statement of operations), and amortization of discounts and closing points (recorded as interest income in the accompanying consolidated statement of operations).

⁽²⁾	Included in change in net unrealized appreciation or depreciation in the accompanying consolidated statement of operations. Net change in unrealized appreciation or depreciation includes net unrealized appreciation (depreciation) resulting from changes in portfolio investment values during the reporting period and the reversal of previously recorded unrealized appreciation or depreciation when gains or losses are realized.

⁽³⁾	Includes interest and dividend income reinvested through the receipt of a debt or equity security (payment-in-kind income) (recorded as interest and dividend income in the accompanying consolidated statement of operations).

The impact on the Company’s consolidated financial statements for periods subsequent to the period of adoption of SFAS 157 cannot be determined at this time as it will be influenced by the estimates of fair value for those periods, the number and amount of investments the Company originates, acquires or exits, and the effect of any additional guidance or any changes in the interpretation of the statement.


	*Managed Funds*

The Company manages funds that invest in the debt and equity of primarily private middle market companies in a variety of industries (together, the “Managed Funds”). As of March 31, 2008, the funds that the Company manages had total assets of approximately $1.2 billion. During 2007, the Company established the Allied Capital Senior Debt Fund, L.P. and the Unitranche Fund LLC, and in the first quarter of 2008, the Company formed the AGILE Fund I, LLC and assumed the management of Knightsbridge as 2007-1 Ltd., all discussed below. The Company’s responsibilities to the Managed Funds may include deal origination, underwriting, and portfolio monitoring and development services consistent with the activities that the Company performs for its portfolio. Each of the Managed Funds may separately invest in the debt or equity of a portfolio company. The Company’s portfolio may include debt or equity investments issued by the same portfolio company as investments held by one or more Managed Funds, and these investments may be senior, pari passu or junior to the debt and equity investments held by the Company.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 3. Portfolio, continued

funds to pledge or exchange the transferred securities, and the Company does not have either the entitlement and the obligation to repurchase the securities or the ability to unilaterally cause the fund to put the securities back to the Company.

Allied Capital Senior Debt Fund, L.P. The Company is a special limited partner in the Allied Capital Senior Debt Fund, L.P. (“ACSDF”), a private fund that generally invests in senior, unitranche and second lien debt. The Company has committed and funded $31.8 million to ACSDF, which is a portfolio company. The Company’s investment in ACSDF totaled $31.8 million at cost and $32.6 million at value at March 31, 2008, and $31.8 million at cost and $32.8 million at value at December 31, 2007. ACSDF has closed on $125 million in equity capital commitments and had total assets of approximately $432 million at March 31, 2008. As a special limited partner, the Company expects to earn an incentive allocation of 20% of ACSDF’s annual net income earned in excess of a specified minimum return, subject to certain performance benchmarks. The value of the Company’s investment in ACSDF is based on the net asset value of ACSDF, which reflects the capital invested plus its allocation of the net earnings of ACSDF, including the incentive allocation.

AC Corp is the investment manager to ACSDF. Callidus Capital Corporation, a portfolio investment controlled by the Company, acts as special manager to ACSDF. An affiliate of the Company is the general partner of ACSDF, and AC Corp serves as collateral manager to a warehouse financing vehicle associated with ACSDF. AC Corp earns a management fee of up to 2% per annum of the net asset value of ACSDF and pays Callidus 25% of that management fee to compensate Callidus for its role as special manager.

The Company may offer to sell loans to ACSDF or the warehouse financing vehicle. ACSDF or the warehouse financing vehicle may purchase loans from the Company. In connection with ACSDF’s formation in June 2007 and during the second half of 2007, the Company sold $224.2 million of seasoned assets with a weighted average yield of 10.0% to a warehouse financing vehicle associated with ACSDF. In the first quarter of 2008, the Company sold $30.0 million of seasoned assets with a weighted average yield of 8.2% to the warehouse financing vehicle. ACSDF also purchases loans from other third parties.

Unitranche Fund LLC. In December 2007, the Company formed the Unitranche Fund LLC (“Unitranche Fund”), which the Company co-manages with an affiliate of General Electric Capital Corporation (“GE”). The Unitranche Fund is a private fund that generally focuses on making first lien unitranche loans to middle market companies with Earnings before Interest, Taxes, Depreciation, and Amortization of at least $15 million. GE has committed $3.075 billion to the Unitranche Fund consisting of $3.0 billion of senior notes and $0.075 billion of subordinated certificates and the Company has committed $525.0 million of subordinated certificates. The Unitranche Fund will be capitalized as transactions are completed. The Company earns a management and sourcing fee totaling 0.375% per annum of managed assets. At March 31, 2008, the Unitranche Fund had total assets of approximately $142 million and the Company’s investment in the Unitranche Fund totaled $31.5 million at cost and at value.

AGILE Fund I, LLC. In January 2008, the Company entered into an investment agreement with the Goldman Sachs Private Equity Group, part of Goldman Sachs Asset Management (“Goldman Sachs”). As part of the investment agreement, the Company agreed to sell a pro-rata strip of private equity and debt investments to AGILE Fund I, LLC (“AGILE”), a private fund in which a fund managed by Goldman Sachs owns substantially all of the interests, for a total transaction value of $167 million. The sales of the assets closed in the first quarter of 2008.

The sale to AGILE included 13.7% of the Company’s equity investments in 23 of its buyout portfolio companies and 36 of its minority equity portfolio companies for a total purchase price of

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


Note 3.	Portfolio, continued

$104 million, which resulted in a net realized gain of $8.8 million and dividend income of $5.4 million. In addition, the Company sold approximately $63 million in debt investments, which represented 7.3% of its unitranche, second lien and subordinated debt investments in the buyout investments included in the equity sale. AGILE generally has the right to co-invest in its proportional share of any future follow-on investment opportunities presented by the companies in its portfolio.

The Company is the managing member of AGILE, and is entitled to an incentive allocation subject to certain performance benchmarks. The Company owns the remaining interests in AGILE not held by Goldman Sachs. At March 31, 2008, AGILE had total assets of approximately $174 million and the Company’s investment in AGILE totaled $0.9 million at cost and at value.

As part of this transaction, the Company also sold nine venture capital and private equity limited partnership investments for approximately $28 million to a fund managed by Goldman Sachs, which assumed the $4.7 million of unfunded commitments related to these limited partnership investments. The sale of these limited partnership investments closed at the end of the first quarter of 2008 and resulted in a net realized loss of $5.5 million.

Knightsbridge CLO 2007-1 Ltd. On March 31, 2008, the Company assumed the management of Knightsbridge CLO 2007-1 Ltd. The Company earns a management fee of up to 0.6% per annum of the assets of the fund. Callidus may assist the Company in the management of the fund and the Company may pay Callidus a portion of the management fee earned for this assistance. This CLO invests primarily in middle market senior loans. At March 31, 2008, Knightsbridge CLO 2007-1 Ltd. had total assets of approximately $500 million and the Company’s investment in this CLO totaled $54.4 million at cost and $53.0 million at value.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 4. Debt

At March 31, 2008, and December 31, 2007, the Company had the following debt:


			2008								2007

								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		$	1,042.8	$	1,042.8			6.1	%	$	1,042.2	$	1,042.2		6.1	%
	Publicly issued unsecured notes payable			880.0		880.0			6.7	%		880.0		880.0		6.7	%

		Total notes payable and debentures		1,922.8		1,922.8			6.4	%		1,922.2		1,922.2		6.4	%
Revolving line of credit				922.5		268.8	⁽⁴⁾		3.8	%⁽²⁾		922.5		367.3		5.9	%⁽²⁾

	Total debt		$	2,845.3	$	2,191.6			6.2	%⁽³⁾	$	2,844.7	$	2,289.5		6.5	%⁽³⁾


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

⁽²⁾	The annual interest cost reflects the interest rate payable for borrowings under the revolving line of credit in effect at the balance sheet date. In addition to the current interest payable, there were annual costs of commitment fees, other facility fees and amortization of debt financing costs of $3.7 million at both March 31, 2008, and December 31, 2007.

