ALLIED CAPITAL LENDING CORP, N-2, 1996-11-07

ALLIED CAPITAL LENDING CORP
N-2, 1996-11-07

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<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 7, 1996

FILE NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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
[ ] PRE-EFFECTIVE AMENDMENT NO.
[ ] POST-EFFECTIVE AMENDMENT NO.

ALLIED CAPITAL LENDING 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, L.L.P.
1275 PENNSYLVANIA AVENUE, N.W.
WASHINGTON, D.C. 20004-2404

Approximate Date of Proposed Public Offering: From time to time after the
effective date of the registration statement.

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

CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
OFFERING PRICE AGGREGATE
TITLE OF SECURITIES AMOUNT BEING PER OFFERING AMOUNT OF
BEING REGISTERED REGISTERED SHARE PRICE REGISTRATION FEE
<S> <C> <C> <C> <C>

<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $0.0001 par
value........................ 1,244,914 shares(1) $ 14.6875(2) $18,284,674.38(2) $ 5,540.81
</TABLE>

- --------------------------------------------------------------------------------
(1) Plus an indeterminate number of additional shares that are issued or
issuable as a result of a split, or a stock dividend on, the above number of
shares.

(2) Estimated for purposes of calculating the registration fee pursuant to Rule
457(c) and the Securities Act of 1933 based on the average of the high and
low prices per share on November 4, 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> 2

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), 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>
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 Operations
5. Plan of Distribution Plan of Distribution
6. Selling Stockholders The Offer
7. Use of Proceeds Proceeds of the Offering
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;
Securities Description of Common Stock; The Company
11. Defaults and Arrears on Senior Securities (Not Applicable)
12. Legal Proceedings Legal Proceedings
13. Table of Contents of the Statement of Table of Contents of the Statement of
Additional Information Additional Information
<CAPTION>
PART B: INFORMATION REQUIRED IN A STATEMENT OF ADDITIONAL INFORMATION
<S> <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
19. Control Persons and Principal Holders of Control Persons and Principal Holders of
Securities Securities
20. Investment Advisory and Other Services Prospectus: Investment Adviser; Investment
Advisory and Other Services
21. Brokerage Allocation and Other Practices The Company
22. Tax Status Tax Status
23. Financial Statements Financial Statements
<CAPTION>
PART C: OTHER INFORMATION
<S> <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> 3

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

SUBJECT TO COMPLETION: THE DATE OF ISSUANCE OF THIS PRELIMINARY PROSPECTUS IS
NOVEMBER 7, 1996.

PROSPECTUS
1,244,914 SHARES

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

Allied Capital Lending Corporation, a Maryland corporation (the "Company")
licensed by the U.S. Small Business Administration ("SBA"), is a closed-end
management investment company that has elected to be regulated as a business
development company ("BDC"). The Company's outstanding shares of common stock
are quoted on the Nasdaq National Market under the symbol "ALCL." The Company
is, and a wholly owned subsidiary following a reorganization will be, licensed
as a small business lending company ("SBLC"). The Company's business consists of
making loans to small businesses. 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 investment objective of the Company is to achieve a high level of current
income by investing in loans at least partially guaranteed by the SBA, as well
as loans made in conjunction with such loans, and other loans. The Company uses
a leveraged capital structure borrowing from banks, other institutional lenders
or government agencies.

FOR THE RISKS OF LEVERAGE, SEE "THE COMPANY--RISK FACTORS--RISKS OF LEVERAGE,"
PAGE .

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, including the Statement
of Additional Information, has been filed with the U.S. Securities and Exchange
Commission (the "Commission") and is available upon written or oral request and
without charge at the address or telephone number of Advisers listed above.
Certain information in the Statement of Additional Information is incorporated
by reference in this Prospectus. See page of this Prospectus for the table of
contents of the Statement of Additional Information.

This Prospectus is being used solely to offer and sell 1,244,914 shares of the
Company's outstanding common stock ("Shares") by Allied Capital Corporation, a
Maryland corporation, ("Allied I" or the "Selling Stockholder"), the holder of
approximately 24% of the Company's outstanding shares (the "Offer"). No part of
the proceeds of the offer will be received by the Company. The Company will not
pay any sales load or other offering or distribution expenses in connection with
the Offer. It is expected that some or all of these Shares will be offered and
sold to or through underwriters at a price that may reflect a discount to the
market price of the outstanding shares at or around the time of any offering, in
which event the offering price and the underwriting terms will be disclosed in
one or more Supplements to this Prospectus. At the date of this Prospectus, no
agreement has been made for the underwriting of any of the Shares. Allied I may
also distribute all or a portion of the Shares pro rata to its own stockholders.
See "The Offer--Plan of Distribution."
------------------------
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>
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- ---------------------------------------------------------------------------------------------------------

PROCEEDS TO SELLING
PRICE TO PUBLIC SALES LOAD (1) STOCKHOLDER (2)
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<S> <C> <C> <C>
Per Share...........................
- ---------------------------------------------------------------------------------------------------------
Total...............................
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- ---------------------------------------------------------------------------------------------------------
</TABLE>

(1) In the event that Shares to which this Prospectus relates are sold to or
through underwriters, a corresponding Supplement to this Prospectus will
disclose the applicable sales load. The Company and the Selling Stockholder
may agree to indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act of 1933, as amended.

(2) Before deduction of other expenses of distribution estimated at
$ , all of which is to be borne by the Selling Stockholder.

The date of this Prospectus and of the Statement of Additional Information is
, 1996.
<PAGE> 4

SUMMARY

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

THE COMPANY Allied Capital Lending Corporation (the "Company") is a
closed-end management investment company that has elected
to be regulated as a business development company ("BDC")
and is managed by Allied Capital Advisers, Inc.
("Advisers"). See "Management--Investment Adviser," page
. The Company is a small business lending company
("SBLC") licensed by the U.S. Small Business
Administration ("SBA"), and, as such, participates in the
Section 7(a) Loan Program and makes loans to small
businesses that are partially guaranteed by the SBA. The
Company also makes loans in conjunction with such 7(a)
guaranteed loans, and makes loans which are not
guaranteed by the SBA, pursuant to the Section 504 Loan
Program. It is anticipated that the Company will
reorganize its corporate structure in the near term. The
Reorganization will not change the business of the
Company on a consolidated basis, but after the
Reorganization, the Company's SBLC (the "Reorganization")
license will be held by Allied Capital SBLC Corporation,
a wholly owned subsidiary ("Allied SBLC"), and the
Company's loans will generally be made by Allied SBLC and
Allied Capital Credit Corporation, also a wholly owned
subsidiary ("Allied Credit"). See "The
Company--Organization," page .

INVESTMENT OBJECTIVE The investment objective of the Company is to achieve a
high level of current income by investing in loans at
least partially guaranteed by the SBA, as well as loans
made in conjunction with such loans, and other loans. See
"The Company--Business of the Company," page .

INVESTMENT
CONSIDERATIONS As a BDC, the Company's consolidated portfolio includes
loans to small privately held companies that involve a
high degree of business and financial risk. A large
number of entities compete for the same kinds of small
business lending opportunities as the Company. The
Company is now, and following the Reorganization Allied
SBLC will be, subject to regulation by the SBA. Entities
regulated by the SBA are exposed to the business risks of
changes in government regulations that may have an
adverse impact on the Company as a whole. In addition,
because the Company and after the Reorganization its
subsidiaries will borrow funds, the Company is exposed to
the risks of leverage, which may be considered a
speculative investment technique. See "The Company--Risk
Factors--Risks of Leverage," page .

PRINCIPAL TRADING
MARKET The Company's shares are quoted on the Nasdaq National
Market under the symbol "ALCL." See "Public Trading and
Net Asset Value Information," page .

FEES AND EXPENSES

<TABLE>
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES
Sales Load (as a percentage of offering price)................................. (1)
Dividend Reinvestment Plan Fees................................................ none(2)
ANNUAL EXPENSES (as a percentage of consolidated net assets attributable to
common shares(3))
Investment Advisory Fees....................................................... 3.58%(4)
Interest Payments on Borrowed Funds............................................ 4.40%(5)
Other Expenses.............................................................. 1.14%(6)
-----
Total Annual Expenses.................................................. 9.12%(7)
=====
</TABLE>

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

(1) In the event that Shares to which this Prospectus relates are sold to or
through underwriters, a corresponding Supplement to this Prospectus will
disclose the applicable sales load.

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

2
<PAGE> 5

(3) "Consolidated net assets attributable to common shares" equals net assets
(i.e., total assets less total liabilities) as of March 31, 1996.

(4) Pursuant to the Commission's disclosure requirements, "Investment Advisory
Fees" in this table are presented as a percentage of consolidated net
assets attributable to common shares; however, the Company's investment
advisory fees are determined using a formula based on total assets. The
fees payable pursuant to the investment advisory agreement (see
"Management--Investment Adviser," page ) are calculated as 0.625% per
quarter (2.5% per annum) of the quarter-end value of the Company's
consolidated total assets, less its consolidated Interim Investments (i.e.,
short-term U.S. government agency securities or repurchase agreements
collateralized thereby), cash and cash equivalents, plus 0.125% per quarter
(0.5% per annum) of the quarter-end value of consolidated Interim
Investments, 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, cash or cash equivalents. The "Investment Advisory
Fees" percentage was calculated as consolidated total assets at March 31,
1996 plus the anticipated net proceeds of the Offer, multiplied by 2.5%,
divided by consolidated net assets attributable to common shares. This
percentage for the year ended December 31, 1995 was 3.47%. At March 31,
1996 and December 31, 1995, approximately 2% and 5%, respectively, of the
Company's consolidated total assets were in the form of Interim
Investments, cash and cash equivalents. See "The Company--Business of the
Company," page .

(5) The "Interest Payments on Borrowed Funds" percentage is based on estimated
interest payments for the year ended December 31, 1996 divided by
consolidated net assets attributable to common shares. The estimated
interest payments for the year ended December 31, 1996 assume that the
outstanding borrowings of $16 million at March 31, 1996 will remain
outstanding for the full year and additional borrowings will be made
throughout the remainder of the year. This percentage for the year ended
December 31, 1995 was 2.58%. See "The Company--Risk Factors--Risks of
Leverage," page .

(6) The "Other Expenses" percentage is based on estimated amounts for the year
ending December 31, 1996 divided by consolidated net assets attributable to
common shares. This percentage for the year ended December 31, 1995 was
1.58%.

(7) "Total Annual Expenses" as a percentage of consolidated net assets
attributable to common shares are higher than the total annual expenses of
most closed-end management investment companies due to the Company's
consolidated outstanding borrowings of $16 million at March 1, 1996, which
significantly reduces the consolidated net assets attributable to common
shares on which the "Total Annual Expenses" percentage is required,
pursuant to the Commission's disclosure requirements, to be calculated for
presentation in the table. If the "Total Annual Expenses" percentage were
calculated instead as a percentage of consolidated total assets, "Total
Annual Expenses" would be 6.36% of consolidated total assets.

