ALLIED CAPITAL CORP, N-2/A, 1996-01-24

ALLIED CAPITAL CORP
N-2/A, 1996-01-24

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<PAGE> 1

As filed with the Securities and Exchange Commission on January 24, 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. 2
-----

/ / 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)
/ / 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 par value 1,783 shares $13.875 (3) $24,732 (3) $100.00 (2)

Common Stock
$1.00 par value 132,817 shares $13.625 (4) $1,809,631 (4) $624.01
- -----------------------------------------------------------------------------------------------------------------------
</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.

(4) 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 22, 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 Outside Front Cover Page

3. Fee Table and Synopsis Summary; Fees and Expenses; Available
Information

4. Financial Highlights Financial Highlights; Management's Discussion
and Analysis of Financial Condition and
Results of Operation

5. Plan of Distribution The Offer

6. Selling Shareholders (Not Applicable)

7. Use of Proceeds Use of Proceeds

8. General Description of the Registrant The Company; Public Trading and Net Asset
Value Information; Financial Statements

9. Management Management; Custodian, Transfer and Dividend
Paying Agent and Registrar

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

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

12. Legal Proceedings (Not Applicable)

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 Outside Front Cover Page

15. Table of Contents Table of Contents

16. General Information and History Not Applicable

17. Investment Objective and Policies The Company

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 Financial Statements

<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

PROSPECTUS

885,448 SHARES

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

Allied Capital Corporation (the "Company") is issuing to the stockholders 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 stockholder of the Company will be issued one Subscription Right
for each whole 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." No certificates or
other physical rights will be distributed. Stockholders 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 subject to subscription by up to 15%, or up to
132,817 Shares (the "Additional Shares"), for an aggregate total of 1,018,265
Shares available under the Offer. No fractional Subscription Rights will be
issued and no fractional shares will be issued upon exercise of Subscription
Rights. 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. The Company may offer and sell any
Shares not sold in the Offer, including any or all of the Additional Shares, to
certain other investors. See "The Offer--Sales of Shares Subsequent to the
Offer," page 17. Stockholder inquires should be directed to Shareholder
Communications Corporation, the Information Agent and Offering Coordinator, 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 EACH OF THE FOUR
PRECEDING BUSINESS DAYS. SEE "THE OFFER," PAGE 12. 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 27, 1996
(THE "EXPIRATION DATE"), UNLESS EXTENDED AS DESCRIBED HEREIN.

The Company, a Maryland corporation, is a closed-end, management investment
company that has elected to be regulated 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," PAGE 24.

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 at the address or telephone number
listed above. As indicated at some points in this Prospectus, certain
information in the Statement of Additional Information is incorporated in this
Prospectus by reference. See page 32 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...................... $12.90 $0.3225 $12.58
- -----------------------------------------------------------------------------------------------------
Total(5)....................... $11,422,279 $285,557 $11,136,722
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
</TABLE>

(Footnotes on the following page)

The date of this Prospectus and of the Statement of Additional Information is
January 25, 1996.

<PAGE> 7

(Footnotes from previous page)

(1) The Estimated Subscription Price is computed as 95% of the average of the
last reported sale price of the Company's common stock on Nasdaq on January
22, 1996 and each of the four preceding business days.

(2) In connection with the Offer, the Company will pay to certain broker-dealers
soliciting the exercise of Subscription Rights solicitation fees equal to
2.5% of the Subscription Price for each Share issued as a result of their
soliciting efforts. 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," page 14.

(3) Before deduction of offering costs incurred related to this offering,
payable by the Company, estimated at $272,304.

(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%. 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
$13,135,618, $328,390, and $12,807,228, respectively.

2
<PAGE> 8

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 businesses. 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 28.
INVESTMENT OBJECTIVE OF The investment objective of the Company is to provide a high level
THE COMPANY 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 18.
INVESTMENT As a BDC, the Company's consolidated portfolio includes primarily
CONSIDERATIONS 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 opportuni-
ties 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 22.
SECURITIES OFFERED AND The Company is offering to stockholders of record as of the close of
SUMMARY OF business on January 22, 1996 (the "Record Date") the right to
DISTRIBUTION 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
29, 1996 and ends as of 5:00 p.m., Eastern Standard Time, on
February 27, 1996 (the "Expiration Date"), unless extended as
described herein. The part of the Offer pursuant to which a
stockholder is entitled to purchase up to one (1) Share for each
seven (7) Subscription Rights held at the Subscription Price is
referred to as the "Primary Subscription."
OVER-SUBSCRIPTION In addition, any stockholder who fully exercises all Subscription
PRIVILEGE 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," page 12.
</TABLE>

3
<PAGE> 9

<TABLE>
<S> <C>
The existence of the Over-Subscription Privilege and the Company's
discretionary ability to increase by up to 15% the number of Shares
subject to the Offer will result in further dilution to those
stockholders who fully exercise their Subscription Rights to
subscribe for Shares pursuant to the Primary Subscription but who do
not fully 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 each Share
issued upon the exercise of Subscription Rights as a result of their
soliciting efforts. See "The Offer--Soliciting Fees," page 14.
</TABLE>

IMPORTANT DATES TO REMEMBER

EVENT DATE

Record Date.................................................... January 22, 1996

Subscription Period............................... January 29-February 27, 1996*

Expiration Date of the Offer................................. February 27, 1996*

Pricing Date................................................. February 27, 1996*

Subscription Forms and Payment for Shares Due+............... February 27, 1996*

Notices of Guaranteed Delivery Due+.......................... February 27, 1996*

Subscription Forms pursuant to Notices of Guaranteed Delivery Due...... March 1,
1996*

Confirmation to Participants..................................... March 8, 1996*

Payment pursuant to Notices of Guaranteed Delivery Due.......... March 22, 1996*

Final Collections or Rebates for Shares Due..................... March 22, 1996*

*Unless the Offer is extended to a date not later than March 1, 1996.

+ A stockholder exercising Subscription Rights must deliver to the Subscription
Agent by the Expiration Date either (1) a Subscription Form and payment for
Shares or (2) a Notice of Guaranteed Delivery.

<TABLE>
<S> <C>
SALES OF SHARES Following the completion of the Offer, the Company may offer and
SUBSEQUENT TO THE OFFER sell Shares not sold pursuant to the Offer to other investors. See
"The Offer--Sales of Shares Subsequent to the Offer," p. 17.
PRINCIPAL TRADING Nasdaq National Market under the symbol "ALLC." See "Public Trading
MARKET and Net Asset Value Information," page 11.
</TABLE>

FEES AND EXPENSES

<TABLE>
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES
Sales Load (as a percentage of offering price)................................. 2.50%(1)
Dividend Reinvestment Plan Fees................................................ none(2)
ANNUAL EXPENSES (as a percentage of consolidated net assets attributable to
common shares(3))
Investment Advisory Fees....................................................... 5.63%(4)
Interest Payments on Borrowed Funds............................................ 10.37%(5)
Other Expenses................................................................. 2.46%(6)
------
Total Annual Expenses..................................................... 18.46%(7)
======
</TABLE>

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

(1) Broker-dealers that have executed and delivered a Soliciting Dealer
Agreement and have solicited the exercise of Subscription Rights will
receive fees of 2.5% of the Subscription Price per Share for each Share
issued as a result of their soliciting efforts. These fees will be borne by
the Company and indirectly

4
<PAGE> 10

by all of the Company's stockholders, including those who do not exercise
their Subscription Rights. In the event that Shares are sold otherwise than
through the Offer, a corresponding supplement to this Prospectus will
disclose any additional sales load.