⁽³⁾	The annual interest cost for total debt includes the annual cost of commitment fees, other facility fees and amortization of debt financing costs on the revolving line of credit regardless of the amount outstanding on the facility as of the balance sheet date. The annual interest cost reflects the facilities in place on the balance sheet date.

⁽⁴⁾	On April 9, 2008, the Company entered into a three-year unsecured revolving line of credit with total commitments of $632.5 million, which replaced the Company’s previous line of credit. Under this new revolving line of credit, in addition to the current interest rate payable, the annual costs of commitment fees, other facility fees and amortization of debt financing costs will be approximately $6.7 million. See discussion below.


	*Notes Payable and Debentures*

Privately Issued Unsecured Notes Payable. The Company has privately issued unsecured long-term notes to institutional investors. The notes have five- or seven-year maturities and have fixed rates of interest. The notes generally require payment of interest only semi-annually, and all principal is due upon maturity. At March 31, 2008, the notes had maturities from May 2008 to May 2013. The notes may be prepaid in whole or in part, together with an interest premium, as stipulated in the note agreements.

The Company also has issued five-year unsecured long-term notes denominated in Euros and Sterling for a total U.S. dollar equivalent of $15.2 million. The notes have fixed interest rates and have substantially the same terms as the Company’s other unsecured notes. The Euro notes require annual interest payments and the Sterling notes require semi-annual interest payments until maturity. These notes mature in March 2009. Simultaneous with issuing the notes, the Company entered into a cross currency swap with a financial institution which fixed the Company’s interest and principal payments in U.S. dollars for the life of the debt.

Publicly Issued Unsecured Notes Payable. At March 31, 2008, the Company had outstanding publicly issued unsecured notes as follows:


		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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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 4. Debt, continued

Scheduled Maturities. Scheduled future maturities of notes payable at March 31, 2008, were as follows:


Year		Amount Maturing

		($ in millions)
2008		$	153.0
2009			270.3
2010			408.0
2011			472.5
2012			339.0
Thereafter			280.0

	Total	$	1,922.8


	*Revolving Line of Credit*

At December 31, 2007, the Company had an unsecured revolving line of credit with a committed amount of $922.5 million that was scheduled to expire on September 30, 2008. On April 9, 2008, the Company entered into a three-year unsecured revolving line of credit with total commitments of $632.5 million, with Bank of America, N.A., as a lender and as administrative agent, and the other lenders thereunder, which replaced the Company’s previous revolving line of credit. The Company may obtain additional commitments up to a total committed facility of $1.5 billion, subject to customary conditions. The revolving line of credit expires on April 11, 2011.

At the Company’s option, borrowings under the revolving line of credit effective April 9, 2008, generally bear interest at a rate per annum equal to (i) LIBOR (for the period selected by the Company) plus 2.00% or (ii) the higher of the Federal Funds rate plus 0.50% or the Bank of America N.A. prime rate. The revolving line of credit requires the payment of an annual commitment fee equal to 0.50% of the committed amount (whether used or unused). The revolving line of credit generally requires payments of interest at the end of each LIBOR interest period, but no less frequently than quarterly, on LIBOR-based loans, and monthly payments of interest on other loans. All principal is due upon maturity.

The revolving credit facility provides for a swing line sub-facility. The swing line sub-facility bears interest at the Bank of America N.A. cost of funds plus 2.00%. The revolving credit facility also provides for a sub-facility for the issuance of letters of credit for up to an aggregate amount of $175 million. This

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ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 4. Debt, continued

letter of credit sub-facility will increase to the extent of 15% of the aggregate amount of commitments over $1.0 billion. The letter of credit fee is 2.00% per annum on letters of credit issued, which is payable quarterly.

The annual cost of commitment fees, other facility fees and amortization of debt financing costs prior to entering into the new three-year facility in April 2008, was $3.7 million at both March 31, 2008, and December 31, 2007, respectively. Subsequent to entering into the new facility in April 2008, the annual cost of commitment fees, other facility fees and amortization of debt financing costs will be approximately $6.7 million.

The average debt outstanding on the revolving line of credit was $289.3 million and $142.1 million, respectively, for the three months ended March 31, 2008 and 2007. The maximum amount borrowed under this facility and the weighted average stated interest rate during the three months ended March 31, 2008 and 2007, were $403.8 million and 4.9%, respectively, and $225.5 million and 6.4%, respectively. At March 31, 2008, the amount available under the revolving line of credit in effect on March 31, 2008, was $557.5 million, net of amounts committed for standby letters of credit of $96.3 million issued under the credit facility. On April 9, 2008, the amount available under the new revolving line of credit was $325.4 million, net of amounts committed for standby letters of credit of $96.3 million issued under the credit facility.


	*Covenant Compliance*

The Company has various financial and operating covenants required by the revolving line of credit and the privately issued unsecured notes payable outstanding at March 31, 2008, and December 31, 2007. These covenants require the Company to maintain certain financial ratios, including asset coverage, debt to equity and interest coverage, and a minimum net worth. These credit facilities provide for customary events of default, including, but not limited to, payment defaults, breach of representations or covenants, cross-defaults, bankruptcy events, failure to pay judgments, attachment of the Company’s assets, change of control and the issuance of an order of dissolution. Certain of these events of default are subject to notice and cure periods or materiality thresholds. The Company’s credit facilities limit its ability to declare dividends if the Company defaults under certain provisions. As of March 31, 2008, and December 31, 2007, the Company was in compliance with these covenants. The financial and operating covenants under the new revolving line of credit are substantially similar to the previous facility.

The Company has certain financial and operating covenants that are required by the publicly issued unsecured notes payable, including that the Company will maintain a minimum ratio of 200% of total assets to total borrowings, as required by the Investment Company Act of 1940, as amended, while these notes are outstanding. As of March 31, 2008, and December 31, 2007, the Company was in compliance with these covenants.

Note 5. Guarantees and Commitments

In the ordinary course of business, the Company has issued guarantees and has extended standby letters of credit through financial intermediaries on behalf of certain portfolio companies. All standby letters of credit have been issued through Bank of America, N.A. As of March 31, 2008, and December 31, 2007, the Company had issued guarantees of debt and rental obligations aggregating $394.0 million and $270.6 million, respectively, and had extended standby letters of credit aggregating $96.3 million and $58.5 million, respectively. Under these arrangements, the Company would be required to make payments to third-party beneficiaries if the portfolio companies were to default on their related

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ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 5. Guarantees and Commitments, continued

payment obligations. The maximum amount of potential future payments was $490.3 million and $329.1 million at March 31, 2008, and December 31, 2007, respectively.

