ALLIED CAPITAL CORP, N-2/A, 1996-01-12

ALLIED CAPITAL CORP
N-2/A, 1996-01-12

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<PAGE> 1

As filed with the Securities and Exchange Commission on January 12, 1996

File No. 33-64629

================================================================================

U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM N-2

(Check appropriate box or boxes)
/x/ REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

/x/ Pre-Effective Amendment No. 1
-----

/ / Post-Effective Amendment No.
-----

ALLIED CAPITAL CORPORATION
--------------------------
Exact name of Registrant as Specified in Charter

c/o Allied Capital Advisers, Inc.
1666 K Street, N.W., 9th Floor
Washington, D.C. 20006-2803
----------------------------
Address of Principal Executive Offices
(Number, Street, City, State, Zip Code)

(202) 331-1112
--------------
Registrant's Telephone Number, including Area Code

David Gladstone, Chairman and Chief Executive Officer
Allied Capital Advisers, Inc.
1666 K Street, N.W., 9th Floor
Washington, D.C. 20006-2803
-----------------------------------------------------
Name and Address of Agent for Service
(Number, Street, City, State, Zip Code)

Copy to:
Steven B. Boehm, Esquire
Sutherland, Asbill & Brennan
1275 Pennsylvania Avenue, N.W.
Washington, D.C. 20004-2404

Approximate Date of Proposed Public Offering:
As soon as practicable 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: /x/

It is proposed that this filing will become effective (check appropriate box)
/x/ when declared effective pursuant to section 8(c)

/ / This form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, and the Securities Act
registration statement number of the earlier effective registration statement
for the same offering is - .
---------
<PAGE> 2

CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
- -----------------------------------------------------------------------------------------------------------------------

Proposed Maximum Proposed Maximum
Title of Securities Amount Being Offering Price Per Aggregate Offering Amount of
Being Registered Registered Share Price Registration Fee
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock,
$1.00 par value 883,655 shares $13.0625 (1) $11,542,874 (1) $3,980.31 (2)

Common Stock, $1.00 1,783 shares $13.875 (3) $24,732 (3) $100.00
par value
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>

(1) Estimated for purposes of calculating the registration
fee pursuant to Rule 457(c) under the Securities Act of
1933, as amended (the "1933 Act"), based on the average
of the high and low prices per share on November 27,
1995 on the Nasdaq National Market.
(2) Previously paid.
(3) Estimated for purposes of calculating the registration
fee pursuant to Rule 457(c) under the 1933 Act, based on
the average of the high and low prices per share on
January 11, 1996 on the Nasdaq National Market.

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 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to Section 8(a), may
determine.
<PAGE> 3
CROSS REFERENCE SHEET
Pursuant to Rule 495(a) under the Securities Act of 1933
Showing the Location of Information Required by Form N-2
in Part A (Prospectus) and Part B (Statement of Additional Information) and
Part C (Other Information) of the Registration Statement

<TABLE>
<CAPTION>
ITEM OF FORM N-2 CAPTION OR LOCATION IN PROSPECTUS
---------------- ---------------------------------

PART A: INFORMATION REQUIRED IN A PROSPECTUS
<S> <C> <C>
1. Outside Front Cover Outside Front Cover Page

2. Inside Front and Outside Back Cover Page Inside Front and Outside Back Cover Page

3. Fee Table and Synopsis Summary; Fees and Expenses

4. Financial Highlights Financial Highlights

5. Plan of Distribution Plan of Distribution

6. Selling Shareholders (Not Applicable)

7. Use of Proceeds Use of Proceeds

8. General Description of the Registrant The Company; Summary

9. Management Management

10. Capital Stock, Long-Term Debt, and Other Authorized Classes of Securities; Description of Common
Securities Stock

11. Defaults and Arrears on Senior Securities (Not Applicable)

12. Legal Proceedings Legal Matters

13. Table of Contents of the Statement of Table of Contents of the Statement of Additional
Additional Information Information
<CAPTION>

PART B: INFORMATION REQUIRED IN A STATEMENT OF ADDITIONAL INFORMATION
<S> <C> <C>

14. Cover Page Cover Page

15. Table of Contents Table of Contents

16. General Information and History The Company in the Prospectus; Summary in the
Prospectus

17. Investment Objective and Policies Investment Objectives and Policies

18. Management Management
</TABLE>
<PAGE> 4
<TABLE>
<S> <C> <C>
19. Control Persons and Principal Holders of Control Persons and Principal Holders of Securities
Securities

20. Investment Advisory and Other Services Investment Advisory and Other Services

21. Brokerage Allocation and Other Practices Brokerage Allocation and Other Practices

22. Tax Status Tax Status

23. Financial Statements (Not Applicable)

<CAPTION>
PART C: OTHER INFORMATION
<S> <C> <C>

24. Financial Statements and Exhibits Financial Statements and Exhibits

25. Marketing Arrangements (Not Applicable)

26. Other Expenses of Issuance and Other Expenses of Issuance and Distribution
Distribution

27. Persons Controlled by or Under Common Persons Controlled by or Under Common Control
Control

28. Number of Holders of Securities Number of Holders of Securities

29. Indemnification Indemnification

30. Business and Other Connections of Business and Other Connections of Investment Adviser
Investment Adviser

31. Location of Accounts and Records Locations of Accounts and Records

32. Management Services Management Services

33. Undertakings Undertakings
</TABLE>
<PAGE> 5
PART A
INFORMATION REQUIRED IN A PROSPECTUS

<PAGE> 6

INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO THE REGISTRATION OF QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH
STATE.

SUBJECT TO COMPLETION: THE DATE OF ISSUANCE OF THIS PRELIMINARY PROSPECTUS IS
________ __, 1996.

PROSPECTUS 885,448 SHARES

ALLIED CAPITAL CORPORATION
COMMON STOCK
-----------------------------

Allied Capital Corporation (the "Company") is issuing to the beneficial
holders of record of the outstanding shares of its common stock at the close of
business on January 22, 1996 ("the Record Date") non-transferable rights (the
"Subscription Rights"). Each shareholder will be issued one Subscription Right
for each share of the Company held as of the Record Date, and will be entitled
to subscribe for and purchase from the Company up to one (1) authorized but
heretofore unissued share of the Company's common stock for each seven (7)
Subscription Rights held (the "Primary Subscription") aggregating a total of
885,448 shares of common stock. Shares of common stock of the Company offered
through this Prospectus are referred to as the "Shares." Shareholders who
fully exercise their Subscription Rights will be entitled to the additional
privilege of subscribing, subject to certain limitations and subject to
allocation or increase, for any Shares not acquired by exercise of Subscription
Rights (the "Over-Subscription Privilege"). The Primary Subscription and the
Over-Subscription Privilege collectively comprise the "Offer." The Company
may, at its sole discretion, increase the number of Shares of common stock
subject to subscription by up to 15% of the Shares, or 132,817 Shares, for an
aggregate total of 1,018,265 Shares available under the Offer. Fractional
shares will not be issued upon exercise of Subscription Rights and no
fractional Subscription Rights will be issued. Subscription Rights are
non-transferable and will not be admitted for trading or quotation on any
exchange and therefore may not be purchased or sold. Only persons who are
stockholders of the Company on the Record Date may subscribe. Beneficial
owners whose shares are held of record by Cede & Co., nominee for The
Depository Trust Company ("DTC"), or by any other depository or nominee are
also eligible to participate. Stockholder inquires should be directed to the
Information Agent and Offering Coordinator, Shareholder Communications
Corporation at (800) 221-5724 ext. 331.

THE SUBSCRIPTION PRICE PER SHARE WILL BE 95% OF THE AVERAGE OF THE LAST
REPORTED SALE PRICE OF A SHARE OF COMMON STOCK ON THE NASDAQ NATIONAL MARKET
("NASDAQ") ON THE DATE OF EXPIRATION OF THE OFFER (THE "PRICING DATE") AND THE
FOUR PRECEDING BUSINESS DAYS. SEE "THE OFFER." The Offer will dilute the
voting power of the common stock owned by stockholders who do not fully
exercise their Subscription Rights. Stockholders who do not fully exercise
their Subscription Rights should expect, upon completion of the Offer, to own a
smaller proportional interest in the Company than before the Offer.

THE OFFER WILL EXPIRE AT 5:00 P.M. EASTERN STANDARD TIME, ON FEBRUARY 23,
1996 (THE "EXPIRATION DATE"), UNLESS EXTENDED AS DESCRIBED HEREIN.

Allied Capital Corporation, a Maryland corporation, is a closed-end,
management investment company that has elected to operate as a business
development company. The Company seeks to achieve a high level of current
income as well as long-term growth in the value of the Company's net assets by
providing debt, mezzanine and equity financing, primarily to small, privately
owned growth companies. The outstanding shares of the Company are quoted on
the Nasdaq National Market under the symbol "ALLC." The Company's investment
adviser is Allied Capital Advisers, Inc. ("Advisers"), a registered investment
adviser whose principal office is located at 1666 K Street, N.W., Ninth Floor,
Washington, D.C. 20006-2803. Advisers' telephone number is (202) 331-1112.

The Company uses a leveraged capital structure by issuing senior securities
representing either indebtedness (i.e., borrowings from banks, other
institutional lenders, or government agencies) or preferred stock. FOR THE
RISKS OF LEVERAGE, SEE "THE COMPANY--RISK FACTORS--LEVERAGE."

This Prospectus sets forth concisely the information about the Company that
a prospective investor ought to know before investing. It should be retained
for future reference. Additional information on the Company has been filed
with the U.S. Securities and Exchange Commission (the "Commission") and is
available without charge upon written or oral request to the attention of
Investor Relations at the address or telephone number listed above. As
indicated at some points in this Prospectus, certain of the information in the
Statement of Additional
Information is incorporated in this Prospectus by reference. See page ___ of
this Prospectus for the table of contents of the Statement of Additional
Information.
----------------------------

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

<TABLE>
<CAPTION>
=============================================================================================================
Estimated Subscription Estimated Estimated Proceeds to
Price(1) Sales Load(2) the Company(3)(4)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share . . . . . . . $ __.__ None $__.__
- -------------------------------------------------------------------------------------------------------------
Total(5) . . . . . . . $___,___,___ None $___,___,___
=============================================================================================================
</TABLE>

(Footnotes on the following page)

The date of this Prospectus and of the Statement of Additional Information is
__________ __, 1996.

<PAGE> 7

(Footnotes from previous page)

(1) The Estimated Subscription Price is computed as the average of the
last reported sale price of the Company's common stock on Nasdaq on
January __, 1996 and the four preceding business days.

(2) In connection with the Offer, broker-dealers soliciting the exercise
of Subscription Rights will receive solicitation fees equal to 2.5% of
the Subscription Price per Share. The Company has agreed to indemnify
such broker-dealers against certain liabilities under the Securities
Act of 1933, as amended. See "The Offer-Soliciting Fees."

(3) Before deduction of offering costs incurred related to this offering,
payable by the Company, estimated at $___________.

(4) Funds received prior to the final due date of the Offer will be
deposited into a segregated interest- bearing bank account (which
interest will be paid to the Company) pending proration and
distribution of Shares.

(5) Assumes all Subscription Rights are exercised at the Estimated
Subscription Price. Pursuant to the Over-Subscription Privilege, the
Company may, at its sole discretion, increase the number of Shares
subject to the Offer by up to 15% of the Shares offered hereby. If
the Company increases the number of Shares subject to Subscription by
15%, the aggregate maximum Estimated Subscription Price, Estimated
Sales Load, and Estimated Proceeds to the Company will be $_____,
$_____, and $_____, respectively.

2
<PAGE> 8
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

FEES AND EXPENSES . . . . . . . . . . . . . . . . . . . . . . . . . 5

AVAILABLE INFORMATION . . . . . . . . . . . . . . . . . . . . . . . 5

FINANCIAL HIGHLIGHTS . . . . . . . . . . . . . . . . . . . . . . . 6

PUBLIC TRADING AND NET ASSET VALUE INFORMATION . . . . . . . . . . 10

THE OFFERING . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Subscription Period . . . . . . . . . . . . . . . . . . . 12
Purpose of the Offer . . . . . . . . . . . . . . . . . . . 12
Dilutive Effect . . . . . . . . . . . . . . . . . . . . . 12
How to Subscribe . . . . . . . . . . . . . . . . . . . . . 12
Closing and Delivery . . . . . . . . . . . . . . . . . . . 14
Institutional Investors . . . . . . . . . . . . . . . . . 14
Expenses . . . . . . . . . . . . . . . . . . . . . . . . . 15

USE OF PROCEEDS . . . . . . . . . . . . . . . . . . . . . . . . . . 15

THE COMPANY . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Organization . . . . . . . . . . . . . . . . . . . . . . . 15
Business of the Company . . . . . . . . . . . . . . . . . 15
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . 19

MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Board of Directors . . . . . . . . . . . . . . . . . . . . 24
Investment Adviser . . . . . . . . . . . . . . . . . . . . 25

AUTHORIZED CLASSES OF SECURITIES . . . . . . . . . . . . . . . . . 26

DESCRIPTION OF COMMON STOCK . . . . . . . . . . . . . . . . . . . . 26
General . . . . . . . . . . . . . . . . . . . . . . . . . 26
Dividends and Distributions . . . . . . . . . . . . . . . 27
Reinvestment Plan . . . . . . . . . . . . . . . . . . . . 27

REPORTS AND INDEPENDENT PUBLIC ACCOUNTANTS . . . . . . . . . . . . 28

CUSTODIAN, TRANSFER AND DIVIDEND PAYING AGENT AND REGISTRAR . . . . 28

TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION . . . . . 28

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . 28
Liquidity and Capital Resources . . . . . . . . . . . . . 28
Results of Operations . . . . . . . . . . . . . . . . . . 29
</TABLE>
<PAGE> 9
SUMMARY

The following summary is qualified in its entirety by the detailed
information and financial statements appearing elsewhere in this Prospectus.

<TABLE>
<S> <C>
THE COMPANY Allied Capital Corporation (the
"Company") provides subordinated debt
financing for developing companies,
mezzanine financing for leveraged
buyout situations, and other types of
loans for small, privately owned
business. The Company is a
closed-end management investment
company which has elected to be
regulated as a business development
company (a "BDC") and is managed by
Allied Capital Advisers, Inc.
("Advisers"). See
"Management--Investment Adviser"
page___.

INVESTMENT OBJECTIVE The investment objective of the
OF THE COMPANY Company is to provide a high level of
current income and long-term
growth on the value of its net assets
by providing debt, mezzanine, and
equity financing primarily for small,
privately owned growth companies.
The Company and its two active small
business investment company
subsidiaries seek to achieve this
objective by making long-term
investments, which typically are made
in the form of debt securities
combined with equity features such as
conversion privileges, options, or
warrants to acquire shares of the
issuer. See "The Company--Business
of the Company" page___.

INVESTMENT CONSIDERATIONS As a BDC, the Company's consolidated
portfolio includes primarily
securities issued by small, privately
held developing companies that
involve a high degree of business and
financial risk. The investments of
the Company and its subsidiaries as a
whole, however, are highly
diversified. A large number of
entities and individuals compete for
the same kinds of venture capital
investment opportunities as the
Company. Both the Company and its
subsidiaries borrow funds from the
U.S. Small Business Administration
(the "SBA") or other lenders (and one
such subsidiary has placed preferred
stock with the SBA) to make
investments in and loans to small
businesses. As a result, the Company
is exposed to the risks of leverage,
which may be considered a speculative
investment technique. See "The
Company--Risk Factors" page___.

SECURITIES OFFERED AND SUMMARY OF The Company is offering to
stockholders of record as of the
close of business on January 22, 1996
DISTRIBUTION
(the "Record Date") the right to
subscribe for an aggregate of 885,448
Shares of common stock of the
Company. Each such stockholder is
being issued one (1) Subscription
Right for each full share of common
stock owned on the Record Date. No
fractional Subscription Rights will
be issued. The Subscription Rights
entitle a stockholder to acquire at
the Subscription Price (as defined in
this Prospectus) one (1) Share for
each seven (7) Subscription Rights
held. Subscription Rights may be
exercised at any time during the
Subscription Period, which commences
on January 25, 1996 and ends as of
5:00 p.m., Eastern Standard Time, on
February 23, 1996 (the "Expiration
Date"), unless extended as described
herein. The part of the Offer
pursuant to which a stockholder may
acquire one (1) Share for each seven
(7) Subscription Rights held during
the Subscription Period as of the
Subscription Price is referred to as
the "Primary Subscription."

OVER-SUBSCRIPTION In addition, any stockholder who
PRIVILEGE fully exercises all Subscription
Rights issued to him is entitled
to subscribe for Shares which were
not otherwise subscribed for pursuant
to the Primary Subscription (the
"Over-Subscription Privilege").
Shares acquired through the
Over-Subscription Privilege are
subject to allotment or increase,
which is more fully discussed below
under "The Offer-Over-Subscription
Privilege." See "The Offer."
</TABLE>

3
<PAGE> 10

<TABLE>
<S> <C>
The combination of the
Over-Subscription Privilege and the
Company's election to issue
additional Shares will result in
further dilution to those
stockholders who exercise their
Subscription Rights and subscribe for
Shares pursuant to the Primary
Subscription but who do not exercise
their Over- Subscription Privilege.

SOLICITING FEES In connection with the Offer, the
Company has agreed to pay to
broker-dealers who have solicited
beneficial owners whose shares of the
Company's stock are held by
broker-dealers in nominee name, fees
equal to 2.5% of the Subscription
Price per Share for Shares issued
upon the exercise of Subscription
Rights as a result of their
soliciting efforts. See "The
Offer-Soliciting Fees."

PRINCIPAL TRADING MARKET Nasdaq National Market under the
symbol "ALLC." See "Public Trading
and Net Asset Value Information,"
page___.
</TABLE>

FEES AND EXPENSES

<TABLE>
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES
Sales Load (as a percentage of offering price) none(1)
Dividend Reinvestment Plan Fees none(2)

ANNUAL EXPENSES (as a percentage of consolidated net assets attributable to common shares(3))
Investment Advisory Fees 5.68%(4)
Interest Payments on Borrowed Funds 10.53%(5)
Other Expenses 2.5%(6)
------
Total Annual Expenses 18.71%(7)
- ------------------- ======
</TABLE>

(1) In the event that Shares are sold otherwise than through the Offer,
the corresponding Supplement to this Prospectus will disclose the
applicable sales load, if any.

(2) The expenses of the Dividend Reinvestment Plan are included in stock
record expenses, a component of "Other Expenses." The Company has no
cash purchase plan.

(3) Net assets for this purpose are at September 30, 1995 and after giving
effect to the anticipated net proceeds of the present offering less
non-redeemable preferred stock outstanding.

(4) The investment advisory fee in this table is presented as a percentage
of net assets; however, the Company's investment advisory fees are
based on a formula based on total assets. The fees payable pursuant
to the investment advisory agreement (see "Management--Investment
Adviser") are 0.625% per quarter (2.5% per annum) of the quarter-end
value of the Company's consolidated total assets, less the value of
the shares of Allied Capital Lending Corporation owned by the Company,
Interim Investments (i.e., short-term U.S. government/agency
securities or repurchase agreements collateralized thereby), and cash
and cash equivalents. The percentage in the table assumes that none
of the Company's consolidated total assets are in the form of Interim
Investments or cash and cash equivalents. Investment advisory fees
are payable with respect to Interim Investments and cash and cash
equivalents at 0.125% per quarter (0.5% per annum) of the quarter-end
value of Interim Investments and cash and cash equivalents. The
investment advisory fee percentage above is based on the actual total
assets less the Company's investment in Allied Capital Lending
Corporation at September 30, 1995 plus the anticipated net proceeds of
this offering, multiplied by 2.5%, divided by consolidated net assets
attributable to common shares. Actual investment advisory fees for
the year ended December 31, 1994 were $2,356,000. At September 30,
1995, 14% of the Company's consolidated total assets were in the form
of Interim Investments and cash and cash equivalents. See "The
Company--Business of the Company."

4
<PAGE> 11

(5) The Company had outstanding borrowings of $81.3 million at September
30, 1995. The Interest Payments on Borrowed Funds percentage is based
on estimated amounts for the year ended December 31, 1995 divided by
consolidated net assets attributable to common shares. Actual
Interest Payments on Borrowed Funds for the year ended December 31,
1994 was $6,223,000.

(6) The Other Expenses percentage is based on estimated amounts for the
year ended December 31, 1995 divided by consolidated net assets
attributable to common shares. Actual Other Expenses for the year
ended December 31, 1994 was $1,401,000.

(7) Annual Expenses as a percentage of consolidated net assets
attributable to common shares are higher than the Annual Expenses of
most closed-end management investment companies due to the Company's
consolidated outstanding borrowings of $81.3 million and consolidated
outstanding preferred stock of $7 million at September 30, 1995, which
significantly reduce the consolidated net assets attributable to
common shares on which the Annual Expenses percentage is calculated.

<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
EXAMPLE 1 year 3 years 5 years 10 years
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
You would pay the following expenses over the indicated period
on a $1,000 investment, assuming a 5% annual return $ 187 $ 483 $ 699 $1,015
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE EXPENSES,
AND ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.

The purpose of the above table, including the example, is to assist the
investor in understanding the various costs that an investor in the Company
will bear either directly or indirectly.

AVAILABLE INFORMATION

The Company has filed with the Commission a registration statement under
the Securities Act of 1933, as amended (the "1933 Act"), with respect to the
shares of common stock offered by this Prospectus, which includes this
Prospectus plus additional information. The Company also files reports, proxy
statements and other information with the Commission under the Securities
Exchange Act of 1934. Such reports, proxy statements, and other information
can be inspected and copied at the public reference facilities maintained by
the Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549,
and at certain of the Commission's Regional Offices located in Suite 1400, 500
West Madison Street, Chicago, Illinois 60661, and Suite 1300, 7 World Trade
Center, New York, New York 10006. Copies of these materials can be obtained
from the Public Reference Section of the Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates.

The Company also furnishes annual reports to stockholders, which include
annual financial information that has been audited and reported on, with an
opinion expressed, by independent public accountants, and quarterly reports
including unaudited financial information. See "Reports and Independent Public
Accountants," page 28.

5
<PAGE> 12
FINANCIAL HIGHLIGHTS

The following condensed consolidated financial information of the Company
should be read in conjunction with the consolidated financial statements and
notes thereto included in this Prospectus. Such consolidated financial
statements as of and for the years ended December 31, 1990, 1991, 1992, 1993
and 1994 have been audited by the firm of Matthews, Carter and Boyce,
independent public accountants, whose opinion thereon appears at page F-26
below. See also "Management's Discussion and Analysis of Financial Condition
and Results of Operations," page 28.

SUMMARY BALANCE SHEET INFORMATION (In Thousands)
<TABLE>
<CAPTION>
December 31 Sept. 30
------------------------------------------------------ --------
1990(1) 1991 1992 1993 1994 1995
---- ---- ---- ---- ---- ----
ASSETS (unaudited)
<S> <C> <C> <C> <C> <C> <C>
Investments, at value $112,139 $ 73,480 $ 78,470 $ 94,630 $115,026 $121,819
Cash and cash equivalents 4,956 24,015 40,554 24,358 6,609 10,963
U.S. government securities 0 0 0 12,202 10,210 9,872
Other assets 3,597 6,788 5,799 3,416 3,672 2,936
-------- -------- -------- -------- -------- --------
Total assets $120,692 $104,283 $124,823 $134,606 $135,517 $145,590
======== ======== ======== ======== ======== ========
LIABILITIES
Debentures and notes payable $ 68,350 $ 52,561 $ 69,800 $ 69,800 $ 77,005 $ 81,300
Dividends and distributions payable 206 3,232 3,387 3,580 3,910 165
Accrued interest payable 1,015 784 1,256 1,283 1,393 1,976
Other liabilities 2,752 1,892 3,389 758 2,222 1,911
------- ------- ------- -------- ------- --------
Total liabilities 72,323 58,469 77,832 75,421 84,530 85,352
------- ------- ------- -------- ------- --------
Redeemable preferred stock 1,000 1,000 1,000 1,000 1,000 1,000
------- ------- ------- ------- ------- --------
SHAREHOLDERS' EQUITY
Preferred stock 6,000 6,000 6,000 6,000 6,000 6,000
Common stock and paid-in capital 48,187 46,648 47,513 47,714 47,113 47,518
Notes receivable from sale of common stock (1,478) (1,115) (812) (766) (816) (401)
Net unrealized appreciation (depreciation)
on investments (4,611) (6,451) (5,757) 6,406 1,110 7,661
Distributions in excess of accumulated earnings (729) (268) (953) (1,169) (3,420) (1,540)
-------- -------- -------- -------- -------- --------
Total shareholders' equity 47,369 44,814 45,991 58,185 49,987 59,238
-------- -------- -------- -------- -------- --------
Total liabilities and shareholders' equity $120,692 $104,283 $124,823 $134,606 $135,517 $145,590
======== ======== ======== ======== ======== ========
</TABLE>

6
<PAGE> 13
SUMMARY INCOME STATEMENT INFORMATION (In Thousands)

<TABLE>
<CAPTION>
Nine Months
Year Ended December 31 Ended September 30
------------------------------------------ ------------------
1990(1) 1991 1992 1993 1994 1994 1995
---- ---- ---- ---- ---- ---- ----
INVESTMENT INCOME (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest and dividends $13,945 $13,143 $8,913 $10,270 $12,147 $7,760 $9,724
Premium and other income 135 149 2,422 2,114 69 59 618
-------- ------ ------- ----- -------- ----- -------
Total investment income 14,080 13,292 11,335 12,384 12,216 7,819 10,342
------ ------ ------ ------ ------ ----- ------
EXPENSES
Interest expense 5,554 5,683 5,131 6,346 6,333 4,673 4,994
Investment advisory fee 0 2,717 2,099 2,285 2,356 1,698 2,077
Other operating expenses 2,100 754 1,050 1,453 1,401 594 987
------- ------ ------- ------ ------- ------- --------
Total expenses 7,654 9,154 8,280 10,084 10,090 6,965 8,058
------- ------ ------- ------- ------- ------- -------
Net investment income 6,426 4,138 3,055 2,300 2,126 854 2,284
Loss from operations of distributed investment
advisory subsidiary, plus spin-off related expenses (278) 0 0 0 0 0 0
------- ------- ------- -------- ------ -------- ------
Net investment income 6,148 4,138 3,055 2,300 2,126 854 2,284
Net realized gains on investments 1,962 2,834 4,507 5,943 3,394 2,024 3,584
-------- ------ ------- ------- ------- ------- -------
Net investment income before net unrealized
appreciation (depreciation) on investments 8,110 6,972 7,562 8,243 5,520 2,878 5,868
Net unrealized appreciation (depreciation) on investments (5,376) (1,840) 694 12,163 (5,296) 460 6,551
------- ------- ------- ------- ------- ------- -------
Net increase in net assets resulting from operations $2,734 $5,132 $8,256 $20,406 $ 224 $3,338 $12,419
======== ====== ======= ======= ======= ======== =======
PER COMMON SHARE AMOUNTS(2)
Net investment income $ 1.02 $ 0.68 $ 0.50 $ 0.37 $ 0.34 $ 0.14 $ 0.37
Net realized and unrealized gains (losses) on investments $(0.56) $ 0.16 $ 0.85 $ 2.94 $ (0.31) $ 0.40 $ 1.63
Net increase in net assets resulting from operations(3) $ 0.42 $ 0.80 $ 1.31 $ 3.28 $ 0.00 $ 0.51 $ 1.97
Net asset value(4) $ 6.83 $ 6.41 $ 6.53 $ 8.49 $ 7.11 $ 8.41 $ 8.61(8)
Dividends declared(5) $ 4.02(6) $ 1.30(7) $ 1.32 $ 1.35 $ 1.40(7) $ 0.60 $ 0.62(8)
</TABLE>

- -------------------------

(1) Numbers have been adjusted for the distribution of Allied Capital
Advisers, Inc. common shares on December 31, 1990.

(2) All per common share figures have been computed assuming that all
issuances of the Company's common stock in connection with the
Company's dividend reinvestment plan are outstanding for all periods
presented.

(3) Net increase in net assets resulting from operations is reduced by
preferred stock dividends of $203,000 for 1990, $220,000 for 1991,
1992, 1993 and 1994 and $165,000 for the nine months ended September
30, 1994 and 1995 for the purpose of calculating the per common share
amount.

(4) Total shareholders' equity is reduced by $6 million of non-redeemable
preferred stock for the purpose of calculating the per common share
amount.

(5) Amount represents the total of the quarterly dividends and the
year-end extra distribution declared by the Company based on the
actual shares outstanding on the record date for each dividend paid.

(6) Includes a $2.75 per common share distribution of shares in Allied
Capital Advisers, Inc. on December 31, 1990.

(7) Includes a tax basis return of capital of $0.25 per share for 1991 and
$0.17 per share for 1994.

7
<PAGE> 14

(8) Subsequent to September 30, 1995, the Company's Board of Directors
declared a regular quarterly divided of $0.24 per common share or
$1,485,000 payable on December 29, 1995 and an extra distribution of
$0.58 per common share or $3,588,000 payable on January 31, 1995.
These declarations will result in total distributions declared for
1995 of $1.44 per common share. Net asset value per common share at
September 30, 1995 does not reflect the effect of these dividend
declarations, and these dividend declarations will reduce net asset
value by $5,073,000, or approximately $0.82 per common share.

8
<PAGE> 15
QUARTERLY FINANCIAL HIGHLIGHTS (In Thousands)
(unaudited)

<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
1993 1994 1995
------------------------------ --------------------------------- ---------------------

Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total investment
income $2,406 $3,425 $3,759 $2,794 $2,594 $2,507 $2,718 $4,397 $3,549 $3,229 $3,564
Net investment income
(loss) $131 $885 $1,303 $(19) $204 $131 $518 $1,273 $881 $504 $899

Net increase
(decrease) in net
assets resulting from
operations $282 $(889) $2,156 $18,857 $752 $2,641 $(55) $(3,114) $2,134 $7,196 $3,089
Preferred stock
dividends $55 $55 $55 $55 $55 $55 $55 $55 $55 $55 $55

Net increase
(decrease) in net
assets resulting from
operations available
to common shareholders $227 $(944) $2,101 $18,802 $697 $2,586 $(110) $(3,169) $2,079 $7,141 $3,034

Per common share
$0.04 $(0.15) $0.34 $3.06 $0.11 $0.42 $(0.02) $(0.52) $0.34 $1.16 $0.49
</TABLE>

SENIOR SECURITIES (at end of year, consolidated)

Certain information about the various classes of senior securities
issued by the Company and its consolidated subsidiaries is set forth in the
following table. The shaded areas indicate information which the Commission
expressly does not require to be disclosed for certain types of senior
securities.

9
<PAGE> 16

<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Involuntary
Total Amount Outstanding Liquidating
Exclusive of Treasury Asset Coverage Preference Per Average Market Value
Class and Year Securities(4) Per Unit(5) Unit(6) Per Unit(7)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BANK LOAN
(REVOLVING LINE OF CREDIT)
1986(1) $ 0 $ 0 -- N/A
1986(2) 0 0 -- N/A
1987 2,000,000 18,590 -- N/A
1988 5,000,000 11,630 -- N/A
1989 0 0 -- N/A
1990 0 0 -- N/A
1991 0 0 -- N/A
1992 0 0 -- N/A
1993 0 0 -- N/A
1994 2,205,000 3,960 -- N/A
1995(3) 0 0 N/A
- -----------------------------------------------------------------------------------------------------------------------------------
SUBORDINATED DEBENTURES(8)
1986(1) $ 12,500,000 N/A -- --
1986(2) 11,300,000 N/A -- --
1987 13,700,000 N/A -- --
1988 24,350,000 N/A -- --
1989 25,350,000 N/A -- --
1990 40,450,000 N/A -- --
1991 49,800,000 N/A -- --
1992 49,800,000 N/A -- --
1993 49,800,000 N/A -- --
1994 54,800,000 N/A -- --
1995(3) 61,300,000 N/A -- --
- -----------------------------------------------------------------------------------------------------------------------------------
REDEEMABLE CUMULATIVE
PREFERRED STOCK(8)
1986(1) $ 0 N/A $ 0.00 N/A
1986(2) 0 N/A 0.00 N/A
1987 0 N/A 0.00 N/A
1988 0 N/A 0.00 N/A
1989 0 N/A 0.00 N/A
1990 1,000,000 N/A 100.00 N/A
1991 1,000,000 N/A 100.00 N/A
1992 1,000,000 N/A 100.00 N/A
1993 1,000,000 N/A 100.00 N/A
1994 1,000,000 N/A 100.00 N/A
1995(3) 1,000,000 N/A 100.00 N/A
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>

10
<PAGE> 17

- ----------------------------

(1) For the fiscal year ended March 31, 1986.