<TABLE>
<CAPTION>
10
EXAMPLE 1 YEAR 3 YEARS 5 YEARS 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 Total Annual Expenses of 6.36% (as a
percentage of consolidated total assets)................... $114 $ 288 $ 458 $ 863
</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 and expenses that an investor in the
Company will bear either directly or indirectly.

3
<PAGE> 6

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 is subject to the
informational requirements of the Securities Exchange Act of 1934, as amended
(the "1934 Act"), and in accordance therewith files reports, proxy statements
and other information with the Commission. 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 may be
obtained from the Public Reference Section of the Commission, 450 Fifth Street,
N.W., Washington, D.C. 20549, at prescribed rates. The Commission maintains a
web site at http://www.sec.gov that contains reports, proxy statements, and
other information regarding registrants, like the Company, which file
electronically with the Commission.

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 accountants, and quarterly unaudited summary
financial information. See "Reports and Independent Accountant," page .

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 condensed consolidated financial
information as of and for the years ended December 31, 1991, 1992, 1993, 1994
and 1995 has been audited by the firm of Matthews, Carter and Boyce, independent
accountants, whose opinion thereon appears at page F-14. See also "Management's
Discussion and Analysis of Financial Condition and Results of Operations," page
.

SUMMARY BALANCE SHEET INFORMATION
(IN THOUSANDS)

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------- MARCH 31,
1991 1992 1993 1994 1995(5) 1996(6)
------- ------- ------- ------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Investments, at value................... $10,509 $12,241 $21,793 $32,771 $47,147 $44,356
Cash and cash equivalents............... 444 2,654 10,998 1,297 3,020 1,237
Excess servicing asset.................. 1,328 1,372 1,605 2,700 3,828 4,230
Other assets............................ 2,646 1,153 557 851 1,485 1,341
------- ------- ------- ------- ------- -------
Total assets........................ $14,927 $17,420 $34,953 $37,619 $55,480 $51,164
------- ------- ------- ------- ------- -------
LIABILITIES
Notes payable, bank..................... $ -- $ -- $ -- $ 3,130 $18,914 $16,008
Note payable, parent.................... 4,292 7,860 -- -- -- --
Repurchase Agreements................... 2,761 -- -- -- -- --
Investment advisory fee payable......... -- -- 67 230 330 314
Other liabilities....................... 2,274 4,055 1,931 1,471 3,352 1,877
------- ------- ------- ------- ------- -------
Total liabilities................... 9,327 11,915 1,998 4,831 22,596 18,199
------- ------- ------- ------- ------- -------
SHAREHOLDERS' EQUITY
Common stock and additional paid-in
capital............................... 5,500 5,500 33,048 33,069 33,252 33,331
Net unrealized depreciation on
investments........................... (355) (180) (112) (164) (155) (176)
Undistributed (distributions in excess
of) accumulated earnings.............. 455 185 19 (117) (213) (190)
------- ------- ------- ------- ------- -------
Total shareholders' equity.......... 5,600 5,505 32,955 32,788 32,884 32,965
------- ------- ------- ------- ------- -------
Total liabilities and shareholders'
equity........................... $14,927 $17,420 $34,953 $37,619 $55,480 $51,164
======= ======= ======= ======= ======= =======
</TABLE>

4
<PAGE> 7

SUMMARY INCOME STATEMENT INFORMATION
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
------------------------------------------------- -----------------
1991(1) 1992(1) 1993 1994 1995(5) 1995(6) 1996(6)
------- ------- ------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Interest............................... $4,738 $1,380 $ 2,260 $ 3,716 $5,966 $1,222 $1,591
Premium income......................... 3,205 1,958 2,196 2,349 2,090 605 662
------ ------ ------ ------ ------ ------ ------
Total investment income............ 7,943 3,338 4,456 6,065 8,056 1,827 2,253
------ ------ ------ ------ ------ ------ ------
OPERATING EXPENSES
Investment advisory fee................ -- -- 572 811 1,140 224 314
Interest expense....................... 2,645 414 707 75 959 74 396
Other operating expenses............... 967 913 233 301 519 135 132
------ ------ ------ ------ ------ ------ ------
Total expenses..................... 3,612 1,327 1,512 1,187 2,618 433 842
------ ------ ------ ------ ------ ------ ------
Net investment income.............. 4,331 2,011 2,944 4,878 5,438 1,394 1,411
Net realized gain (loss) on
investments.......................... (85) (217) (338) (295) (195) 10 (60)
Net investment income before net
unrealized appreciation
(depreciation) on investments... 4,246 1,794 2,606 4,583 5,243 1,404 1,351
Net unrealized appreciation
(depreciation) on investments........ (111) 174 68 (52) 9 (59) (21)
------ ------ ------ ------ ------ ------ ------
Net increase in net assets
resulting from operations....... $4,135 $1,968 $ 2,674 $ 4,531 $5,252 $1,345 $1,330
====== ====== ====== ====== ====== ====== ======
PER SHARE AMOUNTS
Net investment income.................. $ 1.82 $ 0.84 $ 1.14 $ 1.12 $ 1.24 $ 0.32 $ 0.32
Net realized gain (loss) and net
unrealized appreciation
(depreciation) on investments........ $(0.08) $(0.01) $ (0.11) $ (0.08) $(0.04) $(0.01) $(0.02)
Net increase in net assets resulting
from operations...................... $ 1.74 $ 0.83 $ 1.03 $ 1.04 $ 1.20 $ 0.31 $ 0.30
Net asset value........................ $ 2.35 $ 2.31 $ 7.54 $ 7.50 $ 7.50 $ 7.55 $ 7.51
Dividends declared (prior to Initial
Public Offering)(4).................. $ 1.50 (2) $ 0.87 $ 1.02(2) $ -- $ -- $ -- $ --
Dividends declared (subsequent to
Initial Public Offering)(4).......... $ -- $ -- $ .08(3) $ 1.22 $ 1.08 $ 0.27 $ 0.30
</TABLE>

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

(1) Prior to the Company's initial public offering, which was consummated in
November 1993 (the "IPO"), Allied I as the Company's former sole
stockholder, and the Company's board of directors approved an increase in
the authorized shares and a stock split effected in the form of a stock
dividend to Allied I. All per share data for prior years presented have been
restated to reflect the stock split.

(2) 1993 is based on 2,380,000 shares outstanding prior to the IPO and dividends
for the nine months ended September 30, 1993. 1991 excludes a return of
capital paid to Allied I.

(3) 1993 is based on 4,368,420 shares outstanding subsequent to the IPO, and
dividends for the three months ended December 31, 1993.

(4) 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.

(5) In April 1995, ACLC Limited Partnership (the "Partnership") was formed so
the Company could participate in the SBA Section 504 Loan Program and
originate other types of small business loans. The Company is the general
partner of, and has 99% limited partnership interest in, the Partnership.
Accordingly, the consolidated financial statements of the Company include
the accounts of the Company and the Partnership beginning in 1995.

(6) In the opinion of management, the unaudited condensed consolidated financial
information of the Company contains all adjustments (consisting only of
normal recurring accruals) necessary to present fairly the Company's
consolidated financial position as of March 31, 1996 and the results of
operations for the three months ended March 31, 1995 and 1996. The results
of operations for the three months ended March 31, 1996 and June 30, 1996
are not necessarily indicative of the operating results to be expected for
the year ending December 31, 1996.

5
<PAGE> 8

QUARTERLY FINANCIAL HIGHLIGHTS
(IN THOUSANDS)

<TABLE>
<CAPTION>
1994 1995 1996
------------------------------------ ------------------------------------ --------------------------
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.............. $1,137 $1,512 $1,537 $1,879 $1,827 $1,771 $2,327 $2,131 $2,253 $1,937
Net investment
income.............. $ 873 $1,213 $1,242 $1,550 $1,394 $1,231 $1,580 $1,233 $1,411 $ 891
Net increase in net
assets resulting
from operations..... $ 856 $1,228 $1,306 $1,141 $1,345 $1,248 $1,402 $1,257 $1,330 $1,146
Per share............. $ 0.20 $ 0.28 $ 0.30 $ 0.26 $ 0.31 $ 0.29 $ 0.32 $ 0.29 $ 0.30 $ 0.25
</TABLE>

SENIOR SECURITIES
(at December 31, consolidated)

Certain information about the various classes of senior securities issued
by the Company and the consolidated ACLC Limited Partnership (the "Partnership")
is set forth in the following table.

<TABLE>
<CAPTION>
TOTAL AMOUNT
OUTSTANDING ASSET AVERAGE
EXCLUSIVE OF COVERAGE MARKET VALUE
CLASS AND YEAR TREASURY SECURITIES PER UNIT(1) PER UNIT(2)
- ---------------------------------------------- ------------------- ----------- -------------
<S> <C> <C> <C>
BANK LOAN (UNSECURED REVOLVING LINE OF CREDIT)
1986.......................................... $ 0 $ 0 N/A
1987.......................................... 2,000,000 1,396 N/A
1988.......................................... 5,000,000 1,355 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.......................................... 0 0 N/A
1995.......................................... 1,055,000 2,739 N/A
BANK LOANS (SECURED REVOLVING LINES OF CREDIT)
1986.......................................... $ 0 $ 0 N/A
1987.......................................... 0 0 N/A
1988.......................................... 0 0 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.......................................... 3,130,000 11,475 N/A
1995.......................................... 17,859,000 2,739 N/A
</TABLE>

6
<PAGE> 9

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

(1) 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 the aggregate amount of senior securities representing
indebtedness. This asset coverage ratio is multiplied by $1,000 to
determine the Asset Coverage Per Unit.

(2) Not applicable, as no class of senior securities of the Company has been
registered for public trading.

(3) U.S. government agency-guaranteed loans sold under agreements to repurchase.
The Company has been advised by the Staff of the Commission that these
reverse repurchase agreements are not considered a class of senior security
representing indebtedness and thus are not subject to the asset coverage
requirements of the Investment Company Act of 1940 as amended.

7
<PAGE> 10

PUBLIC TRADING AND NET ASSET VALUE INFORMATION

Shares of the Company's common stock are quoted on the Nasdaq National
Market under the symbol "ALCL". 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 necessarily
represent actual transactions. As the table below indicates, the Company's
common stock has historically traded at prices 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>
1994
1st Quarter........................ $15.75 $14.25 $ 7.52 109% 89%
2nd Quarter........................ $15.25 $12.50 $ 7.50 103% 67%
3rd Quarter........................ $14.25 $13.00 $ 7.53 89% 73%
4th Quarter........................ $14.25 $ 9.75 $ 7.53 89% 29%
1995
1st Quarter........................ $12.75 $ 9.50 $ 7.53 69% 26%
2nd Quarter........................ $13.25 $12.00 $ 7.55 75% 59%
3rd Quarter........................ $13.00 $12.00 $ 7.57 72% 59%
4th Quarter........................ $13.25 $12.00 $ 7.55 76% 59%
1996
1st Quarter........................ $14.50 $12.63 $ 7.51 93% 68%
2nd Quarter........................ $15.00 $12.70 $ 7.75 94% 64%
3rd Quarter........................ $15.38 $13.13 $ -- --% --%
</TABLE>

The last sale price for a share of the Company's common stock on Nasdaq on
November 4, 1996 was $14.75.