As of March 31, 2008, the guarantees and standby letters of credit expired as follows:


		Total		2008		2009		2010		2011		2012		After 2012
(in millions)
Guarantees		$	394.0	$	0.3	$	387.3	$	—	$	4.4	$	0.1	$	1.9
Standby letters of credit⁽¹⁾			96.3		96.3		—		—		—		—		—

	Total⁽²⁾	$	490.3	$	96.6	$	387.3	$	—	$	4.4	$	0.1	$	1.9


⁽¹⁾	Standby letters of credit are issued under the Company’s revolving line of credit that expires in September 2008. Therefore, unless a standby letter of credit is set to expire at an earlier date, it is assumed that the standby letters of credit will expire contemporaneously with the expiration of the Company’s line of credit that was in effect at March 31, 2008, which was scheduled to expire in September 2008. In April 2008, the Company entered into a new three-year revolving line of credit that expires in April 2011.

⁽²⁾	The Company’s most significant commitments relate to its investment in Ciena Capital LLC (Ciena), which commitments totaled $444.3 million at March 31, 2008. At March 31, 2008, the Company guaranteed 100% of the outstanding total obligations on Ciena’s revolving line of credit, which matures in March 2009, for a total guaranteed amount of $384.8 million and had standby letters of credit issued totaling $59.5 million in connection with term securitizations completed by Ciena. See Note 3.

At March 31, 2008, the Company had outstanding commitments to fund investments totaling $885.3 million, including $845.3 million related to private finance investments and $40.0 million related to commercial real estate finance investments. Total outstanding commitments related to private finance investments included $493.5 million to the Unitranche Fund LLC, which the Company estimates will be funded over a two to three year period as investments are funded by the Unitranche Fund. See Note 3.

Note 6. Shareholders’ Equity

Sales of common stock for the three months ended March 31, 2008 and 2007, were as follows:


		2008		2007
(in millions)
Number of common shares			8.3		3.3

Gross proceeds		$	175.5	$	97.3
Less costs, including underwriting fees			4.6		3.5

	Net proceeds	$	170.9	$	93.8

In addition, in April 2008, the Company sold 3.2 million shares of its common stock for proceeds of $56.3 million, net of underwriting discounts and estimated offering expenses.

There were no stock options exercised during the three months ended March 31, 2008. The Company issued 0.1 million shares of common stock upon the exercise of stock options during the three months ended March 31, 2007.

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ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 6. Shareholders’ Equity, continued

payment date. For the three months ended March 31, 2008 and 2007, the Company issued new shares in order to satisfy dividend reinvestment requests. Dividend reinvestment plan activity for the three months ended March 31, 2008 and 2007, was as follows:


	For the Three
	Months Ended
	March 31,

	2008		2007

(in millions, except per share amounts)
Shares issued		0.2		0.1
Average price per share	$	19.49	$	29.23

Note 7. Earnings Per Common Share

Earnings per common share for the three months ended March 31, 2008 and 2007, were as follows:


	For the Three
	Months Ended
	March 31,

	2008			2007
(in millions, except per share amounts)
Net increase (decrease) in net assets resulting from operations	$	(40.7	)	$	133.1

Weighted average common shares outstanding — basic		161.5			149.5
Dilutive options outstanding		—			3.3

Weighted average common shares outstanding — diluted		161.5			152.8

Basic earnings (loss) per common share	$	(0.25	)	$	0.89

Diluted earnings (loss) per common share	$	(0.25	)	$	0.87

Note 8. Employee Compensation Plans

In December 2007, the Company’s Board of Directors made a determination that it was in the best interests of the Company to terminate its deferred compensation arrangements (each individually a Plan, or collectively, the Plans). The Board of Directors’ decision was primarily in response to increased complexity resulting from recent changes in the regulation of deferred compensation arrangements. The Board of Directors resolved that the accounts under these Plans would be distributed to participants in full on March 18, 2008, the termination and distribution date, or as soon as was reasonably practicable thereafter, in accordance with the provisions of each of these Plans.

The Company has an Individual Performance Award (“IPA”), which is generally determined annually at the beginning of each year but may be adjusted throughout the year. Through December 31, 2007, the IPA was deposited in a deferred compensation trust in four equal installments, generally on a

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ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 8. Employee Compensation Plans, continued

quarterly basis, in the form of cash. The Compensation Committee of the Board of Directors designed the trust to require the trustee to use the cash to purchase shares of the Company’s common stock in the open market.

Through December 31, 2007, the IPA amounts were contributed into the trust and invested in the Company’s common stock. The accounts of the trust were consolidated with the Company’s accounts. The common stock was classified as common stock held in deferred compensation trust in the accompanying financial statements and the deferred compensation obligation, which represented the amount owed to the employees, was included in other liabilities. Changes in the value of the Company’s common stock held in the deferred compensation trust were not recognized. However, the liability was marked to market with a corresponding charge or credit to employee compensation expense. On March 18, 2008, prior to the distribution of the assets held in the trust, the Company was required to record a final mark to market of the liability with a corresponding credit to employee compensation expense.

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 the Company, rather than contributed to a deferred compensation plan and invested in shares of the Company’s common stock.

The IPA expense for the three months ended March 31, 2008 and 2007, was as follows:


		2008			2007
($ in millions)
IPA		$	2.4		$	2.5
IPA mark to market expense (benefit)			(4.1	)		(4.0	)

	Total IPA expense (benefit)	$	(1.7	)	$	(1.5	)

The Company also has an individual performance bonus (“IPB”), which is distributed in cash to award recipients equally throughout the year (beginning in February of each year) as long as the recipient remains employed by the Company. If a recipient terminates employment during the year, any remaining cash payments under the IPB would be forfeited. For the three months ended March 31, 2008 and 2007, the IPB expense was $1.7 million and $2.0 million, respectively. The IPA and IPB expenses are included in employee expenses.

Note 9. Stock Option Plan

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ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 9. Stock Option Plan, continued

At March 31, 2008, and December 31, 2007, there were 37.2 million shares authorized under the Option Plan and the number of shares available to be granted under the Option Plan was 3.9 million and 10.7 million, respectively.

Information with respect to options granted, exercised and forfeited under the Option Plan for the three months ended March 31, 2008, was as follows:


						Weighted		Aggregate
				Weighted		Average		Intrinsic
				Average		Contractual		Value at
				Exercise Price		Remaining		March 31,
	Shares			Per Share		Term (Years)		2008⁽¹⁾
(in millions, except per share amounts)
Options outstanding at January 1, 2008		18.5		$	28.36
Granted		7.1		$	22.96
Exercised		—		$	—
Forfeited		(0.3	)	$	27.46

Options outstanding at March 31, 2008		25.3		$	26.86		6.35	$	—

Exercisable at March 31, 2008⁽²⁾		11.7		$	27.99		6.13	$	—

Exercisable and expected to be exercisable at March 31, 2008⁽³⁾		23.5		$	27.02		6.33	$	—


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

During the three months ended March 31, 2007, no options were granted, 0.1 million options were exercised and 0.3 million options were forfeited.

There were no shares vested during the three months ended March 31, 2008 and 2007. The total intrinsic value of the options exercised during the three months ended March 31, 2007, was $0.9 million. There were no options exercised during the three months ended March 31, 2008.

Note 10. Dividends and Distributions and Taxes

The Company’s Board of Directors declared and the Company paid a dividend of $0.65 per common share and $0.63 per common share for the first quarters of 2008 and 2007, respectively. These dividends totaled $108.1 million and $95.8 million for the three months ended March 31, 2008 and 2007, respectively. The Company declared an extra cash dividend of $0.05 per share during 2006, which was paid to shareholders on January 19, 2007.