(2) In 1986, the Company changed its fiscal year end from March 31 to
December 31. This data is as of December 31, 1986.

(3) 1995 figures are as of September 30.

(4) Total amount of each class of senior securities outstanding at the end
of the year presented.

(5) An asset coverage ratio is calculated, where applicable, as the
Company's consolidated total assets less all liabilities and
indebtedness not represented by senior securities, divided by senior
securities representing indebtedness other than senior securities issued
by the Company's small business investment company subsidiaries. This
asset coverage ratio is multiplied by $1,000 to determine the asset
coverage per unit.

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

(7) Not applicable as senior securities are not registered for public
trading.

(8) Issued by the Company's small business investment company subsidiaries,
these categories of senior securities are not subject to the asset
coverage requirements of the Investment Company Act of 1940 (the "1940
Act"). Therefore, asset coverage per unit is not applicable.

11
<PAGE> 18

(9) The Company itself was the obligor on $15 million of the senior notes.
The Company's small business investment company subsidiaries were the
obligors on the remaining $5 million, which is not subject to the asset
coverage requirements of the 1940 Act. Therefore, asset coverage per
unit is based on $15 million of senior securities outstanding in this
category.

PUBLIC TRADING AND NET ASSET VALUE INFORMATION

Shares of the Company are traded on the Nasdaq National Market under the
symbol ALLC. The following table sets forth, for the periods indicated, high
and low bid prices and average net asset values per common share. The Nasdaq
bid quotations represent prices between dealers, do not include retail markups,
markdowns or commissions, and may not represent actual transactions. As the
table below indicates, shares of the Company have historically traded at a
price substantially in excess of net asset value.

<TABLE>
<CAPTION>
Bid Price Premium to
Average Net Asset Value
Average Net Asset Per Common Share
Fiscal Year Bid Price Range Value Per Common During Period
Ended --------------- Share During -----------------------
December 31 High Low Period High Low
----------- ---- --- -------------------- ---- ---
<S> <C> <C> <C> <C> <C>
1993
1st Quarter $15.50 $11.75 $6.55 136% 79%
2nd Quarter $14.50 $11.75 $6.77 114% 66%
3rd Quarter $15.50 $13.25 $7.20 115% 84%
4th Quarter $15.75 $13.25 $7.91 99% 68%

1994
1st Quarter $14.00 $12.25 $8.48 65% 44%
2nd Quarter $14.25 $13.25 $9.03 58% 47%
3rd Quarter $14.50 $13.25 $9.54 52% 39%
4th Quarter $15.50 $12.75 $8.29 87% 54%

1995
1st Quarter $13.50 $11.50 $7.22 87% 59%
2nd Quarter $12.00 $11.125 $7.79 54% 43%
3rd Quarter $13.75 $11.25 $8.45 63% 33%
</TABLE>

The last sale price for a share of the Company's common stock on Nasdaq on
September 29, 1995 was $13.00. The consolidated net asset value per share on
that date was $8.61. The premium was 51%.

THE OFFER

TERMS OF THE OFFER

The Company is offering to the holders of its common stock of record on the
Record Date the right to subscribe for Shares. Each Record Date stockholder is
being issued one (1) Subscription Right for each share of common stock owned on
the Record Date. The number of Subscription Rights to be issued to each
stockholder will be rounded down to the nearest whole number of shares and no
fractional Subscription Rights will be issued. The Subscription Rights entitle
a stockholder to acquire pursuant to the Primary Subscription at the
Subscription Price one (1) Share for each seven (7) Subscription Rights held.
Subscription Rights may be exercised at any time during the Subscription
Period, which commences on January 25, 1996, the date of this Prospectus and
ends as of 5:00 p.m., Eastern Standard Time, on February 23, 1996 (the
"Expiration Date"), unless extended by the Company until 5:00 p.m. Eastern
Standard Time on a date no later than March 1, 1996.

12
<PAGE> 19

In addition, any stockholder who fully exercises all Subscription Rights
issued to him is entitled to subscribe for Shares which were not otherwise
subscribed for pursuant to the Primary Subscription. Shares acquired through
the Over-Subscription Privilege are subject to allocation or increase, which is
more fully discussed below under "Over-Subscription Privilege."

Subscription Rights are exercisable through a subscription form
("Subscription Form") which will be provided to all eligible stockholders. No
certificates or other physical rights will be issued or distributed.

The Subscription Rights are non-transferable. Therefore, only the
underlying Shares, and not the Subscription Rights, will be admitted for
quotation on the Nasdaq National Market.

OVER-SUBSCRIPTION PRIVILEGE

If some stockholders do not exercise all of the Subscription Rights
initially issued to them, then any Shares for which subscriptions have not been
received from stockholders will be offered by means of the Over-Subscription
Privilege to those stockholders who have exercised all of the Subscription
Rights initially issued to them and who wish to acquire additional Shares.
Stockholders who exercise all of the Subscription Rights initially issued to
them should indicate on the Subscription Form how many Shares they wish to
acquire through this Over-Subscription Privilege. If sufficient Shares remain,
then all requests for additional Shares will be honored in full.

If sufficient Shares are not available to honor all requests for additional
Shares, then the Company may, in its sole discretion, elect to issue up to an
additional 15% of the Shares available through the Offer in order to honor such
over-subscriptions. All requests to purchase Shares pursuant to the Primary
Subscription and the Over-Subscription Privilege are subject to allocation. To
the extent that there are not sufficient Shares to honor all
over-subscriptions, the available Shares will be allocated pro rata among those
stockholders who over-subscribe based on the number of Subscription Rights
originally issued to them by the Company, so that the number of Shares issued
to stockholders who subscribe through the Over-Subscription Privilege will be
in proportion to the number of shares of the Company's common stock owned by
them on the Record Date. The percentage of remaining Shares each
over-subscribing holder may acquire may be rounded up or down to result in
delivery of whole Shares. The allocation process may involve a series of
allocations in order to ensure that the total number of Shares available for
over-subscriptions are distributed on a pro rata basis.

THE SUBSCRIPTION PRICE

The Subscription Price per Share will be 95% of the average of the last
reported sale price of a share of common stock on the Nasdaq National Market
("Nasdaq") on the date of expiration of the Offer (the "Pricing Date") and the
four preceding business days. Since the Expiration Date of the Offer coincides
with the Pricing Date, holders who choose to exercise their Subscription Rights
will not know the Subscription Price per Share at the time they exercise their
Subscription Rights. It may be more or less than the Estimated Subscription
Price of $______ per Share. See "Confirmation of Purchase."

SUBSCRIPTION PERIOD

The Offer commences on January 25, 1996 and expires at 5:00 p.m., Eastern
Standard Time, on February 23, 1996, unless extended. Subscription Rights will
expire on the Expiration Date and may not be exercised after that date. All
Subscription Forms must be received by the Subscription Agent no later than the
Expiration Date.

As of the date of this prospectus, the Company last determined consolidated
net asset value per common share at September 30, 1995 to be $8.61. During the
fourth quarter of 1995, the Company declared its fouth quarter dividend of
$0.24 per common share, or $1,485,000, and its 1995 extra distribution of $0.58
per common share or $3,588,000. Net asset value per common share at September
30, 1995 does not reflect the effect of these dividend declarations and these
dividend declarations will reduce net asset value by $5,073,000, or
approximately $0.82 per common share. In addition to these dividend
declarations, net asset value per common share at December 31, 1995 will be
affected by fourth quarter net income, which includes the effects of
unrealized appreciation and depreciation in the Company's portfolio of invested
assets. As of the date of this prospectus, 1995 fourth quarter net income has
not yet been computed by the Company, and as a result is not available. The
Company has, as required by the Commission's registration form, undertaken to
suspend the Offer until it amends this Prospectus if subsequent to the
effective date of the Company's registration

13
<PAGE> 20

statement, the Company's net asset value declines more than 10% from its
consolidated net asset value last determined prior to the effective date.
Accordingly, the Company will notify stockholders of any such decline. A
subscribing stockholder will have no right to cancel such subscriptions or
rescind a purchase after the Subscription Agent has received payment, except
that subscription forms received during any period that the Offer is suspended
as described above will be returned to the stockholder for resubmission once
such suspension has ended.

The Company is requesting brokers, banks, trust companies and other
nominees (collectively "Nominees") to transmit a copy of this Prospectus and of
the Subscription Form, with a return envelope, to each person who is a
beneficial owner of shares of the common stock held of record by Nominees as of
the Record Date. Nominees will be responsible for tabulating subscriptions
received from such beneficial owners, and remitting to the Subscription Agent
one Subscription Form and the total aggregate Subscription Price of all shares
for which a Nominee's beneficial owners are subscribing. The Company will pay
such Nominees their usual and customary charges for transmitting issuer
communications to stockholders.

PURPOSE OF THE OFFER

The Board of Directors of the Company has concluded that additional capital
should be raised for the Company through an offering of its common stock. The
Company has determined that new investment opportunities exist, but the Company
lacks the liquidity to take full advantage of them. This additional capital
will increase the Company's equity base and allow the Company to continue to
grow by leveraging against it.

The Company's directors have voted unanimously to authorize the Offer.
Three of the Company's directors who voted to authorize the Offer are
affiliated with Advisers and, therefore, could benefit indirectly from the
Offer. The other five directors are not "interested persons" of the Company
within the meaning of the Investment Company Act of 1940 (the "1940 Act").
Advisers may also benefit from the Offer because its fee is partially based on
the total assets of the Company. See "Management-Investment Adviser." It is
not possible to state precisely the amount of additional compensation Advisers
might receive as a result of the Offer because it is not known how many Shares
will be subscribed for and because the proceeds of the Offer will be invested
in additional portfolio securities, which will presumably fluctuate in value.

The Company may, in the future and at its discretion, from time to time,
choose to make additional rights offerings for a number of shares and on terms
which may or may not be similar to this Offer.

DILUTIVE EFFECT

The Company expects that there will be no dilution of the net asset value
of the Company's common stock because the stock has historically traded, and
continues to trade as of the date of this Prospectus, at a price that
represents a premium over net asset value. See "Public Trading and Net Asset
Value Information." Any stockholder who chooses not to participate in the
Offer, however, should expect to own a smaller proportional interest in the
Company following the expiration of the Offer.

The Company may offer and sell any shares which are not subscribed for
through the Primary Subscription or the Over-Subscription Privilege, following
expiration of the Offer, to certain other investors. The Company undertakes to
update this Prospectus before any such sales are consummated. The combination
of the Over-Subscription Privilege and the Company's election to issue
additional Shares may result in additional dilution of interest and voting
rights to stockholders. See "Sales of Shares Subsequent to the Offer."

SOLICITING FEES

In connection with the Offer, the Company has agreed to pay to certain
broker-dealers who have executed and delivered a Soliciting Dealer Agreement
fees equal to 2.5% of the Subscription Price per Share for Shares issued upon
the exercise of Subscription Rights as a result of their soliciting efforts.
Shareholder Communications Corporation will provide offering coordinator
services, including coordination among soliciting broker-dealers. See "Expenses
of the Offer."

<PAGE> 21

SUBSCRIPTION AGENT

The Subscription Agent for the Offer is American Stock Transfer and Trust
Company, 40 Wall Street, 46th Floor, New York, New York, 10004, which will
receive, for its administrative, processing, invoicing and other services as
Subscription Agent, an estimated fee of $35,000 and reimbursement for all
out-of-pocket expenses related to the Offer. The Subscription Agent is also
the Company's Transfer Agent. Stockholders may contact the Subscription Agent
at 718-921-8200.

Stockholders should mail or deliver Subscription Forms and acceptable forms
of payment for Shares to the Subscription Agent in time to be received by 5:00
p.m. Eastern Standard Time on the Expiration Date by one of the following
methods at the following address:

BY FIRST CLASS MAIL
BY EXPRESS MAIL OR OVERNIGHT COURIER
BY HAND
American Stock Transfer and Trust Company
Corporate Reorganization Department
40 Wall Street, 46th Floor
New York, New York 10005

DELIVERY TO AN ADDRESS OTHER THAN THE ABOVE DOES NOT CONSTITUTE VALID
DELIVERY.

IT IS STRONGLY SUGGESTED THAT STOCKHOLDERS USE A DELIVERY METHOD WHICH WILL
GUARANTEE DELIVERY BY THE EXPIRATION DATE AND WHICH WILL PROVIDE A RETURN
RECEIPT TO THE SENDER. NEITHER THE SUBSCRIPTION AGENT NOR THE COMPANY WILL BE
RESPONSIBLE FOR SUBSCRIPTION FORMS OR PAYMENTS THAT ARE NOT SO DELIVERED.

INFORMATION AGENT AND OFFERING COORDINATOR

Shareholder Communications Corporation ("SCC") will act as the Information
Agent and Offering Coordinator for the Offer, and as such, will distribute
materials and be available to answer questions any stockholders may have
regarding the Offer. For acting as Information Agent for the Offer, SCC will
receive a fee estimated at $5,000 and for acting as Offering Coordinator, SCC
will receive a fee estimated at $35,000. SCC will be reimbursed for all
out-of-pocket expenses in connection with the Offer. SCC may be contacted at:

Shareholder Communications Corporation
17 State Street, 27th and 28th Floors
New York, New York 10004
Telephone: (800) 221-5724, Extension 331

Stockholders may also call their Nominees for information with respect to
the Offer.

<PAGE> 22

IMPORTANT DATES TO REMEMBER

<TABLE>
<S> <C>
Event Date
- ----- ----
Record Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . January 22, 1996
Subscription Period . . . . . . . . . . . . . . . . . . . . . . . . . . January 25-February 23, 1996*
Expiration of the Offer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . February 23, 1996*
Pricing Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . February 23, 1996*
Subscription Forms and Payment for Shares Due+ . . . . . . . . . . . . . . . . . February 23, 1996*
Notices of Guaranteed Delivery Due+ . . . . . . . . . . . . . . . . . . . . . . . February 23, 1996*
Subscription Forms pursuant to Notices of Guaranteed Delivery Date . . . . . . . February 28, 1996*
Confirmation to Participants . . . . . . . . . . . . . . . . . . . . . . . . . . . . March 6, 1996*
Payment Pursuant to Notices of Guaranteed Delivery Due . . . . . . . . . . . . . . March 20, 1996*
Final Collections or Rebates for Shares Due . . . . . . . . . . . . . . . . . . . . March 20, 1996*
</TABLE>

*unless the Offer is extended to a date not later than March 1, 1996.
+a stockholder exercising Subscription Rights must deliver either (1) a
Subscription Form and payment for Shares or (2) a Notice of Guaranteed Delivery
by the Expiration Date.

HOW TO SUBSCRIBE

Subscription Rights may be exercised by stockholders whose shares of the
Company's common stock are held in their own name ("Record Owners") by
completing the enclosed Subscription Form and delivering it to the Subscription
Agent, together with any required payment for the Shares as described below
under "Payment for Shares." Stockholders whose shares are held by a Nominee
must exercise their Subscription Rights by contacting their Nominees, who can
arrange, on a stockholder's behalf, to guarantee delivery of a properly
completed and executed Subscription Form and payment for the Shares. A fee may
be charged for this service. Subscription Forms must be received by the
Subscription Agent prior to 5:00 p.m., Eastern Standard Time, on the Expiration
Date, unless the Offer is extended. If Subscription is to be effected by means
of a Notice of Guaranteed Delivery, then Subscription Forms are due not later
than three (3) business days following the expiration of the Offer and full
payment for the Shares is due not later than ten (10) business days following
the Confirmation Date. See "Payment for Shares."

PAYMENT FOR SHARES

Stockholders who acquire Shares pursuant to the Primary Subscription or the
Over-Subscription Privilege may choose between the following methods of
payment:

(1) If, prior to 5:00 p.m., Eastern Standard Time, on the Expiration Date
(unless extended), the Subscription Agent has received a Notice of
Guaranteed Delivery, by telegram or otherwise, from a Nominee guaranteeing
delivery of (a) payment of the full Subscription Price for the Shares
subscribed for pursuant to the Primary Subscription and any additional
Shares subscribed for through the Over-Subscription Privilege and (b) a
properly completed and executed Subscription Form, the subscription will be
accepted by the Subscription Agent. The Subscription Agent will not honor
a Notice of Guaranteed Delivery if a properly completed and executed
Subscription Form is not received by the Subscription Agent by the close of
business on the third (3rd) business day after the Expiration Date, unless
the Offer is extended, and full payment for the Shares is not received by
it by the close of business on the tenth (10th) business day after the
Confirmation Date (as defined below).

(2) Alternatively, a Record Owner may send payment for the Shares acquired
pursuant to the Primary Subscription, together with the Subscription Form,
to the Subscription Agent based on the Estsimated Subscription Price of
$__.__ per Share. To be accepted, such payment, together with the
Subscription Form, must be made payable to "Allied Capital Corporation" and
received by the Subscription Agent prior to 5:00 p.m., Eastern Standard
Time, on the Expiration Date, unless the Offer is extended.

<PAGE> 23

IF THE SECOND METHOD DESCRIBED ABOVE IS USED, FULL PAYMENT BY CHECK MUST
ACCOMPANY ANY SUBSCRIPTION FORM FOR THE SUBSCRIPTION FORM TO BE ACCEPTED.

CONFIRMATION OF PURCHASE

Within eight business days following the expiration of the Offer (the
"Confirmation Date"), a confirmation will be sent by the Subscription Agent to
each stockholder (or, if the Company's shares on the Record Date are held by a
Nominee, to such Nominee) showing (i) the number of Shares acquired through the
Primary Subscription; (ii) the number of Shares, if any, acquired through the
Over-Subscription Privilege; (iii) the per Share and total purchase price for
the Shares; and (iv) the amount payable by the stockholder to the Company or
any excess to be refunded by the Company to the stockholder, in each case based
on the Subscription Price as determined on the Pricing Date.

In the case of any stockholder who exercises his right to acquire Shares
through the Over-Subscription Privilege, any excess payment which would
otherwise be refunded to him will be applied by the Company toward the payment
for Shares acquired through exercise of the Over-Subscription Privilege. Any
payment required from a stockholder must be received by the Subscription Agent
within ten (10) business days after the Confirmation Date, and any excess
payment to be refunded by the Company to a stockholder will be mailed by the
Subscription Agent to him within ten (10) business days after the Confirmation
Date. All payments by a stockholder must be made in United States dollars by
money order or check drawn on a bank located in the United States of America
and payable to "Allied Capital Corporation."

Issuance and delivery of certificates for the Shares subscribed for are
subject to collection of checks and actual payment through any Notice of
Guaranteed Delivery.

If a stockholder who acquires Shares through the Primary Subscription or
Over-Subscription Privilege does not make payment of all amounts due, the
Company reserves the right to: (i) find other purchasers for such subscribed
for and unpaid shares; (ii) apply any payment actually received by it toward
the purchase of the greatest number of whole Shares which could be acquired by
such stockholder upon exercise of the Primary Subscription or Over-Subscription
Privilege; or (iii) exercise any and all other rights or remedies to which it
may be entitled.

DELIVERY OF SHARES

Participants in the Company's Dividend Reinvestment Plan (the "Plan") will
have any Shares acquired pursuant to the Primary Subscription and pursuant to
the Over-Subscription Privilege credited to their accounts in the Plan. Stock
certificates will not be issued for Shares credited to Plan accounts.

Stockholders whose shares are held of record by a Nominee on their behalf
will have the Shares they acquire credited to the account of such Nominee.

For Record Owners other than Plan participants, stock certificates for all
Shares acquired will be mailed promptly after full payment for the Shares
subscribed for has cleared, and no later than 30 days after the Expiration Date
of the Offer.

In the event that the Offer does not result in all Shares being fully
subscribed for after allocating shares pursuant to the Over-Subscription
Privilege, the Company may offer the remaining shares to certain other
investors. See "Sales of Shares Subsequent to the Offer."

A SAMPLE CALCULATION OF A SUBSCRIPTION

Assume, for example, that you own 1,000 shares of the Company's common
stock as of the Record Date. Dividing that number by seven (7) and dropping
the fraction gives you 142. Assuming that you elect to exercise all of your
Subscription Rights for the Primary Subscription, in the first blank of the
Subscription Form enter 142 Shares and fill in the estimated subscription price
for the Shares, which is 142 multiplied by $______, the Estimated

<PAGE> 24

Subscription Price per share. If you choose to subscribe for additional Shares
pursuant to the Over-Subscription Privilege, enter the number of additional
Shares on the next line of the Subscription Form, and again calculate the
estimated subscription price by multiplying the number of additional Shares by
$_____ . Assuming you decide to purchase 58 shares pursuant to the
Over-Subscription Privilege, enter 58 Shares and $______ on the second line.
Then enter the total amount due on the third line of the Form. After otherwise
completing and signing the form, send it to the Subscription Agent (or your
Nominee if your shares are held by a Nominee) with an acceptable form of
payment.

The Company will, in any event, accept your Primary Subscription to the
extent of the 142 shares. Depending on the number of Shares subscribed for by
other stockholders, the Company may also accept your over-subscription to the
extent of the additional 58 shares for which you have subscribed or some
smaller number, possibly as small as zero and will confirm with you in writing
how many Shares you have been allocated in total. If your over-subscription is
accepted for some number of shares that is smaller than the requested number,
the Subscription Agent will, after the close of the Subscription Period, send
you a check for the amount, without interest, of your subscription in excess of
the amount for which your subscription has been accepted. If the Subscription
Price is lower than the Estimated Subscription Price of $_____ per share, you
will receive a refund; if the Subscription Price is higher than the Estimated
Subscription Price, you will be notified of the additional amount due. You will
then, in due course, receive a certificate for the number of shares for which
your subscription has been accepted, or otherwise be credited for the Shares if
your Shares are held in the Company's Dividend Reinvestment Plan or by a
Nominee.

Stockholders who are Record Owners. Stockholders who are Record Owners can
choose between either option described under "Payment for Shares." Note: If
only a short amount of time is remaining prior to the Expiration Date, option
(1) will permit delivery of the Subscription Form and payment after the
Expiration Date.

Investors Whose Shares Are Held Through A Nominee. Stockholders whose
shares are held by a Nominee such as a broker, bank or trust company, must
contact the Nominee to exercise their Subscription Rights. In that case, the
Nominee may complete the Subscription Form on behalf of the stockholder and
arrange for proper payment by one of the methods described under "Payment for
Shares."

Nominees. Nominees should notify the respective beneficial owners of
shares as soon as possible to ascertain such beneficial owners' intentions and
to obtain instructions with respect to the Subscription Rights. If the
beneficial owner so instructs, the Nominee should complete the Subscription
Form and submit it to the Subscription Agent, together with the proper payment
described under "Payment for Shares."

SALES OF SHARES SUBSEQUENT TO THE OFFER

The Company may, by means of a post-effective amendment to this Prospectus,
offer any unsubscribed for shares to banks, insurance companies, pension funds
and other institutional investors and to certain individuals ("Additional
Offerees") in any state in which the offer and sale to such persons may be made
consistent with applicable law. The Company may solicit and accept
subscriptions from any Additional Offerees for any Shares offered hereby which
were not validly subscribed for by stockholders. It is anticipated that, in
general, offers and sales to Additional Offerees, if any, will be made on
substantially the same terms as those described above for offers and sales made
pursuant to the Offer, although the price of Shares sold to Additional Offerees
is expected to differ based on then-prevailing market conditions. Any material
differences in the terms of sales to Additional Offerees from those made
pursuant to the Offer would be described in a supplement to this Prospectus.

EXPENSES OF THE OFFER

In connection with the Offer, the Company has agreed to pay to certain
broker-dealers who have executed and delivered a Soliciting Dealer Agreement
Fees equal to 2.5% of the Subscription Price per Share for Shares issued upon
exercise of Subscription Rights as a result of their soliciting efforts. The
Company will also pay all other

<PAGE> 25

applicable expenses, including but not limited to the normal charges of brokers
and other Nominees for transmitting offering materials, which will include
Prospectuses, Exercise Forms, and return envelopes, to the beneficial owners of
the shares held by them of record.

USE OF PROCEEDS

The Company anticipates that proceeds of the offering will be used in
accordance with the Company's investment objective, to make new investments to
small, private growth companies in the form of subordinated debt, mezzanine and
equity financings as well as to fund leveraged buyouts, bridge loans, and
acquisitions. The Company may also use proceeds from the offering to repay any
borrowings outstanding under the Company's revolving line of credit.

THE COMPANY

ORGANIZATION

Allied Capital Corporation (the "Company") was incorporated under the laws
of the District of Columbia in 1958 and was reorganized as a Maryland
corporation in 1991. It is a closed-end management investment company that
elected in 1991 to be regulated as a business development company ("BDC") under
the Investment Company Act of 1940, as amended (the "1940 Act"). The Company
has two active wholly owned subsidiaries, Allied Investment Corporation
("Allied Investment") and Allied Capital Financial Corporation ("Allied
Financial"), which represented 47.6% and 30.1%, respectively, of the Company's
consolidated total assets as of September 30, 1995. Allied Investment and
Allied Financial are Maryland corporations registered under the 1940 Act as
closed-end management investment companies. Allied Investment is licensed by
the U.S. Small Business Administration (the "SBA") as a small business
investment company ("SBIC") under Section 301(c) of the Small Business
Investment Act of 1958, as amended ("SBIA"), and Allied Financial is licensed
by the SBA as a specialized small business investment company ("SSBIC") under
Section 301(d) of the SBIA. As described below, the Company also has a
significant ownership interest in Allied Capital Lending Corporation ("Allied
Lending"), a closed-end management investment company that has elected to be
regulated as a BDC and is an SBA-approved small business lending company.
Allied Capital Advisers, Inc. ("Advisers") serves as the investment adviser of
the Company under an investment advisory agreement.

BUSINESS OF THE COMPANY

The investment objective of the Company is to provide a high level of
current income and long-term growth on the value of its net assets by providing
debt, mezzanine, and equity financing primarily for small, privately owned
growth companies. This objective may be changed by the board of directors of
the Company without a vote of a majority of the outstanding voting securities
(as defined in the 1940 Act). The Company generally invests in and lends to
small businesses directly and through its wholly owned subsidiaries, and also
provides financing for leveraged buyouts of such companies, for note purchases
and loan restructurings, and for special situations, such as acquisitions,
buyouts, recapitalizations, and bridge financings of such companies. The
Company also provides financing to private and small public companies through
its origination of loans with equity features.

Historically, all of the investments of the Company and its subsidiaries
(all further references to investments by the Company include those made by its
subsidiaries unless otherwise indicated) have been made in domestic small
businesses. However, the Company currently intends to begin making investments
in conjunction with funding from Overseas Private Investment Corporation
("OPIC"), which would typically involve investments in businesses that engage,
in whole or in part, in overseas operations. Generally, the OPIC-related
investments to be made by the Company will require that the portfolio company
have some affiliation with a U.S.-based business entity. OPIC-

<PAGE> 26
related investments ordinarily will be made in countries representing the
world's emerging markets. Investments in such countries involve special risks.
See "The Company -- Risk Factors -- Foreign Investments," page __.

The Company's investments generally take the form of loans with equity
features, such as warrants or conversion privileges that entitle the Company to
acquire a portion of the equity in the entity in which the investment is made.
The typical maturity of such a loan made by the Company is seven years, with
payments of interest only in the early years and payments of principal and
interest in the later years, although loan maturities and principal
amortization schedules vary. The Company also makes senior loans without
equity features. Senior loans generally bear interest at a fixed rate that the
Company believes is competitive in the venture capital marketplace. Current
income is derived primarily from interest earned on the loan element of the
Company's investments. Generally, long-term growth in net asset value and
realized capital gains, if any, from portfolio companies are achieved through
the equity participations acquired as a result of the Company's growth
financing and leveraged buyout activity. The Company seeks to structure its
investments so that approximately one-half of the potential return is earned in
the form of monthly or quarterly interest payments and the balance is derived
from capital gains. The Company's investments may be secured by the assets of
the entity in which the investment is made, which collateral interests may be
subordinated in certain instances to institutional lenders, such as banks. The
Company makes available significant managerial assistance to its portfolio
companies. Pending investment of its assets, the Company's funds are generally
invested in short-term securities issued or guaranteed by the U.S. government
or an agency or instrumentality thereof, the value of which generally
fluctuates with prevailing levels of interest rates, or in repurchase
agreements fully collateralized by such securities.

The Company usually invests in privately held companies that have been in
business for at least one year, have a commercially proven product or service,
and seek capital to finance expansion or ownership changes. The Company
generally requires that the companies in which it invests demonstrate sales
growth, positive cash flow, and profitability, although turnaround situations
are also considered. The Company's emphasis is on low- to medium-technology
businesses, such as broadcasting, packaging manufacturers, specialty
manufacturing, environmental concerns, wholesale distribution, commodities
storage, and retail operations. The Company emphasizes the quality of
management of the companies in which it invests, and seeks experienced
entrepreneurs with a management track record, relevant industry experience, and
high integrity.

For the first three quarters of 1995, the Company invested approximately
$18 million into small private businesses. In the year ended 1994, the Company
invested approximately $36 million, which represented a 50% increase from the
$24 million that the Company invested in 1993. The invested assets of the
Company at September 30, 1995 were $122 million, a 6% increase over December
31, 1994. December 31, 1994 invested assets were approximately $115 million, a
22% increase from the approximately $95 million in invested assets of the
Company at December 31, 1993. The Company also restructured several
non-performing investments in 1994, with the result that the non-performing
assets (valued at cost) decreased 36% from $15.7 million at December 31, 1993
to $10.1 million at December 31, 1994. At September 30, 1995, the Company's
non-performing assets at cost were $9.5 million, a 6% decrease from December
31, 1994. Subsequent to September 30, 1995, one additional investment in the
Company's portfolio with a net cost of $3.1 million was determined to be
non-performing.

The Company's Operation as a BDC

As a BDC, the Company may not acquire any asset other than Qualifying
Assets unless, at the time the acquisition is made, Qualifying Assets represent
at least 70% of the value of the Company's total assets (the "70% test"). The
principal categories of Qualifying Assets relevant to the business of the
Company are the following:

(1) Securities purchased in transactions not involving any public offering from
the issuer of such securities, which issuer is an eligible portfolio
company. An eligible portfolio company is defined as any issuer that (a)
is organized and has its principal place of business in the United States,
(b) is not an investment company other than a small business investment
company wholly owned by the BDC (the Company's investments in and advances
to Allied Investment and Allied Financial are Qualifying Assets, but its
investment in Allied Lending, a BDC which is not wholly owned, is not), and
(c) does not have any class of publicly traded securities with respect to
which a broker may extend margin credit.

<PAGE> 27
(2) Securities received in exchange for or distributed with respect to
securities described in (1) above, or pursuant to the exercise of options,
warrants, or rights relating to such securities.

(3) 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.

In addition, to count securities described in (1) and (2) above as
Qualifying Assets for the purpose of the 70% test, a BDC must make available to
the issuer of those securities significant managerial assistance. Making
available significant managerial assistance means, among other things, (i) any
arrangement whereby the BDC, through its directors, officers, or employees,
offers to provide, and, if accepted, does provide, significant guidance and
counsel concerning the management, operations, or business objectives and
policies of a portfolio company or (ii) in the case of a small business
investment company, making loans to a portfolio company. Managerial assistance
is made available to the portfolio companies by the Company's directors and
officers who are employees of Advisers, which manages the Company's
investments. Each portfolio company is assigned for monitoring purposes to an
investment officer and its principals are contacted and counseled if the
portfolio company appears to be encountering business or financial
difficulties. The Company also provides managerial assistance on a continuing
basis to any portfolio company that requests it, whether or not difficulties
are perceived. The Company's directors and officers are highly experienced in
providing managerial assistance to small businesses.

The Company may not change the nature of its business so as to cease to be,
or withdraw its election as, a BDC unless authorized by vote of a "majority of
the outstanding voting securities," as defined in the 1940 Act, of the Company.
Since the Company made its BDC election, it has not in practice made any
substantial change in its structure or, on a consolidated basis, in the nature
of its business, except for the disposition of its ownership interest in Allied
Lending, as described below, which is not a change that results in the Company
ceasing to be a BDC.

As a BDC, the Company is entitled to borrow money and issue senior
securities representing indebtedness as long as such senior securities
representing indebtedness has asset coverage to the extent of at least 200%.
This limitation is not applicable to the borrowings of the Company's SBIC and
SSBIC subsidiaries. In 1992, the Company, Allied Investment, and Allied
Financial, together borrowed $20,000,000 from an insurance company on terms
requiring the payment of interest at 9.15% per annum and repayment of principal
in equal annual installments in the five years 1998 through 2002. At December
31, 1994, the Company had borrowed $2,205,000 under its revolving line of
credit agreement, which permits the Company to borrow up to $10 million at the
London Inter-Bank Offered Rate ("LIBOR") plus 1.15 percent (1.15%) through
November 30, 1995. At September 30, 1995, there were no borrowings under this
line of credit. The Company now has a new line of credit which permits the
Company to borrow up to $10,000,000 at LIBOR plus 2.5 percent (2.5%) through
September 30, 1998. As of September 30, 1995, Allied Investment and Allied
Financial had issued subordinated debentures in the aggregate principal amount
of $61,300,000 to the SBA that bear interest from 6.875% to 10.35% per annum
and require principal payments commencing in 1997 through 2005.