(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 attributable to common shares equals net assets (i.e., total
assets less total liabilities and redeemable preferred stock outstanding)
as of September 30, 1995 plus the anticipated net proceeds of the Offer
less non-redeemable preferred stock outstanding.

(4) Pursuant to Commission requirements, 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," page 28) 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.
This percentage for the year ended December 31, 1994 was 5.36%. 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," page 18.

(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. This percentage for
the year ended December 31, 1994 was 14.15%.

(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. This percentage for the year ended December 31, 1994 was
3.59%.

(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. If the Annual Expenses
percentage were calculated instead as a percentage of total assets, Annual
Expenses would be 7.57% of consolidated total assets on a pro forma basis
after giving effect to the anticipated net proceeds of the present
offering.

<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
on total assets and 7.57% (as a percentage of consolidated
total assets) of total annual expenses.................... $205 $ 551 $ 879 $1,628
</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.

5
<PAGE> 11

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 31.

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-20 below. See also
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," page 32.

SUMMARY BALANCE SHEET INFORMATION
(IN THOUSANDS)

<TABLE>
<CAPTION>
DECEMBER 31
-------------------------------------------------------- SEPTEMBER 30
1990(1) 1991 1992 1993 1994 1995
-------- -------- -------- -------- -------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
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> 12

SUMMARY INCOME STATEMENT INFORMATION
(IN THOUSANDS)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 NINE MONTHS
------------------------------------------------------- ENDED SEPTEMBER 30
1990(1) 1991 1992 1993 1994 ---------------------------
------- ------- ------- ------- ------- 1994 1995
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME
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 to stockholders of the Company.

(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 the period.

(3) Net increase in net assets resulting from operations is reduced by preferred
stock dividends of $203,000 for 1990, $220,000 for each of 1991, 1992, 1993
and 1994 and $165,000 for each nine-month period 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 regular 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 so paid.

(6) Includes a $2.75 per common share distribution of shares of 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> 13

(8) Subsequent to September 30, 1995, the Company's Board of Directors declared
a regular quarterly dividend of $0.24 per common share or $1,485,000
payable on December 29, 1995 and the year-end distribution of $0.58 per
common share or $3,588,000 payable on January 31, 1995. These declarations
resulted 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, which will reduce net
asset value by $5,073,000, or approximately $0.82 per common share.

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 fiscal 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.
-----------------------

8
<PAGE> 14

<TABLE>
<CAPTION>
TOTAL AMOUNT INVOLUNTARY
OUTSTANDING ASSET LIQUIDATING AVERAGE
EXCLUSIVE OF COVERAGE PREFERENCE MARKET VALUE
CLASS AND YEAR(9)(10) TREASURY SECURITIES(5) PER UNIT(6) PER UNIT(7) PER UNIT(8)
- ------------------------------------- ---------------------- ----------- ----------- ------------
<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 3,241 -- N/A
1988................................. 5,000,000 2,812 -- 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 1,662 -- N/A
1995(11)............................. 1,500,000 -- -- N/A
SUBORDINATED DEBENTURES(4)
1986(1).............................. $12,500,000 $ 3,066 -- --
1986(2).............................. 11,300,000 4,259 -- --
1987................................. 13,700,000 3,241 -- --
1988................................. 24,350,000 2,812 -- --
1989................................. 25,350,000 3,116 -- --
1990................................. 40,450,000 2,232 -- --
1991................................. 49,800,000 1,942 -- --
1992................................. 49,800,000 1,673 -- --
1993................................. 49,800,000 1,848 -- --
1994................................. 54,800,000 1,662 -- --
1995(11)............................. 61,300,000 -- -- --
REDEEMABLE CUMULATIVE
PREFERRED STOCK(4)
1986(1).............................. $ 0 0 $ 0 N/A
1986(2).............................. 0 0 0 N/A
1987................................. 0 0 0 N/A
1988................................. 0 0 0 N/A
1989................................. 0 0 0 N/A
1990................................. 1,000,000 190 100 N/A
1991................................. 1,000,000 170 100 N/A
1992................................. 1,000,000 152 100 N/A
1993................................. 1,000,000 168 100 N/A
1994................................. 1,000,000 152 100 N/A
1995(11)............................. 1,000,000 -- 100 N/A
</TABLE>

9
<PAGE> 15

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

(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) 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.

(4) Issued by the Company's small business investment company subsidiaries to
the U.S. Small Business Administration. These categories of senior
securities are not subject to the asset coverage requirements of the
Investment Company Act of 1940 (the "1940 Act").

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

(6) The asset coverage ratio for a class of senior securities representing
indebtedness is calculated as the Company's consolidated total assets less
all liabilities and indebtedness not represented by senior securities,
divided by senior securities representing indebtedness. This asset coverage
ratio is multiplied by $1,000 to determine the Asset Coverage Per Unit. The
asset coverage ratio for a class of senior securities that is preferred
stock is calculated as the Company's consolidated total assets less all
liabilities and indebtedness not represented by senior securities, divided
by senior securities representing indebtedness, plus the involuntary
liquidation preference of the preferred stock (see footnote 7). The Asset
Coverage Per Unit is expressed in terms of dollar amounts per share.

(7) 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.

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

(9) This table does not include U.S. government agency guaranteed loans sold
under agreements to repurchase held by Allied Capital Lending Corporation,
a wholly owned subsidiary of the Company until November 23, 1993, for the
years 1986 through 1993. This information is omitted as the Company no
longer uses this type of financing for its operations and has no intention
of resuming this practice in the foreseeable future.

(10) As of December 31, 1995, the Company had not borrowed any funds under its
$20 million loan agreement, which was entered into as of April 1995, with
the Overseas Private Investment Corporation ("OPIC"). Therefore, this class
of senior securities is not represented in the table.

(11) Amounts outstanding as of December 31, 1995 (unaudited). Financial results
as of December 31, 1995 are not available to calculate Asset Coverage Per
Unit.

10
<PAGE> 16

PUBLIC TRADING AND NET ASSET VALUE INFORMATION

Shares of the Company's common stock 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, the Company's common stock has
historically traded at prices substantially in excess of net asset value.

<TABLE>
<CAPTION>
BID PRICE PREMIUM
TO AVERAGE
AVERAGE NET NET ASSET VALUE
ASSET PER COMMON SHARE
BID PRICE RANGE VALUE PER COMMON DURING PERIOD
------------------ SHARE DURING ------------------
FISCAL YEAR ENDED 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%
4th Quarter....................... $14.25 $12.25 * * *
</TABLE>

*The last determined consolidated net asset value per share was $8.61 as of
September 30, 1995. The bid price premium on that date was 51%. Because the
Company's net asset value is determined quarterly as of the end of each
calendar quarter, and such determination is not yet available for the quarter
ended December 31, 1995, the average net asset value and the high/low bid price
premiums cannot be calculated.

The last sale price for a share of the Company's common stock on Nasdaq on
January 22, 1996 was $13.375.