The Company’s Board of Directors also declared a dividend of $0.65 per common share for the second quarter of 2008.

At December 31, 2007, the Company had estimated excess taxable income of $403.1 million available for distribution to shareholders in 2008. Estimated excess taxable income for 2007 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

Dividends for 2008 will first be paid out of the excess taxable income carried over from 2007. Given the regular quarterly dividend payout, which for the first quarter of 2008 was $108.1 million, the Company expects that a majority of the 2008 dividend payments will be made from excess 2007 taxable earnings. The Company currently expects that the excess taxable income carried over from 2007 plus its estimated annual taxable income for 2008 will be in excess of its estimated dividend distributions to shareholders in 2008, therefore, the Company expects to carry over excess taxable income earned in 2008 for distribution to shareholders in 2009. The Company will generally be required to pay a nondeductible excise tax equal to 4% of the amount by which 98% of the Company’s annual taxable income exceeds the distributions from such taxable income for the year. The Company has accrued an excise tax on the estimated excess taxable income earned for the respective periods. For the three months ended March 31, 2008 and 2007, the Company recorded an excise tax of $2.3 million and $3.6 million, respectively.

The excess taxable income carried forward from 2007 and the realized gains deferred through installment treatment for 2007 are estimates and will not be finally determined until the Company files its 2007 tax return in September 2008.

The Company’s consolidated subsidiary, AC Corp, is subject to federal and state income taxes. For the three months ended March 31, 2008 and 2007, AC Corp’s income tax benefit was $0.3 million and $4.2 million, respectively.

Note 11. Supplemental Disclosure of Cash Flow Information

The Company paid interest of $31.1 million and $24.9 million, respectively, for the three months ended March 31, 2008 and 2007.

Non-cash operating activities for the three months ended March 31, 2008 and 2007, totaled $132.0 million and $3.1 million, respectively. Non-cash operating activity for the three months ended March 31, 2008, included the exchange of existing debt securities and accrued interest with a cost basis of $99.6 million for new debt and equity securities and consideration received in connection with the sale of securities of $32.4 million, which was received in cash in April 2008.

Non-cash financing activities included the issuance of common stock in lieu of cash distributions totaling $3.8 million and $4.3 million, for the three months ended March 31, 2008 and 2007, respectively.

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ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 12. Financial Highlights


									At and
			At and for the						for the
			Three Months Ended						Year Ended
			March 31,						December 31,

			2008⁽¹⁾			2007			2007

Per Common Share Data
Net asset value, beginning of period			$	17.54		$	19.12		$	19.12

	Net investment income⁽²⁾			0.43			0.26			0.91
	Net realized gains⁽²⁾⁽³⁾			0.02			0.18			1.74

		Net investment income plus net realized gains⁽²⁾		0.45			0.44			2.65
		Net change in unrealized appreciation or depreciation ⁽²⁾⁽³⁾		(0.70	)		0.43			(1.66	)

Net increase (decrease) in net assets resulting from operations⁽²⁾				(0.25	)		0.87			0.99

Net decrease in net assets from shareholder distributions				(0.65	)		(0.63	)		(2.64	)
Net increase in net assets from capital share transactions ⁽²⁾⁽⁴⁾				0.35			0.22			0.41
Decrease in net assets from cash portion of the option cancellation payment⁽²⁾⁽⁶⁾				—			—			(0.34	)

Net asset value, end of period			$	16.99		$	19.58		$	17.54

Market value, end of period			$	18.43		$	28.81		$	21.50
Total return⁽⁵⁾				(11.4	)%		(9.9	)%		(27.6	)%
Ratios and Supplemental Data
	($ and shares in thousands, except per share amounts)
Ending net assets			$	2,828.4		$	2,978.3		$	2,771.8
Common shares outstanding at end of period				166.5			152.1			158.0
Diluted weighted average common shares outstanding				161.5			152.8			154.7
Employee, employee stock option and administrative expenses/average net assets⁽⁷⁾				1.28	%		1.33	%		6.10	%
Total operating expenses/average net assets⁽⁷⁾				2.62	%		2.37	%		10.70	%
Income tax expense (benefit), including excise tax/average net assets⁽⁷⁾				0.07	%		(0.02	)%		0.47	%
Net investment income/average net assets⁽⁷⁾				2.48	%		1.36	%		4.91	%
Net increase (decrease) in net assets resulting from operations/average net assets⁽⁷⁾				(1.45	)%		4.57	%		5.34	%
Portfolio turnover rate⁽⁷⁾				5.62	%		3.78	%		26.84	%
Average debt outstanding			$	2,209.5		$	1,841.2		$	1,924.2
Average debt per share⁽²⁾			$	13.68		$	12.05		$	12.44


⁽¹⁾	The results for the three months ended March 31, 2008, are not necessarily indicative of the operating results to be expected for the full year.

⁽²⁾	Based on diluted weighted average number of common shares outstanding for the period.

⁽³⁾	Net realized gains and net change in unrealized appreciation or depreciation can fluctuate significantly from period to period. As a result, quarterly comparisons may not be meaningful.

⁽⁴⁾	Excludes capital share transactions related to the cash portion of the option cancellation payment.

⁽⁵⁾	Total return assumes the reinvestment of all dividends paid for the periods presented.

⁽⁶⁾	On July 18, 2007, the Company completed a tender offer, which resulted in a total option cancellation payment of approximately $105.6 million, of which $52.8 million was paid in cash and $52.8 million was paid through the issuance of unregistered shares of the Company’s common stock.

⁽⁷⁾	The ratios for the three months ended March 31, 2008 and 2007, do not represent annualized results.

F-137

ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 13. Litigation

In late December 2006, the Company received a subpoena from the U.S. Attorney for the District of Columbia requesting, among other things, the production of records regarding the use of private investigators by the Company or its agents. The Board established a committee, which was advised by its own counsel, to review this matter. In the course of gathering documents responsive to the subpoena, the Company became aware that an agent of the Company obtained what were represented to be telephone records of David Einhorn and which purport to be records of calls from Greenlight Capital during a period of time in 2005. Also, while the Company was gathering documents responsive to the subpoena, allegations were made that the Company’s management had authorized the acquisition of these records and that management was subsequently advised that these records had been obtained. The Company’s management has stated that these allegations are not true. The Company has cooperated fully with the inquiry by the U.S. Attorney’s Office.

On February 13, 2007, Rena Nadoff filed a shareholder derivative action in the Superior Court of the District of Columbia, captioned Rena Nadoff v. Walton, et al., CA 001060-07, seeking unspecified compensatory and other damages, as well as equitable relief on behalf of Allied Capital Corporation. The complaint was summarily dismissed in July 2007. The complaint alleged breach of fiduciary duty by the Board of Directors arising from internal control failures and mismanagement of Business Loan Express, LLC, an Allied Capital portfolio company. On October 5, 2007, Rena Nadoff sent a letter to the Company’s Board of Directors with substantially the same claims and a request that the Board of Directors investigate the claims and take appropriate action. The Board of Directors has established a committee, which is advised by its own counsel, to review the matter.

F-138

ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 13. Litigation, continued

2007, plaintiffs served an amended complaint. Plaintiffs claim that, between November 7, 2005, and January 22, 2007, Allied Capital either failed to disclose or misrepresented information about its portfolio company, Business Loan Express, LLC. Plaintiffs seek unspecified compensatory and other damages, as well as other relief. The Company believes the lawsuit is without merit, and intends to defend the lawsuit vigorously. On September 13, 2007, the Company filed a motion to dismiss the lawsuit. The motion is pending.