Co-Investment with Allied II, Allied Venture, and Allied Technology

In accordance with the conditions of several exemptive orders of the
Commission permitting co-investments (the "Co-investment Guidelines"), most of
the Company's acquisitions and dispositions of investments are made in
participation with Allied Capital Corporation II ("Allied II"). In the past,
the Company also acquired certain investments in participation with Allied
Venture Partnership ("Allied Venture") and Allied Technology Partnership
("Allied Technology"), private venture capital partnerships managed by Allied
Advisers, neither of which is now making new investments. Allied II is a
closed-end management investment company that has elected to be regulated as a
BDC and for which Advisers serves as its investment adviser. At September 30,
1995 and December 31, 1994, Allied II had total consolidated assets of
$108,684,000 and $101,934,000, respectively, compared to the Company's total
consolidated assets of $145,590,000 and $135,517,000, respectively.

The Co-investment Guidelines generally provide that the Company and its
wholly owned subsidiaries must be offered the opportunity to invest in any
investment, other than in Interim Investments or marketable securities, that
would be suitable for Allied II or its wholly owned subsidiaries and the
Company or its wholly owned subsidiaries

<PAGE> 28
to the extent proportionate to the companies' respective consolidated total
assets. Securities purchased by the Company or its wholly owned subsidiaries
in a co-investment transaction with any of Allied II or its wholly owned
subsidiaries, Allied Venture or Allied Technology will consist of the same
class of securities, will have the same registration rights, if any, and other
rights related thereto, and will be purchased for the same unit consideration.
Any such co-investment transaction must be approved by the Company's Board of
Directors, including a majority of its independent directors. The Company will
not make any investment in the securities of any issuers in which Allied II,
Allied Venture or Allied Technology, but not the Company, has previously
invested. The Co-investment Guidelines also provide that the Company will have
the opportunity to dispose of any securities in which the Company or its wholly
owned subsidiaries and any of Allied II or its wholly owned subsidiaries,
Allied Venture or Allied Technology have invested in proportion to their
respective holdings of such securities, and that, in any such disposition, the
Company will be required to bear no more than its proportionate share of the
transaction costs.

Allied Investment

Allied Investment, as an SBIC, provides capital to privately owned small
businesses primarily through loans, generally with equity features, and, to a
lesser extent, through the purchase of common or convertible preferred stock.
Loans with equity features are generally evidenced by a note or debenture that
is convertible into common stock, requiring the holder to make a choice, prior
to the loan's maturity, between accepting repayment and maintaining its equity
position, or by a note or debenture that is accompanied by an option or warrant
to purchase, frequently for a nominal consideration, common stock of the issuer
even after the loan is repaid. Wherever possible, Allied Investment seeks
collateral for its loans, but its security interest is usually subordinated to
the security interest of other institutional lenders.

Allied Investment provides managerial assistance to its portfolio companies
by arranging syndicated financings, advising on major business decisions,
furnishing one of its executives to serve as a director or otherwise
participating in board meetings and assisting portfolio companies when they are
having operating difficulties.

Allied Financial

Allied Financial, as an SSBIC, operates as a small business investment
company specializing in the financing of small businesses owned and controlled
by socially or economically disadvantaged persons. To determine whether the
owners of a small business are socially or economically disadvantaged, the SBA
relies on a composite of factors. Business owners who are members of the
following groups, among others, are considered socially disadvantaged: African
Americans, Hispanic Americans, Native Americans and Asian Pacific Americans.
In determining whether the owners of a small business are economically
disadvantaged, consideration may be given to factors such as levels of income,
location (for instance, urban ghettos, depressed rural areas and areas of high
unemployment or underemployment), education level, physical or other special
handicap, inability to compete in the marketplace because of prevailing or past
restrictive practices or Vietnam-era service in the armed forces, or any other
factors that may have contributed to disadvantaged conditions.

Allied Financial provides managerial assistance to its portfolio companies
by arranging syndicated financings, advising on major business decisions,
furnishing one of its executives to serve as a director or otherwise
participating in board meetings and assisting portfolio companies when they are
having operating difficulties.

The Company's Interest in Allied Lending

The Company owned 2,380,000 shares, or all of the outstanding capital
stock, of Allied Lending prior to consummation of the initial public offering
of Allied Lending's common stock in November 1993. As a result of that initial
public offering, the Company's ownership of Allied Lending's common stock was
reduced to 1,580,000 shares, or 36.2% of the Allied Lending shares outstanding
at December 31, 1993. The Company has agreed that it would divest itself of
all shares of Allied Lending by December 31, 1998 by public offerings, private
placements, distributions to the Company's stockholders or otherwise.
Accordingly, the Company declared an extra dividend in December 1994 and
distributed in early January 1995 an aggregate of 335,086 Allied Lending
shares, which

<PAGE> 29
reduced its ownership of Allied Lending shares to 1,244,914 shares, or 28.5% of
the Allied Lending shares then outstanding.

In December 1994, in a move unexpected by Allied Lending or the Company,
the SBA altered its regulations concerning the 7(a) guaranteed loan program and
announced that it would reduce the maximum loan size that it would guarantee
under the 7(a) guaranteed loan program from $1 million to $500,000. The
Company believes that the significant decline in the market price of Allied
Lending shares during December 1994 resulted from the SBA's actions. As Allied
Lending had registered, at the Company's expense, 490,000 Allied Lending shares
owned by the Company in December 1994 for sale or distribution, the Company
chose to distribute a substantial portion of those Allied Lending shares to its
stockholders at the end of December 1994 rather than sell those shares at
depressed prices. Although the Company recognized a gain on the portion of the
Allied Lending shares which were held for sale or distribution, the amount of
gain was significantly less than the Company expected due to the decreased
market value of the Allied Lending shares at the end of 1994. In addition,
because of the decline in the market value of the Allied Lending shares, the
Company's unrealized appreciation in this investment at year-end 1994 declined
by $4.1 million as compared to the unrealized appreciation in this investment
at year end 1993, which negatively affected the Company's net asset value per
common share.

In mid-October 1995, federal legislation was enacted which removed the
$500,000 loan size limit and restored 75% guarantees on loans up to $1 million.
In addition, the guaranteed loan program fees were restructured to redirect
some of the program's expenses to the participant lenders and participant
borrowers. Overall, management expects these changes to be favorable for
Allied Lending.

Until 1995, the business of Allied Lending consisted solely of making small
business loans which are partially guaranteed under the SBA's Guaranteed Loan
Program (so-called "7(a) loans"). Allied Lending has been one of the most
active non-bank lenders in the 7(a) loan program. Most of the loans made by
Allied Lending during 1994 were made for the purpose of allowing portfolio
companies to acquire real estate-related assets, such as factories, workshops,
or retail premises, or to refinance outstanding loans made to acquire such real
estate; a smaller proportion of such loans was made for the purpose of allowing
portfolio companies to purchase or refinance machinery and equipment. Allied
Lending, pursuant to stockholder approval at a Special Meeting of Stockholders
on November 9, 1995, expanded its ability to make loans to include, in addition
to 7(a) guaranteed loans, loans that are made in conjunction with guaranteed
loans, as well as other types of loans.

RISK FACTORS

The purchase of the shares offered by this Prospectus involves a number of
significant risk and other factors relating to the structure and investment
objective of the Company. As a result, there can be no assurance that the
Company will achieve its investment objective. AN INVESTMENT IN THE SHARES
WILL NOT BE SUITABLE FOR PERSONS WHO DO NOT INTEND, OR HAVE THE RESOURCES, TO
HOLD THEM AS A LONG-TERM INVESTMENT.

Nature of Investments

Consistent with its operation as a BDC, the Company's portfolio is expected
to consist primarily of securities issued by small and developing privately
held companies. There is generally little or no publicly available information
about such companies, and the Company must rely on the diligence of Allied
Advisers to obtain the information necessary for the Company's decision to
invest in them. Typically, such companies depend for their success on the
management talents and efforts of one person or a small group of persons, so
that the death, disability or resignation of such person or persons could have
a materially adverse impact on them. Moreover, smaller companies frequently
have narrower product lines and smaller market shares than larger companies and
therefore may be more vulnerable to competitor's actions and market conditions,
as well as general economic downturns. Because these companies will generally
have highly leveraged capital structures, reduced cash flow resulting from an
adverse competitive development, shift in customer preferences, or an economic
downturn may adversely affect the return on, or the recovery of, the Company's
investment in them. Investment in such companies therefore involves a high
degree of business and financial risk, which can result in substantial losses
and accordingly should be considered speculative.

<PAGE> 30
Foreign Investments

As noted above, the Company intends to make investments with the proceeds
of its OPIC loans, see "OPIC Loan" on page __. These investments ordinarily
will be made in countries representing the world's emerging or developing
markets. Special risks generally are involved in investments in foreign
countries, and these risks are often heightened for investments in emerging or
developing markets.

In general, foreign investments involve risks not ordinarily associated
with domestic investing, including: (1) changes in currency exchange rates;
(2) possible imposition of market controls or currency exchange controls; (3)
possible imposition of withholding taxes on dividends and interest; (4)
possible seizure, expropriation or nationalization of assets; (5) more limited
financial information or difficulty in interpreting such information because of
foreign regulations and accounting standards; (6) lower liquidity and higher
volatility in certain foreign markets; (7) the impact of political, social or
diplomatic events; (8) the difficulty of evaluating some foreign economic
trends; and (9) the possibility that a foreign government could restrict the
ability of an entity in which the Company has invested from meeting its
obligations under borrowings or other arrangements.

The risks noted above often increase in emerging or developing countries.
For example, emerging countries may have more unstable governments than
developed countries, and their economies may be based on only a few industries.
In addition, foreign investments may be subject to a variety of special
restrictions.

The Company intends to take steps to reduce or eliminate certain of the
above risks. For example, with respect to a currency risk, the Company plans
to make only dollar-denominated investments. In the event that the Company
does engage in foreign currency transactions, the Company plans to hedge
currency risks associated with foreign investments, and not for speculation.
The Company also intends to diversify its OPIC-related investments by country
and type of business.

Long-term Character of Investments

It is expected that investments made in accordance with the Company's
investment objective will usually yield a high current return from the time
they are made but will generally produce a profit, if any, from an accompanying
equity feature only after a further five to eight years. There can be no
assurance that either a high current return or capital gains will actually be
achieved.

Illiquidity

Most of the investments of the Company consist of securities acquired
directly from the issuers in private transactions. They are usually subject to
restrictions on resale or otherwise illiquid. There is usually no established
trading market for such securities into which they could be sold. In addition,
most of the securities are not eligible for sale to the public without
registration under the 1933 Act, which involves delay and expense.

Market Price Disparities

Shares of closed-end investment companies frequently trade at a discount
from net asset value, but there are examples of companies, including the
Company, Allied Lending, and Allied II, the shares of which have historically
traded at a premium to net asset value. This characteristic of shares of
closed-end investment companies is separate and distinct from the risk that a
company's net asset value per share will decline. It is not possible to
predict whether the shares offered hereby will trade at, above, or below net
asset value.

Competition

A large number of entities and individuals compete for the opportunity to
make the kinds of investments proposed to be made by the Company. Many of
these entities and individuals have greater financial resources than the
combined resources of the Company, Allied II, and their respective
subsidiaries. As a result of this competition,

<PAGE> 31
the Company may from time to time be precluded from making otherwise attractive
investments on terms considered by Advisers to be prudent in light of the risks
to be assumed.

Leverage

The Company (including its two small business investment company
subsidiaries) intends to continue to borrow funds from and issue senior debt
securities to banks, insurance companies, or other lenders and to raise capital
from the SBA or other investors up to the limit permitted by the 1940 Act.
Such additional borrowings, unless fully offset by redemptions or repurchases
of the Company's outstanding senior securities, will cause the Company to be
further leveraged with respect to its common stock. When such borrowings
occur, the providers of these funds will have fixed dollar claims on the
Company's consolidated assets superior to the claims of the holders of the
Company's common stock. Any increase in the value of the Company's
consolidated investments would cause its consolidated net asset value
attributable to common shares to increase more than it would had the borrowings
or preferred stock financings not occurred. Decreases in the value of the
consolidated investments below their value at the time of acquisition, however,
would cause the Company's consolidated net asset value attributable to common
shares to decline more sharply than it would if the senior funds had not been
borrowed or otherwise obtained. Similarly, any increase in the Company's rate
of income in excess of consolidated interest payable on the borrowed funds or
dividends payable on the preferred stock would cause its net income to increase
more than it would without the leverage, while any decrease in consolidated
rate of income would cause net income to decline more sharply than it would had
the funds not been borrowed or otherwise obtained for investment. Leverage is
thus generally considered a speculative investment technique. Conversely,
however, the ability of the Company to achieve its investment objective may
depend in part on its ability to achieve additional leverage on favorable terms
by borrowing from the SBA, banks, or insurance companies and there can be no
assurance that such additional leverage can in fact be achieved.

Allied Investment, as an SBIC, and Allied Financial, as an SSBIC, currently
have the opportunity to sell to the SBA subordinated debentures with a maturity
of up to ten years up to an aggregate principal amount determined by a formula
which applies a multiple to its private capital, but not in excess of $90
million (the "$90 million limit"). The $90 million limit generally applies to
all financial assistance provided by the SBA to any licensee and its
"associates," as that term is defined in SBA regulations. For this purpose,
Allied Investment and Allied Financial would be deemed to be "associates" of
one another and both may be deemed to be "associates" of Allied Investment
Corporation II ("Allied Investment II"), which is also an SBIC and is a
subsidiary of Allied II.

Beginning with the SBA's 1996 fiscal year commencing on October 1, 1995,
Congress has discontinued subsidized funding for the SBA's SSBIC program.
Prior to this change, an SSBIC was able to sell preferred stock and debentures
which were issued with a rate reduction or subsidy. Preferred stock sold to
the SBA after November 1989 pays dividends at an annual rate of four percent
(4%) of par value and must be redeemed within 15 years of issuance; preferred
stock sold to the SBA before November 1989 pays dividends at an annual rate of
three percent (3%) of par value and has no required redemption date. In
addition to preferred stock, the SBA had provided leverage to SSBICs at a
reduced rate through the purchase or guarantee of debentures.

As of September 30, 1995 and December 31, 1994, respectively, Allied
Investment and Allied Financial had outstanding debentures sold to the SBA in
the aggregate principal amounts of $61,300,000 and $54,800,000, respectively.
At these respective dates, Allied Financial had $7,000,000 of outstanding
preferred stock issued to the SBA-$6,000,000 of 3% preferred stock and
$1,000,000 of 4% preferred stock. Allied Investment II has not obtained any
financial assistance from the SBA to date.

As a group, Allied Investment and Allied Financial have received
$68,300,000 in leverage and preferred stock investment from the SBA as of
September 30, 1995, and as a result, this combined ability to apply for
additional leverage from the SBA will be limited to $21,700,000 due to the $90
million limit. This combined ability to obtain additional leverage assumes
that Allied Investment II does not obtain any SBA leverage.

The Company is unable to predict the SBA's ability to meet demands for
leverage on an ongoing basis, as such funding may be affected if Congress
reduces appropriations for the SBA, which may compel the SBA to allocate

<PAGE> 32

leverage or to reduce the current limits on available leverage. Therefore,
there is no guarantee that Allied Investment or Allied Financial will be able
to obtain additional leverage beyond what is currently held.

On April 10, 1995, the Company entered into a loan agreement with OPIC
under which the Company may borrow up to $20 million to provide financing for
international projects involving qualifying U.S. small businesses.

The Company had outstanding the following sources of financing as of
September 30, 1995:

Annual Portfolio
Return to Cover
Amount Interest or
Outstanding Annual Rate of Interest Dividend
Class (in thousands) or Dividend Payments Payments(a)
----- -------------- ----------------------- ------------------
Initial Current
------- -------
<S> <C> <C> <C> <C>
Senior notes $20,000 9.15% 9.15% 1.50%

OPIC loan $0 --- --- 0.00%

Bank loan (revolving line of $0 6.213% 7.025% 0.00%
credit)

Subordinated debentures $61,300 5.5%-10.35% 6.08%-10.35% 4.57%

Redeemable preferred stock $1,000 4% 4% 0.03%
Non-redeemable preferred stock $6,000 3% 3% 0.01%
</TABLE>

(a) The annual portfolio return to cover interest or dividend payments
("Annual Return") is calculated as total annual interest or dividend
payments per class of financing, divided by the total invested assets at
September 30, 1995. The total Annual Return needed to cover all classes
of financing combined is 6.11%.

Senior Notes

As of September 30, 1995, the Company, together with Allied Investment and
Allied Financial, had $20 million of 10-year senior notes outstanding to an
insurance company, with interest payable semi-annually at the fixed rate of
9.15% per annum. The senior notes are scheduled to mature over a five-year
period commencing in 1998, with annual principal payments of $4 million. The
senior notes restrict the Company's ability to declare or pay any dividends,
purchase, redeem or retire any shares of capital stock, or make any payment or
distribution in respect to its capital stock, if after giving effect thereto
(i) any default or event of default has occurred or (ii) the total debt of the
Company has asset coverage of less than 200%. The senior notes require the
Company to maintain a minimum consolidated shareholders' equity of $30 million
and a minimum consolidated subordinated debt of $35 million at all times. The
Company must also meet the following financial ratios at the end of each fiscal
quarter:

<TABLE>
<S> <C> <C>
(a) Consolidated Net Income Available for Interest Charges = At least 1.50 to 1
------------------------------------------------------
Consolidated Interest Charges

(b) Consolidated Total Debt = Not exceeding 2.5 to 1
---------------------------------
Consolidated Shareholders' Equity

(c) Consolidated Senior Debt = Not exceeding 1.5 to 1
---------------------------------
Consolidated Shareholders' Equity

</TABLE>

<PAGE> 33
The Company must remain the beneficial owner of 100% of the voting stock
of Allied Investment and Allied Financial and will not, or will not permit a
consolidated subsidiary to, consolidate with or be a party to a merger with any
other corporation.

The senior notes permit the Company to incur additional debt as long as
the financial covenants above are met and the new debt is junior to the
insurance company, and do not restrict the Company's ability to issue
additional securities. The terms of the senior notes may be amended with the
consent of the insurance company.

OPIC Loan. The Company has entered into a loan agreement with OPIC for
the Company to make up to $20 million in international investments involving
OPIC-qualifying United States small businesses ("OPIC Loan"). The OPIC Loan
provides that the Company may borrow at variable interest rates based on the
U.S. Department of Treasury interest rates plus fifty basis points (0.50%) for
the applicable period of borrowing by the Company. In addition, OPIC is
entitled to receive from the Company a contingent fee at maturity of the loan
based on five percent (5%) of the return generated by the OPIC-related
investments in excess of seven percent (7%). There are no required principal
payments until the OPIC Loan matures ten years from the date of the first
disbursement under the OPIC Loan. The loan agreement expires on the earlier of
the first date on which the amount of the loan(s) equal $20 million or April
10, 1998. As of September 30, 1995, there were no outstanding borrowings under
this loan agreement.

OPIC Loan proceeds must be used for investments in projects approved by
OPIC or to pay the reasonable expenses of the Company to manage the OPIC funds.
The individual investments made with the OPIC funds cannot exceed 75 percent
(75%) of the total capital requirements of a single project. No more than 25
percent (25%) of OPIC Loan proceeds can be invested in a single project and no
more than 40 percent (40%) in a single country. The Company may consider
insuring its investments in OPIC qualified investments against political risk
by using OPIC insurance and using other OPIC project financing services, to the
extent that doing so is in the best interests of the Company and the projects.

The OPIC Loan requires the Company to maintain (a) consolidated
shareholders' equity of not less than $35 million, (b) an interest charges
coverage ratio of at least 1.1 to 1 on a trailing twelve month basis, (c) a
quarterly ratio of total indebtedness to consolidate shareholders' equity not
exceeding 3 to 1, and (d) a quarterly ratio of senior debt to consolidate
shareholders' equity not exceeding 1.5 to 1. The Company may not declare or
pay any dividends on its common stock or purchase, acquire, redeem or retire
any of such shares if the Company is in default on the loan or if such
dividends, distributions, share purchase or other such share retirement would
cause a default.

Bank Loan. At September 30, 1995, the Company had a revolving
line of credit agreement with a commercial bank under which it was able
to borrow up to $10 million with interest payable monthly at the variable rate
of 1.15 percent (1.15%) per annum above the 30-day London Inter-Bank Offered
Rate ("LIBOR"), reset daily. There were no required principal payments until
the loan's maturity. As of September 30, 1995, there were no borrowings under
this agreement.

The Company has established a new line of credit dated December 18, 1995.
The new line of credit permits the Company to borrow up to $10,000,000 at LIBOR
plus 2.5 percent (2.5%) and expires September 30, 1998. The new line of credit
agreement requires that Allied Investment and Allied Financial remain wholly
owned subsidiaries of the Company. The new line of credit agreement does not
permit the Company or any subsidiary to merge or consolidate with another
entity,

<PAGE> 34

except that the Company may merge with a subsidiary or any subsidiary may merge
with another subsidiary. Under the agreement, the Company's ability to issue
additional securities is not restricted and the Company may incur additional
debt if it is subordinate to the bank and is on terms satisfactory to the bank.
In addition, the agreement provides that with respect to any sources of
financing maturing prior to the maturity of this new line of credit, the
Company can only refinance 75 percent (75%) of such indebtedness and the new
maturity must be after the maturity of this line of credit.

The financial covenants of this line of credit agreement require Allied
Investment and Allied Financial to maintain a ratio of total liabilities to
tangible net worth (as defined in the agreement) of not greater than 3.3 to 1.
The Company must maintain (a) a ratio of consolidated total liabilities to
consolidated tangible net worth of not greater than 3 to 1; (b) consolidated
tangible net worth of not less than $40 million, (c) a minimum interest
coverage of at least 1.5 to 1 on a trailing four-quarter basis, and (d) a ratio
of consolidated collections of the principal or cost-basis portion of its
investments to consolidated total indebtedness of not less than 0.05 to 1 on a
trailing basis. The Company may not permit the total principal amount of loans
and letters of credit outstanding at any one time to exceed the sum of cash and
cash equivalents plus 75% of non-cash tangible assets, minus total liabilities
(including letters of credit).

Subordinated Debentures. As of September 30, 1995, the Company, through
Allied Investment and Allied Financial, had outstanding $61.3 million of
10-year subordinated debentures payable to the SBA, with interest payable
semi-annually at various fixed interest rates ranging from 6.08% to 10.35%.
The subordinated debentures are scheduled to mature over a 10-year period
commencing in 1997, with annual principal payments ranging from $1 million to
$8 million. The subordinated debentures also permit the Company to issue
additional securities or incur additional debt.

Preferred Stock. As of September 30, 1995, the Company, through Allied
Financial, had outstanding $1 million of redeemable four percent (4%)
cumulative preferred stock, and $6 million of non-redeemable three percent (3%)
cumulative preferred stock, both issued to the SBA. The redeemable four
percent (4%) cumulative preferred stock must be redeemed by the Company in
2005, and the non-redeemable three percent (3%) cumulative preferred stock has
no required redemption date. Nevertheless, the Company has the option to
redeem the non-redeemable three percent (3%) cumulative preferred stock in
whole or in part by paying the SBA the par value of the securities to be
redeemed and any dividends accumulated and unpaid to the date of redemption.
The cumulative preferred stock also permits the Company to issue additional
securities or incur additional debt.

Illustration. The following table is provided to assist the investor in
understanding the effects of leverage. The figures appearing in the table are
hypothetical, and the actual return may be greater or less than those appearing
in the table.

<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assumed return on
portfolio (net of -16% -12% -10% -5% 0% 5% 10% 12% 16%
expenses)

Corresponding
return to common -57.34% -46.40% -40.93% -27.26% -13.58% 0.09% 13.76% 19.23% 30.17%
stockholders
</TABLE>

Loss of Pass-Through Tax Treatment

The Company may cease to qualify for pass-through tax treatment if it is
unable to comply with the diversification requirements contained in Subchapter
M of the Internal Revenue Code of 1986, as amended (the "Code"). The Company
may also cease to qualify for pass-through treatment, or be subject to a 4%
excise tax, if it fails to make certain distributions. Under the 1940 Act, the
Company will not be permitted to make distributions to stockholders unless it
meets certain asset coverage requirements with respect to money borrowed

<PAGE> 35
and senior securities issued. See "Tax Status" in the Statement of Additional
Information. Non-availability of pass- through tax treatment would have a
materially adverse effect on the total return, if any, obtainable from an
investment in the Company's shares.

MANAGEMENT

BOARD OF DIRECTORS

The business of the Company is managed under the supervision of its Board
of Directors. For details concerning the persons who make up the Board of
Directors at the date of the Prospectus, see the Statement of Additional
Information under the caption "Management -- Board of Directors." Three of the
members of the Board of Directors are also officers of the Company as well as
of its investment adviser; and five are non-interested persons, as that term is
defined in the 1940 Act (such persons are hereinafter referred to as
"non-interested directors").

The responsibilities of the Board of Directors include, among other
things, the approval of every loan and other investment to be made by the
Company, the quarterly valuation of the Company's assets, and the approval of
the terms of the Company's borrowing or other leverage arrangements.

The Board, and particularly the non-interested directors, must also, at
least annually, approve the investment advisory agreement with the Company's
investment adviser and, annually and subject to stockholder ratification,
appoint the Company's auditors.

The audit and stock option committees of the Board of Directors, comprised
exclusively of non-interested directors, respectively review with the auditors
the scope of the annual audit and the contents of the audited financial
statements and determine option awards to the officers under the Company's
incentive stock option plan. Under that plan, options on a total of 1,350,000
shares may be granted. Of the authorized options, the stock option plan
committee has to date awarded a number of options, of which a total of 789,387
options are currently outstanding and a total of 518,578 options are currently
exercisable. For details of the stock option plan, see the Statement of
Additional Information under the caption "Management--Stock Options."

The members of the Board of Directors are compensated by fees at the rate
of $1,000 per meeting of the Board of the Company or its wholly owned
subsidiaries or each separate (i.e., not held on the same day as a full Board
meeting) meeting of a committee of such Board which the member attends unless
such separate meeting occurs on the same day as a Board meeting, in which case
directors receive $500 for attendance at such meeting. There is no duplication
of directors' fees and expenses even if some directors also take action on
behalf of the Company's wholly owned subsidiaries. The Company's stockholders
approved, subject to further approval by the Commission, a grant to each
member of the Board of Directors who is not an employee of the investment
adviser a 10-year option to purchase, at the market price on the date of grant,
10,000 shares of the Company. Application was made to the Commission for such
approval and such approval was granted on December 26, 1995. These options
were priced on the date of such approval.

INVESTMENT ADVISER

Advisers, the principal business address of which is 1666 K Street, N.W.,
Ninth Floor, Washington, D.C. 20006-2803, serves as the investment adviser for
the Company pursuant to an investment advisory agreement. Under that
agreement, Advisers manages the investments of the Company and each of the
Company's wholly owned subsidiaries, subject to the supervision and control of
the Board of Directors of the Company or the respective subsidiary, and
identifies, evaluates, structures, closes, and monitors the investments made by
the Company and such subsidiaries. Neither the Company nor any such subsidiary
will make any investments that have not been recommended by Advisers. Except
as to those investment decisions that require specific approval or ratification
by the Company's Board, Advisers has the authority to effect purchases and
sales of assets for the Company's

<PAGE> 36
account. Advisers also serves as the investment adviser of Allied II, Allied
Capital Commercial Corporation ("Allied Commercial") and Business Mortgage
Investors, Inc. ("BMI"), both real estate investment trusts ("REITs"), Allied
Lending, Allied Venture, and Allied Technology. Some of the directors and
officers of Advisers are also directors and officers of the Company.

G. Cabell Williams III is the Company's portfolio manager, a position he
has held since 1991. From 1981 to 1991, Mr. Williams III held positions of
increasing responsibility with Advisers and the Company.

The Company and each of its wholly owned subsidiaries pay all of their own
operating expenses, except those specifically required to be borne by Advisers.
The expenses paid by Advisers include the compensation of its investment
officers and the cost of office space, equipment and other personnel necessary
for day-to-day operations. The expenses that are paid by the Company include
its share of transaction costs incident to the acquisition and disposition of
investments, regular legal and auditing fees and expenses, the fees and
expenses of the Company's directors, costs of printing and distributing proxy
statements and other communications to stockholders, costs associated with
promoting the Company's stock, and the fees and expenses of the Company's
custodian and transfer agent. The Company, rather than Advisers, pays expenses
associated with litigation and other extraordinary or non-recurring expenses
with respect to its operations and investments, as well as expenses of required
and optional insurance and bonding. All fees that may, to the extent permitted
under SBA regulations, be paid to Advisers by any person in connection with an
investment transaction in which the Company participates or proposes to
participate are paid over to the Company. Advisers may, however, retain for
its own account any fees paid by or for the account of a company, including a
portfolio company, for special investment banking or consulting work performed
for that company which is not related to such investment transaction or
follow-on managerial assistance. If the Company uses the services of certain
professionals on the staff of Advisers for the Company's corporate purposes,
the Company will reimburse Advisers for such services at hourly rates
calculated to cover the cost of such services, as well as for incidental
disbursements.

As compensation for its services to and the expenses paid for the account
of the Company, Advisers is entitled to be paid quarterly, in arrears, a fee
equal to 0.625% per quarter of the quarter-end value of the Company's total
consolidated assets (other than the Company's investment in Allied Lending and
Interim Investments and cash and cash equivalents). On an annual basis, such
fees are equivalent to 2.5% of the Company's total consolidated assets (other
than the Company's investment in Allied Lending and Interim Investments and
cash and cash equivalents) and 0.5% on Interim Investments and cash and cash
equivalents. For the purposes of calculating the fee, the values of the
Company's consolidated assets are determined as of the end of each calendar
quarter. The quarterly fee is paid as soon as practicable after the values
have been determined. The current advisory agreement, which was approved by
stockholders in May 1995, is substantially similar to the prior advisory
agreement between the Company and Advisers, and it is anticipated that the
advisory fee payable by the Company under the existing agreement will be
comparable to the fees paid under the prior agreement.

The fee provided for in the investment advisory agreement is substantially
higher than that paid by most investment companies because of the efforts and
resources devoted by Advisers to identifying, structuring, closing and
monitoring the types of private investments in which the Company will
specialize. Other entities managed by Advisers, however, pay fees on
comparable bases and the Company understands that the fee is not in excess of
that frequently paid by private investment funds engaged in similar types of
investments, in addition to the substantial participation in profits that such
private funds also typically allocate to management.

For further details of the compensation of Advisers and the expenses paid
respectively by Advisers and the Company, see the Statement of Additional
Information under the caption "Investment Advisory and Other Services."

AUTHORIZED CLASSES OF SECURITIES

Pursuant to the Company's Articles of Incorporation, the following are the
authorized classes of securities of the Company and its wholly owned
subsidiaries as of September 30, 1995:

30
<PAGE> 37

<TABLE>
<CAPTION>
(4)
(3) Amount Outstanding
(2) Amount Held by Exclusive of
(1) Amount Registrant for Amounts Shown
Title of Class Authorized Its Account Under (3)
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ALLIED I:
Common Stock 10,000,000 0 6,185,660.00

ALLIED INVESTMENT:
Common Stock 100 0 54.93

ALLIED FINANCIAL:
Common Stock 19,800,000 0 131.00
Preferred Stock(a) 200,000 0 70,000.00

ALLIED DEVELOPMENT(B):
Common Stock 100 0 10.00
</TABLE>

- ----------------------------

(a) Amount outstanding consists of 60,000 shares of non-redeemable 3%
cumulative preferred stock and 10,000 shares of redeemable 4% cumulative
preferred stock, both issued to the SBA.

(b) Allied Development Corporation is an inactive wholly owned subsidiary of
the Company with total assets of less than $35,000.

DESCRIPTION OF COMMON STOCK

GENERAL

The authorized capital stock of the Company is ten million (10,000,000)
shares of common stock, $1 par value, of which 6,185,660 shares are outstanding
as of the date of this Prospectus. All shares of common stock have equal
rights as to earnings, assets, dividends, and voting privileges and, when
issued, will be fully paid and nonassessable. Shares of common stock have no
preemptive, conversion, or redemption rights and are freely transferable. In
the event of liquidation, each share of common stock is entitled to its
proportion of the Company's assets after debts, expenses, and liquidation of
preferred stock. Each share is entitled to one vote and does not have
cumulative voting rights, 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.
The Company holds annual stockholders' meetings.