Net asset value is computed quarterly, as of the last day of the fiscal
quarter, to reflect the determination by the Company's Board of Directors, of
the fair value of those portfolio securities for which market quotations are not
readily available, or do not available.

8
<PAGE> 11

THE OFFER

SALE OF SHARES BY ALLIED I

Prior to the Company's initial public offering in November 1993 (the
"IPO"), the Company was a wholly owned subsidiary of Allied I. After that date,
Allied I continued to hold a significant number of the Company's outstanding
shares, but is obligated as a condition of exemptive relief from the Commission
to divest itself of such Shares by December 31, 1998 through public offerings,
private placements, distributions to Allied I stockholders or otherwise. The
Company and Allied I intend to file an application with the Commission
requesting a modification to one of the conditions of the existing order
regarding Allied I's investment in the Company. Specifically, the application
will seek to extend, by up to an additional two years (i.e., until December 31,
2000) ("Extended Period"), the deadline for Allied I's divesting of the Shares.
There can be no assurance that such an extension will be granted by the
Commission. In any event, Allied I has undertaken to register its Shares of the
Company, and will make good faith efforts to sell the Shares in any and all
transactions that are deemed to be in the best interest of Allied I and its
stockholders as the opportunities to do so arise.

Immediately following the IPO, Allied I owned 1,580,000 shares, or
approximately 36% of the Company's shares then outstanding. In December 1994,
Allied I's board of directors declared an extra distribution to its stockholders
payable in shares of the Company's stock held by Allied I (which was paid in
early January 1995), which resulted in the distribution of an aggregate of
335,086 of the Company's shares to Allied I stockholders. That distribution
reduced Allied I's ownership in the Company to 1,244,914 shares, or
approximately 28% of the Company's shares then outstanding. Allied I has not
subsequently made or declared any other distributions payable with Company stock
held by Allied I. The Company issued new shares for cash pursuant to a rights
offering in June 1996, and a subsequent sale of the shares offered but not
purchased in the rights offering. See "The Company -- ," page . Allied
I did not participate in the rights offering. Allied I's holdings of the
Company's shares represented approximately 24% of the Company's shares
outstanding at September 30, 1996.

PLAN OF DISTRIBUTION

At the date of this Prospectus, Allied I had not informed the Company of
any specific plan for the distribution of the Shares covered by the Prospectus.
At such times as Allied I proposes to sell specific amounts of these Shares, it
may make arrangements with underwriters to manage the offering and sale. Allied
I may also sell Shares directly to private buyers in privately negotiated
transactions pursuant to this Prospectus, or otherwise dispose of the Shares.
Sales would be attempted to be made at an offering price as close as practicable
to the then-prevailing market price of the Shares, provided that such price is
satisfactory to Allied I and deemed by its board of directors to be in the best
interests of its stockholders. Any such sale is expected to occur at a premium
to the Shares' net asset value. See "Public Trading and Net Asset Value
Information," page .

Allied I has informed the Company that it will attempt to sell these Shares
within two years of the commencement of the Offer. However, given that Allied I
owns approximately 24% of the Company's outstanding shares at September 30,
1996, its ability to sell such Shares within two years may be limited by the
trading volume of the Company's shares, and its desire not to impact negatively,
to the extent practicable, the market value of the Company's shares, which could
result if too many shares are sold into the market at a given time. Allied I has
also informed that, to the extent that Allied I has not sold all of the Shares
by the end of 1998, or the end of the Extended Period, if granted, or if Allied
I's management believes that it is in the best interest of its stockholders at
any time, it may distribute all or a portion of the unsold Shares pro rata to
its own stockholders.

In connection with each distribution pursuant to the Offer, the Company
will provide a Supplement to this Prospectus containing information about the
distribution to the extent required by applicable law.

9
<PAGE> 12

PROCEEDS OF THE OFFERING

The Shares to which this Prospectus relates are being offered by Allied I.
Accordingly, net proceeds from the sale of Shares, if any, will be received by
Allied I and not by the Company. The Company will not pay any sales load or
other expenses.

THE COMPANY

ORGANIZATION

The Company was incorporated under the laws of the District of Columbia in
1976 and was reorganized as a Maryland corporation in 1991. The Company is a
closed-end management investment company that elected in 1993, at the time of
the Company's IPO, to be regulated as a business development company ("BDC")
under the Investment Company Act of 1940, as amended (the "1940 Act").
Currently, the Company is licensed by the SBA as a small business lending
company ("SBLC") and is a participant in the SBA Section 7(a) Loan Program. The
Company also participates in the SBA Section 504 Loan Program, currently through
the ACLC Limited Partnership (the "Partnership"), and may also make other small
business loans. Allied Capital Advisers, Inc. ("Advisers") serves as the
investment adviser of the Company under an investment advisory agreement.

In 1996, the Company caused to be formed two new entities, Allied Capital
SBLC Corporation ("Allied SBLC"), and Allied Capital Credit Corporation ("Allied
Credit"). Both Allied SBLC and Allied Credit (the "Subsidiaries") are Maryland
corporations and closed-end management investment companies that intend to elect
to be regulated as BDCs under the 1940 Act. Pursuant to a Reorganization plan,
which was approved by the SBA on June 7, 1996 and for which the Commission
granted exemptive relief on September 10, 1996, the Company will become the
parent of the Subsidiaries. On or about December 1, 1996, it is anticipated that
the Company will transfer its SBLC license and all Section 7(a) loans and
related assets and liabilities to Allied SBLC in return for 100% of Allied
SBLC's common stock. The Company will contribute its general partnership
interest and its 99% limited partnership interest in the Partnership and all of
its loans and related assets and liabilities to Allied Credit in return for 100%
of Allied Credit's common stock. Simultaneous with this transaction, Allied
Credit will purchase the 1% limited partnership interest not owned by the
Company and the Partnership will be dissolved. Following the Reorganization,
Allied SBLC will hold the SBLC license and will participate in the Section 7(a)
Loan Program. Allied Credit will generate companion loans to the 7(a) loans,
participate in the SBA Section 504 Loan Program, and make other loans. The
Company itself may also participate in the Section 504 Loan Program and may
generate 7(a) companion loans as well as other loans not related to these SBA
programs. The Company intends to maintain complete ownership of the Subsidiaries
and to raise capital to finance the Subsidiaries, as needed. The Company
believes this new structure will provide the Company and the Subsidiaries with
greater flexibility to generate loans, and to operate within certain regulatory
constraints.

RECENT OFFERINGS BY THE COMPANY

In June 1996, the Company sold 548,887 shares of common stock in a
one-for-five non-transferable rights offering to existing stockholders at a
price of $13.04 per share, which represented 95% of the average of the last
reported sale price of the Company's common stock on the Nasdaq National Market
on the expiration date of the rights offering (June 4, 1996) and each of the
four preceding business days. The Company paid a 2.5% solicitation fee to
certain broker-dealers for each share issued as a result of their soliciting
efforts.

In July 1996, the Company sold the 174,358 shares that had been registered
but not subscribed for in the rights offering at a price of $12.71 per share.
This subsequent sale involved an underwriter, which received a 2.56% commission
on the sale.

BUSINESS OF THE COMPANY AND THE SUBSIDIARIES

The business of the Company and, following the Reorganization, that of the
Subsidiaries, is to make loans to small businesses. It does this primarily
through participation in two SBA programs: the Section 7(a) Loan

10
<PAGE> 13

Program and the Section 504 Loan Program. The Company also generates companion
loans to accompany the Section 7(a) loans and may also generate loans unrelated
to any SBA programs. All further references to investments by the Company
include those made by its Subsidiaries, unless otherwise indicated.

The Section 7(a) Loan Program

The Company currently is, and upon the Reorganization through Allied SBLC
expects to remain, an SBA-licensed SBLC and a participant in the Section 7(a)
Loan Program. Pursuant to Section 7(a) of the Small Business Act of 1958, as
amended, the SBA guarantees 80% of any qualified loan up to $100,000 regardless
of maturity, and 75% of any such loan over $100,000 regardless of maturity, to a
maximum guarantee of $750,000 for any one borrower. SBA regulations define
qualified small businesses generally as businesses with no more than $5 million
in annual sales and no more than 500 employees.

In December 1994, in a move unexpected by the Company, the SBA altered its
regulations concerning the Section 7(a) Loan Program and announced that it would
place a loan size cap of $500,000 on the loans that it would guarantee under the
Section 7(a) Loan Program. In October 1995, the SBA altered the regulations
again and restored the maximum guarantee of $750,000 for any one borrower, thus
effectively raising the maximum loan size with a 75% guarantee to $1 million.
The SBA's 1994 reduction in the maximum loan size under the Section 7(a) Loan
Program had no significant impact on the Company's results of operations for
1995 because the Company had a substantial backlog of loans already approved
under prior rules; however, the frequency of regulatory changes in 1994 and 1995
prompted the Company to reevaluate its lending programs, expand its operations
with additional small business loan programs and reorganize its corporate
structure. The Company continues to explore other financial products and is
pursuing entry into other loan programs to diversify its consolidated portfolio.

The SBA designates certain participants in the Section 7(a) Loan Program as
"Preferred Lenders" in designated markets, which allows the Company to make
Section 7(a) loans without SBA credit approval, thus simplifying and expediting
the process of loan approval and disbursements. As of September 30, 1996, the
Company was a Preferred Lender in 47 regional markets. The Company anticipates
that this Preferred Lender status will be transferred to Allied SBLC at the time
of the Reorganization.

The SBA also designates certain participants in the Section 7(a) Loan
Program as "Certified Lenders." Applications for loan guarantees submitted by
Certified Lenders receive expedited processing by the SBA. The SBA has
designated the Company as a Certified Lender in all markets in which it is a
Preferred Lender, and the Company expects this status to be transferred to
Allied SBLC at the time of the Reorganization.