11
<PAGE> 17

THE OFFER

TERMS OF THE OFFER

The Company is offering to its stockholders 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 29, 1996, the date of this Prospectus, and ends as of 5:00
p.m., Eastern Standard Time, on February 27, 1996 (the "Expiration Date"),
unless extended by the Company until 5:00 p.m. Eastern Standard Time on a date
no later than March 5, 1996.

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 issued
to them, then any Shares for which subscriptions have not been received from
stockholders in the Primary Subscription will be offered by means of the
Over-Subscription Privilege to those stockholders who have exercised all of the
Subscription Rights issued to them and who wish to acquire additional Shares.
Stockholders who exercise all of the Subscription Rights issued to them should
also indicate on the Subscription Form how many Shares they wish to acquire
through this Over-Subscription Privilege. There is no limit to the number of
Shares that may be requested through the Over-Subscription Privilege. If
sufficient Shares remain in excess of those for which Subscription Rights are
exercised in the Primary Subscription, then all requests for additional Shares
will be honored in full.

If sufficient Shares are not available to honor all requests for additional
Shares in full, then the Company may, in its sole discretion, 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
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 generally 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 stockholder 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 the Company's common stock on Nasdaq on the
date of expiration of the Offer (the "Pricing Date") and each of the four
preceding business days. Since the Expiration Date of the Offer coincides with
the Pricing Date, stockholders exercising their Subscription Rights will not
know the Subscription Price per Share at the time

12
<PAGE> 18

they exercise their Subscription Rights. It may be more or less than the
Estimated Subscription Price of $12.90 per Share. See "Confirmation of
Purchase," page 16.

SUBSCRIPTION PERIOD

The Offer commences on January 29, 1996 and expires at 5:00 p.m., Eastern
Standard Time, on February 27, 1996 (the "Expiration Date"), unless extended by
the Company until 5:00 p.m. Eastern Standard Time on a date no later than March
5, 1996. The Subscription Rights and the Over-Subscription Privilege 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, unless Subscription is effected through a notice of guaranteed
delivery, as described herein.

As of the date of this Prospectus, the Company last determined its
consolidated net asset value per common share to be $8.61 as of September 30,
1995. During the fourth quarter of 1995, the Company declared its regular
quarterly dividend of $0.24 per common share, or $1,485,000, and its 1995 annual
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, which 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. The Company has, as required by the Commission's registration form for
the Offer, undertaken to suspend the Offer until it amends this Prospectus if,
subsequent to the effective date of the Company's registration 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 and payments 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. Because the Company, as a BDC, must distribute
essentially all of its income to its stockholders each year to avoid unfavorable
federal income tax consequences, the Company cannot increase its equity base by
retaining net income and must offer its common stock to achieve this goal.

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 based on the total assets of the Company. See
"Management--Investment Adviser," page 28. It is not possible to state precisely
the amount of additional compensation Advisers might receive as a result of the

13
<PAGE> 19

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 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 the Offer will not result in a reduction of the
net asset value per share 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," page 11. 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 existence of
the Over-Subscription Privilege and the Company's discretionary ability to
increase the number of Shares subject to the Offer will result in additional
dilution of interest and voting rights to current stockholders beyond such
dilution resulting from stockholders' non-participation in the Primary
Subscription. See "Sales of Shares Subsequent to the Offer," page 17.

SOLICITING FEES

In connection with the Offer, the Company has agreed to pay to certain
broker-dealers that have executed and delivered a Soliciting Dealer Agreement
fees equal to 2.5% of the Subscription Price per Share for all Shares issued 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 17.

SUBSCRIPTION AGENT

The Subscription Agent for the Offer is American Stock Transfer & Trust
Company, 40 Wall Street, 46th Floor, New York, New York 10005, which will
receive, for its administrative, processing, invoicing and other services as
Subscription Agent, a 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 & Trust Company
Corporate Reorganization Department
40 Wall Street, 46th Floor
New York, New York 10005

DELIVERY TO AN ADDRESS OTHER THAN THE ABOVE WILL NOT CONSTITUTE DELIVERY
FOR PURPOSES OF THE OFFER.

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.

14
<PAGE> 20

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 of $5,000; for acting as Offering Coordinator, SCC will receive a
fee of $35,000. SCC will also 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.

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," below.

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 Estimated Subscription
Price of $12.90 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. All payments by a stockholder must be made in United States
dollars by money order or check and drawn on a bank located in the
United States of America.

IF THE SECOND METHOD DESCRIBED ABOVE IS USED, EACH SUBSCRIPTION FORM MUST
BE ACCOMPANIED BY FULL PAYMENT IN ORDER TO BE ACCEPTED.

15
<PAGE> 21

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 shares are held by a Nominee, on the Record Date, 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 Subscription 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 a right to acquire Shares
through the Over-Subscription Privilege, any excess payment which would
otherwise be refunded to the Stockholder will be applied by the Company toward
payment for Shares acquired through exercise of the Over-Subscription Privilege.
Any further 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 the stockholder within ten (10) business
days after the Confirmation Date.

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) 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; (ii) find other purchasers for such subscribed for
and unpaid Shares; 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, which is
administered by the Company's transfer agent (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, unless
specifically requested.

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.

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.

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," page 17.

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 pursuant to the Primary Subscription, in the first blank of
the Subscription Form enter 142 Shares and fill in the total estimated
subscription price for the Shares, which is 142 multiplied by $12.90, the
Estimated Subscription Price per share which totals $1,831.80. 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 $12.90. Assuming you decide to purchase 58 shares
pursuant to the Over-Subscription Privilege, enter 58 Shares and $748.20 on the
second line. Then enter the total

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amount due, $2,580, 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 for this total
amount.

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 to 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 $12.90 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," page 15. 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.

Stockholders 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 and sell 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 as a
result of their soliciting efforts. The Company will also pay all other
applicable expenses, including but not limited to the normal charges of brokers
and other Nominees for transmitting offering materials, which will include
Prospectuses, Subscription Forms, and return envelopes, to the beneficial owners
of the shares held by them of record.

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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
anticipates that substantially all of the proceeds of the offering will be
invested in the manner described above within one year, and in any event within
two years.

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 under Section
301(c) of the Small Business Investment Act of 1958 (an "SBIC"), and Allied
Financial is licensed by the SBA as a specialized small business investment
company under Section 301(d) of the Small Business Investment Act of 1958 (an
"SSBIC"). 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 the Overseas Private Investment Corporation
("OPIC"), which would typically involve investments in businesses that engage,
in whole or in part, in overseas operations. OPIC is a self-sustaining federal
agency whose purpose is to promote economic growth in developing countries by
encouraging U.S. private investment in those nations. 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-related investments ordinarily will be made in countries representing the
world's emerging markets. Investments in such countries involve special risks.
See "Risk Factors--Foreign Investments," page 23.

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

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<PAGE> 24

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 manufacturing, 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. During 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 to include
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, which is
not a small business investment company), and (c) does not have any
class of publicly traded securities with respect to which a broker may
extend margin credit.

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<PAGE> 25

(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 class of senior security
representing indebtedness has asset coverage of at least 200%. This limitation
is not applicable to classes of senior securities representing indebtedness 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 three-month London Inter-Bank Offered Rate ("LIBOR") plus
1.15 percent (1.15%) per annum. 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 one-month LIBOR plus 2.5
percent (2.5%) per annum 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.