DIVIDENDS AND DISTRIBUTIONS

The Company intends to distribute substantially all of its net investment
income and net realized short-term capital gains to stockholders quarterly,
generally on the last day of March, June, September and December of each year.
The Company distributed an in-kind dividend, in the form of shares of Allied
Lending at a rate equal to $0.60 per share of the Company's common stock (based
on Allied Lending's then-market value of $11.00 per share) on January 6, 1995
to the Company's stockholders of record on December 31, 1994. Since then,
quarterly dividends were declared in February, May, and August 1995 and paid on
March 29, June 28, and September 29, 1995, respectively, at a rate of $0.20,
$0.20, and $0.22, respectively, per share, and a dividend of $0.24 per share
was declared on November 8, 1995 for payment on December 29, 1995. The Company
may also declare in October, November, or December of any year, for payment
during the following January, an additional dividend to distribute

<PAGE> 38
any net investment income and short-term capital gains (and long-term capital
gains, if any) realized by the Company during the year that had not already
been distributed through the quarterly dividends. An additional dividend of
$0.58 per share was declared on December 14, 1995 for payment on January 31,
1996 to stockholders of record on December 28, 1995. If the Company's
investments do not generate sufficient income to make distributions or dividend
payments as determined by the Board of Directors, then the Company may
determine to liquidate a portion of its portfolio to fund the distribution.
Such payments may include a tax basis return of capital to the stockholder,
which, in turn, would reduce the stockholder's cost basis in the investment and
have other tax consequences. Stockholders should consult their tax advisers
for further guidance.

REINVESTMENT PLAN

The Company has adopted a reinvestment plan pursuant to which the
Company's transfer agent, acting as reinvestment plan agent, will reinvest all
distributions in additional whole and fractional shares for the account of all
stockholders of record who inform the Company or the transfer agent of their
preference to participate in this plan before the record date of the
distribution. Stockholders may change enrollment status in the reinvestment
plan at any time by contacting either the plan agent or the Company. A
stockholder's ability to participate in the reinvestment plan may be limited
according to how the stockholder's shares are registered. Beneficial owners
holding shares in street name may be precluded from participation by the
nominee. Stockholders who would like to participate in the reinvestment plan
usually must have the shares registered in their own name.

Shares issued under the reinvestment plan may be newly issued shares
unless the market price of the outstanding shares is less than 110% of their
contemporaneous net asset value. The transfer agent may also, as agent for the
participant, buy shares in the market. Newly issued shares for reinvestment
plan purposes will be valued at the average of the reported closing bid prices
of the outstanding shares 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, including any brokerage commissions. There
are no other charges payable in connection with the reinvestment plan. Any
distributions reinvested under the plan will nevertheless remain taxable to the
stockholders.

Any stockholder who has questions about the reinvestment plan may call the
Company at (202) 973-6334 and ask for Investor Relations, or contact American
Stock Transfer & Trust Company, the plan agent, 40 Wall Street, New York, New
York 10005, telephone (800) 937-5449.

REPORTS AND INDEPENDENT PUBLIC ACCOUNTANTS

For the year ended December 31, 1995, the independent accountant engaged
to audit the Company's consolidated financial statements is the firm of
Matthews, Carter and Boyce, which has been the Company's auditors since
inception. The selection of independent auditors by the Company's directors
will be subject to annual ratification by stockholders at the Company's annual
meeting. The consolidated financial statements of the Company included in this
Prospectus are included in reliance on the authority of Matthews, Carter and
Boyce as experts in auditing and accounting.

CUSTODIAN, TRANSFER AND DIVIDEND PAYING AGENT AND REGISTRAR

The Company's investments are held under a custodian agreement by The
Riggs National Bank of Washington, D.C. at 808 17th Street, N.W., Washington,
D.C. 20006, which also provides recordkeeping services. American Stock
Transfer & Trust Company, 40 Wall Street, New York, New York 10005, acts as the
Company's transfer, dividend paying, and reinvestment plan agent and registrar.

<PAGE> 39
TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION
<TABLE>
<CAPTION>
Page
----
<S> <C>
MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . B-3
Directors and Officers . . . . . . . . . . . . . B-3
Compensation . . . . . . . . . . . . . . . . . . B-4
Compensation Table . . . . . . . . . . . . . . . B-6
Stock Options . . . . . . . . . . . . . . . . . . B-6

SUMMARY COMPENSATION TABLE . . . . . . . . . . . . . . . B-7

CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES . . . B-7

INVESTMENT ADVISORY AND OTHER SERVICES . . . . . . . . . B-8
Investment Advisory Agreement . . . . . . . . . B-8
Custodian Services . . . . . . . . . . . . . . . B-10
Accounting Services . . . . . . . . . . . . . . . B-10

BROKERAGE ALLOCATION AND OTHER PRACTICES . . . . . . . . B-11

TAX STATUS . . . . . . . . . . . . . . . . . . . . . . . B-11
</TABLE>

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

LIQUIDITY AND CAPITAL RESOURCES

Total investments increased by $6.8 million or 5.9% to $121.8 million at
September 30, 1995 from $115.0 million at December 31, 1994. This increase was
primarily due to valuation changes in the portfolio resulting in net unrealized
appreciation of $6.6 million for the nine month period. In the first nine
months of 1995, the Company invested approximately $17.8 million in small
business concerns, and received repayments and early payoffs from other small
businesses of approximately $17.5 million. Cash and cash equivalents increased
$4.4 million primarily due to net cash provided by operating activities.

On September 27, 1995, the Company had $7.5 million in SBA debentures that
matured. The Company obtained new SBA debentures totaling $14.0 million on
September 27, 1995. Proceeds from these new debentures were used to repay the
matured debentures.

During the third quarter of 1995, the Company applied for a forward
commitment from the SBA to provide for up to $6 million in financing to its
SSBIC subsidiary. The Company will be able to draw $1.3 million from the SBA
for this financing; however, the Company must first submit an application to
draw on the committed funds and receive SBA approval of that application.

At September 30, 1995, outstanding commitments for future financings were
$14 million. Given the availability of the SBA commitment, the OPIC Loan,
current cash and government securities available at September 30, 1995, and its
available line of credit, the Company believes that it has adequate capital to
continue to satisfy its operating needs, commitments and other future
investment opportunities that may arise throughout the remainder of the year.
The Company continues to explore obtaining new debt or equity capital sources
as well. See "Leverage."

The Company has a revolving line of credit for $10 million. In December
1995, this line of credit was renewed for a three-year term at a higher rate.
See "Leverage -- Bank Loan," page __.

<PAGE> 40

The Company has secured a credit facility with the OPIC for up to $20
million in financing for international projects involving small businesses. See
"Leverage -- OPIC Loan," page __.

RESULTS OF OPERATIONS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994. The net increase
in net assets resulting from operations increased 272% to $12.4 million for the
nine months ended September 30, 1995 as compared to $3.3 million for the same
period in 1994. Earnings per common share for the nine months increased to
$1.97 per common share from $0.51 per common share for the same period in 1994.

Total investment income increased 32% from $7.8 million to $10.3 million
compared with the first nine months of last year. Interest income increased
due to a reduction in the Company's non-performing assets since the end of 1994
and an increase in loans and debt securities outstanding. The Company also
received a prepayment penalty on the early payoff of a debt in the third
quarter of 1995 totaling $60,000. Other income consists primarily of $327,000
of litigation costs from prior periods recovered during the first nine months
of 1995 and $130,000 of income from an equity participation in one portfolio
company.

Expenses increased 16% from $7.0 million to $8.1 million compared with the
corresponding period in 1994. Investment advisory fee expense increased due to
an increase in investments and other assets upon which the investment advisory
fee is based.

Net realized gains on investments increased 77% from $2.0 million to $3.6
million for the nine-month periods ended September 30, 1995 and 1994,
respectively. The increase in net realized gains resulted from the disposition
or early payoff of investments. A few of the early payoffs were due to
portfolio companies being sold. Net realized gains are unpredictable; however,
the Company exits transactions when it believes the realized gains can be
maximized.

YEAR ENDED DECEMBER 31, 1994 AS COMPARED TO DECEMBER 31, 1993. Net
increase in net assets resulting from operations was $224,000 or approximately
breakeven on a per common share basis, as compared to $20.4 million or $3.28
per common share for the year ended December 31, 1993.

In December 1994, in a move unexpected by Allied Lending or the Company,
the SBA altered its regulations concerning the 7(a) guaranteed loan program and
announced that it would place a loan size cap of $500,000 on the loans that it
would guarantee under the 7(a) guaranteed loan program. The Company believes
that because of the changes in the SBA's guaranteed loan program that were
announced in December 1994, the market price of the Company's investment in
Allied Lending declined to $10.38 per share at December 31, 1994. At December
31, 1993, the market price for this stock was $15.75 per share. This decline
in market value at December 31, 1994 reduced 1994's net increase in net assets
resulting from operations by $4.1 million or $0.66 per common share. In
mid-October 1995, federal legislation was passed which removed the $500,000
loan size limit and restored 75% guarantees on loans of up to $1 million. In
addition, the guaranteed loan program fees were restructured to redirect some
of the programs' expenses to the participant lenders and participant borrowers.
Overall, these changes are expected to be favorable for Allied Lending. During
1993, the Company recorded realized gains of approximately $9 million and
unrealized appreciation of approximately $15 million, resulting from the 1993
initial public offering of the stock of Allied Lending, formerly a wholly owned
subsidiary of the Company.

Investment income remained relatively constant in 1994, even though there
was significant growth in invested assets. This is primarily due to the fact
that 1993 investment income included approximately $3 million, representing
eleven months of Allied Lending's interest income and gains on sales of
guaranteed loans, while Allied Lending was a wholly owned subsidiary of the
Company. Instead, in 1994, the Company received $1.7 million in dividend
income from its residual 36% interest in Allied Lending. As a result, the
Company replaced approximately $1.3 million in investment income with income
from increased investments in the portfolio.

<PAGE> 41
Expenses also remained relatively constant in 1994 as compared to 1993.
Interest expense remained stable because the Company's borrowings of $7.0
million occurred late in 1994 and were at interest rates below the level of
other borrowings of the Company. The investment advisory fee stayed constant
even given the growth in invested assets as the Company was not charged a fee
on its investment of approximately $14.9 million in Allied Lending, as was
agreed to in conjunction with Allied Lending's 1993 initial public offering.
During 1993, the Company was charged an investment advisory fee on the assets
of Allied Lending for the approximate eleven months that it was a wholly owned
subsidiary. Legal and audit fees and other operating expenses remained
constant in total; however, the Company continued to incur legal expenses
related to various matters. The Company has now successfully settled most of
these matters.

For the year ended December 31, 1994, net investment income before net
unrealized appreciation (depreciation) on investments, which includes ordinary
investment income and realized capital gains and losses but excludes the effect
of unrealized appreciation and depreciation, was $5.5 million or $0.89 per
share, a 33% decrease from $8.2 million or $1.34 per share in 1993. Realized
gains of $3.4 million in 1994 were below expectations, again primarily due to
the unexpected decline in the market value of Allied Lending stock.

During the fourth quarter of 1994, the Company chose to distribute shares
of Allied Lending to its stockholders rather than sell these shares at
depressed prices. The gain that was recognized on this transaction reflects
the decreased market value at the end of the year, and as a result, depressed
the Company's net investment income before net unrealized appreciation
(depreciation) on investments.

Distributions to stockholders for 1994 were $1.40 per share and were
comprised of $1.23 in taxable ordinary and capital gain income and $0.17 per
share in a return of capital. The Company's taxable income of $1.26 per share
differed significantly from its net investment income before unrealized
appreciation (depreciation) on investments of $0.89 per share due to timing
differences in the recognition of income for tax purposes versus book purposes.
The $0.17 per share return of capital was an unexpected result, again due to
the decline of value of Allied Lending stock and its effect on the gain
recognition from dividends.

YEAR ENDED DECEMBER 31, 1993 AS COMPARED TO DECEMBER 31, 1992. Investment
income increased by $1.0 million primarily due to the increase in new
investments in 1993. Interest expense increased by $1.2 million, primarily due
to the effect of a full year of interest expense experienced on the $20.0
million debt financing secured in 1992. Investment advisory fees increased due
to continued growth of the Company's assets on which the advisory fee is based.
Legal and audit fees increased by $0.4 million due to the increased cost of
litigation. These changes had the net effect of decreasing net investment
income by $0.8 million.

Net realized gains on investments of $5.9 million in 1993 increased over
1992 due to the gain of $9.2 million from the November 1993 sale of 800,000
shares of Allied Lending, net of losses on and write-offs of investments of
$3.3 million. Net investment income before net unrealized appreciation
(depreciation) on investments increased to $8.2 million in 1993, an increase of
$0.7 million or 9% over 1992.

Net unrealized appreciation on investments in 1993 of $12 million resulted
principally from the appreciation of the Allied Lending stock retained by the
Company, net of the appreciation or depreciation of other investments in the
portfolio. The net unrealized appreciation added to what was disclosed in
prior years as net realized income resulted in a net increase in net assets
resulting from operations of $20.4 million, an increase of 147% over the
previous year.

Distributions paid to stockholders in 1993 of $8.2 million approximate the
net investment income before net unrealized appreciation (depreciation) on
investments. The distributions were comprised solely of capital gain income.

YEAR ENDED DECEMBER 31, 1992 AS COMPARED TO DECEMBER 31, 1991. In 1990,
Allied Lending, which was then a wholly owned subsidiary of the Company, held
100% of its loan balances and used the guaranteed portion of its loans as
collateral to obtain financing. During 1991, Allied Lending began selling the
guaranteed

<PAGE> 42
portion of SBA loans in order to finance further origination, which
significantly reduced the Company's consolidated investments at December 31,
1992 as compared to December 31, 1991, and simultaneously, decreased investment
income by $2.0 million primarily due to a decline in interest income resulting
from non-performing loans, offset by the increase in the gain on sales of
SBA-guaranteed loans sold by Allied Lending. Total expenses decreased by $0.9
million, primarily due to a decrease in advisory fees. The decline in total
assets resulting from Allied Lending's changes in operations caused a
corresponding reduction in investment advisory fees when comparing 1991 to
1992. As a result, net investment income decreased by approximately $1.1
million.

Net realized gains on investments increased to $4.5 million from $2.8
million in the previous year primarily due to the sale of one investment,
Environmental Air Control, Inc. The change in net unrealized appreciation
(depreciation) on investments resulted in a minimal decrease in unrealized
depreciation of $0.7 million. Increases in realized and unrealized gains
offset the decrease in investment income for an overall net increase in net
assets resulting from operations of $8.2 million in 1992, an increase of $3.1
million or 61% over the previous year.

36
<PAGE> 43

ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<S> <C>
Consolidated Statement of Financial Position -- September 30, 1995 (unaudited) and December 31,
1994 and 1993 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F - 2

Consolidated Statement of Operations -- For the Nine Months Ended September 30, 1995 and 1994
(unaudited) and the Years Ended December 31, 1994, 1993, and 1992 . . . . . . . . . . . . . . . . . . . . . F - 3

Consolidated Statement of Changes in Net Assets -- For the Nine Months Ended September 30,
1995 and 1994 (unaudited) and the Years Ended December 31, 1994, 1993, and 1992 . . . . . . . . . . . . . . F - 4

Consolidated Statement of Cash Flows -- For the Nine Months Ended September 30, 1995 and 1994
(unaudited) and the Years Ended December 31, 1994, 1993, and 1992 . . . . . . . . . . . . . . . . . . . . . F - 5

Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F - 6

Consolidated Statement of Loans to and Investments in Small Business Concerns -- September 30,
1995 (unaudited) and December 31, 1994 and 1993 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F - 15

Notes to Consolidated Statement of Loans to and Investments in Small Business Concerns . . . . . . . . . . . F - 24

Report of Independent Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F - 26
</TABLE>

F - 1
<PAGE> 44
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(in thousands, except number of shares)

<TABLE>
<CAPTION>
September 30, December 31,
------------- ----------------------
1995 1994 1993
---- ---- ----
(unaudited)
<S> <C> <C> <C>
ASSETS

Investments at Value:

Loans and debt securities . . . . . . . . . . . . . $ 89,209 $ 84,949 $ 64,248

Equity securities . . . . . . . . . . . . . . . . . 31,517 28,225 27,675

Other investment assets . . . . . . . . . . . . . . 1,093 1,852 2,707
------- ------- -------

Total investments . . . . . . . . . . . . . 121,819 115,026 94,630

Cash and cash equivalents . . . . . . . . . . . . . . 10,963 6,609 24,358

U.S. government securities . . . . . . . . . . . . . 9,872 10,210 12,202

Other assets . . . . . . . . . . . . . . . . . . . . 2,936 3,672 3,416
------- ------- -------

Total Assets . . . . . . . . . . . . . . . . $145,590 $135,517 $134,606
======= ======= =======

LIABILITIES

Revolving line of credit . . . . . . . . . . . . . . $ -- $ 2,205 $ --

Debentures and notes payable . . . . . . . . . . . . 81,300 74,800 69,800

Accrued interest payable . . . . . . . . . . . . . . 1,976 1,393 1,283

Investment advisory fee payable . . . . . . . . . . . 731 658 409

Dividends and distributions payable . . . . . . . . . 165 3,910 3,580

Other liabilities . . . . . . . . . . . . . . . . . . 1,180 1,564 349
-------- -------- -------

Total Liabilities . . . . . . . . . . . . . 85,352 84,530 75,421
-------- -------- -------

Redeemable preferred stock . . . . . . . . . . . . . 1,000 1,000 1,000
-------- -------- -------
Commitments and Contingencies

SHAREHOLDERS' EQUITY

Preferred stock of wholly owned subsidiary, $100
par value; 60,000 shares authorized, issued and
outstanding at 9/30/95, 12/31/94 and 12/31/93 . 6,000 6,000 6,000

Common stock, $1 par value; 10,000,000 shares
authorized; 6,185,660, 6,152,703 and 6,108,809
share issued and outstanding at 9/30/95,
12/31/94 and 12/31/93, respectively . . . . . . 6,186 6,153 6,109

Additional paid-in capital . . . . . . . . . . . . . 41,332 40,960 41,605

Notes receivable from sale of common stock . . . . . (401) (816) (766)

Net unrealized appreciation on investments . . . . . 7,661 1,110 6,406

Distributions in excess of accumulated earnings . . . (1,540) (3,420) (1,169)
------- ------- -------

Total Shareholders' Equity . . . . . . . . 59,238 49,987 58,185
------- ------- -------

Total Liabilities and Shareholders' Equity $145,590 $135,517 $134,606
======= ======= =======
</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS

F - 2
<PAGE> 45
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except per share amounts)

<TABLE>
<CAPTION>
For the Nine Months Ended For the Years Ended
September 30, December 31,
------------------------ -------------------------------------
(unaudited)
1995 1994 1994 1993 1992
----------- --------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C>
Investment Income:

Interest . . . . . . . . . . . $ 8,645 $ 6,545 $ 10,401 $ 10,100 $ 8,890

Dividends . . . . . . . . . . . 1,079 1,215 1,746 170 23

Premium and other income . . . 618 59 69 2,114 2,422
------- ------- -------- -------- -------

Total investment income . . . 10,342 7,819 12,216 12,384 11,335
------- ------- -------- -------- -------

Expenses:

Interest expense . . . . . . . 4,994 4,673 6,333 6,346 5,131

Investment advisory fee . . . . 2,077 1,698 2,356 2,285 2,099

Legal and audit fees . . . . . 499 310 977 1,109 680

Other operating expenses . . . 488 284 424 344 370
------- ------- -------- -------- -------

Total expenses . . . . . . . 8,058 6,965 10,090 10,084 8,280
------- ------- -------- -------- -------

Net investment income . . . . . . 2,284 854 2,126 2,300 3,055

Net realized gains on investments 3,584 2,024 3,394 5,943 4,507
------- ------- -------- -------- -------

Net investment income before net
unrealized appreciation
(depreciation) on investments 5,868 2,878 5,520 8,243 7,562

Net unrealized appreciation
(depreciation) on investments 6,551 460 (5,296) 12,163 694
------- ------ -------- -------- -------

Net increase in net assets
resulting from
operations . . . . . . . . . . $ 12,419 $ 3,338 $ 224 $ 20,406 $ 8,256
====== ====== ======= ======= =======

Earnings per common share . . . . $ 1.97 $ 0.51 $ 0.00 $ 3.28 $ 1.31
====== ====== ======= ======= =======

Weighted average number of
common shares and common share
equivalents outstanding. . . 6,207 6,188 6,187 6,161 6,144
====== ====== ======= ======= =======
</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS

F - 3
<PAGE> 46
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN NET ASSETS
(in thousands, except per share amounts)

<TABLE>
<CAPTION>
For the Nine Months Ended For the Years Ended
September 30, December 31,
-------------------------- ------------------------------
(unaudited)
1995 1994 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Increase in net assets resulting $ 2,284 $ 854 $ 2,126 $ 2,300 $ 3,055
from operations:

Net investment income . . . .

Net realized gains on
investments . . . . . . . . . 3,584 2,024 3,394 5,943 4,507

Net unrealized appreciation
(depreciation) on investments 6,551 460 (5,296) 12,163 694
-------- -------- -------- ------- -------
Net increase in net assets
resulting from operations . . 12,419 3,338 224 20,406 8,256
-------- -------- -------- ------- -------
Distributions to shareholders
from:

Net Investment Income . . . . . (2,119) (689) (705) -- (2,703)

Excess of net investment income -- (959) (1,216) -- --

Net realized gains . . . . . . (1,704) (2,024) (4,595) (8,239) (5,324)

Excess of net realized gains . -- -- (1,035) -- --

Return of capital (tax) . . . . -- -- (1,044) -- --

Preferred stock dividends . . . (165) (165) (220) (220) (220)
-------- -------- -------- ------- -------

Net decrease in net assets
resulting from distributions to
shareholders . . . . . . . . . . (3,988) (3,837) (8,815) (8,459) (8,247)
-------- -------- -------- ------- -------

Capital share transactions:
Net (increase) decrease in
notes receivable from sale of
common stock . . . . . . . . 415 (49) (50) 46 303

Issuance of common shares upon
the exercise of stock options -- 200 200 201 741

Common shares issued in lieu of
cash distributions . . . . . . 405 121 243 -- 124
-------- -------- ------- ------- -------
Net increase in net assets
resulting from capital share
transactions . . . . . . . . . . 820 272 393 247 1,168
-------- -------- ------- ------- -------
Net increase (decrease) in net
assets . . . . . . . . . . . . . 9,251 (227) (8,198) 12,194 1,177

Net assets at beginning of the
period . . . . . . . . . . . . . 49,987 58,185 58,185 45,991 44,814
-------- -------- ------- ------- -------

Net assets at the end of period . 59,238 57,958 49,987 58,185 45,991

Preferred stock of wholly owned
subsidiary . . . . . . . . . . . 6,000 6,000 6,000 6,000 6,000
-------- -------- ------- ------- -------

Net asset value available to
common shareholders . . . . . . . $ 53,238 $ 51,958 $ 43,987 $ 52,185 $ 39,991
======== ======== ======= ======= =======

Net asset value per common share $ 8.61 $ 8.41 $ 7.11 $ 8.50 $ 6.53
======== ======== ======= ======= =======

Common shares outstanding at end
of period . . . . . . . . . . . . 6,186 6,176 6,186 6,142 6,123
======== ======== ======= ======= =======
</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS

F - 4
<PAGE> 47
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)

<TABLE>
<CAPTION>
For the Nine Months Ended For the Years Ended
September 30, December 31,
------------------------- ----------------------------
(unaudited)
1995 1994 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Cash Flows from Operating Activities:

Net increase in net assets resulting
from operations . . . . . . . . . . . . $ 12,419 $3,338 $224 $20,406 $8,256

Adjustments to reconcile net increase in
net assets resulting from operations to
net cash provided by operating
activities:

Net unrealized depreciation
(appreciation) on investments . . . (6,551) (460) 5,296 (12,163) (694)

Net realized gains on investments . . (3,584) (2,024) (3,394) (5,943) (4,507)

Interest . . . . . . . . . . . . . . -- -- (1,159) -- --

Changes in assets and liabilities:

Other assets . . . . . . . . . . . . 736 356 (255) 697 685

Accrued interest payable . . . . . . 583 467 110 27 472

Investment advisory fee payable . . . 73 186 249 (125) 26

Other liabilities . . . . . . . . . . (384) 445 1,215 (2,192) 1,819
------- ------- ------ ------- -------
Net cash provided by operating
activities . . . . . . . . . . . . 3,292 2,308 2,286 707 6,057
------- ------- ------ ------- -------

Cash Flows From Investing Activities:

Net increase (decrease) in investments (350) (11,344) (21,135) 3,318 167

Net redemption (purchase) of U.S.
government securities . . . . . . . 338 (1,150) 1,992 (12,202) --

U.S. government securities sold under
agreements to repurchase . . . . . -- -- -- -- (2,761)

Payments on notes receivable . . . . 415 16 150 247 1,044
------- ------- ------ ------- -------

Net cash provided by (used in)
investing activities . . . . . . . 403 (12,478) (18,993) (8,637) (1,550)
------- ------- ------ ------- --------

Cash Flow From Financing Activities:

Common stock distributions paid . . . (3,416) (7,139) (8,027) (8,046) (7,748)

Preferred stock distributions paid . (220) (220) (220) (220) (220)

Proceeds from the issuance of
debentures . . . . . . . . . . . . 14,000 7,000 7,000 -- 20,000

Payment of debentures . . . . . . . . (7,500) (2,000) (2,000) -- --

Net borrowings (payments on)
revolving line of credit . . . . . (2,205) -- 2,205 -- --
------- ------- ------ ------- -------
Net cash provided by (used in)
financing activities . . . . . . . 659 (2,359) (1,042) (8,266) 12,032
------- ------- ------ ------- -------
Net increase (decrease) in cash and
cash equivalents . . . . . . . . . 4,354 (12,529) (17,749) (16,196) 16,539

Cash and cash equivalents, beginning of
period . . . . . . . . . . . . . . 6,609 24,358 24,358 40,554 24,015
------- ------- ------ ------- -------
Cash and cash equivalents, end of
period . . . . . . . . . . . . . . $ 10,963 $ 11,829 $ 6,609 $ 24,358 $ 40,554
======= ======= ====== ======= =======
</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS

F - 5
<PAGE> 48
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the nine months ended September 30, 1995 and 1994 (unaudited)
and for the years ended December 31, 1994, 1993, and 1992

NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization. The Company is a closed-end management investment
company that has elected to be regulated as a business development company
under the Investment Company Act of 1940. The Company's objective is to
achieve a high level of current income by providing debt, mezzanine and equity
financing, primarily for small privately owned growth companies and through
long-term growth on the value of its net assets. The Company has two wholly
owned, regulated investment company subsidiaries, Allied Investment and Allied
Financial. Allied Investment and Allied Financial are licensed under the Small
Business Investment Act of 1958 as a Small Business Investment Company (SBIC)
and a Specialized Small Business Investment Company (SSBIC), respectively.

The Company has an investment advisory agreement with Allied Advisers, whereby
Advisers manages the investments of the Company subject to the supervision and
control of the Company's board of directors. Certain directors and officers of
Advisers are also directors and officers of the Company.

Co-investments. Investments made by the Company are made in participation with
a separately organized public closed-end management investment company and two
private venture capital partnerships, which are also managed by the Company's
investment adviser, in accordance with various exemptive orders issued to the
Company by the Securities and Exchange Commission permitting co-investments.

Principles of consolidation. The consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries after elimination of
intercompany balances and transactions.

Valuation of investments. Investments are carried at value, as determined by
the Board of Directors. Investments in companies whose securities are publicly
traded are generally valued at their quoted market price, less a discount to
reflect the effects of restrictions on the sale of such securities. U.S.
government securities are carried at cost which approximates fair value.

Interest income. Interest income is recorded on the accrual basis to the
extent that such amounts will be collected.

Realized and unrealized gains or losses on investments. Realized gains or
losses are measured by the difference between the proceeds of sale and the cost
basis of the investment without regard to unrealized gains or losses previously
recognized, and include securities written off during the year, net of
recoveries. Unrealized gains or losses reflect the difference between cost and
value.

Distributions to shareholders. Distributions to shareholders are recorded on
the ex-dividend date.

Federal income taxes. The Company and its wholly owned subsidiaries' policies
are to comply with the requirements of the Internal Revenue Code of 1986, as
amended, that are applicable to regulated investment companies. The Company and
its wholly owned subsidiaries annually distribute all of their taxable income
to their shareholders; therefore, a federal income tax provision is not
required.

Additionally, no provision for deferred income taxes has been made for
unrealized gains on securities since the Company and its wholly owned
subsidiaries intend to continue to annually distribute all of their taxable
realized capital gains.

F - 6
<PAGE> 49
Dividends declared by the Company in October, November or December which are
payable to shareholders of record on a specified date in such months, but are
paid during January of the following year, may be treated as if the dividends
were received by the shareholder on December 31 of the year declared.

Earnings Per Common Share. Earnings are defined as the net investment income
and realized and unrealized gains or losses on investments and are reduced by
the preferred stock dividend requirements. The computation of earnings per
common share are based on the weighted average number of common shares and
common share equivalents outstanding. Common share equivalents included in the
computation represent shares issuable upon assumed exercise of stock options
which would have a dilutive effect in years where there are earnings. In
addition, earnings per share is computed assuming that all issuances of the
Company's common stock in connection with its dividend reinvestment plan are
outstanding for all periods presented. During 1995, the Company has issued
32,957 shares of common stock pursuant to the dividend reinvestment plan. The
weighted average number of shares and share equivalents outstanding for the
three and nine months ended September 30, 1994 have been restated to include
the 1996 common stock issuances under the dividend reinvestment plan. In
addition, the computation of net assets per common share as of September 30,
1994 has been restated to reflect the issuance of common stock pursuant to the
dividend reinvestment plan during 1995.

Cash and Cash Equivalents. The Company considers all highly liquid investments
purchased with an original maturity of three months or less to be cash
equivalents. Cash and cash equivalents consisted of the following:

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
(in thousands) September 30, December 31,
------------- -------------------------------------
1995 1994 1993
----------- ----------- ----------
<S> <C> <C> <C>
Cash $ 8,904 $ 4,707 $ 6,083

Repurchase agreements 2,059 1,902 18,275
--------- --------- ---------
Total $ 10,963 $ 6,609 $ 24,358
========= ========= =========
- --------------------------------------------------------------------------------------------------------------
</TABLE>

Reclassifications. Certain reclassifications have been made to the 1994, 1993,
and 1992 financial statements to conform with the 1995 financial statement
presentation.

NOTE 2. INVESTMENT ADVISORY AGREEMENT

The Company has an investment advisory agreement with Advisers that is approved
at least annually by the Board of Directors or by vote of the holders of a
majority of the outstanding shares of the Company. The agreement may be
terminated at any time on sixty days' notice, without penalty, by the Company's
Board of Directors or by vote of the holders of a majority of the Company's
outstanding shares and will terminate automatically in the event of its
assignment.

The Company pays all operating expenses, except those specifically required to
be borne by Advisers. The expenses paid by Advisers include the compensation
of the Company's investment officers and the cost of office space, equipment
and other personnel required for the Company's day-to-day operations. The
expenses that are paid by the Company include the Company's share of
transaction costs incident to the acquisition and disposition of investments,
legal and audit fees, the fees and expenses of the Company's independent
directors and the fees of its officer-directors, the costs of printing and
mailing proxy statements and reports to shareholders, costs associated with
promoting the Company's stock, and the fees and expenses of the Company's
custodian and transfer agent. The Company is also required to pay expenses
associated with litigation and other extraordinary or non-recurring expenses,
as well as expenses of required and optional insurance and bonding. All fees
paid by or for the account of an actual or prospective portfolio company in
connection with an investment transaction in which the Company participates are
treated as commitment fees or management fees and are received by the Company,
pro rata to its participation in such transaction, rather than by Advisers.
Advisers is entitled to retain for its own account any fees paid by or for the
account of a company, including a portfolio company, for

F - 7
<PAGE> 50
special investment banking or consulting work performed for that company which
is not related to such investment transaction. As compensation for its
services to and the expenses paid for the account of the Company, Advisers is
paid a fee, quarterly in arrears. Beginning in the second quarter of 1995, a
fee was paid equal to 0.625 percent per quarter of the quarter-end value of the
Company's consolidated total assets, less the value of the shares of Allied
Lending owned by the Company interim investments (i.e., U.S. government
securities) and cash and cash equivalents, plus 0.125 percent per quarter of
the quarter-end value of interim investments, cash and cash equivalents. In
the first quarter of 1995, and in 1994, 1993 and 1992, a fee was paid equal to
0.625 percent per quarter of the quarter-end value of the Company's
consolidated total assets, less the value of the shares of Allied Lending owned
by the Company (subsequent to Allied Lending's public offering in November
1993) and cash and cash equivalents in excess of $2,000,000 in working capital.