As permitted by SBA regulations, the Company systematically sells to
investors, without recourse, the guaranteed portion of its loans. Such loan
sales generally take place approximately three months after the closing of the
loan and, under current market conditions, are made at a price of around 110% of
the principal amount of the portion of the loan sold. In October 1995, the SBA
amended its regulations and raised the annual fee payable to the SBA on the
guaranteed portion of loans approved by the SBA after October 12, 1995 from 0.4%
to 0.5% per annum, regardless of whether such loans are sold in the secondary
market. The SBA is also entitled to a fee of 50% of any cash premium in excess
of 10% of face amount received on loan sales. The Company continues to service
sold loans for a servicing fee of approximately 0.4% per annum of the
outstanding principal amount of such loans. To the extent that the Company
receives any higher servicing fee, the value of such additional servicing fee is
recorded as an excess servicing asset. At September 30, 1996, the Company was
servicing approximately $ million aggregate principal amount of loans, of
which approximately % had been sold to investors. It is anticipated that,
following the Reorganization, Allied SBLC will continue the Company's practice
of selling the guaranteed portions of its loans.

The Company requires capital to make loans, to carry those loans for
approximately three months until sale occurs, and to carry the unguaranteed,
unsold portion of the principal amount of the loans to maturity. For the purpose
of carrying the guaranteed portions of such loans pending their sale, the
Company has a $20 million line of credit with a commercial bank that expires
December 31, 1996. See "The Company--Risk Factors--Bank Loans," page . In
anticipation of the Reorganization, Allied SBLC is currently negotiating

11
<PAGE> 14

its own line of credit with a commercial bank, which will be used for the same
purposes as the Company's line of credit.

Section 7(a) loans may be made to qualifying small businesses for the
purposes of acquiring real estate, purchasing machinery or equipment or to
provide working capital. Such loans made to acquire real estate may have
maturities of up to 25 years; loans made for the purpose of purchasing machinery
and equipment may have maturities of up to 15 years; and loans made to provide
working capital may have maturities of up to seven years. These loans are
secured by a mortgage or other lien on the assets of the borrower and,
frequently, of its principals. The Company generally does not make unsecured
working capital loans. In all cases, the principals of the small businesses must
personally guarantee the payment of interest on and principal of the loans.

The Company may, from time to time, concentrate its loans in particular
industries, but generally the Company does not intend to concentrate its loans
in any industry. At September 30, 1996, the Company had in its portfolio or was
servicing loans to, among other industries, hotels and motels, restaurants,
manufacturers, retail shops, food stores, professional services, laundries and
cleaners, home furnishings concerns, gasoline stations, business services firms,
recreational services providers, automobile exhaust repair shops, personal
services providers and automotive repair concerns.

The interest rate on loans recently made by the Company generally is at a
variable rate that is generally 2.75% per annum above the prime rate, as
published in The Wall Street Journal or other financial newspaper, adjusted
monthly.

All loans are payable in equal monthly installments of principal and
interest from the dates on which the loans are made (or the first day of the
month following any month in which there occurs an interest rate adjustment) to
their respective maturities.

The Section 504 Loan Program and Companion Loans

During 1995, as part of the Company's efforts to diversify its lending
activities, the Company began participating, through the Partnership, in the
Section 504 Loan Program. Following the Reorganization, such loans will
generally be made by Allied Credit. Under the Section 504 Loan Program,
qualified small businesses can purchase or build real estate with favorable
long-term debt. Loans made under this program are structured such that the
borrower provides at least 10% of the project cost in equity, the Company
provides 50% of the project cost in an unguaranteed 20-year adjustable rate
first mortgage loan, and a local certified development company ("CDC") provides
a 20-year fixed rate second mortgage loan for the remaining 40% of the project
cost. Both types of loans are fully amortizing, and the total project cost can
be as large as $2.5 million.

During 1995, through the Partnership, the Company also began providing
companion loans in conjunction with traditional Section 7(a) loans. For this
type of financing, the Company provides an unguaranteed first mortgage loan for
up to 50% of the real estate value and a second mortgage loan through the
Section 7(a) Loan Program with a 75% SBA guarantee. The total of the two loans
is generally 80% or less of the appraised value of the real estate. The Company
now also partners with local banks by providing second mortgage loans that are
partially guaranteed by the SBA in conjunction with the banks' conventional
first mortgage loans to qualifying small businesses.

The Partnership finances Section 504 loans and companion loans with a line
of credit that it has with a commercial bank. See The Company--"Risk
Factors--Bank Loans," page . Under this line of credit, which expires on
November 30, 1996, the Partnership may borrow up to $15 million. In anticipation
of the Reorganization, Allied Credit is negotiating its own line of credit with
a commercial bank, which will be used for the same purposes as the Partnership's
line of credit.

Loan Generation

The Company has made arrangements with certain financial consulting
organizations, or "regional associates," to refer to the Company potential
lending opportunities to small businesses in certain designated

12
<PAGE> 15

territories. Any prospective loan referred to the Company by any regional
associate is reviewed by the Company's portfolio manager and its credit
committee and is approved or ratified by the Board of Directors of the Company
or the Subsidiaries and, in the case of Section 7(a) loans, by the SBA if
required. If and when a loan referred by a regional associate is funded, such
regional associate is compensated by an origination fee calculated using a
formula agreed upon by the Company and such regional associate. The origination
fees currently paid by the Company to its regional associates range from 0.5% to
4.0% of the principal amount of each loan made by the Company that was referred
by the respective regional associate. The regional associates from time to time
may assist the Company in monitoring any loans referred by them or otherwise
made in their territories. For those services, the regional associates are
compensated with a fixed fee per site visit.

BDC Regulation

As BDCs, the Company and the Subsidiaries (collectively, the "Allied
Lending Companies"), following their respective election to be regulated as BDCs
will be regulated as BDCs under the 1940 Act. As a result, generally they are
subject to periodic reporting and other requirements under the Securities
Exchange Act of 1934, as amended ("1934 Act"), although the Company and the
subsidiaries will file reports solely on a consolidated basis. Regulation as a
BDC qualifies a company to be taxed under Subchapter M of the Internal Revenue
Code of 1986, as amended (the "Code") (see " , page ), but also
imposes certain limitations upon its operations. Set forth below is an outline
of certain 1940 Act provisions governing BDCs.

In general, a BDC may not acquire any investment asset other than certain
specified assets ("Qualifying Assets") unless, at the time the acquisition is
made, Qualifying Assets represent at least 70% of the value of the Company's
total investment assets (the "70% test"). Among the principal categories of
Qualifying Assets relevant to the business of the Allied Lending Companies 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 in the
1940 Act as any issuer that: (a) is organized under the laws of, and
has its principal place of business in, any state or states or any
possession or possession of the United States; (b) that is neither an
investment company (other than an SBA-licensed small business
investment company which is wholly owned by the BDC nor a company
excluded from the definition of "investment company" in the 1940 Act;
and (c) does not have any class of securities with respect to which a
member of a national securities exchange, broker, or dealer may extend
or maintain margin credit to or for a customer (i.e., publicly traded
securities). The Allied Lending Companies have received an order of the
Commission permitting the Company to treat its investments in the
Subsidiaries following the Reorganization as investments in eligible
portfolio companies, and therefore are Qualifying Assets, for purposes
of this test.

(2) Securities of any eligible portfolio company that is controlled by the
BDC.

(3) Securities purchased in transactions not involving any public offering
from an issuer described in clauses (a) and (b) of the above definition
of "eligible portfolio company," or from certain other persons
including any person in transactions incident thereto, if such
securities were issued by an issuer that, immediately prior to the
purchase of such issuer's securities by the BDC, was in bankruptcy
proceedings or was otherwise unable to meet its obligations as they
came due without material assistance other than conventional lending or
financing arrangements.

(4) Cash, cash items, or Government securities, or high quality debt
securities maturing in one year or less from the time of investment.

In addition, a BDC must be operated for the purpose of making investments
in the types of securities described in (1) through (3) above and, in order to
treat securities as Qualifying Assets for the purpose of the 70% test, generally
must make available with respect significant managerial assistance to the issuer
of those securities. "Making available significant managerial assistance" means,
among other things, any arrangement whereby the BDC, through its directors,
officers or employees, offers to provide, and, if accepted, does so provide,
significant guidance and counsel concerning the management, operations or
business objectives and

13
<PAGE> 16

policies of a portfolio company. Managerial assistance is made available to the
portfolio companies by the loan officers who manage the Company's investments.
Each portfolio company is assigned for monitoring purposes to a loan officer and
is contacted and counseled if it appears to be encountering business or
financial difficulties. The Allied Lending Companies also provide guidance and
counsel on a continuing basis to any portfolio company that requests it, whether
or not difficulties are perceived. The Allied Lending Companies' officers and
directors are highly experienced in providing this type of managerial assistance
to small businesses.

Regarding the degree of leverage in its capital structure, a BDC may not
issue any class of senior security representing an indebtedness or sell any
senior security representing an indebtedness of which it is the issuer unless,
immediately after such issuance or sale, it will have an asset coverage of at
least 200 percent. "Asset coverage" of a class of senior securities representing
indebtedness of an issuer means the ratio which the value of the total assets of
such issuer, less all liabilities and indebtedness not represented by senior
securities, bears to the aggregate amount of senor securities representing
indebtedness of such issuer. This limitation is not applicable to a class of
senior securities not representing an indebtedness, which pursuant to the order
granting exemptive relief from the Commission, specifically includes debt issued
by Allied SBLC.

None of the Allied Lending Companies may change the nature of their
businesses so as to cease to be, or withdraw election as BDCs unless authorized
by "the vote of a majority of its outstanding voting securities" as defined in
the 1940 Act.

RISK FACTORS

The purchase of any Shares offered by this Prospectus involves a number of
significant risks 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.

Government appropriations and SBA regulation. The Company's business
remains largely dependent upon two government-sponsored, SBA-administered Loan
Programs, the Section 7(a) Loan Program and the Section 504 Loan Program. The
Section 7(a) and 504 Loan Programs are regulated by the SBA pursuant to laws
passed by Congress. There is no assurance that the government appropriations for
these programs or for the operations of the SBA will be continued. In addition,
both programs are subject to changes in law or regulation at any time that could
have an adverse impact on the Company's operations with regard to the programs.
See "The Company--Business of the Company and the Subsidiaries--The Section 7(a)
Loan Program," page .

Risks of default. Loans to small businesses involve a high risk of
default. Such loans are not rated by any statistical rating organization. Small
businesses usually have smaller product lines and market shares than larger
companies and therefore may be more vulnerable to competition and general
economic conditions. These businesses typically depend for their success on the
management talents and efforts of one person or a small group of persons whose
death, disability or resignation would adversely affect the business. Because
these businesses frequently have highly leveraged capital structures, reduced
cash flow resulting from economic downturns can severely impact the businesses'
ability to meet their obligations. The portions of Section 7(a) loans retained
and to be retained by the Company do not benefit directly from any SBA
guarantees; in an event of default, however, the Company and the SBA typically
cooperate in collateral foreclosure or other work-out efforts and share in any
resulting collections. The Section 504 loans and the companion loans are not
guaranteed in any part by the SBA and as a result carry a higher risk of loss
from an event of default than do the Section 7(a) loans.

