The following analysis of the financial condition and results of operations of the Company should be read in conjunction with the Company's Consolidated Financial Statements and the Notes thereto included herein and in the Company's annual report on Form 10-K for the year ended December 31, 2008. In addition, this quarterly report on Form 10-Q contains certain forward-looking statements. These statements include the plans and objectives of management for future operations and financial objectives and can be identified by the use of forward-looking terminology such as "may," "will," "expect," "intend," "anticipate," "estimate," or "continue" or the negative thereof or other variations thereon or comparable terminology. These forward-looking statements are subject to the inherent uncertainties in predicting future results and conditions. Certain factors that could cause actual results and conditions to differ materially from those projected in these forward-looking statements are set forth below in Part II. Other Information, Item 1A. Risk Factors. Other factors that could cause actual results to differ materially include:

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

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

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

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

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

OVERVIEW

We are a business development company, or BDC, in the private equity business and we are internally managed. Specifically, we primarily invest in private middle market companies in a variety of industries through long-term debt and equity capital instruments. Our financing generally is used to fund buyouts, acquisitions, growth, recapitalizations, note purchases, and other types of financings. Our investment objective is to achieve current income and capital gains.

The United States and the global economies continue to operate in an unprecedented economic recession and the U.S. capital markets continue to experience volatility and a severe lack of liquidity. Our strategy in these difficult economic times has been focused on reducing costs and streamlining our organization; building liquidity through selected asset sales; retaining capital by limiting new investment activity and suspending dividend payments; and working with portfolio companies to help them position for growth when the economy recovers.

Our portfolio composition at September 30, 2009 and 2008, and December 31, 2008, was as follows:

                                              September 30,        December 31,
                                            2009         2008          2008

          Private finance                      97    %     97%               97%
          Commercial real estate finance        3    %      3%                3%

Our earnings primarily depend 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 funds managed by us. The level of investment activity can vary substantially from period to period depending on many factors, including the general economic environment, the amount of debt and equity capital available to middle market companies, the level of merger and acquisition activity for such companies, the competitive environment for the types of investments we make and our ability to secure debt and equity capital for our investment activities.

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. At September 30, 2009, we had eight separate funds under our management (together, the Managed Funds) for which we may earn management or other fees for our services. In some cases, we have invested 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. At September 30, 2009, the Managed Funds had total assets of approximately $3.3 billion. In October 2009, we sold we sold our investment, including our outstanding commitments and the provision of management services, in the Senior Secured Loan Fund LLC, which had assets of $921.2 million at September 30, 2009, and we may sell additional Managed Funds. See "- Managed Funds" below for further discussion.

In the aggregate, including the total assets on our balance sheet and assets under management in our Managed Funds, we had $5.9 billion in managed assets at September 30, 2009.

On October 26, 2009, we entered into an Agreement and Plan of Merger with Ares Capital Corporation. The merger agreement provides that Allied Capital will merge into Ares Capital with Ares Capital being the surviving company. Upon consummation of the merger, each share of our common stock will be converted into and become exchangeable for 0.325 common shares of Ares Capital Corporation. Consummation of the merger, which is currently anticipated to occur by the end of the first quarter of 2010, is subject to certain conditions, including, among others, Allied Capital stockholder approval, Ares Capital stockholder approval, required regulatory approvals, receipt of certain Ares Capital and Allied Capital lender consents and other customary closing conditions. See "- Recent Developments."

PORTFOLIO AND INVESTMENT ACTIVITY

The total portfolio at value, investment activity, and the yield on
interest-bearing investments at and for the three and nine months ended
September 30, 2009 and 2008, and at and for the year ended December 31, 2008,
were as follows:

                                             At and for the                At and for the            At and for the
                                           Three Months Ended            Nine Months Ended             Year Ended
                                             September 30,                 September 30,              December 31,
($ in millions)                           2009           2008           2009           2008               2008

Portfolio at value                      $ 2,511.2      $ 4,208.5      $ 2,511.2      $ 4,208.5      $        3,493.0
Investments funded                      $    19.4      $   433.8      $   118.1      $ 1,027.8      $        1,078.2
Payment-in-kind interest and
dividends, net of cash collections      $     5.8      $    11.4      $    24.4      $    35.9      $           53.4
Principal collections related to
investment repayments or sales(1)       $    63.5      $   280.6      $   650.9      $   878.2      $        1,037.3
Yield on interest-bearing portfolio
investments(2)                               11.9 %         11.9 %         11.9 %         11.9 %                12.1 %

(1) Principal collections related to investment repayments or sales for the three and nine months ended September 30, 2009, included $0.0 million and $171.0 million, respectively, of cash collections related to notes and other receivables received from the sale of investments in portfolio companies in prior periods. Principal collections related to investment repayments or sales for the three and nine months ended September 30, 2009 and 2008, and year ended December 31, 2008, included collections of $0.0 million, $274.9 million, $46.3 million, $352.7 million and $383.0 million, respectively, related to the sale of loans to certain of our Managed Funds.
(2) The weighted average yield on interest-bearing investments is computed as the
(a) annual stated interest on accruing loans and debt securities plus the annual amortization of loan origination fees, original issue discount, and market discount on accruing loans and debt securities less the annual amortization of loan origination costs, plus the effective interest yield on the preferred shares/income notes of CLOs, plus the effective stated interest yield on the subordinated certificates in the Senior Secured Loan 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
interest bearing investments at and for the three and nine months ended
September 30, 2009 and 2008, and at and for the year ended December 31, 2008,
were as follows:


                                                                      At and for the Three Months                                 At and for the Nine Months                            At and for the
                                                                          Ended September 30,                                         Ended September 30,                           Year Ended December 31,
                                                                   2009                          2008                          2009                          2008                            2008
($ in millions)                                           Value          Yield(1)        Value        Yield(1)        Value          Yield(1)        Value        Yield(1)          Value             Yield(1)

Portfolio at value:
Loans and debt securities:
Senior loans                                            $   289.4             4.8%     $   434.9           4.2%     $   289.4             4.8%     $   434.9            4.2 %   $        306.3              5.6 %
Unitranche debt                                             374.7            12.2%         579.3          12.0%         374.7            12.2%         579.3           12.0 %            456.4             12.0 %
Subordinated debt                                         1,182.9            13.4%       2,062.6          13.1%       1,182.9            13.4%       2,062.6           13.1 %          1,829.1             12.9 %

Total loans and debt securities                           1,847.0            11.8%       3,076.8          11.7%       1,847.0            11.8%       3,076.8           11.7 %          2,591.8             11.9 %
Equity securities:
Preferred shares/income notes of CLOs(2)                     84.4            12.1%         218.3          17.1%          84.4            12.1%         218.3           17.1 %            179.2             16.4 %
Subordinated certificates in Senior Secured Loan
Fund LLC(2)                                                 165.0            14.0%         114.3          10.3%         165.0            14.0%         114.3           10.3 %            125.4             12.0 %
Other equity securities                                     346.3                          692.5                        346.3                          692.5                             502.7

Total equity securities                                     595.7                        1,025.1                        595.7                        1,025.1                             807.3

Total portfolio                                         $ 2,442.7                      $ 4,101.9                      2,442.7                      $ 4,101.9                    $      3,399.1

Investments funded                                      $    18.6 (4)                  $   428.9                    $   115.5 (4)                  $ 1,020.7                    $      1,068.1
Payment-in-kind interest and dividends, net of cash
collections                                             $     5.8                      $    11.4                    $    24.4                      $    35.8                    $         53.2
Principal collections related to investment
repayments or sales(3)                                  $    63.1                      $   280.6                    $   644.2                      $   861.5                    $      1,020.5

(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 Senior Secured Loan Fund LLC is computed as the
(a) effective interest yield on the subordinated certificates divided by
(b) total investment at value. The weighted average yields are computed as of the balance sheet date.

(2) Investments in the preferred shares/income notes of CLOs and the subordinated certificates in the Senior Secured Loan Fund LLC earn a current return that is included in interest income in the consolidated statement of operations.

(3) Includes $0.0 million and $171.0 million, respectively, cash collections during the three and nine months ended September 30, 2009, related to notes and other receivables received from the sale of investments in prior periods. Also includes collections from the sale or repayment of senior loans totaling $13.4 million, $77.6 million, $101.2 million, $225.4 million and $285.3 million, respectively, for the three and nine months ended September 30, 2009 and 2008, and for the year ended December 31, 2008.

(4) Includes $10.6 million and $38.7 million, respectively, funded under pre-existing commitments under revolving lines of credit during the three and nine months ended September 30, 2009. During the three and nine months ended September 30, 2009, a total of $10.1 million and $38.4 million, respectively, was repaid under these arrangements, which is included in principal collections related to investment repayments or sales.

Our private finance portfolio primarily is composed of debt and equity investments. Debt investments 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 have in the portfolio is lower in repayment priority than senior debt and is also known as mezzanine debt. Our portfolio contains equity investments for a minority equity stake in portfolio companies and includes equity features such as nominal cost warrants received in conjunction with our debt investments. 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.

Investment Activity. Investments funded and the weighted average yield on interest-bearing investments funded for the nine months ended September 30, 2009 and 2008, and for the year ended December 31, 2008, consisted of the following:

                                                              For the Nine Months Ended September 30, 2009
                                               Debt Investments             Buyout Investments                 Total
                                                          Weighted                       Weighted                   Weighted
                                                          Average                        Average                    Average
($ in millions)                             Amount        Yield(1)       Amount          Yield(1)      Amount       Yield(1)

Loans and debt securities:
Senior loans                               $   33.9            6.3%     $    14.3             2.8%     $  48.2           5.2%
Unitranche debt                                 1.0            9.5%             -                          1.0           9.5%
Subordinated debt                               3.0           15.0%           3.3            18.0%         6.3          16.5%

Total loans and debt securities                37.9            7.0%          17.6             5.6%        55.5           6.6%
Subordinated certificates in Senior
Secured Loan Fund LLC(2)                       47.4            8.4%             -                         47.4           8.4%
Equity                                          7.1                           5.5                         12.6