As a BDC, the Company is entitled to issue senior securities in the form of
stock as long as such class of senior security which is a stock has asset
coverage of at least 200%. This limitation is not applicable to classes of
senior securities issued by the Company's small business investment company
subsidiaries and held or guaranteed by the SBA. See "Risk Factors--Leverage,"
page 24.

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"), both private venture capital partnerships managed by 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

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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 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.

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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 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 its Section 7(a) Guaranteed Loan
Program (the "7(a) Loan Program") and announced that it would reduce the maximum
loan size that it would guarantee under the 7(a) 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 7(a) 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) loans, loans that are made in conjunction with guaranteed 7(a) 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 Advisers to
obtain the information necessary for the Company's decision to invest in them.
Typically, such companies

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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
competitors' 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.

Foreign Investments

As noted above, the Company intends to make investments with the proceeds
of its OPIC loans. (See "Leverage--OPIC Loan," page 26.) 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. 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 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 would involve 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

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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, 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 sharply 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 consolidated 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. Moreover, the
costs of borrowing may exceed the income from the portfolio securities purchased
with the borrowed funds, and a decline in net asset value may result if the
investment performance of the additional securities purchased fails to cover the
cost to the Company. Such a decline in net asset value could negatively affect
the Company's ability to make common stock dividend payments. Also, if asset
coverage for preferred stock or debt securities, other than those issued by the
Company's small business investment company subsidiaries, declines to less than
200 percent (200%), the Company may be required to sell a portion of its
investments when it may be disadvantageous to do so.

Leverage is thus generally considered a speculative investment technique.
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

24
<PAGE> 30

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, comprised of $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 subordinated debenture and preferred stock investments 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
leverage or to reduce the current limits on available leverage. Therefore, there
is no guaranty that Allied Investment or Allied Financial will be able to obtain
additional SBA 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
December 31, 1995:

<TABLE>
<CAPTION>
ANNUAL RATE OF INTEREST ANNUAL PORTFOLIO
OR DIVIDEND PAYMENTS RETURN TO COVER
AMOUNT ----------------------------------- INTEREST OR DIVIDEND
CLASS OUTSTANDING INITIAL AS OF DEC. 31, 1995 PAYMENTS (1)
- --------------------------------- ----------- ----------- -------------------- ---------------------
<S> <C> <C> <C> <C>
Senior notes..................... $20,000,000 9.15% 9.15% 1.26%
OPIC loan........................ $ 0 -- -- 0.00%
Bank loan (revolving line of
credit)(2)..................... $ 1,500,000 8.375% 8.219% 0.09%
Subordinated debentures.......... $61,300,000 5.5%-10.35% 6.08%-10.35% 3.29%
Redeemable preferred stock....... $ 1,000,000 4% 4% 0.03%
Non-redeemable preferred stock... $ 6,000,000 3% 3% 0.12%
</TABLE>

(1) The annual portfolio return to cover interest or dividend payments ("Annual
Return") is calculated as total estimated 1995 annual interest or dividend
payments per class of financing, divided by total assets at September 30,
1995. The total Annual Return needed to cover all classes of financing as
of December 31, 1995 combined is 4.79%.

(2) Pursuant to the new bank loan effective September 30, 1995.

Senior Notes. As of September 30, 1995 and December 31, 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

25
<PAGE> 31

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> <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>

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 ("Loan Commitment") 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 Commitment 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 and December 31, 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 consolidated shareholders' equity not
exceeding 3 to 1, and (d) a quarterly ratio of senior debt to consolidated
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 three-month London Inter-Bank Offered Rate
("LIBOR"), which expired September 30, 1995. There were no required principal
payments until the loan's maturity. As of September 30, 1995, there were no
borrowings under this agreement.

26
<PAGE> 32

The Company has established a new line of credit effective September 30,
1995. The new line of credit permits the Company to borrow up to $10,000,000 at
one-month LIBOR plus 2.5 percent (2.5%) per annum, requires payment of a 0.125%
per annum commitment fee on the unused portion of the line, and expires
September 30, 1998. There are no required principal repayments until the loan's
maturity. As of December 31, 1995, there was $1.5 million outstanding under this
agreement.

The new line of credit agreement requires that Allied Investment and Allied
Financial remain wholly owned subsidiaries of the Company, and does not permit
the Company or any subsidiary to merge or consolidate with another entity,
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 and December 31, 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 and December 31, 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>
Assumed return on
portfolio (net of
expenses)............... -16% -10% -5% 0% 5% 10% 16%
Corresponding return to
common stockholders..... -57.34% -40.93% -27.26% -13.58% 0.09% 13.76% 30.17%
</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 as a regulated investment company and therefore to

27
<PAGE> 33

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 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--Management Table." Three of the
members of the Board of Directors are also officers of the Company as well as of
its investment adviser; five are non-interested persons, as that term is defined
in the 1940 Act (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 account. Advisers also serves as the investment adviser
of Allied II, Allied Capital

28
<PAGE> 34

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 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."

29
<PAGE> 35

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 December 31, 1995:

<TABLE>
<CAPTION>
(4)
(3) AMOUNT OUTSTANDING
(2) AMOUNT HELD BY EXCLUSIVE OF
(1) AMOUNT REGISTRANT OR FOR AMOUNTS SHOWN
TITLE OF CLASS AUTHORIZED ITS ACCOUNT UNDER (3)
- ------------------------------------------------ --------- ----------------- ------------------
<S> <C> <C> <C>
THE COMPANY:
Common Stock.................................. 10,000,000 0.00 6,198,138
ALLIED INVESTMENT:
Common Stock.................................. 100 54.93 0
ALLIED FINANCIAL:
Common Stock.................................. 19,800,000 131.00 0
Preferred Stock(a)............................ 200,000 70,000.00 0
ALLIED DEVELOPMENT(b):
Common Stock.................................. 100 10.00 0
</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, as of September 30,
1995 and December 31, 1995.

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 6,198,138 shares were outstanding
as of December 31, 1995. 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 30, 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 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.

30
<PAGE> 36

Distributions made by the Company are taxable to stockholders as ordinary
income or capital gains; however stockholders not subject to tax on income will
not be required to pay tax on amounts distributed to them by the Company.
Stockholders will receive notification from the Company at the end of the year
as to the amount and nature of the income or gains distributed to them for that
year. The distributions from the Company may be subject to the alternative
minimum tax under the provisions of the Code.

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.

Under the reinvestment plan, the Company may issue new shares unless the
market price of the outstanding shares is less than 110% of their
contemporaneous net asset value. Alternatively, the transfer agent may, as agent
for the participants, 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 and
including 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) 973-6383 and ask for Investor Relations, or contact American
Stock Transfer & Trust Company, the plan agent, 40 Wall Street, 46th floor, New
York, New York 10005, telephone (718) 921-8200.

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 non-interested 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, 46th floor, New York, New York 10005, acts as the
Company's transfer, dividend paying, and reinvestment plan agent and registrar.