Premium refund. Under its regulations, the SBA has the right to repurchase
the guaranteed portions of loans at any time, though the Company is not aware of
any instance in which the SBA has exercised that right. Conversely, the Company
has the right to require the SBA to repurchase any loan which is 60 days past
due. If such delinquency occurs within the first three months after the Company
has sold the guaranteed portion of a loan and the late payments are not made up
within 275 days after the loan sale, the Company must, when the loan is
repurchased by the SBA from the secondary market, refund any premium that it had
received on its

14
<PAGE> 17

sale of the loan to the secondary market. Moreover, under its guaranty the SBA
will pay only the principal amount of the guaranteed portion of the loan and
interest thereon for up to 120 days.

Illiquidity of loans. SBLCs are required by SBA regulations to retain an
economic interest in the unguaranteed portions of the Section 7(a) loans made by
them until maturity. The Company may attempt at some time in the future to
obtain the SBA's consent to the sale of the unguaranteed portion such loans, but
there is no assurance that such consent, if sought, will be forthcoming or that
a market for such loans could be developed even if such consent were obtained.

Interest rate fluctuations. Since all loans made by the Company are
currently being made at variable rates of interest, the return on the Company's
investment in them could decline if market interest rates were to decline from
their current levels. New loans are being made on the basis of market rates
which, being variable, may become unduly burdensome or otherwise come to appear
unattractive to some borrowers as market interest rates increase. Moreover,
rising interest rates may tend to reduce the premium that the Company receives
on sales of the guaranteed portions of loans. Thus, any substantial increase in
market interest rates could result in greater rates of prepayments of or
defaults on outstanding loans and might tend to inhibit the expansion of the
Company's business or otherwise reduce its profitability.

Competition. There are several other SBLCs (non-bank lenders) as well as a
large number of banks that participate in the Section 7(a) Loan Program. All of
these participants compete for the business of eligible borrowers. From time to
time, these competitors will offer loans at a lower rate of interest than the
2.75%-above-prime maximum rate permitted by the SBA, which is the rate at which
the Company generally offers loans. However, such lower-cost loans are generally
offered with shorter maturities than those which the Company is prepared to
offer for its loans. Moreover, unlike SBLCs such as the Company, banks are
frequently under different regulatory constraints on the types of loans that
they are able to offer. Also, many participants in the Section 7(a) Loan Program
do not have the same degree of expertise as does the Company in tailoring loans
to meet the SBA's approval requirements and, accordingly, the Company is
frequently in a position to obtain guaranteed funding for the borrower more
rapidly than many other participants.

The Company has not to date perceived competition to be a significant
negative factor in the volume of loans that it is able to make or the rate of
interest that it is able to charge for such loans. There is no assurance,
however, that increased competition may not become a negative factor in the
future.

In addition, pursuant to the 1940 Act, the Company and the Subsidiaries are
limited as to the amount of indebtedness they may have. The Company and Allied
Credit must maintain an asset coverage of at least 200% for each class of senior
security representing indebtedness. Accordingly, the Company may be at a
competitive disadvantage with regard to other lenders or financial institutions
that may be able to achieve greater leverage.

Market price disparities. Shares of closed-end investment companies
frequently trade at a discount from net asset value, but shares of some
closed-end investment companies, including the Company as well as Allied I and
Allied Capital Corporation II which are also managed by Advisers, have
historically traded at a premium to net asset value. This characteristic of
shares of closed-end investment companies is separate and distinct from the risk
that a company's net asset value per share will decline. It is not possible to
predict whether the shares offered hereby will trade at, above, or below net
asset value.

Loss of Subchapter M Tax Treatment. The Company may cease to qualify for
Subchapter M tax treatment if it is unable to comply with the diversification
requirements contained in Subchapter M of the Code. The Company may also cease
to qualify as a regulated investment company and therefore to qualify for
Subchapter M 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
Subchapter M tax treatment would have a materially adverse effect on the total
return, if any, obtainable from an investment in the Company's shares.

Risks of leverage. The Company and the Subsidiaries intend to continue to
borrow funds from and issue senior debt securities to banks or other lenders up
to the limit permitted by the 1940 Act. Such borrowings,

15
<PAGE> 18

unless fully offset by redemptions or repurchases of the Company's outstanding
senior securities, will cause the Company to be fully 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 otherwise
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 otherwise would if
the senior funds had not been borrowed. Similarly, any increase in the Company's
consolidated income in excess of consolidated interest payable on the borrowed
funds would cause its net income to increase more than it would without the
leverage, while any decrease in its consolidated income would cause net income
to decline more sharply than it would had the funds not been borrowed 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 fail to cover the Company's costs of borrowing to purchase
these additional securities. 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 a class of senior security representing indebtedness declines
to less than 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 continued ability to maintain a leveraged capital structure by
borrowing from banks, or other lenders on favorable terms, and there can be no
assurance that such leverage can in fact be maintained.

The Company had outstanding the following sources of financing as of
September 30, 1996:

<TABLE>
<CAPTION>
ANNUAL RATE OF
INTEREST PAYMENTS ANNUAL PORTFOLIO
AMOUNT ----------------------------------------- RETURN TO COVER
CLASS OUTSTANDING INITIAL AS OF SEPTEMBER 30, 1996 INTEREST PAYMENTS(1)
- --------------------------- ----------- ------------- ------------------------ --------------------
<S> <C> <C> <C> <C>
Secured lines of credit.... $23,325,000 7.875%-8.122% 7.638%-8.138% 2.92%
</TABLE>

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

(1) The "Annual Portfolio Return to Cover Interest Payments" is calculated as
estimated 1996 annual interest payments per class of senior security,
divided by total assets at September 30, 1996.

Bank Loans. At September 30,1996, the Company had a secured revolving line
of credit agreement with a commercial bank which permits the Company to borrow
up to $20 million with interest payable monthly at one-month London Inter-Bank
Offered Rate (" LIBOR") plus 2.2% per annum. The agreement requires payment of a
quarterly facility fee of 0.375% per annum on the unused portion of the line,
and expires December 31, 1996. Principal payments are not required until the
loan's maturity. The financial covenants of this line of credit agreement
require the Company to have net worth at least equal to total liabilities. The
Company may not permit total intangible assets (i.e., excess servicing asset) to
exceed $5 million. Also, the Company must maintain a minimum interest coverage
ratio (as defined in the credit agreement) of at least 1.5 to 1.

At September 30, 1996, the Partnership had a secured revolving line of
credit with a commercial bank to borrow up to $15 million at one-month LIBOR
plus 2.7%. The agreement requires payment of a quarterly facility fee of 0.375%
per annum on the unused portion of the line and expires November 30, 1996. This
line of credit is used to finance the Partnership's loans closed under the
Section 504 program and companion loans made in conjunction with Section 7(a)
guaranteed loans. The financial covenants of this line of credit agreement
require the Company to have net worth at least equal to total liabilities. The
Company may not permit total intangible assets (i.e., excess servicing asset) to
exceed $5 million. The Company must maintain a minimum interest coverage ratio
(as defined in the agreement) of at least 1.5 to 1.

The Company is currently renegotiating its lines of credit in anticipation
of the Reorganization. It is anticipated that each of the Subsidiaries will have
a secured revolving line of credit with a commercial bank

16
<PAGE> 19

with similar amounts and terms as the existing credit facilities in existence at
September 30, 1996, however there is no guarantee that such terms or amounts may
be achieved.

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)......... -12% -10% -5% 0% 5% 10% 12%
Corresponding return to
common stockholders....... -29.61% -25.54% -15.38% -5.23% 4.93% 15.09% 19.15%
</TABLE>

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 ("Board") at the date of this Prospectus, see the Statement of
Additional Information under the caption "Management." Four of the members of
the Board are "interested persons," as the term is defined in the 1940
Act -- two are officers of the Company as well as of Advisers, one is formerly
an executive officer of the Company and Advisers, and one is an officer of a
registered broker-dealer. Five of the other Board members are not "interested
persons," of the Company within the of the 1940 Act, and are hereinafter
referred to as "non-interested directors."

The responsibilities of the Board of Directors include, among other things,
the approval or ratification of loans 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, including 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 independent accountant.

The audit and compensation committees of the Board of Directors, comprised
exclusively of non-interested directors, respectively review with the Company's
independent accountants 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 up to a
total of 504,860 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 504,860 options were outstanding, a total of 226,644 options were
exercisable, and a no additional options were available for grant at September
30, 1996. 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 each compensated by fees at the
rate of $1,000 per meeting of the Board of the Company or the Subsidiaries or
each separate (i.e., not held on the same day as a full Board meeting) meeting
of a committee of the 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 committee meeting. There is no duplication
of directors' fees and expenses even if some directors also take action on
behalf of the Subsidiaries. The Company's stock option plan permits a one-time
grant of options to each member of the Board who is not an employee of Advisers
to purchase 10,000 shares of the Company's common stock. On December 26, 1995,
such options were granted at an exercise price of $15.00 per share to all
non-interested directors. On May 13, 1996, one newly elected director received a
similar grant of 10,000 options also at an exercise price of $15.00 per share.
The exercise price of all of these grants was the minimum provided under the
Company's stock option plan.

17
<PAGE> 20

INVESTMENT ADVISER

Advisers is the investment adviser of the Company pursuant to an investment
advisory agreement. Under that agreement, Advisers manages the loans made by the
Company and each of the Subsidiaries, subject to the supervision and control of
the Company's Board of Directors or the respective subsidiary, and evaluates,
structures, closes and monitors those loans made by the Company and the
Subsidiaries. Neither the Company nor any of its subsidiaries will make any loan
or other investment that has not been recommended by Advisers. Except as to
those investment decisions that require specific approval by the Company's Board
of Directors so long as the investment advisory agreement remains in effect,
Advisers has the authority to effect loans and sales of portions of loans for
the Company's account or for the Subsidiaries' accounts. Advisers also serves as
the investment adviser of Allied I, Allied Capital Corporation II ("Allied II"),
Allied Capital Commercial Corporation ("Allied Commercial"), Business Mortgage
Investors, Inc. ("BMI"), Allied Venture Partnership and Allied Technology
Partnership. Some of the directors and officers of Advisers are also directors
and officers of the Company.

Katherine C. Marien is the Company's portfolio manager, a position she has
held since 1992. She was a Financial Consultant with Wilks & Schwartz
Broadcasting from 1991 to 1992 and a Financial Consultant to USA Mobil
Communications, Inc. from 1991 to 1992.

In May 1995, the Company's stockholders approved a new investment advisory
agreement with Advisers (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
non-interested directors, or by a vote of a majority of the outstanding voting
securities of the Company within the meaning of the 1940 Act. The current
agreement may, however, be terminated at any time on sixty (60) days' notice,
without the payment of any penalty, by the Board of Directors or by vote of a
majority of the outstanding voting securities of the Company, as defined in the
1940 Act, and will terminate automatically in the event of its assignment.