NOTE 3. DIVIDENDS AND DISTRIBUTIONS

The Company's Board of Directors declared and the Company paid a $0.22 per
share dividend for the third quarter and a $0.20 per share dividend each for
the first and second quarters of 1995.

The components of the cash dividends and distributions of taxable income
declared by the Board of Directors for 1994, 1993 and 1992 are as follows:

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
(in thousands, except per share amounts) 1994 1993 1992
--------------------- -------------------- --------------------
Per Per Per
Amount Share Amount Share Amount Share
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Ordinary income $ 1,921 $ 0.31 $ $ - $ 2,703 $ 0.45
-
Long-term capital gains 5,630 0.92 8,239 1.35 5,324 0.87

Return of capital (tax) 1,044 0.17 - - - -
------- ------ -------- ------ -------- ------
Totals $ 8,595 $ 1.40 $ 8,239 $ 1.35 $ 8,027 $ 1.32
======= ====== ======== ====== ======== ======
- --------------------------------------------------------------------------------------------------------------
</TABLE>

The 1994 distributions of $1.40 per common share were comprised of cash
payments, issuance of the Company's common shares pursuant to the Company's
dividend reinvestment plan, and the issuance of shares of Allied Lending in the
amounts of $0.76, $0.04, and $0.60, respectively. The 1993 and 1992
distributions of $1.35 and $1.32 per common share, respectively, were paid in
cash. Amount represents the total of the quarterly dividends and the year-end
extra distribution declared by the Company based on the actual shares
outstanding on the record date for each dividend paid.

The following represents a reconciliation from taxable income to income for
financial reporting purposes for the years ended December 31:

F - 8
<PAGE> 51
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
(in thousands, except per share 1994 1993 1992
amounts) --------------------- ---------------------- ---------------------
Per Per Per
Amount Share Amount Share Amount Share
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Taxable income $ 7,771 $ 1.26 $ 8,239 $ 1.35 $ 8,027 $ 1.31

Market discount amortization (807) (0.13) - - - -

Realized gains (1,049) (0.17) - - (465) (0.08)

Unrealized gains (losses) (5,296) (0.86) 12,163 1.97 694 0.11

Other (395) (0.06) 4 - - -
-------- ------- ------ ----- ------- ------

Financial statement income 224 0.04 20,406 3.32 8,256 1.34

Preferred stock dividends (220) (0.04) (220) (0.04) (220) (0.03)
-------- ------- -------- ------- --------- -------

Amount available for common
shareholders $ 4 $ 0.00 $ 20,186 $ 3.28 $ 8,036 $ 1.31
======= ====== ======== ====== ======== ======
- --------------------------------------------------------------------------------------------------------------
</TABLE>

NOTE 4. DEBT

Line of Credit. As of September 30, 1995, the Company had a revolving line of
credit agreement with a bank under which it could borrow up to $10,000,000,
which charged interest at the thirty-day LIBOR rate plus 1.15 percent and
expired November 30, 1995. As of September 30, 1995, the Company had available
$10,000,000 under the revolving line of credit agreement. The Company has
established a new line of credit dated December 18, 1995 which permits the
Company to borrow up to $10,000,000 at LIBOR plus 2.5 percent and expires
September 30, 1998.

Senior Notes. The Company has $20,000,000 of senior notes outstanding to an
insurance company. These notes bear interest at a rate of 9.15 percent per
annum, payable semi-annually. The senior notes are scheduled to mature over a
five-year period commencing in 1998 through 2002 with annual principal payments
of $4,000,000.

Subordinated Debentures. Subordinated debentures are payable to the Small
Business Administration (SBA) and represent amounts due to the SBA as a result
of borrowings made pursuant to the Small Business Investment Act of 1958. The
debentures require semi-annual interest payments at various interest rates with
the entire principal balance due at maturity. Principal payments required on
these debentures at September 30, 1995 are as follows:

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
Year Ending December Amount
31, (in thousands) Interest Rates
-------------------- -------------- --------------
<S> <C> <C>
1997 $ 7,000 7.95% - 10.35%

1998 6,650 8.875% - 9.80%

2000 17,300 8.70% - 9.60%

Thereafter 30,350 6.875% - 9.08%
----------

Total $ 61,300
==========
- --------------------------------------------------------------------------------------------------------------
</TABLE>

F - 9
<PAGE> 52
OPIC Facility. On April 10, 1995, the Company entered into a loan
agreement with the Overseas Private Investment Corporation under which the
Company may borrow up to $20 million to provide financing for international
projects involving qualifying U.S. small businesses. Loans under this
agreement bear interest at the U.S. Treasury Rate plus 0.5% and have a ten year
maturity from the date of disbursement. The loan agreement expires on the
earlier of the first date on which the amount of the loan(s) equal $20 million
or April 10, 1998. At September 30, 1995, there were no outstanding borrowings
under the loan agreement.

NOTE 5. PREFERRED STOCK

As of September 30, 1995, the Company's subsidiary, Allied Capital Financial
Corporation, had outstanding a total of 60,000 shares of $100 par value, 3
percent cumulative preferred stock and 10,000 shares of $100 par value, 4
percent redeemable cumulative preferred stock issued to the SBA pursuant to
Section 303(c) of the Small Business Investment Act of 1958, as amended. The 3
percent cumulative preferred stock does not have a required redemption date.
Allied Capital Financial Corporation has the option to redeem in whole or in
part the preferred stock by paying the SBA the par value of such securities and
any dividends accumulated and unpaid to the date of redemption. The 4 percent
redeemable cumulative preferred stock has a required redemption date of June 4,
2005.

NOTE 6. SHAREHOLDERS' EQUITY

During 1994, the Company paid $1,044,000 in distributions that represented a
return of capital for tax purposes. This has been charged to additional paid-in
capital.

The Company has a dividend reinvestment plan (the "Plan"). Shareholders of
record may enroll in the Plan at any time. The Company instructs the stock
transfer agent to buy shares in the open market or to issue new shares. When
the Company issues new shares, the price is equal to the average of the closing
sales prices reported for the shares for the five days on which trading in the
shares takes place immediately prior to the dividend payment date. During the
nine month period ended September 30, 1995, the Company issued 32,957 shares at
an average price of $12.30 per share. During 1994, the Company issued 18,513
shares at an average price of $13.13 per share.

The Company has an incentive stock option plan which allows the granting of
options to the Company's officers. Under the plan as amended, a maximum of
1,350,000 options may be granted at a price not less than the market value on
the date of grant and may be exercisable over a ten year period. In May 1994,
the option plan was amended to permit grants to non-officer directors. The
Company's stockholders approved a one-time grant of options to each member
of the Board of Directors who is not an employee of the investment advisor to
purchase 10,000 shares of the Company's common stock and such grants were
subject to SEC approval. Such approval was granted by the SEC on December 26,
1995 and the options were granted at the current market price as of that date.

Holders of ten percent or more of the Company's stock must exercise their
options within a five-year period.

Officers of the Company may borrow from the Company the funds necessary to
exercise vested stock options. The loans have varying terms not exceeding ten
years and bear interest generally at the applicable federal interest rate in
effect at the date of issue. A summary of the activity in the plan is as
follows:

F - 10
<PAGE> 53
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Nine months ended
September 30, Year ended December 31,
------------- ---------------------------------------------------------------

1995 1994 1993 1992
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Options outstanding at 701,473 686,847 496,285 494,809
beginning of period

Options granted 282,800 50,000 336,101 86,228

Options exercised - (25,382) (19,169) (59,007)

Options cancelled (194,886) (9,992) (126,370) (25,745)
--------- --------- ---------- ---------

Options outstanding at
end of period 789,387 701,473 686,847 496,285
========= ========= ========== =========

Options available for
grant at end of
period 212,136 300,050 3,967 138,248

Options exercisable at
end of period 518,578 521,487 422,362 457,899

Option price per share:

Granted $12.38 $14.13 $13.00 $18.00

Exercised - $7.34 - $8.53 $9.00 - $12.00 $12.00 - $16.50

Cancelled $12.05 - $16.50 $14.00 - $16.50 $14.00 - $18.00 $14.00 - $18.00
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

NOTE 7. SUPPLEMENTAL CASH FLOW INFORMATION

The consolidated statement of cash flows excludes the effects of certain
noncash investing and financing activities relating to restructuring of
investments and the issuance of common shares as follows:

<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
(in thousands) Nine months ended
September 30, Year ended December 31,
---------------- -------------------------------------------

1995 1994 1993 1992
------------ ----------- ----------- ----------
<S> <C> <C> <C> <C>
Issuance of common shares in exchange for
notes receivable $ - $ 200 $ 201 $ 741

Issuance of common shares in lieu of cash
dividends $ 405 $ 243 $ - $ 124

Issuance of Allied Capital Lending
Corporation shares in lieu of cash
dividends $ 3,906 $ - $ - $ -
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

In addition, the Company paid interest in the amount of $4,411,000 for the nine
months ended September 30, 1995 and $6,223,000, $6,319,000 and $4,659,000
during 1994, 1993, and 1992, respectively.

F - 11
<PAGE> 54
NOTE 8. COMMITMENTS AND CONTINGENCIES

The Company had commitments outstanding at September 30, 1995 to various
prospective portfolio companies totaling $13.6 million.

At September 30, 1995, the Company had standby letters of credit and third
party guarantees outstanding totaling $1.4 million. The letters of credit have
been issued by a financial institution on behalf of the Company to guarantee
performance of certain portfolio companies to third parties. Repurchase
agreements of $0.9 million have been used as collateral for the letters of
credit.

The Company is party to certain lawsuits in connection with investments it has
made to small businesses. While the outcome of these legal proceedings cannot
at this time be predicted with certainty, management does not expect that these
actions will have a material effect upon the financial position of the Company.

Allied Lending, formerly a wholly owned subsidiary, originates loans which are
70%-90% guaranteed by the SBA. Lending then sells the guaranteed portion of
these loans in the secondary market. The Internal Revenue Service may assert
that these transactions subject Allied Lending to a liability for income taxes
of up to $845,000 for the year ended December 31, 1992. The Company has agreed
to indemnify Allied Lending for this potential liability. Management believes
that the Company has valid defenses for the position that such transactions do
not subject Allied Lending to a liability for additional income taxes.

NOTE 9. CONCENTRATIONS OF CREDIT RISK

The Company and its subsidiaries place their cash in financial institutions and
at times, cash held in checking accounts may be in excess of the FDIC insurance
limit. As of September 30, 1995, the Company had invested in repurchase
agreements collateralized by U.S. government securities. These repurchase
agreements mature within seven days.

Investments in U.S. government securities at September 30, 1995 have maturities
from December 1995 to December 1996 with interest rates ranging from 4.25
percent to 6.875 percent.

NOTE 10. DISPOSITION OF SUBSIDIARY

The Company owned all of the outstanding capital stock of Allied Capital
Lending Corporation ("Allied Lending") prior to consummation of the initial
public offering of Allied Lending shares in November 1993. As a result of that
intial public offering, the Company's ownership of Allied Lending shares was
reduced to 1,580,000 shares, or approximately 36% of the Allied Lending shares
outstanding at December 31, 1993. The Company has agreed that it would divest
itself of all shares of Allied Lending by December 31, 1998 by public
offerings, private placements, distributions to the Company's shareholders or
otherwise. The Company declared an extra dividend in December 1994 and
distributed on January 8, 1995 an aggregate of 335,086 Allied Lending shares,
which reduced its ownership of Allied Lending shares to 1,244,914 shares, or
approximately 28% of the Allied Lending shares then outstanding.

F - 12
<PAGE> 55
NOTE 11. QUARTERLY FINANCIAL HIGHLIGHTS

<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
(Unaudited)
(in thousands, except per share information) 1995
------------------------------------------------

Qtr 1 Qtr 2 Qtr 3
---------- ----------- ----------
<S> <C> <C> <C>
Total investment income $ 3,549 $ 3,229 $ 3,564

Net investment income $ 881 $ 504 $ 899

Net increase in net assets resulting
from operations $ 2,134 $ 7,196 $ 3,089

Preferred stock dividends $ 55 $ 55 $ 55

Net increase in net assets resulting
from operations available to
common shareholders $ 2,079 $ 7,141 $ 3,034

Per common share $ 0.34 $ 1.16 $ 0.49

- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
1994
----------------------------------------------------------------------------------

Qtr 1 Qtr 2 Qtr 3 Qtr 4(1)
---------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Total investment income $ 2,594 $ 2,507 $ 2,718 $ 4,397

Net investment income $ 204 $ 131 $ 518 $ 1,273

Net increase (decrease) in net assets
resulting from operations $ 752 $ 2,641 $ (55) $ (3,114)

Preferred stock dividends $ 55 $ 55 $ 55 $ 55

Net increase (decrease) in net assets
resulting from operations
available to common
shareholders $ 697 $ 2,586 $ (110) $ (3,169)

Per common share $ 0.11 $ 0.42 $ (0.02) $ (0.52)
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>

F - 13
<PAGE> 56
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
1993
----------------------------------------------------------------------------------

Qtr 1 Qtr 2 Qtr 3 Qtr 4
---------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Total investment income $ 2,406 $ 3,425 $ 3,759 $ 2,794

Net investment income (loss) $ 131 $ 885 $ 1,303 $ (19)

Net increase (decrease) in net assets
resulting from operations $ 282 $ (889) $ 2,156 $ 18,857

Preferred stock dividends $ 55 $ 55 $ 55 $ 55

Net increase (decrease) in net assets
resulting from operations
available to common
shareholders $ 227 $ (944) $ 2,101 $ 18,802

Per common share $ 0.04 $ (0.15) $ 0.34 $ 3.06
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>

(1) Included in the 1994 fourth quarter income was $0.7 million in interest
income resulting from the restructuring of certain non-performing loans that
had not been accrued into income in prior periods.

Quarterly amounts for 1993 and 1994 have been reclassified to conform with
classifications used in the financial statements for 1995.

F - 14
<PAGE> 57
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF LOANS TO AND INVESTMENTS IN SMALL BUSINESS CONCERNS
(dollars in thousands)

SEPTEMBER 30, 1995 DECEMBER 31, 1994
(UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------------------
COMPANY'S NAME (STATE) INVESTMENTS (4) COST VALUE COST VALUE
(TYPE OF BUSINESS)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
AGPAL BROADCASTING, INC. (OR) Loans and Debt Securities $930 $930 $933 $933
(radio stations) Warrants 0 0 0 0
- ------------------------------------------------------------------------------------------------------------------------------------
ALLIED CAPITAL LENDING CORPORATION (MD)(1,3,5) Common Stock (1,244,914 shares) 2,996 11,951 3,802 14,906
(small business lender)
- ------------------------------------------------------------------------------------------------------------------------------------
ALLIED WASTE INDUSTRIES, INC. (AZ)(1) Loans and Debt Securities 0 0 0 0
(solid waste collection & removal) Warrants 92 1,038 92 92
- ------------------------------------------------------------------------------------------------------------------------------------
AMERICAN BARBECUE & GRILL (KS) Loans and Debt Securities 1,790 1,790 926 926
(restaurant) Warrants 71 71 71 71
- ------------------------------------------------------------------------------------------------------------------------------------
ARNOLD MOVING CO. (KY) Loans and Debt Securities 298 298 297 297
(moving/storage firm) Warrants 11 11 11 11
- ------------------------------------------------------------------------------------------------------------------------------------
ASW HOLDING CORPORATION (IL) Loans and Debt Securities 831 831 829 829
(steel wool manufacturer) Warrants 53 53 53 53
- ------------------------------------------------------------------------------------------------------------------------------------
ATLANTIC HOMES DEVELOPMENT CORP. (VA) Loans and Debt Securities 0 0 320 320
(real estate development) Warrants 0 0 0 0
- ------------------------------------------------------------------------------------------------------------------------------------
BELLEFONTE LIME CO. (PA)(3) Common Stock (2,869 shares) 16 533 16 104
(mineral quarry & production)
- ------------------------------------------------------------------------------------------------------------------------------------
BROADCAST HOLDINGS, INC. (DC)(3) Loans and Debt Securities 3,039 2,900 3,215 2,166
(radio station)
- ------------------------------------------------------------------------------------------------------------------------------------
CELEBRITIES, INC. (FL) Loans and Debt Securities 414 414 428 428
(radio station) Warrants 12 12 12 12
- ------------------------------------------------------------------------------------------------------------------------------------
CENTENNIAL MEDIA CORP. (CO)(2) Loans and Debt Securities 2,078 725 2,078 900
(telephone directories) Common Stock (1,803 shares) 948 0 948 0
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1993
- ------------------------------------------------------------------------------------------------------------------------------------
COMPANY'S NAME (STATE) INVESTMENTS (4) COST VALUE
(TYPE OF BUSINESS)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
AGPAL BROADCASTING, INC. (OR) Loans and Debt Securities $935 $935
(radio stations) Warrants 0 0
- ------------------------------------------------------------------------------------------------------------------------------------
ALLIED CAPITAL LENDING CORPORATION (MD)(1,3,5) Common Stock (1,244,914 shares) 3,757 18,960
(small business lender)
- ------------------------------------------------------------------------------------------------------------------------------------
ALLIED WASTE INDUSTRIES, INC. (AZ)(1) Loans and Debt Securities 1,630 1,630
(solid waste collection & removal) Warrants 92 92
- ------------------------------------------------------------------------------------------------------------------------------------
AMERICAN BARBECUE & GRILL (KS) Loans and Debt Securities 0 0
(restaurant) Warrants 0 0
- ------------------------------------------------------------------------------------------------------------------------------------
ARNOLD MOVING CO. (KY) Loans and Debt Securities 295 295
(moving/storage firm) Warrants 11 11
- ------------------------------------------------------------------------------------------------------------------------------------
ASW HOLDING CORPORATION (IL) Loans and Debt Securities 1,362 1,362
(steel wool manufacturer) Warrants 53 53
- ------------------------------------------------------------------------------------------------------------------------------------
ATLANTIC HOMES DEVELOPMENT CORP. (VA) Loans and Debt Securities 0 0
(real estate development) Warrants 0 0
- ------------------------------------------------------------------------------------------------------------------------------------
BELLEFONTE LIME CO. (PA)(3) Common Stock (2,869 shares) 16 150
(mineral quarry & production)
- ------------------------------------------------------------------------------------------------------------------------------------
BROADCAST HOLDINGS, INC. (DC)(3) Loans and Debt Securities 3,302 2,200
(radio station)
- ------------------------------------------------------------------------------------------------------------------------------------
CELEBRITIES, INC. (FL) Loans and Debt Securities 437 437
(radio station) Warrants 12 12
- ------------------------------------------------------------------------------------------------------------------------------------
CENTENNIAL MEDIA CORP. (CO)(2) Loans and Debt Securities 1,645 0
(telephone directories) Common Stock (1,803 shares) 948 0
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

(1) Public company; (2) Interest not being accrued as of September 30, 1995;
(3) May be considered an affiliate; (4) Share information as of September 30,
1995; (5) Non-qualifying asset for BDC purposes as of September 30, 1995.

F - 15
<PAGE> 58

<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
SEPTEMBER 30, 1995
(UNAUDITED) DECEMBER 31, 1994
- ------------------------------------------------------------------------------------------------------------------------------------
COMPANY'S NAME (STATE) INVESTMENTS (4) COST VALUE COST VALUE
(TYPE OF BUSINESS)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CERATECH CORPORATION (IL) Loans and Debt Securities 1,180 1,180 1,180 1,180
(ceramic plate manufacturer) Warrants 0 0 0 0
- ------------------------------------------------------------------------------------------------------------------------------------
CHERRY TREE TOYS, INC. (OH) Loans and Debt Securities 1,091 1,091 1,146 1,146
(direct marketer of woodcrafts) Common Stock (117 shares) 1 0 1 0
- ------------------------------------------------------------------------------------------------------------------------------------
CITIPOSTAL, INC. (NY)(2) Loans and Debt Securities 0 0 216 216
(courier network) Preferred Stock Series A 0 0 177 177
Convertible Preferred Stock Series B 289 0 289 0
Common Stock (27 shares) 71 0 173 103
Warrants 0 0 7 7
- ------------------------------------------------------------------------------------------------------------------------------------
COAST GAS, INC. (CA) Loans and Debt Securities 2,168 2,168 2,159 2,159
(courier network) Warrants 124 124 124 124
- ------------------------------------------------------------------------------------------------------------------------------------
CONSUMER HEALTH SERVICES, INC. (CO) Convertible Preferred Stock (234,583 shares) 116 0 180 54
(medical/dental consumer info. service) Common Stock (127,940 shares) 64 0 0 0
- ------------------------------------------------------------------------------------------------------------------------------------
CONTEMPORARY MEDIA (ID) Loans and Debt Securities 586 586 602 602
(radio stations) Warrants 204 204 204 204
- ------------------------------------------------------------------------------------------------------------------------------------
DEH PRINTED CIRCUITS, INC. (IL) Loans and Debt Securities 2,307 2,307 2,287 2,287
(circuit board manufacturer) Warrants 133 133 133 133
- ------------------------------------------------------------------------------------------------------------------------------------
DEVLIEG-BULLARD INC. (CT)(1) Loans and Debt Securities 2,134 2,134 2,104 2,104
(tool manufacturer) Warrants 275 400 275 275
- ------------------------------------------------------------------------------------------------------------------------------------
DMI FURNITURE, INC. (KY)(1) Convertible Preferred Stock (399,840 shares) 500 279 500 576
(furniture manufacturer)
- ------------------------------------------------------------------------------------------------------------------------------------
DOGLOO, INC. (CA) Loans and Debt Securities 3,335 3,335 3,307 3,307
(pet products manufacturer) Warrants 0 0 265 265
- ------------------------------------------------------------------------------------------------------------------------------------
EDWARDS HEATING & AIR CONDITIONING (GA) Loans and Debt Securities 2,306 441 2,306 911
(heating & air conditioning Warrants 29 0 29 0
dealer/contractor)
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1993
- ------------------------------------------------------------------------------------------------------------------------------------
COMPANY'S NAME (STATE) INVESTMENTS (4) COST VALUE
(TYPE OF BUSINESS)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CERATECH CORPORATION (IL) Loans and Debt Securities 0 0
(ceramic plate manufacturer) Warrants 0 0
- ------------------------------------------------------------------------------------------------------------------------------------
CHERRY TREE TOYS, INC. (OH) Loans and Debt Securities 1,022 1,022
(direct marketer of woodcrafts) Common Stock (117 shares) 23 23
- ------------------------------------------------------------------------------------------------------------------------------------
CITIPOSTAL, INC. (NY)(2) Loans and Debt Securities 216 216
(courier network) Preferred Stock Series A 177 177
Convertible Preferred Stock Series B 289 31
Common Stock (27 shares) 173 75
Warrants 7 7
- ------------------------------------------------------------------------------------------------------------------------------------
COAST GAS, INC. (CA) Loans and Debt Securities 0 0
(courier network) Warrants 0 0
- ------------------------------------------------------------------------------------------------------------------------------------
CONSUMER HEALTH SERVICES, INC. (CO) Convertible Preferred Stock (234,583 shares) 180 54
(medical/dental consumer info. service) Common Stock (127,940 shares) 0 0
- ------------------------------------------------------------------------------------------------------------------------------------
CONTEMPORARY MEDIA (ID) Loans and Debt Securities 0 0
(radio stations) Warrants 0 0
- ------------------------------------------------------------------------------------------------------------------------------------
DEH PRINTED CIRCUITS, INC. (IL) Loans and Debt Securities 0 0
(circuit board manufacturer) Warrants 0 0
- ------------------------------------------------------------------------------------------------------------------------------------
DEVLIEG-BULLARD INC. (CT)(1) Loans and Debt Securities 0 0
(tool manufacturer) Warrants 0 0
- ------------------------------------------------------------------------------------------------------------------------------------
DMI FURNITURE, INC. (KY)(1) Convertible Preferred Stock (399,840 shares) 500 1,040
(furniture manufacturer)
- ------------------------------------------------------------------------------------------------------------------------------------
DOGLOO, INC. (CA) Loans and Debt Securities 0 0
(pet products manufacturer) Warrants 0 0
- ------------------------------------------------------------------------------------------------------------------------------------
EDWARDS HEATING & AIR CONDITIONING (GA) Loans and Debt Securities 1,776 1,312
(heating & air conditioning Warrants 29 0
dealer/contractor)
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

F - 16
<PAGE> 59

<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
SEPTEMBER 30, 1995 DECEMBER 31, 1994
(UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------------------
COMPANY'S NAME (STATE) INVESTMENTS (4) COST VALUE COST VALUE
(TYPE OF BUSINESS)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ENVIRCO CORP. (NJ) Loans and Debt Securities 0 0 32 188
(clean room equipment manufacturer) Warrants 0 0 0 0
- ------------------------------------------------------------------------------------------------------------------------------------
ENVIROPLAN, INC. (NJ) Loans and Debt Securities 2,443 1,890 2,425 2,425
(emissions monitoring equipment mfg.) Warrants 119 0 120 204
- ------------------------------------------------------------------------------------------------------------------------------------
ESQUIRE COMMUNICATIONS, LTD. (NY)(1) Loans and Debt Securities 2,397 2,397 2,397 2,397
(court reporters) Warrants 3 36 3 3
- ------------------------------------------------------------------------------------------------------------------------------------
FOUNTAINHEAD TECHNOLOGIES, INC. (RI) Loans and Debt Securities 1,180 1,180 1,180 1,180
(non-chlorine water purification sys.) Warrants 0 0 0 0
- ------------------------------------------------------------------------------------------------------------------------------------
GARDEN RIDGE CORP. (TX) Loans and Debt Securities 0 0 3,302 3,302
(home decorating and craft products) Common Stock (61,241 shares) 687 3,469 761 1,236
Warrants 112 1,455 112 145
- ------------------------------------------------------------------------------------------------------------------------------------
GATEWAY HEALTHCARE CORP. (VA) Loans and Debt Securities 853 853 853 853
(medical/supplies distributor) Convertible Preferred Stock
(10,725 shares) 497 42 497 42
Warrants 2 0 2 0
- ------------------------------------------------------------------------------------------------------------------------------------
GENOA MINE ACQUISITION CORP. (OH)(3) Capital Stock (20 shares) 44 533 44 44
(limestone mining)
- ------------------------------------------------------------------------------------------------------------------------------------
GLOBAL SOFTWARE INC. (NC) Loans and Debt Securities 1,664 1,664 1,662 1,662
(accounting software development) Warrants 19 626 19 19
- ------------------------------------------------------------------------------------------------------------------------------------
GRANT BROADCASTING SYSTEMS II (FL) Loans and Debt Securities 1,072 1,072 1,064 1,064
(television stations) Warrants 78 448 78 78
- ------------------------------------------------------------------------------------------------------------------------------------
HIGH PLAINS CABLEVISION (TX) Loans and Debt Securities 0 0 129 129
(cable television) Warrants 0 0 14 14
- ------------------------------------------------------------------------------------------------------------------------------------
HOUSTON FOODS COMPANY (IL) Loans and Debt Securities 0 0 0 0
(seasonal gift packages) Convertible Preferred Stock 0 0 0 0
Warrants 0 0 0 0
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1993
- ------------------------------------------------------------------------------------------------------------------------------------
COMPANY'S NAME (STATE) INVESTMENTS (4) COST VALUE
(TYPE OF BUSINESS)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ENVIRCO CORP. (NJ) Loans and Debt Securities 700 700
(clean room equipment manufacturer) Warrants 32 32
- ------------------------------------------------------------------------------------------------------------------------------------
ENVIROPLAN, INC. (NJ) Loans and Debt Securities 1,906 1,906
(emissions monitoring equipment mfg.) Warrants 60 60
- ------------------------------------------------------------------------------------------------------------------------------------
ESQUIRE COMMUNICATIONS, LTD. (NY)(1) Loans and Debt Securities 0 0
(court reporters) Warrants 0 0
- ------------------------------------------------------------------------------------------------------------------------------------
FOUNTAINHEAD TECHNOLOGIES, INC. (RI) Loans and Debt Securities 0 0
(non-chlorine water purification sys.) Warrants 0 0
- ------------------------------------------------------------------------------------------------------------------------------------
GARDEN RIDGE CORP. (TX) Loans and Debt Securities 1,821 1,821
(home decorating and craft products) Common Stock (61,241 shares) 387 387
Warrants 112 112
- ------------------------------------------------------------------------------------------------------------------------------------
GATEWAY HEALTHCARE CORP. (VA) Loans and Debt Securities 701 692
(medical/supplies distributor) Convertible Preferred Stock
(10,725 shares) 650 199
Warrants 2 0
- ------------------------------------------------------------------------------------------------------------------------------------
GENOA MINE ACQUISITION CORP. (OH)(3) Capital Stock (20 shares) 44 0
(limestone mining)
- ------------------------------------------------------------------------------------------------------------------------------------
GLOBAL SOFTWARE INC. (NC) Loans and Debt Securities 0 0
(accounting software development) Warrants 0 0
- ------------------------------------------------------------------------------------------------------------------------------------
GRANT BROADCASTING SYSTEMS II (FL) Loans and Debt Securities 1,045 1,045
(television stations) Warrants 78 78
- ------------------------------------------------------------------------------------------------------------------------------------
HIGH PLAINS CABLEVISION (TX) Loans and Debt Securities 142 142
(cable television) Warrants 14 14
- ------------------------------------------------------------------------------------------------------------------------------------
HOUSTON FOODS COMPANY (IL) Loans and Debt Securities 126 126
(seasonal gift packages) Convertible Preferred Stock 7 152
Warrants 3 89
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

F - 17
<PAGE> 60

<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
SEPTEMBER 30, 1995 DECEMBER 31, 1994
(UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------------------
COMPANY'S NAME (STATE) INVESTMENTS (4) COST VALUE COST VALUE
(TYPE OF BUSINESS)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INNOTECH, INC. (VA) Warrants 29 29 29 29
(bifocal lens manufacturer)
- ------------------------------------------------------------------------------------------------------------------------------------
ISOTECHNOLOGIES, INC. (NC) Convertible Debt Securities 602 602 609 609
(orthopedic equipment)
- ------------------------------------------------------------------------------------------------------------------------------------
JACKSON PRODUCTS, INC. (MI) Loans and Debt Securities 0 0 856 856
(safety equipment manufacturer) Common Stock 0 0 230 303
- ------------------------------------------------------------------------------------------------------------------------------------
JARAD BROADCASTING (NY) Loans and Debt Securities 0 0 0 0
(radio station) Warrants 0 0 0 0
- ------------------------------------------------------------------------------------------------------------------------------------
JUNE BROADCASTING (NJ) Loans and Debt Securities 0 0 0 0
(radio station) Warrants 58 1,680 58 582
- ------------------------------------------------------------------------------------------------------------------------------------
KIRKER ENTERPRISES (NJ) Loans and Debt Securities 2,131 2,131 0 0
(chemical manufacturer) Warrants 203 203 0 0
- ------------------------------------------------------------------------------------------------------------------------------------
LOVE MORTGAGE CO. (DC) Loans and Debt Securities 736 736 736 736
(real estate mortgages) Convertible Debentures 0 0 0 0
Warrants 200 0 200 0
- ------------------------------------------------------------------------------------------------------------------------------------
MARKINGS & EQUIPMENT CORP. (FL)(2) Loans and Debt Securities 0 0 0 0
(highway striping) Warrants 0 0 0 0
- ------------------------------------------------------------------------------------------------------------------------------------
MASTER POWER, INC. (MD) Loans and Debt Securities 286 286 285 285
(power tool manufacturer) Preferred Stock (37,097 shares) 7 7 7 7
Warrants 4 4 4 4
- ------------------------------------------------------------------------------------------------------------------------------------
MAXTEC INTERNATIONAL CORP. (IL) Loans and Debt Securities 0 0 85 85
(electronic test instruments) Warrants 0 0 7 7
- ------------------------------------------------------------------------------------------------------------------------------------
MEDIFIT OF AMERICA, INC. (NJ) Loans and Debt Securities 895 895 1,584 1,584
(physical rehabilitation) Warrants 93 0 93 0
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1993
- ------------------------------------------------------------------------------------------------------------------------------------
COMPANY'S NAME (STATE) INVESTMENTS (4) COST VALUE
(TYPE OF BUSINESS)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INNOTECH, INC. (VA) Warrants 29 29
(bifocal lens manufacturer)
- ------------------------------------------------------------------------------------------------------------------------------------
ISOTECHNOLOGIES, INC. (NC) Convertible Debt Securities 580 435
(orthopedic equipment)
- ------------------------------------------------------------------------------------------------------------------------------------
JACKSON PRODUCTS, INC. (MI) Loans and Debt Securities 839 839
(safety equipment manufacturer) Common Stock 173 173
- ------------------------------------------------------------------------------------------------------------------------------------
JARAD BROADCASTING (NY) Loans and Debt Securities 2,111 2,111
(radio station) Warrants 73 73
- ------------------------------------------------------------------------------------------------------------------------------------
JUNE BROADCASTING (NJ) Loans and Debt Securities 1,346 1,346
(radio station) Warrants 58 58
- ------------------------------------------------------------------------------------------------------------------------------------
KIRKER ENTERPRISES (NJ) Loans and Debt Securities 0 0
(chemical manufacturer) Warrants 0 0
- ------------------------------------------------------------------------------------------------------------------------------------
LOVE MORTGAGE CO. (DC) Loans and Debt Securities 732 732
(real estate mortgages) Convertible Debentures 197 197
Warrants 205 19
- ------------------------------------------------------------------------------------------------------------------------------------
MARKINGS & EQUIPMENT CORP. (FL)(2) Loans and Debt Securities 1,613 975
(highway striping) Warrants 0 0
- ------------------------------------------------------------------------------------------------------------------------------------
MASTER POWER, INC. (MD) Loans and Debt Securities 348 348
(power tool manufacturer) Preferred Stock (37,097 shares) 7 7
Warrants 4 4
- ------------------------------------------------------------------------------------------------------------------------------------
MAXTEC INTERNATIONAL CORP. (IL) Loans and Debt Securities 161 161
(electronic test instruments) Warrants 7 7
- ------------------------------------------------------------------------------------------------------------------------------------
MEDIFIT OF AMERICA, INC. (NJ) Loans and Debt Securities 1,501 1,501
(physical rehabilitation) Warrants 93 93
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