31
<PAGE> 37

TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION

<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
MANAGEMENT............................................................................ B-2
Directors and Officers.............................................................. B-2
Compensation........................................................................ B-3
Stock Options....................................................................... B-4
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES................................... B-5
INVESTMENT ADVISORY AND OTHER SERVICES................................................ B-5
Investment Advisory Agreement....................................................... B-6
Custodian Services.................................................................. B-8
Accounting Services................................................................. B-8
BROKERAGE ALLOCATION AND OTHER PRACTICES.............................................. B-8
TAX STATUS............................................................................ B-8
</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
"The Company--Risk Factors--Leverage," page 24.

At September 30, 1995, the Company had a revolving line of credit for $10
million. Effective September 30, 1995, the Company established a new line of
credit for $10 million for a three-year term. See "The Company--Risk
Factors--Leverage--Bank Loan," page 26.

The Company has secured a credit facility with the OPIC for up to $20
million in financing for international projects involving small businesses. See
"The Company--Risk Factors--Leverage--OPIC Loan," page 26.

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.

32
<PAGE> 38

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.

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,

33
<PAGE> 39

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 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.

34
<PAGE> 40

ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

FINANCIAL STATEMENTS

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<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-14
Notes to Consolidated Statement of Loans to and Investments in Small Business
Concerns............................................................................ F-18
Report of Independent Accountants..................................................... F-20
</TABLE>

F-1
<PAGE> 41

ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(IN THOUSANDS, EXCEPT NUMBER OF SHARES)

<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, --------------------
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 shares 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> 42

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,
------------------ -----------------------------
1995 1994 1994 1993 1992
------- ------- ------- ------- -------
(UNAUDITED)
<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> 43

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,
------------------ -----------------------------
1995 1994 1994 1993 1992
------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Increase in net assets resulting from
operations:
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 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> 44

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,
------------------ -----------------------------
1995 1994 1994 1993 1992
------- ------- ------- ------- -------
(UNAUDITED)
<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> 45

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 Corporation
("Allied Investment") and Allied Capital Financial Corporation ("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 Capital
Advisers, Inc. ("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.

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.

F-6
<PAGE> 46

ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994 (UNAUDITED)
AND FOR THE YEARS ENDED DECEMBER 31, 1994, 1993, AND 1992

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 the first
nine months of 1995, the Company issued 32,957 shares of common stock pursuant
to the dividend reinvestment plan. The common shares outstanding and the
weighted average number of shares and share equivalents outstanding for all
prior periods presented have been restated to include the 1995 common stock
issuances during the first nine months of 1995 under the dividend reinvestment
plan.

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>
DECEMBER 31,
SEPTEMBER 30, -------------------
1995 1994 1993
------------- ------- -------
(IN THOUSANDS)
<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 special investment banking or consulting work performed for that

F-7
<PAGE> 47

ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994 (UNAUDITED)
AND FOR THE YEARS ENDED DECEMBER 31, 1994, 1993, AND 1992

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
Capital Lending Corporation ("Allied Lending") owned by the Company, interim
investments (i.e., U.S. government securities or repurchase agreements) 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>
1994 1993 1992
--------------- --------------- ---------------
PER PER PER
AMOUNT SHARE AMOUNT SHARE AMOUNT SHARE
------ ----- ------ ----- ------ -----
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<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.

F-8
<PAGE> 48

ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994 (UNAUDITED)
AND FOR THE YEARS ENDED DECEMBER 31, 1994, 1993, AND 1992

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

<TABLE>
<CAPTION>
1994 1993 1992
----------------- ----------------- ----------------
PER PER PER
AMOUNT SHARE AMOUNT SHARE AMOUNT SHARE
------- ------ ------- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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 three-month LIBOR rate plus 1.15 percent per annum
and expired September 30, 1995. No borrowings were outstanding at the time the
agreement expired. The Company has established a new line of credit effective
September 30, 1995 which permits the Company to borrow up to $10,000,000 at
one-month LIBOR plus 2.5 percent per annum 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 U.S.
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>
AMOUNT
YEAR ENDING DECEMBER 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>

OPIC Loan. 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 ("Loan Commitment") to

F-9
<PAGE> 49

ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994 (UNAUDITED)
AND FOR THE YEARS ENDED DECEMBER 31, 1994, 1993, AND 1992

provide financing for international projects involving qualifying U.S. small
businesses. Loans under this agreement bear interest at the U.S. Department of
Treasury interest rate plus 0.5 percent and have a ten year maturity from the
date of first disbursement. The Loan Commitment 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 Financial, 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 Financial 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 adviser to
purchase 10,000 shares of the Company's common stock 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.

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

F-10
<PAGE> 50

ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994 (UNAUDITED)
AND FOR THE YEARS ENDED DECEMBER 31, 1994, 1993, AND 1992

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:

<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEAR ENDED DECEMBER 31,
SEPTEMBER 30, -----------------------------------------------
1995 1994 1993 1992
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Options outstanding at beginning
of period...................... 701,473 686,847 496,285 494,809
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>
NINE MONTHS YEAR ENDED DECEMBER
ENDED 31,
SEPTEMBER 30, --------------------
1995 1994 1993 1992
------------- ---- ---- ----
(IN THOUSANDS)
<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 Lending 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.

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.

F-11
<PAGE> 51

ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994 (UNAUDITED)
AND FOR THE YEARS ENDED DECEMBER 31, 1994, 1993, AND 1992

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 Lending
prior to consummation of the initial public offering of Allied Lending shares in
November 1993. As a result of that initial 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 6, 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.

NOTE 11. QUARTERLY FINANCIAL HIGHLIGHTS (UNAUDITED)

<TABLE>
<CAPTION>
1995
----------------------------
QTR 1 QTR 2 QTR 3
------ ------ ------
<S> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER
SHARE INFORMATION)
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>

F-12
<PAGE> 52

ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994 (UNAUDITED)
AND FOR THE YEARS ENDED DECEMBER 31, 1994, 1993, AND 1992

<TABLE>
<CAPTION>
1994
----------------------------------------
QTR
QTR 1 QTR 2 QTR 3 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>