The current advisory 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 the
Company's 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
accounting) 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 investment transaction or
follow-on managerial assistance. Advisers will report to the Company's 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 non-interested Directors.

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 Interim Investments and cash and cash
equivalents) and 0.125% per quarter of the quarter-end value of the Company's
Interim Investments and cash and cash equivalents. Such fees on an annual basis
equal approximately 2.5% of the Company's total assets (other than Interim
Investments and cash and cash equivalents) and 0.5% of the Company's Interim
Investments and cash and cash equivalents. For the purposes of calculating the
fee, the values of the Company's consolidated

18
<PAGE> 21

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.

AUTHORIZED CLASSES OF SECURITIES

Pursuant to the Company's Articles of Incorporation, the following are the
authorized classes of securities of the Company, its Subsidiaries, and the
Partnership as of September 30, 1996:

<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.................................... 20,000,000 0 5,122,060
THE PARTNERSHIP (ACLC LIMITED PARTNERSHIP)(a):
Limited Partnership Interests................... N/A 99% 1%
Allied Capital SBLC Corporation................... 20,000,000 0 0
Allied Capital Credit Corporation................. 20,000,000 0 0
</TABLE>

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

(a) The Company is also the general number partner of the Partnership.

DESCRIPTION OF COMMON STOCK

GENERAL

The authorized capital stock of the Company is twenty million (20,000,000)
shares with a par value of $0.0001. All of such shares were initially classified
as common stock, of which 5,122,060 shares were outstanding as of September 30,
1996. 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. The 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 and expenses. 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.
Allied I owned approximately 24% of the Company's outstanding shares of common
stock at September 30, 1996. On matters requiring a vote of the Company's
stockholders, Allied I has agreed to vote its shares only in the same proportion
as the shares voted by the Company's public stockholders. The Company holds
annual stockholders' meetings.

The Board of Directors may classify and reclassify any unissued shares of
capital stock by setting or changing in any one or more respects the
preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends, qualifications, terms or conditions of redemption
or other rights of such shares of capital stock.

DIVIDENDS AND DISTRIBUTIONS

The Company intends to distribute substantially all of its net investment
income to stockholders quarterly, generally on the last day of March, June,
September and December of each year. In 1996, quarterly dividends were declared
in February, May and August and paid on March 29, June 28, and September 30 each
at a rate of $0.30 per share. For 1995, quarterly dividends were declared in
February, May, August and November and paid on March 29, June 28, September 29,
and December 29, 1995 at a rate of $0.27, $0.2825, $0.29 and $0.30 per share,
respectively. The Board of Directors also declared an extra distribution in
December 1995 of $0.0775 per share, which was paid to stockholders on January
31, 1996, for a total distribution for 1995 equal to $1.22 per share.

19
<PAGE> 22

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 decide 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.

DIVIDEND REINVESTMENT PLAN

The Company has adopted an "opt-out" dividend reinvestment plan pursuant to
which the Company's transfer agent, acting as reinvestment plan agent, will
automatically reinvest all distributions in additional whole and fractional
shares for the accounts of all stockholders of record. 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 holding such shares. 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
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 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 by stockholders in connection
with the reinvestment plan. Any distributions reinvested under the plan will
nevertheless remain taxable to the stockholders.

REPORTS AND INDEPENDENT ACCOUNTANT

For the year ended December 31, 1995, the independent accountant engaged to
audit the Company's consolidated financial statements was the firm of Matthews,
Carter and Boyce, which has been the Company's independent accountant since
inception. The selection of independent accountant by the Company's non-
interested directors is subject to annual ratification by stockholders at the
Company's annual meeting. Matthews, Carter and Boyce has been selected as the
independent accountant for the year ending December 31, 1996. This selection was
ratified by a majority of the Company's stockholders at the Company's 1996
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 as well as those of the Subsidiaries are held
under a custodian agreement by Riggs Bank N.A. at 808 17th Street, N.W.,
Washington, D.C. 20006, which also provides record keeping 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.

20
<PAGE> 23

TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION

LEGAL PROCEEDINGS. 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.

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
CHANGE OF NAME....................................................................... B-2
MANAGEMENT........................................................................... B-2
Directors and Certain Officers..................................................... B-2
Compensation....................................................................... B-5
Stock Options...................................................................... B-7
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES.................................. B-7
INVESTMENT ADVISORY AND OTHER SERVICES............................................... B-8
Investment Advisory Agreement...................................................... B-8
Custodian Services................................................................. B-9
Accounting Services................................................................ B-9
TAX STATUS........................................................................... B-10
</TABLE>

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

LIQUIDITY AND CAPITAL RESOURCES

In 1995, the Company expanded its product lines to small businesses as a
result of the changes made to the SBA guaranteed loan program during December
1994. These changes in the SBA guaranteed loan program reduced the maximum loan
size allowable under the program from $1 million to $500,000. The Company
reacted quickly to the change in regulations and developed additional products
for small businesses by utilizing the SBA 504 certified development company loan
program, and by offering companion senior loans with Section 7(a) loans. Because
the Company had a substantial backlog of guaranteed loans at December 31, 1994
that had been approved by the SBA prior to the 1994 regulation changes, and
because of the development of new products, the Company was able to achieve its
1995 loan origination goals.

In late 1995, the SBA again revised its guaranteed loan program and
increased the maximum loan guarantee to $750,000. Thus, the Company is now able
to once again provide up to a $1 million loan with a 75% government guarantee.
This change should benefit the Company's loan origination activity.

The Company originated $6.5 million in new loans during the first quarter
of 1996. Net of loan sales, repayments and changes in portfolio valuation, the
Company's total loans to small businesses decreased by $2.8 million to $44.4
million at March 31, 1996 as compared to December 31, 1995. At March 31, 1996,
loans to small businesses totaled 87% of the Company's total assets, compared to
85% at December 31, 1995.

The Company originated $48.2 million in new loans during 1995, a 10%
increase over new loan originations of $43.9 million in 1994. Net of loan sales,
repayments and changes in portfolio valuation, the Company increased its total
loans to small businesses by $14.4 million or 44% during 1995 compared to 1994.
At December 31, 1995, loans to small businesses totaled 85% of the Company's
total assets, compared to 87% at December 31, 1994. The Company financed this
growth in new loans through borrowings under the Company's lines of credit.

During 1995, the Company modified a credit facility it has with a bank,
consisting of a secured and unsecured line of credit. The secured line of credit
was increased from $13 million to $15 million and the interest rate was changed
from The Wall Street Journal floating prime rate to one-month LIBOR plus 2.2%
per annum. As of March 31, 1996 and December 31, 1995, the Company was paying an
interest rate of 7.51% and 7.95% per annum, respectively, as compared to an
interest rate of 8.5% per annum at December 31, 1994.

21
<PAGE> 24

The secured line of credit expires December 31, 1996. The Company had total
borrowings under this facility equal to $8.9 million at March 31, 1996. In April
1996, this line of credit was amended to increase the borrowing limit to $20
million. This line of credit is used to finance loans made under the Section
7(a) guaranteed loan program.

The unsecured line of credit has a borrowing limit of $2 million and bears
interest at The Wall Street Journal prime rate plus 0.25% per annum. As of March
31, 1996 and December 31, 1995, the Company was paying an interest rate of 8.50%
and 8.75% per annum, respectively, and had total borrowings under the facility
equal to $0.8 million at March 31, 1996. In April 1996, the Company canceled
this unsecured line of credit.

During September 1995, the Company, through the Partnership, entered into a
credit agreement with an investment bank whereby the Partnership could borrow up
to $20 million in order to finance its loans closed under the SBA 504 program
and companion loans closed in conjunction with guaranteed loans. This credit
agreement bears interest at one-month LIBOR plus 2% per annum and expires in
September 1996. As of March 31, 1996 and December 31, 1995, the Company was
paying interest of 7.44% and ranging from 7.75% to 7.93% per annum,
respectively. The Company had total borrowings under this agreement equal to
$6.3 million at March 31, 1996.

In addition, the Partnership entered into a new line of credit with a bank
in April 1996 to borrow up to $15 million at one-month LIBOR plus 2.7% which
expires November 30, 1996. This line of credit will also be used to finance the
Partnership's loans closed under the Section 504 loan program and companion
loans closed in conjunction with guaranteed loans.

Management plans to continue to use leverage to finance the growth of the
Company; however as a BDC, the Company must maintain 200% asset coverage for
each class of senior security representing indebtedness, which will limit the
Company's ability to borrow. It is management's belief that the Company will
have access to the capital resources necessary to expand and develop its
business. The Company may seek to obtain funds through additional equity
offerings, debt financings, or loan sales. The Company anticipates that adequate
cash will be available to make new loans, fund its operating and administrative
expenses, satisfy debt service obligations and pay dividends throughout 1996.
However, there can be no assurance that the Company will be able to obtain all
required financing.

The Company is anticipating a reorganization of its corporate structure for
which it has received exemptive relief from the Commission and permission from
the SBA. Under the new structure, which is expected to be in effect December 1,
1996, the Company will become a holding company with two wholly owned
subsidiaries -- Allied SBLC and Allied Credit. The Company will transfer its
SBLC license and all Section 7(a) loans and related assets and liabilities to
Allied SBLC in return for 100% of Allied SBLC's outstanding stock. The Company
will contribute its 99% limited partnership interest in the Partnership and all
of its loans and related assets and liabilities to Allied Credit in return for
100% of Allied Credit's outstanding stock. Simultaneously with this transaction,
Allied Credit will purchase the 1% limited partnership interest not owned by the
Company. The Company believes the new structure will provide the Company and the
subsidiaries with greater flexibility to generate loans, and to operate within
certain regulatory constraints.

RESULTS OF OPERATIONS

Comparison of the Three Months Ended March 31, 1996 to March 31, 1995

For the three months ended March 31, 1996, the net increase in net assets
resulting from operations was $1.3 million, or $0.30 per share, which was even
with $1.3 million, or $0.31 per share, for the same period for 1995.

Investment income increased $426,000, or 23%, over the comparative three
months in 1995 to $2.3 million. This increase was due to the net increase in
loans of $12.5 million from March 31, 1995, which increased interest income
earned by the Company. Premium income from the sales of the guaranteed portion
of the Section 7(a) guaranteed loans was $662,000 in the three months ended
March 31, 1996 as compared to $605,000 for the three months ended March 31,
1995.

22
<PAGE> 25

Investment advisory fees increased from $314,000 for the three months ended
March 31, 1996, a 40% increase over $224,000 for the three months ended March
31, 1995. This increase is a result of an increase in invested and other assets
on which the advisory fee is based. Interest expense was $396,000 for the three
months ended March 31, 1996 as compared to $74,000 for the same period in 1995.
This increase is due to the Company and the Partnership financing its new
investments in loans by using leverage, which resulted in an increase in notes
payable outstanding of $16 million at March 31, 1996 compared to $2.4 million at
March 31, 1995. All other expenses of $132,000 for the three months ended March
31, 1996 were constant with $135,000 for the same period of 1995.