In addition, the Company is party to certain lawsuits in the normal course of business.

F-139

ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 13. Litigation, continued

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,							March 31,
Portfolio Company			Credited				2007		Gross		Gross			2008
(in thousands)		Investment⁽¹⁾	to Income⁽⁶⁾		Other⁽²⁾		Value		Additions⁽³⁾		Reductions⁽⁴⁾			Value


Companies More Than 25% Owned

AGILE Fund I, LLC		Equity Interests					$	—	$	860	$	—		$	860
	(Private Equity Fund)

Alaris Consulting, LLC		Senior Loan⁽⁵⁾						—		—		—			—
	(Business Services)	Equity Interests						—		1,211		(1,211	)		—

AllBridge Financial, LLC		Equity Interests						7,800		13,944		(6,274	)		15,470
	(Asset Management)

Allied Capital Senior Debt Fund, L.P.		Equity Interests						32,811		—		(206	)		32,605
	(Private Debt Fund)

Avborne, Inc.		Preferred Stock						1,633		51		—			1,684
	(Business Services)	Common Stock						—		—		—			—

Avborne Heavy Maintenance, Inc.		Preferred Stock						2,557		—		(2,400	)		157
	(Business Services)	Common Stock						370		667		—			1,037

Aviation Properties Corporation		Common Stock						—		—		—			—
	(Business Services)

Border Foods, Inc.		Preferred Stock						4,648		—		(1,507	)		3,141
	(Consumer Products)	Common Stock						—		—		—			—

Calder Capital Partners, LLC		Senior Loan⁽⁵⁾			$	65		3,035		540		(502	)		3,073
	(Asset Management)	Equity Interests						3,559		—		(25	)		3,534

Callidus Capital Corporation		Senior Loan	$	4				—		1,500		—			1,500
	(Asset Management)	Subordinated Debt		348				6,871		4,309		—			11,180
		Common Stock		3,000				44,587		—		(4,565	)		40,022

Ciena Capital LLC		Class A Equity
	(f/k/a Business Loan	Interests⁽⁵⁾						68,609		—		(39,318	)		29,291
	Express, LLC)	Class B Equity Interests						—		—		——			—
	(Financial Services)	Class C Equity Interests						—		—		—			—

CitiPostal Inc.		Senior Loan		13				679		1		—			680
	(Business Services)	Unitranche Debt		1,561				50,597		529		—			51,126
		Subordinated Debt		327				8,049		43		—			8,092
		Common Stock						12,726		4,051		—			16,777

Coverall North America, Inc.		Unitranche Debt		1,013				34,923		19		(3,019	)		31,923
	(Business Services)	Subordinated Debt		216				5,979		3		(437	)		5,545
		Common Stock						27,597		2,698		(2,287	)		28,008

CR Holding, Inc.		Subordinated Debt		1,645				40,812		374		(3,006	)		38,180
	(Consumer Products)	Common Stock						40,934		—		(13,452	)		27,482

Crescent Equity Corp.		Senior Loan		11				433		—		—			433
	(Business Services/	Subordinated Debt		892				42,977		488		(12,486	)		30,979
	Broadcasting & Cable)	Subordinated Debt⁽⁵⁾						1,583		100		—			1,683
		Common Stock		36				83,453		5,622		(64,762	)		24,313

See related footnotes at the end of this schedule.

F-140

ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 13. Litigation, continued


			Amount of Interest or
			Dividends
PRIVATE FINANCE						December 31,							March 31,
Portfolio Company			Credited			2007		Gross		Gross			2008
(in thousands)		Investment⁽¹⁾	to Income⁽⁶⁾		Other⁽²⁾	Value		Additions⁽³⁾		Reductions⁽⁴⁾			Value

Direct Capital Corporation		Subordinated Debt		1,661			39,030		13,641		(2,965	)		49,706
	(Financial Services)	Common Stock					6,906		6,744		(2,644	)		11,006

Financial Pacific Company		Subordinated Debt		3,027			72,850		362		(5,314	)		67,898
	(Financial Services)	Preferred Stock		1,281			19,330		—		(1,779	)		17,551
		Common Stock					38,544		—		(14,523	)		24,021

ForeSite Towers, LLC		Equity Interest					878		—		(75	)		803
	(Tower Leasing)

Global Communications, LLC		Senior Loan⁽⁵⁾					1,822		—		(472	)		1,350
	(Business Services)

Hot Light Brands, Inc.		Senior Loan⁽⁵⁾					—		29,628		—			29,628
	(Retail)	Common Stock					—		5,151		(4,001	)		1,150

Hot Stuff Foods, LLC		Senior Loan	$	956		$	50,752	$	1,596	$	(110	)	$	52,238
	(Consumer Products)	Subordinated Debt		826			29,907		545		(10,053	)		20,399
		Subordinated Debt⁽⁵⁾					1,337		—		(1,337	)		—
		Common Stock					—		—		—			—

Huddle House, Inc.		Subordinated Debt		2,165			59,618		454		(4,355	)		55,717
	(Retail)	Common Stock					44,154		—		(7,330	)		36,824

Impact Innovations Group, LLC		Equity Interests in
	(Business Services)	Affiliate					320		1		—			321

Insight Pharmaceuticals		Subordinated Debt		2,633			45,041		1,304		(904	)		45,441
	Corporation	Subordinated Debt⁽⁵⁾					16,796		171		—			16,967
	(Consumer Products)	Preferred Stock					1,462		9,099		—			10,561
		Common Stock					—		—		—			—

Jakel, Inc.		Subordinated Debt⁽⁵⁾					1,563		—		(815	)		748
	(Industrial Products)

Legacy Partners Group, Inc.		Senior Loan⁽⁵⁾					3,843		—		(3,000	)		843
	(Business Services)	Equity Interests					1,332		—		(187	)		1,145

Litterer Beteiligungs-GmbH		Subordinated Debt		16			772		56		—			828
	(Business Services)	Equity Interest					700		150		—			850

MHF Logistical Solutions, Inc.⁽⁷⁾		Subordinated Debt⁽⁵⁾					—		14,310		(4,991	)		9,319
	(Business Services)	Preferred Stock					—		—		—			—
		Common Stock					—		—		—			—

MVL Group, Inc.		Senior Loan		922			30,639		6		—			30,645
	(Business Services)	Subordinated Debt		1,518			39,943		296		—			40,239
		Common Stock					4,949		—		(576	)		4,373

Old Orchard Brands, LLC		Subordinated Debt		838			19,544		209		(1,428	)		18,325
	(Consumer Products)	Equity Interests					25,419		2,793		(2,910	)		25,302

Penn Detroit Diesel Allison, LLC		Subordinated Debt		1,457			39,180		714		(2,883	)		37,011
	(Business Services)	Equity Interests					37,965		—		(4,443	)		33,522

Powell Plant Farms, Inc.		Senior Loan					1,534		—		(1,534	)		—
	(Consumer Products)

Service Champ, Inc.		Subordinated Debt		1,086			28,351		193		(2,083	)		26,461
	(Business Services)	Common Stock					26,292		—		(2,541	)		23,751

Staffing Partners Holding		Subordinated Debt					223		286		(509	)		—
	Company, Inc.
	(Business Services)

Startec Equity, LLC		Equity Interests					430		—		(33	)		397
	(Telecommunications)

Sweet Traditions, Inc.		Senior Loan⁽⁵⁾					35,229		4,597		(39,399	)		427
	(Retail)	Preferred Stock					—		950		(950	)		—
		Common Stock					—		50		(50	)		—

Unitranche Fund LLC		Subordinated Certificates		274			744		30,747		—			31,491
	(Private Debt Fund)	Equity Interests					1		—		—			1

Worldwide Express Operations, LLC		Subordinated Debt		102			2,670		81		(212	)		2,539
	(Business Services)	Equity Interests		796			21,516		—		(2,852	)		18,664
		Warrants					272		—		(36	)		236

See related footnotes at the end of this schedule.