<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-13
<PAGE> 53

CONSOLIDATED STATEMENT OF LOANS TO AND INVESTMENTS IN SMALL BUSINESS CONCERNS
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
1995 1994 1993
COMPANY'S NAME (STATE) ----------------- ----------------- -----------------
(TYPE OF BUSINESS) INVESTMENTS(4) COST VALUE COST VALUE COST VALUE
- ----------------------- --------------------------------------------- ------- ------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
AGPAL BROADCASTING, Loans and Debt Securities $ 930 $ 930 $ 933 $ 933 $ 935 $ 935
INC. (OR) Warrants 0 0 0 0 0 0
(radio stations)
ALLIED CAPITAL LENDING Common Stock (1,244,914 shares) 2,996 11,951 3,802 14,906 3,757 18,960
CORPORATION
(MD)(1,3,5)
(small business lender)
ALLIED WASTE Loans and Debt Securities 0 0 0 0 1,630 1,630
INDUSTRIES, INC. Warrants 92 1,038 92 92 92 92
(AZ)(1)
(solid waste collection
& removal)
AMERICAN BARBECUE & Loans and Debt Securities 1,790 1,790 926 926 0 0
GRILL (KS) Warrants 71 71 71 71 0 0
(restaurant)
ARNOLD MOVING CO. (KY) Loans and Debt Securities 298 298 297 297 295 295
(moving/storage firm) Warrants 11 11 11 11 11 11
ASW HOLDING CORPORATION Loans and Debt Securities 831 831 829 829 1,362 1,362
(IL) Warrants 53 53 53 53 53 53
(steel wool
manufacturer)
ATLANTIC HOMES Loans and Debt Securities 0 0 320 320 0 0
DEVELOPMENT CORP. Warrants 0 0 0 0 0 0
(VA)
(real estate
development)
BELLEFONTE LIME CO. Common Stock (2,869 shares) 16 533 16 104 16 150
(PA)(3)
(mineral quarry &
production)
BROADCAST HOLDINGS, Loans and Debt Securities 3,039 2,900 3,215 2,166 3,302 2,200
INC. (DC)(3)
(radio station)
CELEBRITIES, INC. (FL) Loans and Debt Securities 414 414 428 428 437 437
(radio station) Warrants 12 12 12 12 12 12
CENTENNIAL MEDIA CORP. Loans and Debt Securities 2,078 725 2,078 900 1,645 0
(CO)(2) Common Stock (1,803 shares) 948 0 948 0 948 0
(telephone directories)
CERATECH CORPORATION Loans and Debt Securities 1,180 1,180 1,180 1,180 0 0
(IL) Warrants 0 0 0 0 0 0
(ceramic plate
manufacturer)
CHERRY TREE TOYS, INC. Loans and Debt Securities 1,091 1,091 1,146 1,146 1,022 1,022
(OH) Common Stock (117 shares) 1 0 1 0 23 23
(direct marketer of
woodcrafts)
CITIPOSTAL, INC. Loans and Debt Securities 0 0 216 216 216 216
(NY)(2) Preferred Stock Series A 0 0 177 177 177 177
(courier network) Convertible Preferred Stock Series B 289 0 289 0 289 31
Common Stock (27 shares) 71 0 173 103 173 75
Warrants 0 0 7 7 7 7
COAST GAS, INC. (CA) Loans and Debt Securities 2,168 2,168 2,159 2,159 0 0
(courier network) Warrants 124 124 124 124 0 0
CONSUMER HEALTH Convertible Preferred Stock (234,583 shares) 116 0 180 54 180 54
SERVICES, INC. (CO) Common Stock (127,940 shares) 64 0 0 0 0 0
(medical/dental
consumer info. service)
CONTEMPORARY MEDIA (ID) Loans and Debt Securities 586 586 602 602 0 0
(radio stations) Warrants 204 204 204 204 0 0
DEH PRINTED CIRCUITS, Loans and Debt Securities 2,307 2,307 2,287 2,287 0 0
INC. (IL) Warrants 133 133 133 133 0 0
(circuit board
manufacturer)
DEVLIEG-BULLARD INC. Loans and Debt Securities 2,134 2,134 2,104 2,104 0 0
(CT)(1) Warrants 275 400 275 275 0 0
(tool manufacturer)
DMI FURNITURE, INC. Convertible Preferred Stock (399,840 shares) 500 279 500 576 500 1,040
(KY)(1)
(furniture
manufacturer)
DOGLOO, INC. (CA) Loans and Debt Securities 3,335 3,335 3,307 3,307 0 0
(pet products Warrants 0 0 265 265 0 0
manufacturer)
EDWARDS HEATING & AIR Loans and Debt Securities 2,306 441 2,306 911 1,776 1,312
CONDITIONING (GA) Warrants 29 0 29 0 29 0
(heating & air
conditioning
dealer/contractor)
ENVIRCO CORP. (NJ) Loans and Debt Securities 0 0 32 188 700 700
(clean room equipment Warrants 0 0 0 0 32 32
manufacturer)
ENVIROPLAN, INC. (NJ) Loans and Debt Securities 2,443 1,890 2,425 2,425 1,906 1,906
(emissions monitoring Warrants 119 0 120 204 60 60
equipment mfg.)
ESQUIRE COMMUNICATIONS, Loans and Debt Securities 2,397 2,397 2,397 2,397 0 0
LTD. (NY)(1) Warrants 3 36 3 3 0 0
(court reporters)
</TABLE>

F-14
<PAGE> 54

<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
1995 1994 1993
COMPANY'S NAME (STATE) ----------------- ----------------- -----------------
(TYPE OF BUSINESS) INVESTMENTS(4) COST VALUE COST VALUE COST VALUE
- ----------------------- --------------------------------------------- ------- ------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
FOUNTAINHEAD Loans and Debt Securities 1,180 1,180 1,180 1,180 0 0
TECHNOLOGIES, INC. Warrants 0 0 0 0 0 0
(RI)
(non-chlorine water
purification sys.)
GARDEN RIDGE CORP. (TX) Loans and Debt Securities 0 0 3,302 3,302 1,821 1,821
(home decorating and Common Stock (61,241 shares) 687 3,469 761 1,236 387 387
craft products) Warrants 112 1,455 112 145 112 112
GATEWAY HEALTHCARE Loans and Debt Securities 853 853 853 853 701 692
CORP. (VA) Convertible Preferred Stock (10,725 shares) 497 42 497 42 650 199
(medical/supplies Warrants 2 0 2 0 2 0
distributor)
GENOA MINE ACQUISITION Capital Stock (20 shares) 44 533 44 44 44 0
CORP. (OH)(3)
(limestone mining)
GLOBAL SOFTWARE INC. Loans and Debt Securities 1,664 1,664 1,662 1,662 0 0
(NC) Warrants 19 626 19 19 0 0
(accounting software
development)
GRANT BROADCASTING Loans and Debt Securities 1,072 1,072 1,064 1,064 1,045 1,045
SYSTEMS II (FL) Warrants 78 448 78 78 78 78
(television stations)
HIGH PLAINS CABLEVISION Loans and Debt Securities 0 0 129 129 142 142
(TX) Warrants 0 0 14 14 14 14
(cable television)
HOUSTON FOODS COMPANY Loans and Debt Securities 0 0 0 0 126 126
(IL) Convertible Preferred Stock 0 0 0 0 7 152
(seasonal gift Warrants 0 0 0 0 3 89
packages)
INNOTECH, INC. (VA) Warrants 29 29 29 29 29 29
(bifocal lens
manufacturer)
ISOTECHNOLOGIES, INC. Convertible Debt Securities 602 602 609 609 580 435
(NC)
(orthopedic equipment)
JACKSON PRODUCTS, INC. Loans and Debt Securities 0 0 856 856 839 839
(MI) Common Stock 0 0 230 303 173 173
(safety equipment
manufacturer)
JARAD BROADCASTING (NY) Loans and Debt Securities 0 0 0 0 2,111 2,111
(radio station) Warrants 0 0 0 0 73 73
JUNE BROADCASTING (NJ) Loans and Debt Securities 0 0 0 0 1,346 1,346
(radio station) Warrants 58 1,680 58 582 58 58
KIRKER ENTERPRISES (NJ) Loans and Debt Securities 2,131 2,131 0 0 0 0
(chemical manufacturer) Warrants 203 203 0 0 0 0
LOVE MORTGAGE CO. (DC) Loans and Debt Securities 736 736 736 736 732 732
(real estate mortgages) Convertible Debentures 0 0 0 0 197 197
Warrants 200 0 200 0 205 19
MARKINGS & EQUIPMENT Loans and Debt Securities 0 0 0 0 1,613 975
CORP. (FL)(2) Warrants 0 0 0 0 0 0
(highway striping)
MASTER POWER, INC. (MD) Loans and Debt Securities 286 286 285 285 348 348
(power tool Preferred Stock (37,097 shares) 7 7 7 7 7 7
manufacturer) Warrants 4 4 4 4 4 4
MAXTEC INTERNATIONAL Loans and Debt Securities 0 0 85 85 161 161
CORP. (IL) Warrants 0 0 7 7 7 7
(electronic test
instruments)
MEDIFIT OF AMERICA, Loans and Debt Securities 895 895 1,584 1,584 1,501 1,501
INC. (NJ) Warrants 93 0 93 0 93 93
(physical
rehabilitation)
MILL-IT STRIPING (FL) Loans and Debt Securities 125 125 125 125 0 0
(highway paint Warrants 125 0 125 125 0 0
striping)
MIDVIEW ASSOCIATES (VA) Loans and Debt Securities 282 282 0 0 0 0
(real estate Warrants 0 0 0 0 0 0
development)
MLX/SINTERMET CORP. Common Stock (5,835 shares-MLX) 241 61 241 24 241 31
(GA)(1)
(friction materials
manufacturer)
MONTGOMERY TANK LINES Common Stock 0 0 0 0 62 92
(FL) Warrants 0 0 0 0 46 346
(tank truck carrier)
NOBEL EDUCATION Loans and Debt Securities 2,250 2,250 0 0 0 0
DYNAMICS (PA)(1) Preferred Stock (398,936 shares) 750 1,047 0 0 0 0
(education) Warrants 0 345 0 0 0 0
OLD MILL HOLDINGS, INC. Loans and Debt Securities 657 657 545 545 0 0
(NY) Warrants 45 0 35 35 0 0
(custom embroidery of
apparel)
</TABLE>