F - 18
<PAGE> 61
<TABLE>
<CAPTION>
SEPTEMBER 30, 1995 DECEMBER 31, 1994
(UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------------------
COMPANY'S NAME (STATE) INVESTMENTS (4) COST VALUE COST VALUE
(TYPE OF BUSINESS)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
MILL-IT STRIPING (FL) Loans and Debt Securities 125 125 125 125
(highway paint striping) Warrants 125 0 125 125
- ------------------------------------------------------------------------------------------------------------------------------------
MIDVIEW ASSOCIATES (VA) Loans and Debt Securities 282 282 0 0
(real estate development) Warrants 0 0 0 0
- ------------------------------------------------------------------------------------------------------------------------------------
MLX/SINTERMET CORP. (GA)(1) Common Stock (5,835 shares-MLX) 241 61 241 24
(friction materials manufacturer)
- ------------------------------------------------------------------------------------------------------------------------------------
MONTGOMERY TANK LINES (FL) Common Stock 0 0 0 0
(tank truck carrier) Warrants 0 0 0 0
- ------------------------------------------------------------------------------------------------------------------------------------
NOBEL EDUCATION DYNAMICS (PA)(1) Loans and Debt Securities 2,250 2,250 0 0
(education) Preferred Stock (398,936 shares) 750 1,047 0 0
Warrants 0 345 0 0
- ------------------------------------------------------------------------------------------------------------------------------------
OLD MILL HOLDINGS, INC. (NY) Loans and Debt Securities 657 657 545 545
(custom embroidery of apparel) Warrants 45 0 35 35
- ------------------------------------------------------------------------------------------------------------------------------------
PALMER CORPORATION (NJ) Preferred Stock (200,000 shares) 200 100 200 100
(video stores)
- ------------------------------------------------------------------------------------------------------------------------------------
PIATL HOLDINGS, INC. (NJ)(3) Loans and Debt Securities 167 167 148 148
(environmental consulting) Preferred Stock (36 shares) 267 44 267 106
Common Stock (36 shares) 0 0 0 0
- ------------------------------------------------------------------------------------------------------------------------------------
POLYFLEX/B & L HOLDINGS (MS) Loans and Debt Securities 529 533 665 665
(plastic bag manufacturer) Warrants 28 486 28 487
- ------------------------------------------------------------------------------------------------------------------------------------
PROVIDENTIAL CORPORATION (CA)(1) Common Stock (52,794 shares) 1,000 211 1,000 211
(shared appreciation reverse mortgages)
- ------------------------------------------------------------------------------------------------------------------------------------
RADIO ONE (GA) Loans and Debt Securities 2,280 2,280 0 0
(radio stations) Warrants 0 0 0 0
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1993
- ------------------------------------------------------------------------------------------------------------------------------------
COMPANY'S NAME (STATE) INVESTMENTS (4) COST VALUE
(TYPE OF BUSINESS)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
MILL-IT STRIPING (FL) Loans and Debt Securities 0 0
(highway paint striping) Warrants 0 0
- ------------------------------------------------------------------------------------------------------------------------------------
MIDVIEW ASSOCIATES (VA) Loans and Debt Securities 0 0
(real estate development) Warrants 0 0
- ------------------------------------------------------------------------------------------------------------------------------------
MLX/SINTERMET CORP. (GA)(1) Common Stock (5,835 shares-MLX) 241 31
(friction materials manufacturer)
- ------------------------------------------------------------------------------------------------------------------------------------
MONTGOMERY TANK LINES (FL) Common Stock 62 92
(tank truck carrier) Warrants 46 346
- ------------------------------------------------------------------------------------------------------------------------------------
NOBEL EDUCATION DYNAMICS (PA)(1) Loans and Debt Securities 0 0
(education) Preferred Stock (398,936 shares) 0 0
Warrants 0 0
- ------------------------------------------------------------------------------------------------------------------------------------
OLD MILL HOLDINGS, INC. (NY) Loans and Debt Securities 0 0
(custom embroidery of apparel) Warrants 0 0
- ------------------------------------------------------------------------------------------------------------------------------------
PALMER CORPORATION (NJ) Preferred Stock (200,000 shares) 200 100
(video stores)
- ------------------------------------------------------------------------------------------------------------------------------------
PIATL HOLDINGS, INC. (NJ)(3) Loans and Debt Securities 293 393
(environmental consulting) Preferred Stock (36 shares) 266 0
Common Stock (36 shares) 0 0
- ------------------------------------------------------------------------------------------------------------------------------------
POLYFLEX/B & L HOLDINGS (MS) Loans and Debt Securities 813 813
(plastic bag manufacturer) Warrants 28 506
- ------------------------------------------------------------------------------------------------------------------------------------
PROVIDENTIAL CORPORATION (CA)(1) Common Stock (52,794 shares) 1,000 277
(shared appreciation reverse mortgages)
- ------------------------------------------------------------------------------------------------------------------------------------
RADIO ONE (GA) Loans and Debt Securities 0 0
(radio stations) Warrants 0 0
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

F - 19

<PAGE> 62
<TABLE>
<CAPTION>
SEPTEMBER 30, 1995 DECEMBER 31, 1994
(UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------------------
COMPANY'S NAME (STATE) INVESTMENTS (4) COST VALUE COST VALUE
(TYPE OF BUSINESS)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
R-TEX DECORATIVES COMPANY, INC. (PA) Loans and Debt Securities 905 905 902 902
(decorative ribbon manufacturer) Warrants 32 0 32 32
- ------------------------------------------------------------------------------------------------------------------------------------
SALTON/MAXIM HOUSEWARES, INC. (IL)(1,2) Loans and Debt Securities 0 0 0 0
(small appliance distributor) Common Stock 0 0 0 0
- ------------------------------------------------------------------------------------------------------------------------------------
SPA LENDING CORPORATION (DC)(3) Preferred Stock Series A (5,578 shares) 398 398 398 398
(health spas) Preferred Stock Series B (8,755 shares) 506 424 506 506
Preferred Stock Series C (14,092 shares) 1,680 0 1,680 632
Common Stock (6,208 shares) 413 0 413 0
- ------------------------------------------------------------------------------------------------------------------------------------
SUNSTATES REFRIGERATED SERVICES, INC. (GA)(3) Loans and Debt Securities 2,778 2,778 2,799 2,799
(cold food storage) Preferred Stock (43,884 shares) 193 193 204 204
Common Stock (163 shares) 145 145 145 137
- ------------------------------------------------------------------------------------------------------------------------------------
TACO TICO, INC. (KS)(2) Loans and Debt Securities 1,189 382 1,188 382
(Mexican fast food restaurant) Warrants 28 0 28 0
- ------------------------------------------------------------------------------------------------------------------------------------
TIMBERCREEK COMPANY (NY)(3) Loans and Debt Securities 2,248 2,248 1,537 1,537
(archery equipment) Common Stock 0 0 17 0
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL FOAM, INC. (CT)(2,3) Loans and Debt Securities 1,744 174 1,744 174
(packaging systems) Common Stock (910 shares) 57 0 57 0
- ------------------------------------------------------------------------------------------------------------------------------------
TPG HOLDINGS, INC. (TX) Loans and Debt Securities 2,179 2,179 2,407 2,407
(commercial banking software development) Warrants 13 2,120 13 2,120
- ------------------------------------------------------------------------------------------------------------------------------------
TOWER BROADCASTING (MN) Loans and Debt Securities 0 0 0 0
(radio station) Warrants 0 0 0 0
- ------------------------------------------------------------------------------------------------------------------------------------
VISTECH CORPORATION (FL) Loans and Debt Securities 0 0 0 0
(computer vision products) Warrants 0 0 0 0
- ------------------------------------------------------------------------------------------------------------------------------------
VISU-COM, INC. (MD)(3) Loans and Debt Securities 2,248 1,500 2,244 1,500
(visual communications products) Preferred Stock 0 0 0 0
Common Stock (270 shares) 277 0 277 0
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31, 1993

- ------------------------------------------------------------------------------------------------------------------------------------
COMPANY'S NAME (STATE) INVESTMENTS (4) COST VALUE
(TYPE OF BUSINESS)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
R-TEX DECORATIVES COMPANY, INC. (PA) Loans and Debt Securities 0 0
(decorative ribbon manufacturer) Warrants 0 0
- ------------------------------------------------------------------------------------------------------------------------------------
SALTON/MAXIM HOUSEWARES, INC. (IL)(1,2) Loans and Debt Securities 250 125
(small appliance distributor) Common Stock 0 118
- ------------------------------------------------------------------------------------------------------------------------------------
SPA LENDING CORPORATION (DC)(3) Preferred Stock Series A (5,578 shares) 0 0
(health spas) Preferred Stock Series B (8,755 shares) 0 0
Preferred Stock Series C (14,092 shares) 0 0
Common Stock (6,208 shares) 0 0
- ------------------------------------------------------------------------------------------------------------------------------------
SUNSTATES REFRIGERATED SERVICES, INC. (GA)(3) Loans and Debt Securities 2,234 2,234
(cold food storage) Preferred Stock (43,884 shares) 0 0
Common Stock (163 shares) 35 0
- ------------------------------------------------------------------------------------------------------------------------------------
TACO TICO, INC. (KS)(2) Loans and Debt Securities 1,188 199
(Mexican fast food restaurant) Warrants 28 0
- ------------------------------------------------------------------------------------------------------------------------------------
TIMBERCREEK COMPANY (NY)(3) Loans and Debt Securities 762 762
(archery equipment) Common Stock 17 17
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL FOAM, INC. (CT)(2,3) Loans and Debt Securities 1,570 369
(packaging systems) Common Stock (910 shares) 57 0
- ------------------------------------------------------------------------------------------------------------------------------------
TPG HOLDINGS, INC. (TX) Loans and Debt Securities 1,463 1,463
(commercial banking software development) Warrants 13 2,120
- ------------------------------------------------------------------------------------------------------------------------------------
TOWER BROADCASTING (MN) Loans and Debt Securities 358 358
(radio station) Warrants 19 19
- ------------------------------------------------------------------------------------------------------------------------------------
VISTECH CORPORATION (FL) Loans and Debt Securities 7 0
(computer vision products) Warrants 8 0
- ------------------------------------------------------------------------------------------------------------------------------------
VISU-COM, INC. (MD)(3) Loans and Debt Securities 2,239 1,270
(visual communications products) Preferred Stock 224 0
Common Stock (270 shares) 54 0
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

F - 20
<PAGE> 63
<TABLE>
<CAPTION>
SEPTEMBER 30, 1995 DECEMBER 31, 1994 DECEMBER 31, 1993
(UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------------------
COMPANY'S NAME (STATE) INVESTMENTS (4) COST VALUE COST VALUE COST VALUE
(TYPE OF BUSINESS)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
WEATHERTECH DISTRIBUTING CO. (AL) Loans and Debt Securities 84 84 169 169 259 259
(HVAC wholesale distributor) Warrant 14 960 14 960 14 440
- ------------------------------------------------------------------------------------------------------------------------------------
WEST VIRGINIA RADIO CORP. (WV) Loans and Debt Securities 582 582 599 599 599 599
(radio station) Warrants 200 0 200 78 200 200
- ------------------------------------------------------------------------------------------------------------------------------------
WILLIAMS BROTHERS LUMBER (GA) Loans and Debt Securities 830 830 378 378 376 376
(builders' supply yards) Warrants 15 1,614 15 2,017 15 1,004
- ------------------------------------------------------------------------------------------------------------------------------------
WINCAPP BROADCASTING INC. (PA) Debt Securities 694 694 690 690 692 692
(radio station) Warrants 23 23 23 23 23 23
- ------------------------------------------------------------------------------------------------------------------------------------
Z-SPANISH RADIO NETWORK (CA) Loans and Debt Securities 2,983 2,983 2,606 2,606 0 0
(radio station) Warrants 3 3 2 2 0 0
- ------------------------------------------------------------------------------------------------------------------------------------
SUBTOTAL $78,313 $87,984 $75,838 $81,773 $52,447 $61,962
====================================================================================================================================
</TABLE>

F - 21
<PAGE> 64
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF LOANS TO AND INVESTMENTS IN
SMALL BUSINESS CONCERNS
(dollars in thousands)
SEPTEMBER 30, 1995 DECEMBER 31, 1994 DECEMBER 31, 1993
(UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------------------
LOANS WITH NO EQUITY COST VALUE COST VALUE COST VALUE
(TYPE OF BUSINESS) (a)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Accounting Services (1 Loan) $179 $179 $182 $182 $186 $186
- ------------------------------------------------------------------------------------------------------------------------------------
Adult Care Facility (2 Loans) 1,936 1,936 606 527 424 424
- ------------------------------------------------------------------------------------------------------------------------------------
Asbestos Removal 0 0 16 0 27 22
- ------------------------------------------------------------------------------------------------------------------------------------
Auto Repair Shops (11 Loans) 1,590 1,519 1,729 1,675 1,926 1,926
- ------------------------------------------------------------------------------------------------------------------------------------
Chemical Manufacturer (1 Loan) 6 6 4 4 7 7
- ------------------------------------------------------------------------------------------------------------------------------------
Clean Room Equipment Manufacturer (1 Loan) 66 0 0 0 0 0
- ------------------------------------------------------------------------------------------------------------------------------------
Coin Laundromats 0 0 77 77 92 92
- ------------------------------------------------------------------------------------------------------------------------------------
Computer Hardware & Software Distributor 0 0 0 0 207 207
- ------------------------------------------------------------------------------------------------------------------------------------
Contract Nursing Agency (1 Loan) 159 50 0 0 159 79
- ------------------------------------------------------------------------------------------------------------------------------------
Doughnut Shops (4 Loans) 735 735 690 690 1,451 1,451
- ------------------------------------------------------------------------------------------------------------------------------------
Drycleaners (1 Loan) 133 133 149 149 252 252
- ------------------------------------------------------------------------------------------------------------------------------------
Federal Government Contractors (1 Loan) 207 104 207 207 0 0
- ------------------------------------------------------------------------------------------------------------------------------------
Fried Chicken Restaurants (2 Loans) 1,436 1,436 1,563 1,563 1,712 1,712
- ------------------------------------------------------------------------------------------------------------------------------------
Gas Stations (1 Loan) 363 363 364 364 368 368
- ------------------------------------------------------------------------------------------------------------------------------------
Grocery Stores (1 Loan) 170 170 177 177 573 573
- ------------------------------------------------------------------------------------------------------------------------------------
Health Spas 0 0 0 0 2,333 988
- ------------------------------------------------------------------------------------------------------------------------------------
Hotels/Motels (6 Loans) 9,077 9,077 9,157 8,505 6,941 6,280
- ------------------------------------------------------------------------------------------------------------------------------------
Hotel In-room Services 0 0 0 0 685 685
- ------------------------------------------------------------------------------------------------------------------------------------
Limestone Mining (1 Loan) 834 1,310 939 939 0 0
- ------------------------------------------------------------------------------------------------------------------------------------
Liquor Store (1 Loan) 531 531 535 535 539 539
- ------------------------------------------------------------------------------------------------------------------------------------
Pizza Shops (24 Loans) 1,390 745 2,117 1,936 2,946 2,332
- ------------------------------------------------------------------------------------------------------------------------------------
Publishing Company 0 0 1,000 1,000 0 0
- ------------------------------------------------------------------------------------------------------------------------------------
Radio Stations (10 Loans) 11,408 11,408 10,786 10,749 9,905 9,836
- ------------------------------------------------------------------------------------------------------------------------------------
Restaurants 0 0 0 0 28 28
- ------------------------------------------------------------------------------------------------------------------------------------
Retail Shops (1 Loan) 529 1,068 544 1,083 0 0
- ------------------------------------------------------------------------------------------------------------------------------------
Small Appliances Distributor (1 Loan) 250 250 250 250 0 0
- ------------------------------------------------------------------------------------------------------------------------------------
Telephone Directories (1 Loan) 1,000 1,000 0 0 50 50
- ------------------------------------------------------------------------------------------------------------------------------------
Television Station (1 Loan) 125 125 125 125 1,125 1,125
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

(a) Number of loans as of September 30, 1995.

F - 22

<PAGE> 65
<TABLE>
<CAPTION>
SEPTEMBER 30, 1995 DECEMBER 31, 1994 DECEMBER 31, 1993
(UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------------------
LOANS WITH NO EQUITY COST VALUE COST VALUE COST VALUE
(TYPE OF BUSINESS) (a)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Tobacco Shop 0 0 0 0 154 154
- ------------------------------------------------------------------------------------------------------------------------------------
Travel Agency (1 Loan) 138 69 138 69 138 138
- ------------------------------------------------------------------------------------------------------------------------------------
Video Store 0 0 0 0 18 18
- ------------------------------------------------------------------------------------------------------------------------------------
Warehouse 0 0 0 0 40 40
- ------------------------------------------------------------------------------------------------------------------------------------
Wholesale Food Distributor (1 Loan) 232 232 232 232 0 0
- ------------------------------------------------------------------------------------------------------------------------------------
Yogurt Shops (3 Loans) 296 296 363 363 449 449
- ------------------------------------------------------------------------------------------------------------------------------------
SUBTOTAL $32,790 $32,742(b) $31,950 $31,401 $32,735 $29,961
- ------------------------------------------------------------------------------------------------------------------------------------
OTHER INVESTMENT ASSETS
- ------------------------------------------------------------------------------------------------------------------------------------
Pledged repurchase agreements $865 $865 $1,217 $1,217 $1,342 $1,342
- ------------------------------------------------------------------------------------------------------------------------------------
Other investment assets 2,012 228 2,053 635 1,700 1,365
- ------------------------------------------------------------------------------------------------------------------------------------
SUBTOTAL $2,877 $1,093 $3,270 $1,852 $3,042 $2,707
- ------------------------------------------------------------------------------------------------------------------------------------
GRAND TOTAL $113,980 $121,819 $111,058 $115,026 $88,224 $94,630
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

(a) Number of loans as of September 30, 1995; (b) Includes 3 loans totaling
$5,191 which are non-qualifying assets for BDC purposes at September 30, 1995.

F - 23
<PAGE> 66
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED STATEMENT OF LOANS TO
AND INVESTMENTS IN SMALL BUSINESS CONCERNS
As of September 30, 1995 (unaudited) and December 31, 1994 and 1993

A. COMPANIES HOLDING LOANS AND INVESTMENTS

The loans and other investments listed are held by the Company and its wholly
owned subsidiaries.

B. LOANS AND DEBT SECURITIES

The loans and debt securities included in investments bear interest at an
annual rate ranging from 4 percent to 16.75 percent, and are generally payable
in installments with final maturities from five to twenty years from date of
issue. At September 30, 1995, of the aggregate cost of investments of
$113,980,000, investments totaling approximately $9,519,000 are not accruing
interest.

C. VALUATION AS DETERMINED BY THE BOARD OF DIRECTORS

Loans and debt securities, which are not publicly traded, and warrants and
stocks for which there is no public market are valued based on collateral, the
ability to make payments, the earnings of the investee and other pertinent
factors. The values assigned are considered to be amounts which could be
realized in the normal course of business or from an orderly sale or other
disposition of the investments.

In the normal course of business, loans and debt securities are held to
maturity, and the amount realized, in addition to interest, is the face value,
which equals or exceeds cost.

Common stock investments that are traded on the over-the-counter market have
been valued at the prevailing bid price, less a discount where appropriate.

D. RESTRICTED SECURITIES

The portfolios of the Company and its subsidiaries consist primarily of
securities issued by privately held companies. The major portion of the assets
of the Company and its subsidiaries consists of securities that are subject to
restrictions on the resale or are otherwise illiquid. A majority of the
securities held by the Company cannot be sold to the public without
registration under the Securities Act of 1933.

In connection with the Company's investments in securities with publicly traded
companies, the securities held with the following companies are subject to
restrictions on their sale: Allied Capital Lending Corporation;
DeVlieg-Bullard, Inc.; DMI Furniture, Inc.; Garden Ridge Corporation;
MLX/SinterMet Corp.; Nobel Education Dynamics; Esquire Communications, Ltd. and
Providential Corporation.

F - 24
<PAGE> 67
E. DIVERSIFICATION OF LOANS AND INVESTMENTS

The following industries represent 5 percent or more of the total value of the
loans and investments outstanding at the dates indicated:

<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
September 30, December 31,
------------- -------------------------
1995 1994 1993 1992
---- ---- ---- ----
<S> <C> <C> <C> <C>
Restaurants * * * 7%
Hotels and Motels 7% 7% 7% 10%
Manufacturing 16% 12% 6% *
Pizza Shops * * * 5%
Radio Stations 20% 17% 20% 12%
Registered Investment Company 10% 13% 19% *
Software Development 5% 5% * *

* Less than 5%.
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>

F. NET UNREALIZED APPRECIATION (DEPRECIATION)

The net unrealized appreciation (depreciation) for all securities based on cost
for Federal income tax purposes is as follows:

<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
September 30, December 31,
(in thousands) 1995 1994
------------- ------------
<S> <C> <C>
Aggregate gross unrealized appreciation in which there is an excess of value over cost $ 22,625 $14,036
Aggregate gross unrealized depreciation in which there is an excess of cost over value (17,061) (15,191)
-------- --------
Net unrealized appreciation (depreciation) $ 5,564 $(1,155)
======== ========
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>

The aggregate cost of securities for federal income tax purposes was
$115,212,000 and $113,323,000 at September 30, 1995 and December 31, 1994,
respectively.

F - 25
<PAGE> 68

REPORT OF INDEPENDENT ACCOUNTANTS

The Board of Directors and Shareholders
Allied Capital Corporation

We have audited the consolidated statement of financial position of
Allied Capital Corporation and its wholly owned subsidiaries as of December 31,
1994 and 1993, including the consolidated statement of loans to and investments
in small business concerns as of December 31, 1994, and the related
consolidated statements of operations, cash flows, and changes in net assets
for each of the three years in the period ended December 31, 1994, and the
selected per share data presented as financial highlights for each of the five
years in the period ended December 31, 1994. These financial statements and per
share data are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and per
share data based on our audits.

We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements and per
share data 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 the examination or confirmation of
securities owned at December 31, 1994 and 1993. 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 financial statements and selected per share data
referred to above present fairly, in all material respects, the financial
position of Allied Capital Corporation and its wholly owned subsidiaries as of
December 31, 1994 and 1993, and the consolidated results of their operations,
cash flows, and changes in net assets for each of the three years in the period
ended December 31, 1994, and the selected per share data for each of the five
years in the period ended December 31, 1994 in conformity with generally
accepted accounting principles.

As explained in Note 1, the consolidated financial statements include
securities valued at $115,026,000 as of December 31, 1994 and $94,630,000 as of
December 31, 1993, (85 percent and 70 percent, respectively, of total assets)
whose values have been estimated by the Board of Directors in the absence of
readily ascertainable market values. We have reviewed the procedures used by
the Board of Directors in arriving at its estimate of value of such securities
and have inspected underlying documentation, and, in the circumstances, we
believe the procedures are reasonable and the documentation appropriate.
However, because of the inherent uncertainty of valuation, those estimated
values may differ significantly from the values that would have been used had a
ready market for the securities existed, and the differences could be material.

MATTHEWS, CARTER AND BOYCE

McLean, Virginia
February 10, 1995

F - 26

<PAGE> 69

<TABLE>
<S> <C>
====================================================== ================================================
No dealer, salesman or other person has been
authorized to give any information or to make any 883,665 SHARES
representations not contained in this Prospectus in
connection with the offer contained herein, and, if
given or made, such information or representation ALLIED CAPITAL
must not be relied upon as having been authorized by CORPORATION
the Company, the Company's investment adviser or any
underwriter. This Prospectus does not constitute an COMMON STOCK
offer of any securities other than those to which it
relates or an offer to sell, or a solicitation of an
offer to buy, to any person in any jurisdiction
where such an offer or solicitation would be
unlawful.

-------------

PROSPECTUS
----------------------- ________ __, 199_

-------------

====================================================== ================================================

</TABLE>
<PAGE> 70

ALLIED CAPITAL CORPORATION
HIGHLIGHTS OF THE OFFERING

ALLIED CAPITAL CORPORATION (the "Company") is issuing to its existing
stockholders non-transferable rights ("Subscription Rights") which entitle the
holders thereof to purchase new shares of the Company at a discounted price to
the Company's market price. Each stockholder will be issued one Subscription
Right for each share of the Company held as of January 22, 1996, the Record
Date. Each seven Subscription Rights will entitle stockholders to purchase one
new share of the Company's common stock (1-for-7) at a discounted price.

EXCLUSIVE OPPORTUNITY TO PURCHASE NEW SHARES AT A DISCOUNT TO THE CURRENT
MARKET VALUE

The pricing structure provides current stockholders with a unique and exclusive
opportunity to purchase additional shares of the Company's stock at 95% of the
average of the last reported sales price of a share of the Company's common
stock on the Nasdaq National Market on the Pricing Date and the four preceding
business days. This pricing formula guarantees the stockholder a subscription
price below the then-current market price. See the dilution section in the
prospectus for more information. The Company expects that there will be no
dilution to the Company's net asset value because the Company's shares have
historically traded, and continue to trade as of the date of this Prospectus,
at a premium to the last reported net asset value. Stockholders who choose not
to participate in the offer, however should expect to own a smaller
proportional interest in the Company following the expiration of the offer.

INCREMENTAL PROCEEDS MAY REDUCE EXPENSE RATIO AND INCREASE STOCK LIQUIDITY

Proceeds from a well-subscribed offering may reduce the Company's expense
ratio, thus benefiting both participating and non-participating stockholders.
Additional shares issued as a result of the completion of the rights offering
may also increase the liquidity of the shares.

INVESTMENT ADVISER WITH AN ESTABLISHED TRACK RECORD IN MANAGING THE COMPANY

The Company's investment adviser is Allied Capital Advisers, Inc. Advisers is
a registered investment adviser with more than $600 million under management
and whose management team has more than 35 years of experience managing Allied
Capital Corporation's portfolio of private small business investments.

IF YOU HAVE QUESTIONS, CONTACT THE INFORMATION AGENT FOR MORE INFORMATION

For additional information on the rights offering, please contact Shareholder
Communications Corporation, the Information Agent and Offering Coordinator for
the offering, at (800) 221-5724 extension 331. You may also contact your bank,
broker or other nominee, or contact the Company at (202) 331-1112.

(NOT PART OF THE PROSPECTUS)

ALLIED CAPITAL CORPORATION
QUESTIONS AND ANSWERS

WHY SHOULD I EXERCISE MY SUBSCRIPTION RIGHTS?

Allied Capital Corporation believes that an increase in the assets of the
Company at this time will permit the Company to invest in additional small
private businesses, as well as to leverage against this additional capital and
continue the growth of the Company.

WHAT AM I BUYING?

The Company is a business Development Company which commenced public operations
in January 1960. The investment objective of the Company is to provide a high
level of current income and long-term growth in the value of its net assets by
providing debt, mezzanine, and equity financing primarily for small privately
owned growth companies. The Company's investment adviser is Allied Capital
Advisers, Inc. ("Advisers").

HOW MUCH DID THE COMPANY PAY IN DIVIDENDS FOR 1995?

The Company declared dividends totaling $1.44 per share for 1995, including a
$0.58 per share extra dividend.

WHAT WILL BE THE PRICE OF THE NEW SHARES?

The purchase price per share (the "Subscription Price") will be 95% of the
average of the last reported sales price of a share of the Company's common
stock on the Nasdaq National Market on the Expiration Date of the Offer (the
"Pricing Date") and the four preceding business days. Therefore, Record Date
stockholders have the opportunity to purchase new shares below the market price
in the rights offering.

CAN STOCKHOLDERS SUBSCRIBE FOR ADDITIONAL SHARES AT THE DISCOUNTED PRICE?

Stockholders who fully exercise all of the Subscription Rights issued to them
may also request to purchase additional shares at the same discounted price
pursuant to the Over-Subscription Privilege. This privilege makes shares not
purchased by other stockholders available to those who wish to acquire more
than their entitlement through the exercise of Subscription Rights. These
shares will be allocated to stockholders requesting over-subscription shares
following the expiration of the offering on a pro rata basis, based on the
number of Subscription Rights issued.

WHAT ABOUT FRACTIONAL SHARES?

Fractional shares will not be issued.

CAN I SELL MY SUBSCRIPTION RIGHTS?

No. The Subscription Rights are non-transferable and have no resale value.

(NOT PART OF THE PROSPECTUS)

<PAGE> 71

These Questions and Answers and Highlights of the Offering should be read in
conjunction with the accompanying Prospectus relating to Allied Capital
Corporation's rights offering. The Prospectus contains more detailed
information, including special risk considerations about the rights offering
and the Company. These Questions and Answers and Highlights of the Offering are
qualified in their entirety by reference to the information included in the
Prospectus.

Investment in the Company, which invests in small private businesses, involves
a high degree of business and financial risk. The Company and its subsidiaries
borrow funds, and as a result are exposed to the risks of leverage.

DILUTION

An immediate dilution of each stockholder's proportional share of the Company
will be experienced as the number of shares outstanding after the offering will
increase. Such dilution will disproportionately affect those stockholders who
do not fully exercise their Subscription Rights and should expect that they
will, at the completion of the offering, own a smaller proportional interest in
the Company than they owned prior to the offering.

(NOT PART OF THE PROSPECTUS)

[ALLIED CAPITAL LOGO]
ALLIED CAPITAL

ALLIED
CAPITAL
CORPORATION

RIGHTS OFFERING

An Exclusive

Opportunity for

Stockholders

IMPORTANT DATES:

Record Date January 22, 1996

Subscription Period January 25 to Feb 23, 1996*

Expiration/Pricing Date Feb 23, 1996*

Confirmation Date March 6, 1996*

*unless extended

(NOT PART OF THE PROSPECTUS)

<PAGE> 72

PART B

INFORMATION REQUIRED IN A STATEMENT OF ADDITIONAL INFORMATION
<PAGE> 73

SUBJECT TO COMPLETION
Date of issuance of this preliminary SAI: November __, 1995

885,448 SHARES

ALLIED CAPITAL CORPORATION

COMMON STOCK

---------------

STATEMENT OF ADDITIONAL INFORMATION

This Statement of Additional Information is not a prospectus. It
should be read with the prospectus dated ______________ ___, 1996 relating to
this offering (the "Prospectus"), which may be obtained by calling the Company
at (202) 331-1112 and asking for Investor Relations. Terms not defined herein
have the same meaning as given to them in the Prospectus.

Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
any offers to buy be accepted prior to the time the registration statement
becomes effective. This Statement of Additional Information does not constitute
a prospectus.
<PAGE> 74

TABLE OF CONTENTS

<TABLE>
<CAPTION>
Page in the Statement Location of
of Additional Related Disclosure
Information in the Prospectus
----------- -----------------
<S> <C>
MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-3
Directors and Officers . . . . . . . . . . . . . . . . . . . . . . . B-3
Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-4
Stock Options. . . . . . . . . . . . . . . . . . . . . . . . . . . . B-6

CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES . . . . . . . . . . . B-7

INVESTMENT ADVISORY AND OTHER SERVICES . . . . . . . . . . . . . . . . . B-8
Investment Advisory Agreement . . . . . . . . . . . . . . . . . . . B-8
Custodian Services . . . . . . . . . . . . . . . . . . . . . . . . . B-10
Accounting Services . . . . . . . . . . . . . . . . . . . . . . . . B-10

BROKERAGE ALLOCATION AND OTHER PRACTICES . . . . . . . . . . . . . . . . B-11

TAX STATUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-11
</TABLE>

B - 2
<PAGE> 75
MANAGEMENT

DIRECTORS AND OFFICERS

The directors and officers of the Company are listed below together
with their respective positions with the Company and a brief statement of their
principal occupations during the past five years and any positions held with
affiliates of the Company:

<TABLE>
<CAPTION>
Position(s) Held
Name, Address, and With the
Age Company Principal Occupation(s) During Past Five (5) Years
------------------------ --------------- --------------------------------------------------------------
<S> <C> <C>
David Gladstone* Chairman of the Employed by the Company or Advisers since 1974; Chairman and
(Age 53) Board and Chief Chief Executive Officer of Allied II, Allied Commercial,
Executive Allied Lending, and Advisers; Director, President, and Chief
Officer Executive Officer of BMI; Director of Riggs National
Corporation; Trustee of The George Washington University. He
has served as a director of the Company since 1976.

George C. Williams* Vice Chairman of Employed by the Company or Advisers since 1959; Vice Chairman
(Age 69) the Board of Allied II, Allied Commercial, Allied Lending, and
Advisers; Chairman of BMI. He has served as a director of
the Company since 1964. He is the father of G. Cabell
Williams III (see below).

Joseph A. Clorety III Director President of Clorety & Company, Inc. (registered investment
(Age 53) adviser) for more than the past five years. He has served as
a director of the Company since 1984.

Michael I. Gallie Director Principal of The Millenium Group Inc. (financial and
(Age 49) management consulting firm) for the past five years;
President of Economic Development Finance Corporation from
1987 to 1990; Trustee and Chairman of Investment Committee of
the District of Columbia Retirement Board from 1991 to 1995.
He has served as a director of the Company since 1994.

Warren K. Montouri Director Private investor for more than the past five years; Director
(Age 66) of NationsBank, N.A. He has served as a director of the
Company since 1986.

Guy T. Steuart II Director Director and President of Steuart Investment Company
(Age 64) (manages, operates, and leases real and personal property and
holds stock in operating subsidiaries engaged in various
manufacturing and service businesses) for more than the past
five years; Trustee Emeritus of Washington and Lee
University. He has served as a director of the Company since
1984.
</TABLE>

B - 3
<PAGE> 76

<TABLE>
<CAPTION>
Position(s) Held
Name, Address, and With the
Age Company Principal Occupation(s) During Past Five (5) Years
------------------------ --------------- --------------------------------------------------------------
<S> <C> <C>
T. Murray Toomey Director Attorney in private practice for more than the past five
(Age 71) years; Director of The National Capital Bank of Washington;
Director of Federal Center Plaza Corporation; Director of The
Donohoe Companies, Inc.; Trustee of The Catholic University
of America. He has served as a director of the Company since
1959.

G. Cabell Williams III* Director, Executive Vice President of Allied II, Allied Commercial,
(Age 41) President, and Allied Lending Corporation, BMI, and Advisers; Director of
Chief Operating Environmental Enterprises Assistance Fund. Since 1981, he
Officer has held positions with the Company and with Advisers, Allied
II, Allied Commercial, Allied Lending, and BMI after their
inception. He has served as a director of the Company since
1993. He is the son of George C. Williams (see above).

Jon A. DeLuca Senior Vice Employed by Advisers since 1994. Senior Vice President,
(Age 33) President, Treasurer, and Chief Financial Officer of Allied II, Allied
Treasurer, and Commercial, Allied Lending, BMI, and Advisers since 1994;
Chief Financial Manager of Entrepreneurial Services at Coopers & Lybrand from
Officer 1986 to 1994.

William F. Dunbar Executive Vice Employed by the Company or Advisers since 1987; President and
(Age 36) President Chief Operating Officer of Allied II; Executive Vice
President of Allied Commercial, Allied Lending, BMI, and
Advisers.

Thomas R. Salley General Counsel Employed by Advisers since 1988; General Counsel and
(Age 38) and Secretary Secretary of Allied II, Allied Lending, Allied Commercial,
BMI, and Advisers.

Joan M. Sweeney Executive Vice Employed by Advisers since 1993; President and Chief
(Age 36) President Operating Officer of Advisers; Executive Vice President of
Allied II, Allied Commercial, Allied Lending, and BMI; Senior
Manager at Ernst & Young from 1990 to 1993.
</TABLE>

* "Interested persons" as defined in the 1940 Act.

COMPENSATION

The Company has no employees and does not pay any cash compensation to
any of its officers, other than directors' fees to those of its officers who
are also directors. All of the Company's officers are employed by Allied
Advisers, the Company's investment adviser, which pays their cash compensation.
The Company, from time to time, grants stock options to its officers under the
Company's Stock Option Plan.

B - 4
<PAGE> 77

During 1994, each director received a fee of $1,000 for each meeting
of the Board of Directors of the Company and its wholly owned subsidiaries or
each separate committee meeting attended. The members of the Board of
Directors are compensated by fees at the rate of $1,000 per meeting of the
Board of the Company or its wholly owned subsidiaries or each Separate (i.e.,
not held on the same day as a full Board meeting) meeting of a committee of
such Board which the member attends unless such separate meeting occurs on the
same day as a Board meeting, in which case directors receive $500 for
attendance at such meeting. There is no duplication of directors' fees and
expenses even if some directors also take action on behalf of the Company's
wholly owned subsidiaries. The Company's stockholders approved a one-time
grant of options to each member of the Board of Directors who is not an
employee of the investment advisor to purchase 10,000 shares of the Company's
common stock pursuant to the Company's Stock Option Plan and such grants were
subject to Commission approval. Such approval was granted by the Commission on
December 26, 1995 and the options were granted at the current market price as
of that date.

The following table sets forth certain details of compensation paid to
directors during 1994, as well as compensation paid for serving as a director
of the two other investment companies to which the Company may be deemed to be
related.

B - 5
<PAGE> 78
COMPENSATION TABLE

Aggregate Pension Or Estimated Total Compensation
Compensation From Retirement Benefits Annual From Company and
the Accrued as Part of Benefits Upon Related Companies
Name and Position Company(1) Company Expenses Retirement Paid to Directors(2)
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
David Gladstone $9,500 $0 $0 $28,000
Director

George C. Williams 12,000 0 0 29,000
Director

G. Cabell Williams III 10,000 0 0 10,000
Director

Joseph A. Clorety III 10,500 0 0 10,500
Director

Guy T. Steuart II 13,500 0 0 13,500
Director

Warren K. Montouri 10,500 0 0 10,500
Director

T. Murray Toomey 12,000 0 0 12,000
Director

Michael I. Gallie 8,000 0 0 8,000
Director
</TABLE>
- ------------------------------------

(1) Consists only of directors' fees.
(2) Includes amounts paid as compensation to directors by Allied II and
Allied Lending, the other companies in the fund complex.

STOCK OPTIONS

No stock options were granted during 1994. The following chart
summarizes the grant of options to directors during the past three fiscal years
including the securities underlying those options or stock appreciation rights
("SARs"), and any long term incentive payouts ("LTIP").

B - 6
<PAGE> 79

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
Long-Term Compensation
--------------------------------------

Awards Payouts
----------------------------------- -------------

Securities
Restricted Underlying
Names and Principal Position Year Stock Award(s) Options/SARs LTIP Payouts
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
David Gladstone 1992 $0 0 $0
Director 1993 0 50,610 0
1994 0 0 0

George C. Williams 1992 $0 0 $0
Director 1993 0 5,556 0
1994 0 0 0

G. Cabell Williams III 1992 $0 0 $0
Director 1993 0 48,963 0
1994 0 0 0

Joseph A. Clorety III 1992 $0 0 $0
Director 1993 0 0 0
1994 0 0 0

Guy T. Steuart II 1992 $0 0 $0
Director 1993 0 0 0
1994 0 0 0

Warren K. Montouri 1992 $0 0 $0
Director 1993 0 0 0
1994 0 0 0

T. Murray Toomey 1992 $0 0 $0
Director 1993 0 0 0
1994 0 0 0

Michael I. Gallie 1992 $0 0 $0
Director 1993 0 0 0
1994 0 0 0
</TABLE>

CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES

As of September 30, 1995, there were 6,185,660 shares of the Company's
common stock outstanding. The Company knows of no person who owned
beneficially five percent or more of its shares at that date. At that date,
the Company's directors and officers as a group, 30 in number, beneficially
owned 1,166,373 shares, which includes for this purpose 518,578 shares of
underlying unexercised stock options granted under the Company's Stock Option
Plan that would be exercisable within sixty days of that date. Those 1,166,373
shares represent 17.26% of the shares that would be outstanding if all of those
options were exercised.

B - 7
<PAGE> 80
INVESTMENT ADVISORY AND OTHER SERVICES

Subject to the supervision and control of its Board of Directors, the
investments of the Company are managed by Allied Capital Advisers, Inc., a
publicly owned investment adviser located at 1666 K Street, N.W., 9th Floor,
Washington, D.C. 20006-2803, telephone (202) 331-1112. Advisers is registered
with the Commission under the Investment Advisers Act of 1940. The shares of
Advisers are traded on the Nasdaq National Market (symbol: ALLA).

Advisers currently has thirty-eight (38) investment and other
professionals, as well as thirty-four (34) other employees. David Gladstone
and George C. Williams have 55 years of combined experience in making the types
of investments proposed to be made by the Company. Mr. Gladstone holds an MBA
degree from the Harvard Business School and worked for Price Waterhouse and ITT
Corporation before joining the Allied Capital organization in 1974. He is the
author of Venture Capital Handbook and Venture Capital Investing, both
published by Simon & Schuster/Prentice Hall. Mr. Williams is a past President
of the National Association of Small Business Investment Companies and has
lectured as a resident executive at the McIntyre School of Commerce at the
University of Virginia.

All investments of the Company must be approved by a credit committee
composed of the senior investment officers of Allied Advisers, including David
Gladstone, George C. Williams, and G. Caball Williams III. Additionally, the
Board of Directors reviews and approves every investment made by the Company.

David Gladstone, George C. Williams, and G. Cabell Williams III are
interested persons and affiliated persons, as those terms are defined in the
1940 Act, of the Company and its investment adviser.

Advisers is at this time a party to investment advisory agreements
with the Company and with Allied II and Allied Lending, both business
development companies which, directly or through one or more small business
investment company subsidiaries, specialize in loans with equity features to
and equity investments in small business concerns. Advisers is the general
partner of a private limited partnership which itself is the general partner of
two privately funded venture capital limited partnerships, Allied Venture and
Allied Technology, engaging in the same business as the Company and Allied II
but no longer making new investments. Advisers serves as the investment
adviser to those two limited partnerships. All of these entities co-invest
with one another. In addition, Advisers is the investment manager of Allied
Commercial, a publicly held real estate investment trust (a "REIT"), and the
co-manager of BMI, a privately held REIT. Allied Commercial and BMI
participate with one another in buying interest paying business loans secured
by real estate. At September 30, 1995, total assets under Advisers' management
approximated $639 million.

INVESTMENT ADVISORY AGREEMENT

In May 1995, the Company's stockholders approved a new investment
advisory agreement (the "current agreement"). The current agreement will
remain in effect from year to year as long as its continuance is approved at
least annually by the Board of Directors, including a majority of the
disinterested directors, or by the vote of the holders of a majority, as
defined in the 1940 Act, of the outstanding voting securities of the Company.
The current agreement may, however, be terminated at any time on (60) sixty
days' notice, without the payment of any penalty, by the Board of Directors or
by vote of a majority of the Company's outstanding voting securities, as
defined, and will terminate automatically in the event of its assignment.

B - 8
<PAGE> 81

The terms of the current agreement are virtually identical to those of
the investment advisory agreement between the Company and Advisers that it
replaced ("former agreement") except as to the calculation of the investment
advisory fee and to the extent clarifying changes were made regarding the
nature of professional or technical fees and expenses to be paid by the
Company. The terms of the current agreement regarding calculation of the
investment advisory fee are intended to reflect Advisers' practice of generally
imposing a significantly lower fee on the Company's cash and cash equivalents
and Interim Investments than the fee applicable to the Company's
invested assets, which Advisers has effected by waiving portions of the
investment advisory fee applicable to the Company's cash and cash equivalents
and Interim Investments. In the current agreement the provisions of the former
agreement concerning the transaction costs to acquire or dispose of an
investment were clarified to describe the nature of professional or technical
fees and expenses to be paid by the Company and to provide that those fees and
expenses included items such as credit reports, title searches, fees of
accountants or industry-specific technical experts, and transaction-specific
travel expenses. The effect of those clarifications and the replacement of the
former agreement does not result in the imposition of any new fee or expense to
be paid by the Company or its stockholders. Replacement of the former
agreement with the current agreement is expected to result in an advisory fee
that is lower than that provided under the former agreement (absent waiver by
Advisers of any portion of its fee) and approximately the same as that provided
in recent practice when Advisers waives a portion of its fee annually. The
terms of the current agreement are summarized below.

Pursuant to the current agreement, Advisers manages the investments of
the Company, subject to the supervision and control of the Board of Directors.
Specifically, Advisers identifies, evaluates, structures, closes, and monitors
the investments made by the Company. The Company will not make any investments
that have not been recommended by Advisers as long as the current agreement
remains in effect. Advisers has the authority to effect acquisitions and
dispositions of investments for the Company's account, subject to approval by
the Company's Board of Directors.

The current agreement provides that the Company will pay all of its
own operating expenses, except those specifically required to be borne by
Advisers. The expenses paid by Advisers include the compensation of its
investment officers and the cost of office space, equipment, and other
personnel necessary for day-to-day operations. The expenses that are paid by
the Company include the Company's share of transaction costs (including legal
and auditing) incident to the acquisition and disposition of investments,
regular legal and auditing fees and expenses, the fees and expenses of the
Company's directors, the costs of printing and distributing proxy statements
and other communications to stockholders, the costs of promoting the Company's
stock, and the fees and expenses of the Company's custodian and transfer agent.
The Company, rather than Advisers, is also required to pay expenses associated
with litigation and other extraordinary or non-recurring expenses with respect
to its operations and investments, as well as expenses of required and optional
insurance and bonding. Advisers is, however, entitled to retain for its own
account any fees paid by or for the account of any company, including a
portfolio company, for special investment banking or consulting work performed
for that company which is not related to the Company's such investment
transaction or follow-on managerial assistance. Advisers will report to the
Board of Directors not less often than quarterly all fees received by Advisers
from any source whatever and whether, in its opinion, any such fee is one that
Advisers is entitled to retain under the provisions of the current agreement.
In the event that any member of the Board of Directors should disagree, the
matter will be conclusively resolved by a majority of the Board of Directors,
including a majority of the independent Directors. If the Company uses the
services of attorneys or paraprofessionals on the staff of Advisers for the
Company's corporate purposes in lieu of outside counsel, the Company will
reimburse Advisers for such services at hourly rates calculated to cover the
cost of such services, as well as for incidental disbursements by Advisers in
connection with such services.

B - 9
<PAGE> 82

consolidated total assets (less the Company's investment in Allied Lending and
the Company's consolidated Interim Investments and cash) and 0.125% per quarter
of the quarter-end value of the Company's Interim Investments and cash. The
current agreement provides specifically that the fee to Advisers will not apply
to the Company's investment in Allied Lending, as required by the SEC's 1993
exemptive order permitting the stepwise spinoff of Allied Lending. Such fees
on an annual basis are equivalent to 2.5% of the Company's consolidated total
assets (less the Company's investment in Allied Lending and the Company's
consolidated Interim Investments and cash and cash equivalents) and 0.5% of
the Company's Interim Investments and cash and cash equivalents.

Pursuant to the terms of the former agreement, as compensation for its
services to and the expenses paid for the account of the Company, Allied
Advisers was entitled to be paid, quarterly in arrears, a fee equal to the sum
of 0.625% per quarter of each quarter-end value of the Company's consolidated
assets less the Company's investment in Allied Lending. Such fees on an annual
basis were equivalent to 2.5% of the Company's consolidated invested assets
less the Company's investment in Allied Lending. For the purposes of
calculating the fee, the values of the Company's assets are determined as of
the end of each calendar quarter. The quarterly fee was paid as soon as
practicable after the values had been determined. The total amounts paid to
Advisers under the former agreement for the last three fiscal years were
$2,125,000 for 1992, $2,160,000 for 1993, and $2,605,000 for 1994.

Under the former agreement, during 1992, 1993 and 1994, Advisers waived
most of its fee on the Company's consolidated Interim Investments and cash and
cash equivalents, as the Company had excess Interim Investments and cash and
cash equivalents obtained with debt capital. The total fees waived on Interim
Investments and cash and cash equivalents were: $724,000 for 1992, $671,000 for
1993, and $527,000 for 1994.

The fee to Advisers provided for by the current agreement is
substantially higher than that paid by most investment companies because of the
efforts and resources devoted by Advisers to identifying, evaluating,
structuring, closing, and monitoring the types of private investments in which
the Company specializes. The rate of compensation paid by the Company to
Advisers is substantially the same as that paid by Allied II, with which
Advisers has also negotiated a new investment advisory agreement.

The Company also understands that the fee to Advisers provided for by
the current agreement is not in excess of that frequently paid by private
investment funds engaged in similar types of investments. Such private funds
also typically allocate to management a substantial participation in profits.

CUSTODIAN SERVICES

Under a Custodian Agreement, The Riggs National Bank of Washington,
D.C., whose principal business address is 808 17th street, N.W., Washington,
D.C. 20006, holds all securities of the Company, provides recordkeeping
services, and serves as the Company's custodian.

ACCOUNTING SERVICES

The firm of Matthews, Carter and Boyce is the independent accountant
for the Company for the year ending December 31, 1995. Its business
address is: 8200 Greensboro Drive, Suite 1000, McLean, Virginia 22102-3864.
Their phone number is (703) 761-4600. Matthews, Carter and Boyce is also the
independent accountant for the Company's subsidiaries, Allied Investment
Corporation, Allied Capital Financial Corporation, and Allied Development
Corporation.

B - 10
<PAGE> 83
Matthews, Carter and Boyce, or its predecessor, has served as the
Company's independent accountants since its inception and has no financial
interest in the Company. The expense recorded during the fiscal year ended
December 31, 1994, for the professional services provided to the Company
by Matthews, Carter and Boyce consisted of fees for audit services (which
included the audit of the consolidated financial statements of the Company
and its subsidiaries and review of the filings by the Company of reports and
registration statements with the Commission, the SBA or other regulatory
authorities) and for non-audit services (the fees for the latter aggregating
approximately 17% of the fees for audit services). The non-audit services,
which were arranged for by management without prior consideration by the Board
of Directors, consisted of non-audit related consultation and the preparation
of tax returns for the Company and its subsidiaries.

BROKERAGE ALLOCATION AND OTHER PRACTICES

Since the Company generally acquires and disposes of its investments
in privately negotiated transactions, it infrequently uses brokers.

TAX STATUS

The Company intends to qualify for and elect for each taxable year to
be treated as a "regulated investment company" under Subchapter M of the
Internal Revenue Code of 1986, as amended (the "Code"). If the Company
qualifies as a regulated investment company and distributes to stockholders
annually in a timely manner at least 90% of its "investment company taxable
income," as defined in the Code (i.e., net investment income, including accrued
original issue discount, and net short-term capital gains) (the "90%
Distribution Requirement"), it will not be subject to federal income tax on the
portion of its investment company taxable income and net capital gains (net
long-term capital gain in excess of net short-term capital loss) distributed to
stockholders as required under the Code. In addition, if the Company
distributes in a timely manner 98% of its capital gain net income for each
one-year period ending on December 31, and distributes 98% of its net ordinary
income for each calendar year (as well as any income not distributed in prior
years), it will not be subject to the 4% nondeductible federal excise tax
imposed with respect to certain undistributed income of regulated investment
companies. If the Company qualifies as a regulated investment company as it
intends to do, it generally will endeavor to distribute to stockholders all of
its investment company taxable income and its net capital gain, if any, for
each taxable year so that the Company will not incur income and excise taxes on
its earnings.

In order to qualify as a regulated investment company for federal
income tax purposes, the Company must, among other things: (a) derive in each
taxable year at least 90% of its gross income from dividends, interest,
payments with respect to securities loans, gains from the sale of stock or
securities, or other income derived with respect to its business of investing
in such stock or securities (the "90% Income Test"); (b) derive in each taxable
year less than 30% of its gross income from the sale of stock or securities
held for less than three months (the "30% Limitation"); and (c) diversify its
holdings so that at the end of each quarter of the taxable year (i) at least
50% of the value of the Company's assets consists of cash, cash items, U.S.
government securities, and other securities if such other securities of any one
issuer do not represent more than 5% of the Company's assets or 10% of the
outstanding voting securities of the issuer, and (ii) no more than 25% of the
value of the Company's assets is invested in the securities of one issuer
(other than U.S. government securities and securities of other regulated
investment companies) or of two or more issuers that are controlled (as
determined under applicable Code rules) by the Company and are engaged in the
same or similar trades or businesses.

Allied Lending, formerly a wholly owned subsidiary of the Company,
originates loans which are 70%-90% guaranteed by the SBA. Allied Lending then
sells the guaranteed portion of these loans in the secondary market.

B - 11
<PAGE> 84
The Internal Revenue Service may assert that these transactions subject Allied
Lending to a liability for income taxes of up to $845,000 for the year ended
December 31, 1992. The Company has agreed to indemnify Allied Lending for this
potential liability. Management believes that the Company has valid defenses
for the position that such transactions do not subject Allied Lending to a
liability for additional income taxes.

If the Company acquires or is 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, it will be required to
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 the Company in the same taxable year and to make
distributions accordingly.

Although the Company presently does not expect to do so, it is
authorized to borrow funds and to sell assets in order to satisfy its
distribution requirements. However, under the 1940 Act, the Company will not
be permitted to make distributions to stockholders while the Company's debt
obligations and other senior securities are outstanding unless certain "asset
coverage" tests are met. Moreover, the Company's ability to dispose of assets
to meet its distribution requirements may be limited by other requirements
relating to its status as a regulated investment company, including the 30%
Limitation and the diversification requirements. If the Company disposes of
assets in order to meet its distribution requirements, it may make such
dispositions at times which, from an investment standpoint, are not
advantageous.

If the Company fails to satisfy the 90% Distribution Requirement or
otherwise fails to qualify as a regulated investment company in any taxable
year, it will be subject to tax in such year on all of its taxable income,
regardless of whether the Company makes any distributions to its stockholders.
In addition, in that case, all of the Company's distributions to its
stockholders will be characterized as ordinary income (to the extent of the
Company's current and accumulated earnings and profits). In contrast, as
explained below, if the Company qualifies as a regulated investment company, a
portion of its distributions may be characterized as long-term capital gain in
the hands of stockholders.

For any period during which the Company qualifies as a regulated
investment company for tax purposes, dividends to stockholders of the Company's
investment company taxable income will be taxable as ordinary income to
stockholders to the extent of the Company's current or accumulated earnings and
profits.

Distributions of the Company's net capital gain properly designated by
the Company as "capital gain dividends" will be taxable to stockholders as a
long-term capital gain regardless of the stockholder's holding period for his
or her shares.

To the extent that the Company retains any net capital gain, it may
designate such retained gain as "deemed distributions" and pay a tax thereon
for the benefit of its stockholders. In that event, the stockholders will be
required to report their share of retained net capital gain on their tax
returns as if it had been distributed to them and report a credit for the tax
paid thereon by the Company. The amount of the deemed distribution net of such
tax would be added to the stockholder's cost basis for his shares. Since the
Company expects to pay tax on net capital gain at the regular corporate tax
rate of 35% and the maximum rate payable by individuals on net capital gain is
28%, the amount of credit that individual stockholders may report would exceed
the amount of tax that they would be required to pay on net capital gain.
Stockholders who are not subject to federal income tax or tax on capital gains
should be able to file a Form 990T or an income tax return on the appropriate
form that allows them to recover the taxes paid on their behalf.

B - 12
<PAGE> 85
Any dividend declared by the Company 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 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.

Investors should be careful to consider the tax implications of buying
shares just prior to a distribution. Even if the price of the shares includes
the amount of the forthcoming distribution, the stockholder generally will be
taxed upon receipt of the distribution and will not be entitled to offset the
distribution against the tax basis in his shares.

A stockholder may recognize taxable gain or loss if he sells or
exchanges his shares. Any gain arising from (or, in the case of distributions
in excess of earnings and profits, treated as arising from) the sale or
exchange of shares generally will be a capital gain or loss except in the case
of dealers or certain financial institutions. This capital gain or loss
normally will be treated as a long-term capital gain or loss if the stockholder
has held his shares 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 shares held for six months or less will be treated as a
long-term capital loss to the extent of the amount of capital gain dividends
received with respect to such shares and, for this purpose, the special rules
of Section 246(c)(3) and (4) of the Code generally apply in determining the
holding period of shares. Net capital gain of noncorporate taxpayers is
currently subject to a maximum federal income tax rate of 28% while other
income may be taxed at rates as high as 39.6%. Corporate taxpayers are
currently subject to federal income tax on net capital gain at the maximum 35%
rate also applied to ordinary income. Tax rates imposed by states and local
jurisdictions on capital gain and ordinary income may differ.

The Company may be required to withhold U.S. federal income tax at the
rate of 31% of all taxable dividends and distributions payable to stockholders
who fail to provide the Company with their correct taxpayer identification
number or to make required certifications, or regarding whom the Company has
been notified by the Internal Revenue Service that they are subject to backup
withholding. Backup withholding is not an additional tax, and any amounts
withheld may be credited against a stockholder's U.S. federal income tax
liability.

Federal withholding taxes at a 30% rate (or a lesser treaty rate) may
apply to distributions to stockholders that are nonresident aliens or foreign
partnerships, trusts, or corporations. Foreign investors should consult their
tax advisors with respect to the possible U.S. federal, state, and local tax
consequences and foreign tax consequences of an investment in the Company.

The Company will send to each of the stockholders, as promptly as
possible after the end of each fiscal 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 and as long-term capital gain.
In addition, the federal tax status of each year's distributions generally will
be reported to the Internal Revenue Service. Distributions may also be subject
to additional state, local, and foreign taxes depending on each stockholder's
particular situation. Stockholders are advised to consult their own tax
advisors with respect to the particular tax consequences to them of an
investment in the Company, including the possible effect of any pending
legislation or proposed regulation.

B - 13
<PAGE> 86

PART C

OTHER INFORMATION
<PAGE> 87
PART C

OTHER INFORMATION

ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS

1. Financial Statements

The following financial statements of Allied Capital Corporation (the
"Registrant" or "Company") are included in the Prospectus (Part A of
this Registration Statement):

Consolidated Statement of Financial Position -- September 30,
1995 (unaudited) and December 31, 1994 and 1993

Consolidated Statement of Operations -- For the Nine Months
Ended September 30, 1995 and 1994 (unaudited) and the Years
Ended December 31, 1994, 1993 and 1992

Consolidated Statement of Changes in Net Assets -- For the
Nine Months Ended September 30, 1995 and 1994 (unaudited) and
the Years Ended December 31, 1994, 1993 and 1992

Consolidated Statement of Cash Flows -- For the Nine Months
Ended September 30, 1995 and 1994 (unaudited) and the Years
Ended December 31, 1994, 1993 and 1992

Notes to Consolidated Financial Statements

Consolidated Statement of Loans to and Investments in Small
Business Concerns -- September 30, 1995 (unaudited) and
December 31, 1994 and 1993

Notes to Consolidated Statement of Loans to and Investments in
Small Business Concerns

Report of Independent Accountants

2. Exhibits

a. Articles of Incorporation of the Registrant (1)

b. By-laws of the Registrant, as amended (2)

c. None

d.1 Specimen certificate of Registrant's Common Stock, par value
$1.00, the rights of holders of which are defined in Exhibits
a and b **

d.2 Form of subscription form by which beneficial owners of
Registrant's Common Stock may exercise their non-transferable
Subscription Rights and Over-Subscription Priviledge. *

C - 1
<PAGE> 88
e. Registrant's dividend reinvestment plan (7)

f.1 Form of SBA subordinated debentures comprising the long-term
debt of Registrant's wholly-owned subsidiary, Allied
Investment Corporation **

f.2 Form of preferred stock agreement for 3 percent cumulative
preferred stock, $100 par value, of Allied Capital Financial
Corporation, the rights of the holder of which are defined in
Exhibit f.4 (9)

f.3 Form of preferred stock agreement for 4 percent preferred
stock, $100 par value, of Allied Capital Financial
Corporation, the rights of the holder of which are defined in
Exhibit f.4 (10)

f.4 Excerpts from Articles of Incorporation and By-laws of Allied
Capital Financial Corporation that define rights of holder of
preferred stock **

f.5 Form of SBA subordinated debentures comprising the long-term
debt of Registrant's wholly owned subsidiary, Allied Capital
Financial Corporation **

f.6 Note Agreement between Massachusetts Mutual Life Insurance
Company and the Registrant, Allied Investment Corporation, and
Allied Capital Financial Corporation dated April 30, 1992 and
amendments (3)

f.7 Loan Agreement between Overseas Private Investment Corporation
and Registrant, dated April 10, 1995 **

f.8 Unsecured Line of Credit Agreement between The Riggs National
Bank of Washington, D.C. and the Registrant dated December 18,
1995 **

g. Investment Advisory Agreement between Registrant and Allied
Capital Advisers, Inc. (4)

h. Form of solicitive Dealer Agreement between the Registrant
and Dealers *

i. Registrant's Incentive Stock Option Plan, as amended in May
1994 (8)

j.1. Custodian Agreement between The Riggs National Bank of
Washington, D.C., and the Registrant, dated June 27, 1989 **

j.2. Custodian Agreement between The Riggs National Bank of
Washington, D.C., and Allied Investment Corporation, dated
June 27, 1989 **

j.3 Custodian Agreement between The Riggs National Bank of
Washington, D.C., and Allied Capital Financial Corporation,
dated June 27, 1989 **

C - 2
<PAGE> 89

k.1. Tax Indemnification Agreement dated November 12, 1993 between
the Registrant and Allied Capital Lending Corporation (5)

k.2. Letter Agreement dated November 16, 1993 among Allied Capital
Lending Corporation, the Registrant and Lehman Brothers Inc.
(6)

k.3 Form of offering Coordinator/Information Agent Agreement
between the Registrant and Shareholder Communications
Corporation **

k.4 Form of subscription Agency Agreement between the Registrant
and American Stock Transfer & Trust Company **

l. Opinion of the firm of Sutherland, Asbill & Brennan, as to the
legality of the common stock being registered, and Consent to
the use of such Opinion *

m. None

n. Consent of Matthews, Carter and Boyce, independent
accountants *

o. None

p. None

q. None

r. Financial Data Schedule (11)

s. Powers of Attorney of certain signatories of this registration
statement (12)

- -----------

* Filed herewith.

** To be filed by subsequent pre-effective amendment.

(1) Incorporated by reference to Exhibit D to the Company's definitive
proxy statement filed on April 11, 1991.

(2) Incorporated by reference to Exhibit E to the Company's definitive
proxy statement filed on April 11, 1991.

(3) Incorporated by reference to Exhibit (4)(D)(i) filed with the
Company's Annual Report on Form 10-K for the year ended December 31,
1992. Amendments thereto are incorporated by reference to Exhibits
(4)(D)(ii), (4)(D)(iii) and (4)(D)(iv) to the Company's Form 8-K
filed on December 9, 1993.

(4) Incorporated by reference to Exhibit A to the Company's definitive
proxy statement filed on March 30, 1995.

(5) Incorporated by reference to an exhibit of the same number filed with
the Company's Annual Report on Form 10-K for the year ended
December 31, 1993.

(6) Incorporated by reference to an exhibit of the same number filed with
the Company's Form 8-K dated November 19, 1993.

C - 3
<PAGE> 90
(7) Incorporated by reference to an exhibit of the same number filed with
the Company's Annual Report on Form 10-K for the year ended
December 31, 1992.

(8) Incorporated by reference to Exhibit A to the Company's definitive
proxy statement with respect to an annual meeting of stockholders held
on May 5, 1994.

(9) Incorporated by reference to such Exhibit filed with Registration
Statement No. 33-22200.

(10) Incorporated by reference to such Exhibit filed with Registration
Statement No. 34501 or Pre-Effective Amendment No. 1 thereto.

(11) Incorporated by reference to the Company's quarterly report on Form
10-Q for the quarter ended September 30, 1995, (File No. 814-97), filed
with the Commission on November 14, 1995.

(12) Incorporated by reference to the Company's initial registration
statement on Form N-2 (File No. 33-64629), filed with the Commission on
November 29, 1995.

ITEM 25. MARKETING ARRANGEMENTS

None.