Comparison of 1995 to 1994

For the year ended December 31, 1995, the net increase in net assets
resulting from operations was $5.2 million or $1.20 per share as compared to
$4.5 million or $1.04 per share for the year ended December 31, 1994, which
represented a 16% increase. The net increase in net assets resulting from
operations, which includes ordinary investment income, realized gains and
losses, and unrealized appreciation and depreciation in the portfolio, increased
primarily due to continued growth in the Company's portfolio of loans to small
businesses.

The Company's investments consist primarily of loans to small, privately
held companies. These types of investments, by their nature, carry a high degree
of business and financial risk. The Company thus obtains a high level of
collateral to secure these loans and seeks to achieve a level of current income
from its investments in these businesses commensurate with the risks assumed.
Loans in the portfolio generally carry variable interest rates up to the prime
rate plus 2.75% per annum. Given these variable rates, the interest income on
the portfolio will fluctuate with the changes in the prime interest rate. The
Company had a net increase in total investments of $14.4 million in 1995 which
should result in improved investment income in future years, with the degree of
such improvement dependent upon prime interest rate fluctuations.

Interest income increased by $2.3 million in 1995 over 1994 to $6 million.
This increase was directly related to the net increase in invested assets of
$14.4 million during the year. Premium income from the sale of loans in 1995
decreased 11% to $2.1 million as compared to $2.3 million in the prior year.
Overall total investment income increased by $2 million in 1995 or 33%.

Investment advisory fees increased by $329,000 or 41% to $1.1 million in
1995 due to the growth of investments and other assets, upon which the
investment advisory fee is based. The Company pays investment advisory fees at
an approximate annual rate of 2.5% on invested assets and 0.5% on Interim
Investments, cash and cash equivalents.

In total, all other expenses increased by $1.1 million to $1.5 million for
1995 as compared to $376,000 for 1994. This increase in other expenses is
primarily due to the increase in interest expense of $884,000 to $959,000 in
1995 compared to $75,000 in 1994 as a result of the Company leveraging its
portfolio. Total borrowings increased from $3.1 million at December 31, 1994 to
$18.9 million at December 31, 1995.

Costs of stockholder services increased by $94,000 to $148,000 in 1995. The
Company had a special stockholders meeting in 1995 to expand the Company's
investment objective and policies. The Company also incurred higher stockholder
costs because Allied Capital Corporation (former Parent), the Company's former
Parent, distributed 335,086 shares of the Company's common stock to the former
Parent's stockholders in lieu of a cash dividend in January 1995, thus
increasing the number of the Company's stockholders. Other operating expenses
increased $85,000 to $201,000 in 1995 from $116,000 in 1994 due to increased
costs of operations resulting from growth.

Total dividends from taxable income for 1995 equaled $1.22 per share.
Taxable income was greater than the net increase in net investment income before
net unrealized appreciation on investments because of certain timing differences
in the recognition of income for federal income tax purposes.

23
<PAGE> 26

Comparison of 1994 to 1993

For the year ended December 31, 1994, the net increase in net assets
resulting from operations was $4.5 million as compared to $2.7 million for the
year ended December 31, 1993, a 69% increase. The net increase in net assets
resulting from operations, which includes ordinary investment income, realized
gains and losses, and unrealized appreciation and depreciation in the portfolio,
increased primarily due to continued growth in the Company's portfolio of loans
to small businesses and increases in the prime interest rate.

Interest income increased $1.5 million or 64% in 1994 to $3.7 million. This
increase was both a function of the net increase in total investments of $11
million during the year and the rise in the prime interest rate during the year.
At December 31, 1993, the prime rate was 6% per annum, and as a result the
Company's approximate lending rate was 8.75% per annum. At December 31, 1994,
the prime rate had risen to 8.5% per annum, causing the Company's approximate
lending rate to increase to 11.25% per annum. Premiums on the sale of loans
stayed relatively constant during 1994 at $2.3 million even though total loans
sold in 1994 were $37 million as compared to $23 million sold in 1993. The rise
in interest rates during 1994 had the effect of depressing loan sale premiums in
the secondary market during certain periods throughout the year; however, this
effect was mitigated by the increase in yield on the portfolio. Overall total
investment income increased by $1.6 million in 1994 or 36%.

The Company completed its first full year of operating as a public company
in 1994. In 1993, the Company operated as a subsidiary of the former Parent for
almost eleven months of the year preceding the initial public offering in
November 1993. As a result, the change in expense levels between 1994 and 1993
are mostly due to the change in operations of a separate public company.
Investment advisory fees increased by $239,000 or 42% to $811,000 in 1994. This
was due to the fact that for a majority of 1993, the Company's total assets were
approximately $22 million, and as a result of new capital generated by the
initial public offering, assets during 1994 were approximately $36 million, an
overall increase in assets of approximately $14 million or 64%. The Company paid
investment advisory fees at an approximate annual rate of 2.5% on invested
assets, and 0.5% on cash and cash equivalents.

In total, other operating expenses and interest expense declined in 1994 by
$564,000 primarily due to the fact that for much of 1993 the Company had
outstanding loans from the former Parent of approximately $10 million which
generated interest expense totaling $707,000. Upon the completion of the initial
public offering, these loans were repaid, and the Company's borrowings in 1994
under its new credit facilities were at substantially lower levels, causing 1994
interest expense to be only $75,000.

Total quarterly dividends and the annual extra dividend from taxable income
for 1994 were $1.08 per share. Taxable income was greater than the net
investment income before net unrealized depreciation on investments because of
certain timing differences in the recognition of income for federal income tax
purposes versus financial reporting purposes.

24
<PAGE> 27

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Consolidated Balance Sheet--March 31, 1996 (unaudited) and December 31, 1995 and
1994............................................................................... F-2
Consolidated Statement of Operations--For the Three Months Ended March 31, 1996 and
1995 (unaudited) and the Years Ended December 31, 1995, 1994 and 1993.............. F-3
Consolidated Statement of Changes in Net Assets--For the Three Months Ended March 31,
1996 and 1995 (unaudited) and the Years Ended December 31, 1995, 1994 and 1993..... F-4
Consolidated Statement of Cash Flows--For the Three Months Ended March 31, 1996 and
1995 (unaudited) and the Years Ended December 31, 1995, 1994 and 1993.............. F-5
Consolidated Statement of Investments in Small Business Concerns--March 31, 1996
(unaudited) and December 31, 1995 and 1994......................................... F-6
Notes to Consolidated Financial Statements........................................... F-7
Report of Independent Accountants.................................................... F-14
</TABLE>

F-1
<PAGE> 28

ALLIED CAPITAL LENDING CORPORATION

CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT NUMBER OF SHARES)

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1995 1994
MARCH 31, ----------- -----------
1996
-----------
(UNAUDITED)
<S> <C> <C> <C>
Assets
Investments at Value:
Loans receivable (cost: 1996-$43,946; 1995-$46,451;
1994-$32,935)............................................. $43,730 $ 46,223 $ 32,771
Loans held for sale (cost: 1996-$586; 1995-$851; 1994-$0).... 626 924 --
----------- ----------- -----------
Total investments......................................... 44,356 47,147 32,771
Cash and cash equivalents...................................... 1,237 3,020 1,297
Accrued interest receivable.................................... 703 732 451
Excess servicing asset......................................... 4,230 3,828 2,700
Other assets................................................... 638 753 400
----------- ----------- -----------
Total assets.............................................. $51,164 $ 55,480 $ 37,619
========= ======= =======
Liabilities and Shareholders' Equity
Liabilities:
Notes payable................................................ $16,008 $ 18,914 $ 3,130
Dividends and distributions payable.......................... -- 340 262
Accounts payable and accrued expenses........................ 1,877 3,012 1,209
Investment advisory fee payable.............................. 314 330 230
----------- ----------- -----------
Total liabilities......................................... 18,199 22,596 4,831
----------- ----------- -----------
Commitments and Contingencies
Shareholders' Equity:
Common stock, $.0001 par value, 20,000,000 shares authorized;
4,389,461, 4,384,921 and 4,370,400 shares issued and
outstanding at March 31, 1996, December 31, 1995 and
1994...................................................... -- -- --
Additional paid-in capital................................... 33,318 33,252 33,069
Net unrealized depreciation on investments................... (176) (155) (164)
Distributions in excess of accumulated earnings.............. (177) (213) (117)
----------- ----------- -----------
Total shareholders' equity................................ 32,965 32,884 32,788
----------- ----------- -----------
Total liabilities and shareholders' equity................ $51,164 $ 55,480 $ 37,619
========= ======= =======
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-2
<PAGE> 29

ALLIED CAPITAL LENDING CORPORATION

CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
FOR THE
THREE MONTHS FOR THE YEARS ENDED
ENDED MARCH 31, DECEMBER 31,
---------------- --------------------------
1996 1995 1995 1994 1993
------ ------ ------ ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Investment Income:
Interest.......................................... $1,591 $1,222 $5,966 $3,716 $2,260
Premium income.................................... 662 605 2,090 2,349 2,196
------ ------ ------ ------ ------
Total investment income........................ 2,253 1,827 8,056 6,065 4,456
------ ------ ------ ------ ------
Operating Expenses:
Investment advisory fee........................... 314 224 1,140 811 572
Interest expense.................................. 396 74 959 75 707
Legal and accounting fees......................... 74 38 170 131 124
Stockholder services.............................. 18 46 148 54 --
Other operating expenses.......................... 40 51 201 116 109
------ ------ ------ ------ ------
Total expenses................................. 842 433 2,618 1,187 1,512
------ ------ ------ ------ ------
Net investment income............................... 1,411 1,394 5,438 4,878 2,944
Net realized gain (loss) on investments............. (60) 10 (195) (295) (338)
------ ------ ------ ------ ------
Net investment income before net unrealized
appreciation (depreciation) on investments........ 1,351 1,404 5,243 4,583 2,606
Net unrealized appreciation (depreciation) on
investments....................................... (21) (59) 9 (52) 68
------ ------ ------ ------ ------
Net increase in net assets resulting from
operations........................................ $1,330 $1,345 $5,252 $4,531 $2,674
====== ====== ====== ====== ======
Earnings per share.................................. $ 0.30 $ 0.31 $ 1.20 $ 1.04 $ 1.03
====== ====== ====== ====== ======
Weighted average number of shares and share
equivalents outstanding........................... 4,386 4,370 4,376 4,368 2,587
====== ====== ====== ====== ======
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-3
<PAGE> 30