F-15
<PAGE> 55

<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
1995 1994 1993
COMPANY'S NAME (STATE) ----------------- ----------------- -----------------
(TYPE OF BUSINESS) INVESTMENTS(4) COST VALUE COST VALUE COST VALUE
- ----------------------- --------------------------------------------- ------- ------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
PALMER CORPORATION (NJ) Preferred Stock (200,000 shares) 200 100 200 100 200 100
(video stores)
PIATL HOLDINGS, INC. Loans and Debt Securities 167 167 148 148 293 393
(NJ)(3) Preferred Stock (36 shares) 267 44 267 106 266 0
(environmental Common Stock (36 shares) 0 0 0 0 0 0
consulting)
POLYFLEX/B & L HOLDINGS Loans and Debt Securities 529 533 665 665 813 813
(MS) Warrants 28 486 28 487 28 506
(plastic bag
manufacturer)
PROVIDENTIAL Common Stock (52,794 shares) 1,000 211 1,000 211 1,000 277
CORPORATION (CA)(1)
(shared appreciation
reverse mortgages)
RADIO ONE (GA) Loans and Debt Securities 2,280 2,280 0 0 0 0
(radio stations) Warrants 0 0 0 0 0 0
R-TEX DECORATIVES Loans and Debt Securities 905 905 902 902 0 0
COMPANY, INC. (PA) Warrants 32 0 32 32 0 0
(decorative ribbon
manufacturer)
SALTON/MAXIM Loans and Debt Securities 0 0 0 0 250 125
HOUSEWARES, INC. Common Stock 0 0 0 0 0 118
(IL)(1,2)
(small appliance
distributor)
SPA LENDING CORPORATION Preferred Stock Series A (5,578 shares) 398 398 398 398 0 0
(DC)(3) Preferred Stock Series B (8,755 shares) 506 424 506 506 0 0
(health spas) Preferred Stock Series C (14,092 shares) 1,680 0 1,680 632 0 0
Common Stock (6,208 shares) 413 0 413 0 0 0
SUNSTATES REFRIGERATED Loans and Debt Securities 2,778 2,778 2,799 2,799 2,234 2,234
SERVICES, INC. Preferred Stock (43,884 shares) 193 193 204 204 0 0
(GA)(3) Common Stock (163 shares) 145 145 145 137 35 0
(cold food storage)
TACO TICO, INC. (KS)(2) Loans and Debt Securities 1,189 382 1,188 382 1,188 199
(Mexican fast food Warrants 28 0 28 0 28 0
restaurant)
TIMBERCREEK COMPANY Loans and Debt Securities 2,248 2,248 1,537 1,537 762 762
(NY)(3) Common Stock 0 0 17 0 17 17
(archery equipment)
TOTAL FOAM, INC. Loans and Debt Securities 1,744 174 1,744 174 1,570 369
(CT)(2,3) Common Stock (910 shares) 57 0 57 0 57 0
(packaging systems)
TPG HOLDINGS, INC. (TX) Loans and Debt Securities 2,179 2,179 2,407 2,407 1,463 1,463
(commercial banking Warrants 13 2,120 13 2,120 13 2,120
software development)
TOWER BROADCASTING (MN) Loans and Debt Securities 0 0 0 0 358 358
(radio station) Warrants 0 0 0 0 19 19
VISTECH CORPORATION Loans and Debt Securities 0 0 0 0 7 0
(FL) Warrants 0 0 0 0 8 0
(computer vision
products)
VISU-COM, INC. (MD)(3) Loans and Debt Securities 2,248 1,500 2,244 1,500 2,239 1,270
(visual communications Preferred Stock 0 0 0 0 224 0
products) Common Stock (270 shares) 277 0 277 0 54 0
WEATHERTECH Loans and Debt Securities 84 84 169 169 259 259
DISTRIBUTING CO. (AL) Warrant 14 960 14 960 14 440
(HVAC wholesale
distributor)
WEST VIRGINIA RADIO Loans and Debt Securities 582 582 599 599 599 599
CORP. (WV) Warrants 200 0 200 78 200 200
(radio station)
WILLIAMS BROTHERS Loans and Debt Securities 830 830 378 378 376 376
LUMBER (GA) Warrants 15 1,614 15 2,017 15 1,004
(builders' supply
yards)
WINCAPP BROADCASTING Debt Securities 694 694 690 690 692 692
INC. (PA) Warrants 23 23 23 23 23 23
(radio station)
Z-SPANISH RADIO NETWORK Loans and Debt Securities 2,983 2,983 2,606 2,606 0 0
(CA) Warrants 3 3 2 2 0 0
(radio station)
------- ------- ------- ------- ------- -------
SUBTOTAL $78,313 $87,984 $75,838 $81,773 $52,447 $61,962
======= ======= ======= ======= ======= =======
</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 assets for BDC purposes at September 30, 1995

F-16
<PAGE> 56

CONSOLIDATED STATEMENT OF LOANS TO AND INVESTMENTS IN
SMALL BUSINESS CONCERNS
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
SEPTEMBER 30, 1995 DECEMBER 31, 1994 DECEMBER 31, 1993
LOANS WITH NO EQUITY --------------------- --------------------- ---------------------
(TYPE OF BUSINESS) (A) COST VALUE COST VALUE COST VALUE
- --------------------------------------------- -------- -------- -------- -------- -------- --------
(UNAUDITED)
<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
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 approximately $5.2 million which are
non-qualifying assets for BDC purposes at September 30, 1995

F-17
<PAGE> 57

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 Inc.; Esquire Communications, Ltd.
and Providential Corporation.