ITEM 26. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

The expenses in connection with the distribution of the securities
being offered hereby, other than underwriting discounts and commissions, are
estimated as follows:

<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee . . . . . . . . . . . . $3,980.31
Blue Sky Fees and Expenses . . . . . . . . . . . . . . . . . . . . . . . .
Federal Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State Taxes and Fees . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transfer Agent's and Registrar's Fees and Expenses . . . . . . . . . . . .
Expenses of Nominees . . . . . . . . . . . . . . . . . . . . . . . . . . .
Printing Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Legal Fees and Expenses . . . . . . . . . . . . . . . . . . . . . . . . . .
Auditor's Fees and Expenses . . . . . . . . . . . . . . . . . . . . . . .
Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $________
</TABLE>

ITEM 27. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL

<TABLE>
<S> <C>
Allied Capital Corporation (the Registrant)* - Maryland
Subsidiaries:
------------
Allied Investment Corporation - Maryland 100%
Allied Capital Financial Corporation - Maryland 100%
Allied Development Corporation - District of Columbia 100%
</TABLE>

C - 4
<PAGE> 91
<TABLE>
<S> <C>
Allied Capital Corporation II* - Maryland
Subsidiaries:
------------
Allied Investment Corporation II - Maryland 100%
Allied Financial Corporation II - Maryland 100%

Allied Capital Commercial Corporation* - Maryland
Subsidiaries:
------------
ALCC Holdings, Inc. - Maryland 100%
ALCC Acceptance Corporation - Maryland 100%

Allied Capital Lending Corporation* - Maryland
Subsidiary:
----------
ACLC Limited Partnership - Maryland 99%

Business Mortgage Investors, Inc.* - Maryland
Subsidiaries:
------------
BMI Holdings, Inc. - Maryland 100%
BMI Acceptance Corporation - Maryland 100%

Allied Capital Funding, L.L.C.** - Delaware

Allied Capital Mortgage Corporation* - Maryland

Allied Capital Advisers, Inc. - Maryland
Subsidiary:
----------
Allied Capital Property Corporation - Maryland 100%
</TABLE>

- -------------
* Each of these entities is, like the Registrant, advised by Allied
Capital Advisers, Inc. ("Advisers"). By so including these entities herein,
the Registrant does not concede, however, that it and such other entities are
controlled by Allied Advisers.

** The members of Allied Capital Funding, L.L.C. are ALCC Acceptance
Corporation and BMI Acceptance Corporation.

ITEM 28. NUMBER OF HOLDERS OF SECURITIES

The following table presents the number of record holders of each
class of securities of the Company outstanding as of December 31, 1995:

<TABLE>
<CAPTION>
Number of
Title of Class Record Holders
-------------- --------------
<S> <C>
Common Stock 1,400*

Non-Redeemable 3% Cumulative Preferred Stock 1
(Allied Financial)

Redeemable 4% Cumulative Preferred Stock 1
(Allied Financial)

10-Year Subordinated Debentures 1
(Allied Investment and Allied Financial)
</TABLE>

C - 5
<PAGE> 92
<TABLE>
<S> <C>
LIBOR +2.5% Revolving Line of Credit 1

10-Year 9.15% Senior Notes 1
(The Company, Allied Investment and Allied Financial)
</TABLE>

--------------------
* Estimate. The Company also estimates that there are a total of 9,000
beneficial owners of its common stock.

ITEM 29. INDEMNIFICATION

The Annotated Code of Maryland, Corporations and Associations, Section
2-418 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, or 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 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 Articles of Incorporation of the Company 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. The Company's Bylaws also, however, provide that the
Company may not indemnify any director or officer against liability to the
Registrant or its security holders to which he might otherwise be subject by
reason of such person's willful

C - 6
<PAGE> 93
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his 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.

Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the Company pursuant to the provisions described above, or
otherwise, the Company 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
the Company 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, the Company 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 the court of the issue.

The Registrant, in conjunction with its investment adviser and other
entities managed thereby, carries liability insurance for the benefit of its
directors and officers on a claims-made basis of up to $2,500,000, subject to a
$200,000 retention and the other terms thereof.

ITEM 30. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER

Allied Capital Advisers, Inc., the investment adviser of the
Registrant, is engaged in the business of identifying, evaluating, structuring,
closing, and monitoring the investments made by the Registrant as well as other
public and private entities engaged in small business finance. Certain
information about the activities of each director or executive officer of
Allied Capital Advisers, Inc., at any time during the past two fiscal years is
set forth below:

NAME AND PRINCIPAL BUSINESS ADDRESS*
OF EACH COMPANY WITH WHICH THE
NAMED PERSON HAS HAD ANY CONNECTION,
AND THE NATURE OF SUCH
NAME CONNECTION.
---- --------------------------------------
<S> <C>
David Gladstone Chairman of the Board and Chief Executive
Officer, Allied Capital Advisers, Inc.,
Allied Capital Corporation, Allied Capital
Corporation
</TABLE>

C - 7
<PAGE> 94

<TABLE>
<S> <C>
II, Allied Capital Lending Corporation, and
Allied Capital Commercial Corporation; Director,
President and Chief Executive Officer, Business
Mortgage Investors, Inc.; Director, Riggs National
Corporation, 808 17th Street, N.W., Washington,
DC 20006.

George C. Williams Vice Chairman of the Board, Allied Capital Advisers,
Inc., Allied Capital Corporation, Allied Capital
Corporation II, Allied Capital Lending Corporation,
and Allied Capital Commercial Corporation; Chairman,
Business Mortgage Investors, Inc.; Director, Golden
Eagle/Satellite Archery, Inc., 1111 Corporate Drive,
Farmington, NY 14425.

Brooks H. Browne Director, Allied Capital Advisers, Inc.; President,
Environmental Enterprises Assistance Fund, 1901
N. Moore Street, Suite 1004, Arlington, VA 22209
(since 1993).

Robert E. Long Director, Allied Capital Advisers, Inc.; Chairman
and Chief Executive Officer, Southern Starr
Broadcasting Group, Inc., 99 Canal Center Plaza,
Suite 220, Alexandria, VA 22314; Director, American
Heavy Lift Shipping Company, 365 Canal Street, New
Orleans, LA 70130, Global Travel, Inc., 1911 N.
Fort Meyer Drive, Arlington, VA 22209, CSC Scientific,
Inc., 8315 Lee Highway, Fairfax, VA 22031, Outer
Seal Building Products, Inc., 5114 College Avenue,
College Park, MD 20740, Business News Network, Inc.,
99 Canal Center Plaza, Suite 220, Alexandria, VA
22314, and Ambase Corporation, 51 Weavers Street,
Greenwich, CT 06831.

William L. Walton Director, Allied Capital Advisers, Inc.;
Director and President, Education Partners,
Inc.; Director, Odyssey Publishing Co.; Chairman,
Success Lab, Inc.; and President, Language Odyssey
(all located at 401 N. Michigan Avenue, Suite 3370,
Chicago, IL 60611).

Joan M. Sweeney Director, President, and Chief Operating Officer,
Allied Capital Advisers, Inc.; Executive Vice
President, Allied Capital Corporation, Allied
Capital Corporation
</TABLE>

C - 8
<PAGE> 95
<TABLE>
<S> <C>
II, Allied Capital Lending Corporation, Allied
Capital Commercial Corporation, and Business
Mortgage Investors, Inc.

William F. Dunbar Executive Vice President, Allied Capital
Advisers, Inc.; President and Chief Operating
Officer, Allied Capital Corporation II;
Executive Vice President, Allied Capital
Corporation, Allied Capital Commercial
Corporation, Allied Capital Lending
Corporation, and Business Mortgage Investors, Inc.

Katherine C. Marien Executive Vice President, Allied Capital Advisers,
Inc.; President and Chief Operating Officer,
Allied Capital Lending Corporation; Executive
Vice President, Allied Capital Corporation,
Allied Capital Corporation II, Allied Capital
Commercial Corporation, and Business Mortgage
Investors, Inc.

John M. Scheurer Executive Vice President, Allied Capital Advisers,
Inc.; President and Chief Operating Officer,
Allied Capital Commercial Corporation; Executive
Vice President, Allied Capital Corporation, Allied
Capital Corporation II, and Allied Capital
Lending Corporation; Executive Vice President
and Chief Operating Officer, Business Mortgage
Investors, Inc.

George Stelljes III Executive Vice President, Allied Capital Advisers,
Inc.; Senior Vice President, Allied Capital
Corporation, Allied Capital Corporation II, Allied
Capital Commercial Corporation, Allied Capital
Lending Corporation, and Business Mortgage
Investors, Inc.; Director, Total Foam, Inc., 80
Rowe Avenue, Unit B, Milford, CT 06460, Visu-Com,
Inc., 1207 Bernard Drive, Baltimore, MD 21203,
and Centennial Media Corporation, 6061 S. Willow
Drive, Suite 232, Englewood, CO 80111.

G. Cabell Williams III Executive Vice President, Allied Capital Advisers,
Inc.; President and Chief Operating Officer,
Allied Capital Corporation; Executive Vice President,
Allied Capital Corporation II, Allied Capital
Commercial Corporation, Allied Capital Lending
Corporation and Business
</TABLE>

C - 9
<PAGE> 96

<TABLE>
<S> <C>
Mortgage Investors, Inc. Director, President,
and Treasurer, Broadcast Holdings, Inc., 1025
Vermont Avenue, N.W., Suite 1030, Washington,
DC 20005 and Georgetown Broadcasting Company, Inc.,
1416 Highmarket Street, Georgetown, SC 29442;
Director, Garden Ridge Corporation, 19411 Atrium
Place, Suite 170, Houston, TX 77084; Director,
Environmental Enterprises Assistance Fund, 1901
N. Moore Street, Suite 1004, Arlington, VA 22209.

Jon A. DeLuca Senior Vice President, Treasurer and Chief
Financial Officer, Allied Capital Advisers,
Inc., Allied Capital Corporation, Allied Capital
Corporation II, Allied Capital Lending Corporation,
Allied Capital Commercial Corporation, and Business
Mortgage Investors, Inc. Manager, Entrepreneurial
Services, Coopers & Lybrand (1986-1994).

Thomas R. Salley General Counsel and Secretary, Allied Capital
Advisers, Inc., Allied Capital Corporation,
Allied Capital Corporation II, Allied Capital
Lending Corporation, Allied Capital Commercial
Corporation, and Business Mortgage Investors, Inc.
</TABLE>

- ----------------
* The business address of Allied Capital Advisers, Inc., Allied Capital
Corporation, Allied Capital Corporation II, Allied Capital Lending Corporation,
Allied Capital Commercial Corporation, and Business Mortgage Investors, Inc.,
is c/o Allied Capital Advisers, Inc., 1666 K Street, N.W., Ninth Floor,
Washington, D.C. 20006-2803.

ITEM 31. LOCATIONS OF ACCOUNTS AND RECORDS

All of the accounts and records of the Registrant, including all the
accounts, books and documents required to be maintained by Section 31(a) of the
1940 Act and the rules thereunder, are maintained by Allied Capital Advisers,
Inc., 1666 K Street, N.W., Ninth Floor, Washington, D.C. 20006-2803.

ITEM 32. MANAGEMENT SERVICES

Other than with its investment adviser, the Registrant is not a party
to any contract pursuant to which any person performs management-related
services to the Registrant.

C - 10
<PAGE> 97
ITEM 33. UNDERTAKINGS

1. The Registrant undertakes to suspend the offering of shares
until the Prospectus is amended if (1) subsequent to the effective date of its
Registration Statement, the net asset value declines more than ten percent from
its net asset value as of the effective date of the Registration Statement or
(2) the net asset value increases to an amount greater than its net proceeds as
stated in the Prospectus.

2. Not Applicable.

3. The Registrant undertakes in the event that the securities
being registered are to be offered to existing shareholders pursuant to
warrants or rights and any securities are to be offered to the public, to
supplement the prospectus, after the expiration of the subscription period, to
set forth the results of the subscription offer, the transactions by
underwriters during the subscription period, the amount of unsubscribed
securities to be purchased by underwriters, and the terms of any subsequent
reoffering thereof. The Registrant further undertakes that if any public
offering by the underwriters of the securities being registered is to be made
on terms differing from those set forth on the cover page of the prospectus,
the Registrant shall file a post-effective amendment to set forth the terms of
such offering.

4. a. The Registrant undertakes to file, during any period
in which offers or sales are being made, a post-effective amendment to this
registration statement:

(1) To include any prospectus required by Section 10(a)(3) of
the 1933 Act;

(2) To reflect in the prospectus any fact or events arising
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

(3) 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;

b. The Registration undertakes 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 such securities
at that time shall be deemed to be the initial bona fide offering thereof; and

c. The Registrant undertakes 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.

5. a. The Registrant undertakes that, for the purpose of
determining any liability under the 1933 Act, the information omitted from the
form of Prospectus filed as part of this Registration Statement in reliance
upon Rule 430A and contained in a form of Prospectus filed by the Registrant
under Rule 497(h) under the 1933 Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective;

b. The Registrant undertakes that for the purpose of
determining any liability under the 1933 Act, each post-effective amendment
that contains a form of Prospectus shall be deemed to be a new Registration
Statement relating to the securities offered therein, and the offering of the
securities at that time shall be deemed to be the initial bona fide offering
thereof.

6. The Registrant undertakes to send by first class mail or other
means designed to ensure equally prompt delivery, within two business days of
receipt of a written or oral request, any Statement of Additional Information.

C - 11
<PAGE> 98
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, and District of Columbia, on the 11th day of January , 1996.

ALLIED CAPITAL CORPORATION

By: /s/ T.R. Salley
-----------------------------
Thomas R. Salley
General Counsel and Secretary

Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.

<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>

* Chairman of the Board and Chief
- -------------------------- Executive Officer (Principal ---------
David Gladstone Executive Officer) and Director

* Vice Chairman of the Board and
- -------------------------- Director ---------
George C. Williams

* President and Chief Operating
- -------------------------- Officer and Director ---------
G. Cabell Williams III

* Director ---------
- --------------------------
Joseph A. Clorety III

* Director ---------
- --------------------------
Michael I. Gallie

* Director ---------
- --------------------------
Warren K. Montouri

* Director
- -------------------------- ---------
Guy T. Steuart II

* Director
- -------------------------- ---------
T. Murray Toomey

* Vice President, Treasurer and
- -------------------------- Chief Financial Officer ---------
Jon A. DeLuca (Principal Financial Officer and
Principal Accounting Officer)

* By: /s/ T.R. Salley
--------------------
</TABLE>

Thomas R. Salley, Attorney-in-Fact and Agent, on January 11, 1996, pursuant
to the Powers of Attorney filed on November 29, 1995, as Exhibit (s) to the
initial registration statement.

<PAGE> 99
EXHIBIT INDEX

<TABLE>
<CAPTION>
Exhibit
Number Page
- ------ ----
<S> <C>

d.2 Form of Subscription Form by which beneficial owners of the Registrant's Common Stock may exercise their
non-transferable Subscription Rights and Over-Subscription Privilege

h Form of Soliciting Dealer Agreement between the Registrant and Dealers

n Consent of Matthews, Carter and Boyce, independent accountants
</TABLE>

<PAGE> 1
Exhibit d.2

Form of Subscription Form by which beneficial owners of the Registrant's
Common Stock may exercise their non-transferable
Subscription Rights and Over-Subscription Privilege
<PAGE> 2

THIS OFFER EXPIRES AT 5:00 PM EASTERN STANDARD TIME ON _________, 1996*
ALLIED CAPITAL CORPORATION
RIGHTS OFFERING

Subscription Form
Dear Stockholder:

As a stockholder of Allied Capital Corporation on January 22, 1996, the Record
Date for the Company's rights offering, you have been issued subscription
rights equal to the number of shares of common stock held by you on the Record
Date. Pursuant to the Primary Subscription, you are entitled to exercise your
Subscription Rights to purchase one (1) additional share of Allied Capital
Corporation for every seven (7) Subscription Rights held at an Estimated Price
of $_____ and according to the terms and conditions set forth in the Company's
Prospectus dated ___________, 1996. The terms and conditions of the rights
offering (the "Offer") set forth in the Prospectus are incorporated herein by
reference. Capitalized terms not defined herein have the meanings attributed
to them in the Prospectus.

In accordance with the Over-Subscription Privilege, as a Record Date
stockholder, you are also entitled to subscribe for additional Shares if, after
all Primary Subscriptions have been fulfilled, Shares are available and you
have fully exercised all Subscription Rights issued to you. If there are
insufficient Shares remaining to satisfy all requests pursuant to the
Over-Subscription Privilege, the available shares will be allocated in
proportion to the number of Subscription Rights originally issued to you. The
Company may also, at its sole discretion, elect to increase the number of
Shares available in the Offer by up to 15% in order to satisfy requests for
additional Shares pursuant to the Over-Subscription Privilege.

SAMPLE CALCULATION OF PRIMARY SUBSCRIPTION
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Subscription Price is estimated at
Number of shares of Number of Subscription Rights divided by $____ per Share. In this example, if
Allied Capital Number of 7 = Number of Shares available to you the full Primary Subscription was
Corporation owned on Subscription Rights under Primary Subscription exercised, the Estimated Subscription
the Record Date: issued: (any fractions must be dropped): Price would be:
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1,000 1,000 142 $_________
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>

HOW TO EXERCISE SUBSCRIPTION RIGHTS

In order to Exercise your Subscription Rights, you must either (a) complete and
sign this Subscription Form on the back and return it together with payment of
the Estimated Subscription Price for the shares, or (b) present a properly
completed Notice of Guaranteed Delivery, in either case to the Subscription
Agent, American Stock Transfer and Trust Company, before 5:00 pm, Eastern
Standard Time, on February 23, 1996 * (the "Expiration Date").

<TABLE>
<S> <C>
By Mail or Express Mail By Hand or Overnight Courier
----------------------- ----------------------------
American Stock Transfer and American Stock Transfer and Trust Company
Trust Company Corporate Reorganization Department
Corporate Reorganization Dept. 40 Wall Street, 46th Floor
40 Wall Street, 46th Floor New York, NY 10005
New York, NY 10005
</TABLE>

FULL PAYMENT OF THE ESTIMATED SUBSCRIPTION PRICE PER SHARE FOR ALL SHARES
SUBSCRIBED FOR PURSUANT TO BOTH THE PRIMARY SUBSCRIPTION AND THE
OVER-SUBSCRIPTION PRIVILEGE MUST ACCOMPANY THIS SUBSCRIPTION FORM AND MUST BE
MADE PAYABLE IN UNITED STATES DOLLARS BY MONEY ORDER OR CHECK DRAWN ON A BANK
LOCATED IN THE UNITED STATES AND MADE PAYABLE TO ALLIED CAPITAL CORPORATION.
ALTERNATIVELY, IF A NOTICE OF GUARANTEED DELIVERY IS USED, A PROPERLY COMPLETED
AND EXECUTED SUBSCRIPTION FORM MUST BE RECEIVED BY THE SUBSCRIPTION AGENT NO
LATER THAN THE CLOSE OF BUSINESS ON THE THIRD (3RD) BUSINESS DAY FOLLOWING THE
EXPIRATION DATE AND FULL PAYMENT, AS DESCRIBED IN THE NOTICE OF GUARANTEED
DELIVERY, IS RECEIVED NO LATER THAN THE TENTH (10TH) BUSINESS DAY FOLLOWING THE
CONFIRMATION DATE. PLEASE SEE "PAYMENT FOR SHARES" IN THE PROSPECTUS FOR
ADDITIONAL INFORMATION.

Delivery of shares subscribed to pursuant to the Primary Subscription and
Over-Subscription Privilege will be made within thirty (30) days following the
Expiration Date of the Offer. See "Delivery of Shares" in the Prospectus for
additional information.

THESE SUBSCRIPTION RIGHTS ARE NON-TRANSFERABLE.

* UNLESS EXTENDED.
<PAGE> 3
In order to exercise your Subscription Rights, you must complete Part 1 and
Part 2 below. Complete Part 3 only if applicable.

PART 1 - If you choose to subscribe for Shares, plesae complete the following:
/ / I wish to subscribe for the following number of shares pursuant to the
Primary Subscription:

<TABLE>
<S> <C>
_________________________ X $_______ (a) per share = $____________
Number of shares
</TABLE>

/ / I wish to exercise my Over-Subscription Privilege (b):

<TABLE>
<S> <C>
_________________________ X $_______ (a) per share = $____________
Number of additional shares
AMOUNT ENCLOSED $____________
</TABLE>

(a) Please note: $_______ per share is an estimated price only. The
Subscription Price will be determined on ___________, 1996, the Pricing Date
(which is the same date as the Expiration Date, unless extended), and could be
higher or lower depending on changes in the share price of the common stock as
quoted on the Nasdaq National Market.

(b) You can only over-subscribe if you have fully exercised your Primary
Subscription.

PART 2 - I acknowledge that I have received the Prospectus for this Offer and I
hereby irrevocably subscribe for the number of Shares indicated above on the
terms and conditions set out in the Prospectus. I understand and agree that I
will be obligated to pay an additional amount to the Company if the
Subscription Price as determined on the Pricing Date is in excess of the
$______ Estimated Subscription Price per share.

I hereby agree that if I fail to pay in full for the shares for which I have
subscribed, the Company may exercise any of the remedies provided for in the
Prospectus.

Signature of stockholder(s):
-----------------------------------------

Printed Name: Telephone number:( )
-------------------------- ---- ------
Please note that all stock certificates and refund checks, if any, will be
delivered to the address of record, which is the address to which the materials
for this offering were delivered. If you wish to change the address of record,
please provide separate written instructions, sign the instructions, and
deliver them to the Subscription Agent.

PART 3 - The following broker-dealer is hereby designated as having been
instrumental in the exercise of the rights hereby exercised:

FIRM:
-----------------------------------------------------------------

REPRESENTATIVE NAME:
--------------------------------------------------

REPRESENTATIVE NUMBER:
------------------------------------------------

<PAGE> 1
Exhibit h

Form of Soliciting Dealer Agreement between the Registrant and Dealers
<PAGE> 2

ALLIED CAPITAL CORPORATION
RIGHTS OFFERING

Soliciting Dealer Agreement

THE OFFER WILL EXPIRE AT 5:00 PM, EASTERN STANDARD TIME, ON FEBRUARY 23, 1996,
UNLESS EXTENDED.

To Securities Brokers and Dealers:

Allied Capital Corporation (the "Company") is issuing to its stockholders of
record as of the close of business on January 22, 1996 (the "Record Date)
subscription rights ("Subscription Rights") to subscribe for an aggregate of
885,448 shares (the "Shares") of common stock, par value $1.00 per share, of
the Company upon the terms and subject to the conditions set forth in the
Company's Prospectus dated __________________, 1996 (the "Offer"). Each
stockholder of record on the Record Date is being issued one Subscription Right
for each full share of common stock owned on the Record Date. No fractional
Subscription Rights will be issued. The Subscription Rights are
non-transferable and will not be quoted for trading on the Nasdaq National
Market System ("Nasdaq") or on any other exchange. The Subscription Rights
entitle stockholders to acquire at the Subscription Price (as hereinafter
defined) one Share for each seven Subscription Rights held in the Primary
Subscription. The Subscription Price per Share will be 95% of the average of
the last reported sale price of a share of the Company's common stock on Nasdaq
on the date of expiration of the Offer (the "Pricing Date") and on the four
preceding business days. The Subscription Period commences on January 25, 1996
and ends at 5:00 pm, Eastern Standard Time, on February 23, 1996 (the
"Expiration Date"), unless extended by the Company at its sole discretion. Any
stockholder who fully exercises all Subscription Rights issued to him is
entitled to subscribe for Shares which were not otherwise subscribed for by
others in the primary subscription (the "Over-Subscription Privilege"). Shares
acquired pursuant to the Over-Subscription Privilege are subject to increase
and allotment, as more fully discussed in the Prospectus.

The Company will pay Soliciting Fees (as hereinafter defined) to any qualified
broker or dealer who solicits the exercise of Subscription Rights in connection
with the Offer and who complies with the procedures described below (each such
broker or dealer, a "Soliciting Dealer"). Upon timely delivery to American
Stock Transfer and Trust Company, the Company's subscription agent for the
Offer (the "Subscription Agent") of payment for Shares purchased pursuant to
the exercise of Subscription Rights and of properly completed and executed
documentation as set forth in this Soliciting Dealer Agreement, a Soliciting
Dealer hereunder will be entitled to receive fees equal to 2.5% of the
Subscription Price per Share purchased pursuant to exercise of the Subscription
Rights by such Soliciting Dealer's customers (the "Soliciting Fees"). A
qualified broker or dealer is a broker or dealer that is a member of a
registered national securities exchange in the United States or the National
Association of Securities Dealers, Inc. ("NASD") or otherwise eligible to
participate under the NASD Rules.

The Company hereby agrees to pay the Soliciting Fees payable to each such
Soliciting Dealer. Solicitation and other activities by Soliciting Dealers may
be undertaken only in accordance with the applicable rules and regulations of
the Securities and Exchange Commission and the NASD or any other applicable
self-regulatory organization and only in those states and other jurisdictions
where those solicitations and other activities may be undertaken in accordance
with the laws in those states and other jurisdictions. Compensation will not
be paid for solicitations in any state or jurisdiction in which, in the opinion
of counsel to the Company, compensation may not be lawfully paid. No
Soliciting Dealer will be paid Soliciting Fees with respect to Shares purchased
pursuant to an exercise of Subscription Rights for its own account or for the
account of any affiliate of the Solicitor Dealer. No Soliciting Dealer or any
other person is authorized by the Company to give any information or make any
representations in connection with the Offer other than those contained in the
Prospectus and other authorized solicitation material furnished by the Company
through the Company's Information Agent and Offering Coordinator, Shareholder
Communications Corporation. No Soliciting Dealer is authorized to act as agent
of the Company in any connection or transaction. In addition, nothing
contained in this Soliciting Dealer Agreement will cause the Soliciting Dealer
to become a partner with the Company or create any other association between
the Soliciting Dealer and the Company, or will render the Company liable for
the obligations of any Soliciting Dealer. The Company will be under no
liability to make any payment to any Soliciting Dealer except as otherwise set
forth herein.
<PAGE> 3
In order for a Soliciting Dealer to receive Soliciting Fees: (i) Shareholder
Communications Corporation, the Company's Information Agent and Offering
Coordinator, must have received from that Soliciting Dealer, no later
than 5:00 pm, Eastern Standard Time, on the Expiration Date, a properly
completed and duly executed Soliciting Dealer Agreement. The Subscription
agent must have received the Beneficial Owner Certification (in the form
provided by the Company)(or a facsimile thereof), and (ii) Subscription Rights
must be exercised and Shares must be paid for as and when set forth in the
Prospectus.

All questions as to the form, validity and eligibility (including time
of receipt) of the Soliciting Dealer Agreement will be determined by the
Company's Information Agent and Offering Coordinator, in its sole discretion,
which determination will be final and binding. Unless waived, any
irregularities in connection with a Soliciting Dealer Agreement must be cured
within such time as the Company may determine. None of the Company, Shareholder
Communications Corporation, the Company's Subscription Agent, or any other
person will be under any duty to give notification of any defects or
irregularities in any Soliciting Dealer Agreement or incur any liability for
failure to give that notification.

Execution and delivery of this Soliciting Dealer Agreement and the acceptance
of Soliciting Fees from the Company by a Soliciting Dealer constitute a
representation and warranty by that Soliciting Dealer to the Company that: (i)
it has received and reviewed the Prospectus; (ii) in soliciting purchases of
Shares pursuant to the exercise of the Subscription Rights, it has complied
with the applicable requirements of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), the applicable rules and regulations thereunder,
any applicable securities laws of any state or other jurisdiction where such
solicitations may lawfully be made and the applicable rules and regulations of
any self-regulatory organization or registered national securities exchange;
(iii) in soliciting purchases of Shares pursuant to the exercise of the
Subscription Rights, it has not published, circulated or used any soliciting
materials other than the Prospectus and any other authorized solicitation
material furnished by the Company through Shareholder Communications
Corporation;(iv) it has not purported to act as agent of the Company in any
connection or transaction relating the Offer; (v) the information contained in
this Soliciting Dealer Agreement is, to its best knowledge, true and complete;
(vi) it is not affiliated with the Company; (vii) the Soliciting Fees being
paid are not being paid with respect to Shares purchased by it or an affiliate
pursuant to an exercise of Subscription Rights for its own or the affiliates
account; (viii) it will not remit, directly or indirectly, any part of the
Soliciting Fees paid by the Company pursuant to the terms of this Soliciting
Dealer Agreement to any beneficial owner of Shares purchased pursuant to the
Offer; and (ix) it has agreed to the amount of the Soliciting Fees and the
terms and conditions set forth in this Soliciting Dealer Agreement with respect
to receiving those Soliciting Fees. By returning a Soliciting Dealer Agreement
and accepting Soliciting Fees, a Soliciting Dealer agrees to indemnify the
Company against losses, claims, damages and liabilities to which the Company
may become subject as a result of the breach of that Soliciting Dealer's
representations and warranties made in this Soliciting Dealer Agreement and
described above. In making the foregoing representations and warranties,
Soliciting Dealers are reminded of the possible applicability of Rule 10b-6
under the Exchange Act if they have bought, sold, dealt in or traded in any
shares of the common stock of the Company for their own account since the
commencement of the Offer.

The Company agrees to indemnify and hold harmless each of the Soliciting
Dealers and each person, if any, who controls a Soliciting Dealer within the
meaning of either Section 15 of the Securities Act of 1933, as amended (the
"Securities Act"), or Section 20 of the Exchange Act (a "controlling person")
from and against any and all losses, claims, damages and liabilities
(including, without limitation, any legal or other expenses reasonably incurred
by such Selected Dealer or any such controlling person in connection with
defending or investigating any such action or claim) caused by any untrue
statement of a material fact contained in the Registration Statement of the
Company on Form N-2 under the Securities Act covering the Shares or any
amendment thereof or the Prospectus (as amended or supplemented if the Company
has furnished any amendments or supplements thereto), or any other soliciting
materials furnished by the Company through Shareholder Communications
Corporation, or caused by any omission to state therein a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances in which such statements were made,not misleading.

Soliciting Fees due to an eligible Soliciting Dealer will be paid promptly
after the Company's receipt of payment for the Shares issued upon the exercise
of Subscription Rights as a result of the Soliciting Dealer's soliciting effort
and upon verification by Shareholder Communications Corporation that the
documentation has been received in good form.
<PAGE> 4
This Soliciting Dealer Agreement may be signed in two or more counterparts,
each of which will be an original, with the same effect as if the signatures
were upon the same instrument.

This Soliciting Dealer Agreement will be governed by the internal laws of the
State of Maryland.

Please execute this Soliciting Dealer Agreement below, accepting the terms and
conditions set forth in this Soliciting Dealer Agreement and confirming that
you are a member firm of a registered national securities exchange or of the
NASD or a foreign broker or dealer not eligible for membership who has
conformed to the Rules of Fair Practice of the NASD in making solicitations of
the type being undertake pursuant to the Offer in the United States to the same
extent as if you were a member of the NASD, and certifying that you have
solicited the purchase of the Shares pursuant to exercise of the Rights, all as
described above, in accordance with the terms and conditions set forth in this
Soliciting Dealer Agreement.

----------------------------------
Chairman of the Board
Allied Capital Corporation

ACCEPTED AND CONFIRMED

- ----------------------------- ---------------------------------
Printed Firm Name Address

- ----------------------------- ---------------------------------
Authorized Signature City State Zip Code

- ----------------------------- ---------------------------------
Name Area Code Telephone Number

- -----------------------------
Title

Dated:
------------------------

ALL SOLICITING DEALER AGREEMENTS SHOULD BE RETURNED TO:
SHAREHOLDER COMMUNICATIONS CORPORATION
by facsimile (telecopier) at 800-733-1885.
Facsimile transmissions may be confirmed by calling 212-805-7113.

ALL QUESTIONS CONCERNING
SOLICITING DEALER AGREEMENTS SHOULD BE DIRECTED TO:
SHAREHOLDER COMMUNICATIONS CORPORATION
toll free at 800-221-5724, extension 331

<PAGE> 1
Exhibit n

Consent of Matthews, Carter and Boyce, independent accountants
<PAGE> 2

Allied Capital Corporation
Washington, D.C. 20006

We hereby consent to the use in the Prospectus constituting part
of this Registration Statement on Form N-2, in the form in which it becomes
effective, of our report dated February 10, 1995 relating to the consolidated
financial statements of Allied Capital Corporation and its wholly owned
subsidiaries for the years ended December 31, 1994, 1993 and 1992, which appear
in such Prospectus. We also consent to the reference to us under the headings
"Financial Highlights" and "Reports and Independent Public Accountants" in such
Prospectus.

/s/ MATTHEWS, CARTER AND BOYCE

McLean, Virginia
January 11, 1996