F-141

ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 13. Litigation, continued


			Amount of Interest or
			Dividends
PRIVATE FINANCE						December 31,							March 31,
Portfolio Company			Credited			2007		Gross		Gross			2008
(in thousands)		Investment⁽¹⁾	to Income⁽⁶⁾		Other⁽²⁾	Value		Additions⁽³⁾		Reductions⁽⁴⁾			Value

Total companies more than 25% owned			$	28,624		$	1,279,080						$	1,157,473


Companies 5% to 25% Owned

10th Street, LLC		Subordinated Debt	$	680		$	20,645	$	129		—		$	20,774
	(Business Services)	Equity Interests					1,100		—		(25	)		1,075
		Option					—		25		—			25

Advantage Sales & Marketing, Inc.		Subordinated Debt		4,738			154,854		2,589		—			157,443
	(Business Services)	Equity Interests					10,973		—		(773	)		10,200

Air Medical Group Holdings LLC		Senior Loan		63			2,980		3,217		(2,332	)		3,865
	(Healthcare Services)	Equity Interests		1,011			10,800		—		(900	)		9,900

Alpine ESP Holdings, Inc.		Preferred Stock		19			749		—		(127	)		622
	(Business Services)	Common Stock					262		—		(262	)		—

Amerex Group, LLC		Subordinated Debt		241			8,400		—		(611	)		7,789
	(Consumer Products)	Equity Interests		2,349			13,713		—		(941	)		12,772

BB&T Capital
	Partners/ Windsor
	Mezzanine Fund, LLC	Equity Interests					11,467		8		—			11,475
	(Private Equity Fund)

Becker Underwood, Inc.		Subordinated Debt	$	921		$	24,798	$	726	$	—		$	25,524
	(Industrial Products)	Common Stock					4,190		609		(799	)		4,000

BI Incorporated		Subordinated Debt		1,049			30,499		422		—			30,921
	(Business Services)	Common Stock					7,382		—		(1,182	)		6,200

Creative Group, Inc.		Subordinated Debt⁽⁵⁾					6,197		—		(1,012	)		5,185
	(Business Services)	Common Stock					—		—		—			—
		Warrant					—		—		——			—

Drew Foam Companies, Inc.		Preferred Stock					396		—		(126	)		270
	(Business Services)	Common Stock					—		1		(1	)		—

Hilden America, Inc.		Common Stock					—		454		(9	)		445
	(Consumer Products)

MedBridge Healthcare, LLC		Senior Loan⁽⁵⁾					7,164		—		—			7,164
	(Healthcare Services)	Subordinated Debt⁽⁵⁾					2,406		195		—			2,601
		Convertible
		Subordinated Debt⁽⁵⁾					—		—		—			—
		Equity Interests					—		—		—			—

MHF Logistical Solutions, Inc.		Subordinated Debt					9,280		—		(9,280	)		—
	(Business Services)	Common Stock					—		—		—			—
		Warrants					—		—		—			—

Multi-Ad Services, Inc.		Unitranche Debt		568			19,704		78		(50	)		19,732
	(Business Services)	Equity Interests					940		348		(274	)		1,014

Progressive International
	Corporation	Subordinated Debt		65			1,545		31		—			1,576
	(Consumer Products)	Preferred Stock					1,038		21		—			1,059
		Common Stock					4,900		900		—			5,800
		Warrants					—		—		—			—

Regency Healthcare Group, LLC		Senior Loan		1			—		—		—			—
	(Healthcare Services)	Unitranche Debt		340			11,941		356		—			12,297
		Equity Interests		25			1,681		22		(206	)		1,497

SGT India Private Limited		Common Stock					3,075		—		(495	)		2,580
	(Business Services)

Soteria Imaging Services, LLC		Subordinated Debt		530			13,744		2,006		—			15,750
	(Healthcare Services)	Equity Interests		74			2,686		—		(483	)		2,203

Universal Environmental		Equity Interests					—		249		(249	)		—
	Services, LLC
	(Business Services)

Total companies 5% to 25% owned			$	12,674		$	389,509						$	381,758

F-142

ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 13. Litigation, continued


⁽¹⁾	Common stock, preferred stock, warrants, options, and equity interests are generally non-income producing and restricted. The principal amount for loans and debt securities and the number of shares of common stock and preferred stock is shown in the consolidated statement of investments as of March 31, 2008.

⁽²⁾	Other includes interest, dividend, or other income which was applied to the principal of the investment and therefore reduced the total investment. These reductions are also included in the Gross Reductions for the investment, as applicable.

⁽³⁾	Gross additions include increases in the cost basis of investments resulting from new portfolio investments, paid-in-kind interest or dividends, the amortization of discounts and closing fees, the exchange of one or more existing securities for one or more new securities and the movement of an existing portfolio company into this category from a different category. Gross additions also include net increases in unrealized appreciation or net decreases in unrealized depreciation.

⁽⁴⁾	Gross reductions include decreases in the cost basis of investments resulting from principal collections related to investment repayments or sales, the exchange of one or more existing securities for one or more new securities and the movement of an existing portfolio company out of this category into a different category. Gross reductions also include net increases in unrealized depreciation or net decreases in unrealized appreciation.

⁽⁵⁾	Loan or debt security is on non-accrual status at March 31, 2008, and is therefore considered non-income producing. Loans or debt securities on non-accrual status at the end of the period may or may not have been on non-accrual status for the full period.

⁽⁶⁾	Represents the total amount of interest or dividends credited to income for the portion of the year an investment was included in the companies more than 25% owned or companies 5% to 25% owned categories, respectively.

⁽⁷⁾	In the first quarter of 2008, the Company exercised its option to acquire a majority of the voting securities of MHF Logistical Solutions, Inc. (MHF). Therefore, MHF was reclassified to companies more than 25% owned in the first quarter of 2008. At December 31, 2007, the Company’s investment in MHF was included in the companies 5% to 25% owned category.