Total                                      $   92.4                     $    23.1                      $ 115.5

                                                               For the Nine Months Ended September 30, 2008
                                               Debt Investments             Buyout Investments                  Total
                                                          Weighted                       Weighted                     Weighted
                                                          Average                        Average                      Average
($ in millions)                            Amount         Yield(1)        Amount         Yield(1)       Amount        Yield(1)

Loans and debt securities:
Senior loans                               $ 155.0             7.3%     $     12.6            6.0%     $   167.6           7.2%
Senior secured loan to Ciena
Capital LLC                                      -               -           319.0            0.0%         319.0           0.0%
Unitranche debt(3)                            15.3            10.5%            0.5            6.6%          15.8          10.4%
Subordinated debt                            243.4 (4)        12.6%           50.5           15.2%         293.9          13.0%

Total loans and debt securities              413.7            10.5%          382.6            2.2%         796.3           6.5%
Preferred shares/income notes of CLOs(5)      35.6            18.6%              -                          35.6          18.6%
Subordinated certificates in Senior
Secured Loan Fund LLC(2)                     113.6            10.8%              -                         113.6          10.8%
Equity                                        37.7                            37.5                          75.2

Total                                      $ 600.6                      $    420.1                     $ 1,020.7

                                                                       For the Year Ended December 31, 2008
                                                 Debt Investments             Buyout Investments                      Total
                                                            Weighted                        Weighted                        Weighted
                                                            Average                         Average                         Average
($ in millions)                              Amount         Yield(1)        Amount          Yield(1)          Amount        Yield(1)

Loans and debt securities:
Senior loans                                 $ 175.9             7.4%     $     13.9              5.4 %      $   189.8            7.2 %
Senior secured loan to Ciena Capital LLC           -                           319.0              0.0 %(6)       319.0            0.0 %(6)
Unitranche debt(3)                              15.3            10.5%            0.5              6.6 %           15.8           10.4 %
Subordinated debt                              246.4 (4)        12.6%           54.8             15.4 %          301.2           13.1 %

Total loans and debt securities                437.6            10.4%          388.2              2.4 %          825.8            6.6 %(7)
Preferred shares/income notes of CLOs(5)        35.6            18.6%              -                              35.6           18.6 %
Subordinated certificates in Senior
Secured Loan Fund LLC(2)                       124.7            10.9%              -                             124.7           10.9 %
Equity                                          40.5                            41.5                              82.0

Total                                        $ 638.4                      $    429.7                         $ 1,068.1

(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 Senior Secured Loan Fund LLC is computed as the (a) effective interest yield on the subordinated certificates (b) total investment at value. The weighted average yield is calculated using yields as of the date an investment is funded.
(2) In June 2009, the Unitranche Fund LLC was renamed the Senior Secured Loan Fund LLC. In October 2009, we sold our investment, including our outstanding commitments and the provision of management services, in the Senior Secured Loan Fund. See "- Recent Developments."
(3) 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.
(4) Subordinated debt investments for the nine months ended September 30, 2008, and year ended December 31, 2008, included $43.8 million in investments in the bonds of collateralized loan obligations (CLOs). Certain of these CLOs are managed by Callidus Capital Corporation (Callidus), a wholly owned portfolio company. These CLOs 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 us or by Callidus.
(6) The senior secured loan to Ciena Capital LLC was acquired on September 30, 2008, and was placed on non-accrual status on the purchase date.
(7) Excluding the senior secured loan to Ciena, the weighted average yield on new investments for the year ended December 31, 2008 was 10.8%.

For the nine months ended September 30, 2009, we made private finance investments totaling $115.5 million. Investments arose primarily from fundings under pre-existing investment commitments, including fundings under revolving line of credit instruments and $47.4 million to fund investments made by the Senior Secured Loan Fund LLC.

Historically, our focus for investments generally has been on higher return junior debt capital investments. Senior loans funded by us generally were funded with the intent to sell the loan or for the portfolio company to refinance the loan at some point in the future as discussed below. We have made fewer direct unitranche debt investments since the establishment of the Senior Secured Loan Fund LLC (formerly, the Unitranche Fund LLC) in the fourth quarter of 2007. Unitranche loans sourced by us in these periods generally were referred to the Senior Secured Loan Fund. Since its inception, we have invested $172.8 million in the Senior Secured Loan Fund. See "- Managed Funds" and "- Recent Developments" 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.

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 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 the Managed Funds or funds managed by Callidus Capital Corporation (Callidus), a wholly owned portfolio company. After completing loan sales, we may 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.

We have focused our efforts on selling assets in our portfolio to generate capital. Principal collections related to private finance investment repayments or sales were $644.2 million for the nine months ended September 30, 2009, including $171.0 million of cash collections related to notes and other receivables received from the sale of investments in portfolio companies in prior periods. 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 plan to continue to sell assets and re-balance our portfolio with an emphasis on current income. However, there can be no assurance that we will . . .