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>
DECEMBER 31,
SEPTEMBER 30, ----------------------
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% * *
</TABLE>

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

*Less than 5%.

F-18
<PAGE> 58

ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED STATEMENT OF LOANS TO

AND INVESTMENTS IN SMALL BUSINESS CONCERNS (CONTINUED)

AS OF SEPTEMBER 30, 1995 (UNAUDITED) AND DECEMBER 31, 1994 AND 1993

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,
1995 1994
------------- ------------
<S> <C> <C>
(IN THOUSANDS)
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-19
<PAGE> 59

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-20
<PAGE> 60
===================================================================

NO DEALER, SALESMAN OR OTHER
PERSON HAS BEEN AUTHORIZED TO GIVE
ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN
THIS PROSPECTUS IN CONNECTION WITH
THE OFFER CONTAINED HEREIN, AND, IF
GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY
THE COMPANY, THE COMPANY'S
INVESTMENT ADVISER OR ANY
UNDERWRITER. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER OF ANY SECURITIES 885,448 SHARES
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.

ALLIED CAPITAL
-----------------
TABLE OF CONTENTS
CORPORATION

<TABLE>
<CAPTION>
PAGE
------
<S> <C>
Summary................................ 3
Fees and Expenses...................... 4
Available Information.................. 6
Financial Highlights................... 6
Public Trading and Net Asset Value
Information.......................... 11 COMMON STOCK
The Offer.............................. 12
Use of Proceeds........................ 18
The Company............................ 18
Management............................. 28
Authorized Classes of Securities....... 30
Description of Common Stock............ 30
Reports and Independent Public
Accountants.......................... 31 PROSPECTUS
Custodian, Transfer and Dividend Paying
Agent and Registrar.................. 31 JANUARY 25, 1996
Table of Contents of Statement of
Additional Information............... 32
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................... 32
Financial Statements................... F-1
</TABLE>

===================================================================
<PAGE> 61
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 provides the stockholder with 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").
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.

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 AT
(800) 221-5724 EXTENSION 331. You may also contact your bank, broker or other
nominee.

(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 first offered its shares to the public in January 1960, and
currently operates as a business development company. 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.

HOW MUCH DID THE COMPANY DECLARE IN DIVIDENDS AND DISTRIBUTIONS FOR 1995?

The Company declared dividends totaling $1.44 per share for 1995, including a
$0.58 per share year-end extra distribution.

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 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 IF I HOLD FRACTIONAL SHARES?

Subscription Rights will only be issued for whole shares, not fractional
shares. Also, no fractional shares will be issued as a result of
allocation or proration.

CAN I SELL MY SUBSCRIPTION RIGHTS?

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

(NOT PART OF THE PROSPECTUS)

<PAGE> 62

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.

In addition, 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 29 to February 27, 1996*

Expiration/Pricing Date February 27, 1996*

*unless extended

(NOT PART OF THE PROSPECTUS)

<PAGE> 63

PART B

INFORMATION REQUIRED IN A STATEMENT OF ADDITIONAL INFORMATION
<PAGE> 64

885,448 SHARES

ALLIED CAPITAL CORPORATION

COMMON STOCK

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

STATEMENT OF ADDITIONAL INFORMATION

January 25, 1996

This Statement of Additional Information is not a prospectus. It
should be read with the prospectus dated January 25, 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.

TABLE OF CONTENTS

<TABLE>
<CAPTION>
Page in the Statement Location of
of Additional Related Disclosure
Information in the Prospectus
----------- -----------------
<S> <C> <C>
MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-2 28
Directors and Officers . . . . . . . . . . . . . . . . . . . . . . . B-2 --
Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-3 --
Stock Options. . . . . . . . . . . . . . . . . . . . . . . . . . . . B-4 --

CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES . . . . . . . . . . . B-5 --

INVESTMENT ADVISORY AND OTHER SERVICES . . . . . . . . . . . . . . . . . B-5 --
Investment Advisory Agreement . . . . . . . . . . . . . . . . . . . B-6 28-29
Custodian Services . . . . . . . . . . . . . . . . . . . . . . . . . B-8 31
Accounting Services . . . . . . . . . . . . . . . . . . . . . . . . B-8 31

BROKERAGE ALLOCATION AND OTHER PRACTICES . . . . . . . . . . . . . . . . B-8 --

TAX STATUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-8 30-31
</TABLE>

B - 1
<PAGE> 65
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:

MANAGEMENT TABLE

<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.

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.
</TABLE>

B - 2
<PAGE> 66

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.

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 adviser 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.

B - 3
<PAGE> 67

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.

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 plan ("LTIP") payouts.

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
</TABLE>

B - 4
<PAGE> 68

<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>
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.

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).

B - 5
<PAGE> 69

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.

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

B - 6
<PAGE> 70
(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.

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
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.

B - 7
<PAGE> 71

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.

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 has elected 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") and continues to maintain that
status. If the Company 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%

B - 8
<PAGE> 72
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. The Company 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.

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.

B - 9
<PAGE> 73
Other than distributions properly designated as "Capital gain
dividend" as described below, 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.

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.

B - 10
<PAGE> 74

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 - 11
<PAGE> 75

PART C

OTHER INFORMATION
<PAGE> 76
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 *

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 (2)

d.2 Form of Subscription Form by which stockholders of
Registrant's common stock may exercise their non-transferable
Subscription Rights and Over-Subscription Privileges *

C - 1
<PAGE> 77
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 Soliciting 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> 78
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 *

s. Powers of Attorney of certain signatories of this registration
statement (11)

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

(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 4(a) filed with the Company's
Annual Report on Form 10-K for the year ended December 31, 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> 79
(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 initial registration
statement on Form N-2 (File No. 33-64629), filed with the Commission on
November 29, 1995.

(12) Incorporated by reference to such Exhibit filed with Registration
Statement No. 33-64629 on Pre-Effective Amendment No. 1 filed with
the Commission on January 12, 1996.

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 . . . . . . . . . . . . $ 4,704
NASD Filing Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,700
Blue Sky Fees and Expenses . . . . . . . . . . . . . . . . . . . . . . . . 2,500
Information Agent's Fees and Expenses . . . . . . . . . . . . . . . . . . . 50,000
Transfer Agent's and Registrar's Fees and Expenses . . . . . . . . . . . . 40,000
Expenses of Nominees . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,000
Printing and Conversion Expenses . . . . . . . . . . . . . . . . . . . . . 48,000
Legal Fees and Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . 100,000
Auditor's Fees and Expenses . . . . . . . . . . . . . . . . . . . . . . . 5,400

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $272,304
</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> 80
<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 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> 81
<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 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> 82
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> 83

<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> 84
<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> 85

<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> 86
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. Not Applicable.

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> 87
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 24th 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 24, 1996, pursuant
to the Powers of Attorney filed on November 29, 1995, as Exhibit (s) to the
initial registration statement.

<PAGE> 88
EXHIBIT INDEX

<TABLE>
<CAPTION>
Exhibit
Number Page
- ------ ----
<S> <C>
b. By-laws of the Registrant, as amended *