F-143

Note 13. Litigation, continued

PART C

OTHER INFORMATION

Item 25. Financial Statements and Exhibits

1. Financial Statements.

The following financial statements of Allied Capital Corporation are included in this registration statement in “Part A: Information Required in a Prospectus”:


	Page

Report of Independent Registered Public Accounting Firm		F-2
Consolidated Balance Sheet — December 31, 2007 and 2006		F-3
Consolidated Statement of Operations — For the Years Ended December 31, 2007, 2006 and 2005		F-4
Consolidated Statement of Changes in Net Assets — For the Years Ended December 31, 2007, 2006 and 2005		F-5
Consolidated Statement of Cash Flows — For the Years Ended December 31, 2007, 2006 and 2005		F-6
Consolidated Statement of Investments — December 31, 2007		F-7
Consolidated Statement of Investments — December 31, 2006		F-18
Notes to Consolidated Financial Statements		F-29
Report of Independent Registered Public Accounting Firm		F-66
Schedule 12-14 — Investments in and Advances to Affiliates for the Year Ended December 31, 2007		F-67
Report of Independent Registered Public Accounting Firm		F-71
Consolidated Balance Sheet as of March 31, 2008 (unaudited) and December 31, 2007		F-72
Consolidated Statement of Operations (unaudited) — For the Three Months Ended March 31, 2008 and 2007		F-73
Consolidated Statement of Changes in Net Assets (unaudited) — For the Three Months Ended March 31, 2008 and 2007		F-74
Consolidated Statement of Cash Flows (unaudited) — For the Three Months Ended March 31, 2008 and 2007		F-75
Consolidated Statement of Investments as of March 31, 2008 (unaudited)		F-76
Consolidated Statement of Investments as of December 31, 2007		F-93
Notes to Consolidated Financial Statements		F-108
Schedule 12-14 — Investments in and Advances to Affiliates for the Three Months Ended March 31, 2008		F-140

2. Exhibits


Exhibit
Number		Description

a.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).
b.		Amended and Restated Bylaws. (Incorporated by reference to Exhibit 3.1 filed with Allied Capital’s Form 8-K on March 14, 2008).
c.		Not applicable.
d.		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).

C-1


Exhibit
Number		Description

d.1		Form of Note under the Indenture relating to the issuance of debt securities. (Contained in Exhibit d.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).
d.2		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).
d.3		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).
d.4		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).
d.5		Form of 6.625% Notes 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).
d.6		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).
d.7		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).
d.8		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).
d.9		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).
d.9(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).
e.		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).
f.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).
f.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).
f.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).
f.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).
f.2(d)**		Fourth Amendment to Credit Agreement, dated February 29, 2008.
f.3		Note Agreement, dated October 13, 2005. (Incorporated by reference to Exhibit 10.1 filed with Allied Capital’s Form 8-K filed on October 14, 2005).
f.3(a)**		Amendment dated February 29, 2008, to Note Agreement dated as of October 13, 2005.

C-2


Exhibit
Number		Description

f.11		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).
f.11(a)**		Amendment dated February 29, 2008, to Note Agreement dated as of May 1, 2006.
f.15		Second Amended and Restated Control Investor Guaranty Agreement, 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).
f.19		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).
f.19(a)**		Amendment dated February 29, 2008, to Note Agreement dated as of May 14, 2003.
f.25		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.)
f.25(a)**		Amendment dated February 29, 2008, to Note Agreement dated as of March 25, 2004.
f.26		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).
f.26(a)**		Amendment dated February 29, 2008, to Note Agreement dated as of November 14, 2004.
f.27		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.)
f.28		Platform Assets Purchase Agreement. (Incorporated by reference to Exhibit 2.2 filed with Allied Capital’s Form 8-K filed on May 4, 2005.)
f.29		Transition Services Agreement. (Incorporated by reference to Exhibit 10.1 filed with Allied Capital’s Form 8-K filed on May 4, 2005.)
f.30		Credit Agreement, dated April 9, 2008. (Incorporated by reference to Exhibit 10.1 filed with Allied Capital’s Form 8-K filed on April 10, 2008).
g.		Not applicable.
h.*		Form of Underwriting Agreement.
i.2		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).
i.2(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).
i.2(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).
i.3		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).
i.3(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).
i.3(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).
i.4		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).

C-3


Exhibit
Number		Description

i.5		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).
i.5(a)		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).
i.5(b)		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).
i.5(c)		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).
i.5(d)		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).
i.5(e)		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).
i.5(f)		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).
i.5(g)		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).
i.6		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).
i.6(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).
i.7		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).
i.7(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).
i.8		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).
i.8(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).
j.1		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).
j.2		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).
j.3		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).

C-4


Exhibit
Number		Description

j.4		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).
j.5		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).
j.6		Custodian Agreement with Branch Banking and Trust Company. (Incorporated by reference to Exhibit 10.32 filed with Allied Capital’s Form 10-Q for the quarter ended March 31, 2008).
k.2		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).
l.*		Opinion of counsel and consent to its use.
m.		Not applicable.
n.1*		Consent of Sutherland Asbill & Brennan LLP. (Contained in exhibit 1).
n.2*		Consent of KPMG LLP, independent registered public accounting firm.
n.3*		Opinion of KPMG LLP, independent registered public accounting firm, regarding “Senior Securities” table contained herein.
n.4*		Letter regarding Unaudited Interim Financial Information.
o.		Not applicable.
p.		Not applicable.
q.		Not applicable.
r.		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).

* Filed herewith.

** Previously filed.

Item 26. Marketing Arrangements

The information contained under the heading “Plan of Distribution” of the prospectus is incorporated herein by reference, and any information concerning any underwriters will be contained in any prospectus supplement, if any, accompanying this prospectus.

Item 27. Other Expenses of Issuance and Distribution*


SEC registration fee		$	11,284
New York Stock Exchange Additional Listing Fee			62,500
Accounting fees and expenses			872,500
Legal fees and expenses			490,000
Printing and engraving			1,495,000
Miscellaneous fees and expenses			68,716

	Total	$	3,000,000

* Estimated for filing purposes.

All of the expenses set forth above shall be borne by us.

C-5

Item 28. Persons Controlled by or Under Common Control

Direct Subsidiaries

The following list sets forth each of our subsidiaries, the state or country under whose laws the subsidiary is organized, and the percentage of voting securities or membership interests owned by us in such subsidiary:


Allied Capital REIT, Inc. (“Allied REIT”) (Maryland)			100%
A.C. Corporation (Delaware)			100%
Allied Capital Holdings, LLC (Delaware)			100%
Allied Capital Beteiligungsberatung GmbH (Germany) (inactive)			100%
Allied Investment Holdings, LLC (Delaware)			100%

Each of our subsidiaries is consolidated for financial reporting purposes, except as noted below.

Indirect Subsidiaries

We indirectly control the entities set forth below through A.C. Corporation, which is the sole member and manager of each entity. The following list sets forth each of A.C. Corporation’s subsidiaries, the state under whose laws the subsidiary is organized, and the percentage of voting securities or membership interests owned by A.C. Corporation of such subsidiary:


AC Management Services LLC (Delaware)			100%
AC Finance LLC (Delaware)			100%
ACSM LLC (Delaware)			100%
ACGPI, LLC (Delaware)			100%
ACKB, LLC (Delaware)			100%

We indirectly control Allied Capital Property LLC (Delaware) through Allied REIT, which owns all of the membership interests.

Other Entities Deemed to be Controlled by the Company

We have also established certain limited purpose entities in order to facilitate certain portfolio transactions. In addition, we may be deemed to control certain portfolio companies. See “Portfolio Companies” in the prospectus.

Item 29. Number of Holders of Securities

The following table sets forth the approximate number of record holders of our common stock at May 6, 2008.


	Number of
Title of Class	Record Holders

Common stock, $0.0001 par value		3,900
Publicly issued notes		95

At May 6, 2008, we have privately issued long-term debt securities to approximately 40 institutional lenders, primarily insurance companies.

C-6

Item 30. Indemnification

Section 2-418 of the Maryland General Corporation Law provides that a Maryland corporation may indemnify any director of the corporation and any person who, while a director of the corporation, is or was serving at the request of the corporation as a director, officer, partner, trustee, employee, or agent of another foreign or domestic corporation, partnership, joint venture, trust, other enterprise or employee benefit plan, made a party to any proceeding by reason of service in that capacity unless it is established that the act or omission of the director was material to the matter giving rise to the proceeding and was committed in bad faith or was the result of active and deliberate dishonesty; or the director actually received an improper personal benefit in money, property or services; or, in the case of any criminal proceeding, the director had reasonable cause to believe that the act or omission was unlawful. Indemnification may be made against judgments, penalties, fines, settlements, and reasonable expenses actually incurred by the director in connection with the proceeding, but if the proceeding was one by or in the right of the corporation, indemnification may not be made in respect of any proceeding in which the director shall have been adjudged to be liable to the corporation. Such indemnification may not be made unless authorized for a specific proceeding after a determination has been made, in the manner prescribed by the law, that indemnification is permissible in the circumstances because the director has met the applicable standard of conduct. On the other hand, the director must be indemnified for expenses if he or she has been successful in the defense of the proceeding or as otherwise ordered by a court. The law also prescribes the circumstances under which the corporation may advance expenses to, or obtain insurance or similar cover for, directors.

The law also provides for comparable indemnification for corporate officers and agents.

The Restated Articles of Incorporation of Allied Capital provide that its directors and officers shall, and its agents in the discretion of the board of directors may be indemnified to the fullest extent permitted from time to time by the laws of Maryland (with such power to indemnify officers and directors limited to the scope provided for in Section 2-418 as currently in force), provided, however, that such indemnification is limited by the Investment Company Act of 1940 or by any valid rule, regulation or order of the Securities and Exchange Commission thereunder. Allied Capital’s bylaws, however, provide that Allied Capital may not indemnify any director or officer against liability to Allied Capital or its security holders to which he or she might otherwise be subject by reason of such person’s willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his or her office unless a determination is made by final decision of a court, by vote of a majority of a quorum of directors who are disinterested, non-party directors or by independent legal counsel that the liability for which indemnification is sought did not arise out of such disabling conduct. In addition, Allied Capital will only indemnify any person in a manner consistent with the SEC’s policy regarding any request to hold harmless or indemnify any individual as permitted under Sections 17(h) and 17(i) of the 1940 Act where liability has not been adjudicated, where the matter has been settled, or in a situation involving an advance of attorney’s fees or other expenses.

Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of Allied Capital pursuant to the provisions described above, or otherwise, Allied Capital has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by Allied Capital of expenses incurred or paid by a director, officer or controlling person in the successful defense of an action, suit or proceeding) is asserted by a director, officer or controlling person in connection with the securities being registered, Allied Capital will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.

C-7

Allied Capital carries liability insurance for the benefit of its directors, officers and certain controlled portfolio companies on a claims-made basis of up to $50,000,000, subject to a $1,000,000 retention and the other terms thereof. Allied Capital also maintains an additional $20,000,000 of insurance coverage for the benefit of its directors and officers.

We have entered into indemnification agreements with our directors and certain senior officers. The indemnification agreements attempt to provide these directors and senior officers the maximum indemnification permitted under Maryland law and the Investment Company Act of 1940. Each indemnification agreement provides that Allied Capital shall indemnify the director or senior officer who is a party to the agreement (an “Indemnitee”) if, by reason of his corporate status, the Indemnitee is, or is threatened to be, made a party to or a witness in any threatened, pending, or completed proceeding, other than a proceeding by or in the right of Allied Capital.

Item 31. Business and Other Connections of Investment Adviser

Not applicable.

Item 32. Location of Accounts and Records

We maintain at our principal office physical possession of each account, book or other document required to be maintained by Section 31(a) of the 1940 Act and the rules thereunder.

Item 33. Management Services

Not applicable.

Item 34. Undertakings

We hereby undertake:


	(1) to suspend the offering of shares until the prospectus is amended if: (1) subsequent to the effective date of this registration statement, our net asset value declines more than ten percent from our net asset value as of the effective date of this registration statement; or (2) our net asset value increases to an amount greater than our net proceeds as stated in the prospectus;

	(2) to file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement:


	(i)	to include any prospectus required by Section 10(a)(3) of the Securities Act of 1933;

	(ii)	to reflect in the prospectus any facts or events after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement; and

	(iii)	to include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement.


	(3) that, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of those securities at that time shall be deemed to be the initial bona fide offering thereof;

C-8


	(4) to remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering; and

	(5) that, for the purpose of determining liability under the Securities Act of 1933 to any purchaser, if the Registrant is subject to Rule 430C [17 CFR 230.430C]: Each prospectus filed pursuant to Rule 497(b), (c), (d) or (e) under the Securities Act of 1933 [17 CFR 230.497(b), (c), (d) or (e)] as part of a registration statement relating to an offering, other than prospectuses filed in reliance on Rule 430A under the Securities Act of 1933 [17 CFR 230.430A], shall be deemed to be part of and included in the registration statement as of the date it is first used after effectiveness. Provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such first use, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such date of first use.

	(6) that for the purpose of determining liability of the Registrant under the Securities Act of 1933 to any purchaser in the initial distribution of securities: The undersigned Registrant undertakes that in a primary offering of securities of the undersigned Registrant pursuant to this registration statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of the following communications, the undersigned Registrant will be a seller to the purchaser and will be considered to offer or sell such securities to the purchaser:


	(i)	any preliminary prospectus or prospectus of the undersigned Registrant relating to the offering required to be filed pursuant to Rule 497 under the Securities Act of 1933 [17 CFR 230.497];

	(ii)	the portion of any advertisement pursuant to Rule 482 under the Securities Act of 1933 [17 CFR 230.482] relating to the offering containing material information about the undersigned Registrant or its securities provided by or on behalf of the undersigned Registrant; and

	(iii)	any other communication that is an offer in the offering made by the undersigned Registrant to the purchaser.

C-9

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Washington, in the District of Columbia, on the 13th day of May, 2008.


	ALLIED CAPITAL CORPORATION


	By:	/s/ William L. Walton



	William L. Walton,
	Chairman of the Board, Chief


	Executive Officer and President

Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities indicated on May 13th, 2008.


Signature		Title


/s/ William L. Walton William L. Walton		Chairman of the Board, Chief Executive Officer, and President

* Ann Torre Bates		Director

* Brooks H. Browne		Director

* John D. Firestone		Director
* Anthony T. Garcia		Director

* Edwin L. Harper		Director

* Lawrence I. Hebert		Director

* John I. Leahy		Director

* Robert E. Long		Director

* Alex J. Pollock		Director

* Marc F. Racicot		Director


Signature		Title


* Guy T. Steuart II		Director

/s/ Joan M. Sweeney Joan M. Sweeney		Director

* Laura W. van Roijen		Director

/s/ Penni F. Roll Penni F. Roll		Chief Financial Officer (Principal Financial and Accounting Officer)


*	Signed by William L. Walton on behalf of those identified pursuant to his designation as attorney-in-fact signed by each on March 31, 2008.

INDEX TO EXHIBITS


Exhibit
Number		Description

	h.	Form of Underwriting Agreement.
	l.	Opinion of counsel and consent to its use.
	n.1	Consent of Sutherland Asbill & Brennan LLP (contained in exhibit 1).
	n.2	Consent of KPMG LLP, independent registered public accounting firm.
	n.3	Opinion of KPMG LLP, independent registered public accounting firm, regarding “Senior Securities” table contained herein.
	n.4	Letter regarding Unaudited Interim Financial Information.