ALLIED CAPITAL LENDING CORPORATION

CONSOLIDATED STATEMENT OF CHANGES IN NET ASSETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
FOR THE
THREE MONTHS FOR THE YEARS ENDED
ENDED MARCH 31, DECEMBER 31,
------------------ -----------------------------
1996 1995 1995 1994 1993
------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Increase in Net Assets Resulting from
Operations:
Net investment income........................ $ 1,411 $ 1,394 $ 5,438 $ 4,878 $ 2,944
Net realized gain (loss) on investments...... (60) 10 (195) (295) (338)
Net unrealized appreciation (depreciation) on
investments............................... (21) (59) 9 (52) 68
------- ------- ------- ------- -------
Net increase in net assets resulting from
operations.............................. 1,330 1,345 5,252 4,531 2,674
------- ------- ------- ------- -------
Distributions to Stockholders from:
Net investment income........................ (1,315) (1,179) (5,339) (4,718) (2,772)
Capital Share Transactions:
Sale of common stock in initial public
offering.................................. -- -- -- -- 27,548
Issuance of common shares in lieu of cash
distributions............................. 66 43 183 20 --
------- ------- ------- ------- -------
Net increase in net assets resulting from
capital share transactions.............. 66 43 183 20 27,548
------- ------- ------- ------- -------
Total increase (decrease) in net assets........ 81 209 96 (167) 27,450
Net assets at beginning of period.............. 32,884 32,788 32,788 32,955 5,505
------- ------- ------- ------- -------
Net assets at end of period.................... $32,965 $32,997 $32,884 $32,788 $32,955
======= ======= ======= ======= =======
Net asset value per share...................... $ 7.51 $ 7.55 $ 7.50 $ 7.50 $ 7.54
======= ======= ======= ======= =======
Shares outstanding at end of period............ 4,389 4,373 4,385 4,370 4,368
======= ======= ======= ======= =======
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-4
<PAGE> 31

ALLIED CAPITAL LENDING CORPORATION

CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)

<TABLE>
<CAPTION>
FOR THE
THREE MONTHS FOR THE YEARS ENDED
ENDED MARCH 31, DECEMBER 31,
------------------ --------------------------------
1996 1995 1995 1994 1993
------- ------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash Flows from Operating Activities:
Net increase in net assets resulting from
operations....................................... $ 1,330 $ 1,345 $ 5,252 $ 4,531 $ 2,674
Adjustments to reconcile net increase in net assets
resulting from operations to net cash provided by
operating activities:
Premium income................................... (662) (605) (2,090) (2,349) (2,196)
Amortization of loan discounts and fees.......... (100) (110) (286) (362) (188)
Net realized (gain) loss on investments.......... 60 (10) 195 295 338
Net unrealized (appreciation) depreciation on
investments.................................... 21 59 (9) 52 (68)
Changes in assets and liabilities:
Accrued interest receivable...................... 29 (156) (281) (227) (8)
Excess servicing asset........................... (402) (256) (1,128) (1,094) (233)
Other assets..................................... 115 267 (353) (67) 604
Accounts payable and accrued expenses............ (1,135) 111 1,803 (372) (411)
Investment advisory fee payable.................. (16) (5) 100 163 67
------- ------- -------- -------- --------
Net cash provided by (used in) operating
activities.................................. (760) 640 3,203 570 579
------- ------- -------- -------- --------
Cash Flows from Investing Activities:
Loan originations.................................. (6,509) (8,917) (48,213) (43,853) (30,482)
Proceeds from the sale of loans.................... 8,080 9,981 31,816 32,509 20,992
Collection of principal............................ 1,901 566 4,211 2,728 1,702
------- ------- -------- -------- --------
Net cash provided by (used in) investing
activities.................................. 3,472 1,630 (12,186) (8,616) (7,788)
------- ------- -------- -------- --------
Cash Flows from Financing Activities:
Dividends and distributions paid................... (1,589) (1,398) (5,078) (4,785) (4,135)
Proceeds from issuance of common stock............. -- -- -- -- 27,548
Payment of long term debt.......................... -- -- -- -- (7,860)
Net borrowings (repayments) under revolving lines
of credit........................................ (2,906) (735) 15,784 3,130 --
------- ------- -------- -------- --------
Net cash provided by (used in) financing
activities.................................. (4,495) (2,133) 10,706 (1,655) 15,553
------- ------- -------- -------- --------
Net increase (decrease) in cash and cash
equivalents...................................... (1,783) 137 1,723 (9,701) 8,344
Cash and cash equivalents, beginning of period..... 3,020 1,297 1,297 10,998 2,654
------- ------- -------- -------- --------
Cash and cash equivalents, end of period........... $ 1,237 $ 1,434 $ 3,020 $ 1,297 $ 10,998
======== ======== ========= ========= =========
Supplemental Disclosure of Cash Flow Information
Noncash investing and financing activities:
Issuance of common shares in lieu of cash
distributions.................................... $ 66 $ 43 $ 183 $ 20 $ --
======== ======== ========= ========= =========
Interest paid........................................ $ 421 $ 57 $ 849 $ 70 $ 744
======== ======== ========= ========= =========
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-5
<PAGE> 32

ALLIED CAPITAL LENDING CORPORATION

CONSOLIDATED STATEMENT OF INVESTMENTS IN SMALL BUSINESS CONCERNS
(IN THOUSANDS, EXCEPT NUMBER OF LOANS AND PERCENTAGES)

<TABLE>
<CAPTION>
MARCH 31, 1996 DECEMBER 31, 1995 DECEMBER 31, 1994
NUMBER PERCENT OF ------------------ ------------------ ------------------
TYPE OF BUSINESS OF LOANS(a) PORTFOLIO(a) COST VALUE COST VALUE COST VALUE
- ---------------------------- ----------- ------------ ------- ------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Autoexhaust Repair.......... 39 1 $ 279 $ 242 $ 237 $ 215 $ 330 $ 307
Automotive Repair........... 29 2 785 785 819 819 483 483
Bakeries.................... 5 * 109 89 88 88 159 159
Car Washes.................. 4 1 622 622 621 621 256 256
Contractors................. 5 1 434 434 439 439 -- --
Day Care Centers............ 7 4 1,594 1,594 1,710 1,710 -- --
Food Stores................. 12 4 1,949 1,944 1,849 1,844 2,087 2,037
Gasoline Stations........... 22 16 6,996 6,996 8,530 8,530 1,739 1,739
Hobbies and Games........... 9 * 40 40 41 41 49 49
Home Furnishings............ 14 1 517 517 532 532 473 473
Hotels and Motels........... 46 27 12,135 12,135 11,559 11,559 6,020 6,020
Laundries and Cleaners...... 58 1 598 598 480 473 586 586
Manufacturing............... 54 12 5,511 5,538 5,596 5,583 5,744 5,744
Personal Services........... 13 2 747 747 1,125 1,162 172 172
Professional Services....... 16 2 702 702 779 779 3,255 3,202
Restaurants................. 62 8 3,649 3,558 3,935 3,874 5,294 5,256
Retail Shops................ 32 3 1,493 1,460 2,225 2,222 1,321 1,321
Wholesalers................. 6 2 901 901 952 951 -- --
Miscellaneous Businesses.... 83 12 5,471 5,454 5,785 5,705 4,967 4,967
--- ------- ------- ------- ------- ------- -------
TOTAL LOANS............. 516 $44,532 $44,356 $47,302 $47,147 $32,935 $32,771
========== ======= ======= ======= ======= ======= =======
</TABLE>

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

* Less than 1%.

(a) Number of loans and percent of portfolio are as of March 31, 1996.

The accompanying notes are an integral part of these financial statements.

F-6
<PAGE> 33

ALLIED CAPITAL LENDING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION

Organization. Allied Capital Lending Corporation (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 is an authorized small business lending company and engages in the
business of originating loans to qualified small businesses throughout the
United States. The Company raised net proceeds of approximately $27,500,000 in
equity through an initial public offering (IPO) in November 1993. Prior to the
IPO, the Company was a wholly owned subsidiary of Allied Capital Corporation
(former Parent). As of March 31, 1996 and December 31, 1995, Allied Capital
Corporation owned approximately 28 percent of the Company's outstanding common
stock.

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.

Basis of Presentation. In April 1995, ACLC Limited Partnership (the
Partnership) was formed so the Company could participate in the U.S. Small
Business Administration (SBA) 504 loan program and originate other types of
small business loans. The Company is the general partner and has a 99 percent
interest in the Partnership. Accordingly, the consolidated financial statements
of the Company include the accounts of the Company and this majority owned
Partnership. All significant intercompany accounts and transactions have been
eliminated in consolidation.

In the opinion of management, the unaudited consolidated financial
statements of the Company presented contain all adjustments (consisting only of
normal recurring accruals) necessary to present fairly the Company's
consolidated financial position as of March 31, 1996 and the results of
operations, changes in net assets and cash flows for the three months ended
March 31, 1996 and 1995. The results of operations, changes in net assets and
cash flows for the three months ended March 31, 1996 are not necessarily
indicative of the operating results to be expected for the year ending December
31, 1996.

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Valuation of Investments. Loans receivable and the related excess
servicing asset are valued by the Company's board of directors. Generally, the
board of directors considers the fair value of the loans receivable to
approximate their carrying value or amortized cost. Unrealized depreciation is
recorded by the Company when the board of directors determines that significant
doubt exists as to the ultimate realization of a loan.

Loans that are held for sale are valued by the board of directors based
upon the net proceeds which the Company may reasonably expect to receive for the
sale of the guaranteed portion of the loan assuming such transaction occurred on
the valuation date. The Company designates and classifies the guaranteed portion
of a current loan as a security held for sale once the loan has been fully
disbursed and held for at least 90 days.

Interest Income. Interest income is recorded on the accrual basis to the
extent that such amounts are expected to be collected. Interest income also
includes servicing fees on loans sold to the secondary market less the
amortization of any excess servicing asset.

Premium Income. Premium income represents the differential in the value
attributable to the sale of the guaranteed portion of a loan to the secondary
market over the carrying amount of the loan.

Realized Losses and Unrealized Appreciation or Depreciation on
Investments. Realized losses result when a loan is written off as
uncollectible. Unrealized appreciation or depreciation reflects the difference
between cost and value.

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

F-7
<PAGE> 34

ALLIED CAPITAL LENDING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Federal Income Taxes. The Company's objective is to comply with the
requirements of the Internal Revenue Code that are applicable to regulated
investment companies. The Company annually distributes all of its taxable income
to its stockholders; therefore, a federal income tax provision is not required.

Dividends declared by the Company in December that are payable to
stockholders of record on a specified date in such month, but paid during
January of the following year, are treated as if the distribution was received
by the stockholder on December 31 of the year declared.

Earnings Per Share. Earnings are defined as net investment income, net
realized losses on investments and net unrealized appreciation or depreciation
on investments. The computation of earnings per share is based on the weighted
average number of shares and share equivalents outstanding during the period.

Cash and Cash Equivalents. Cash equivalents consist of highly liquid
investments with insignificant interest rate risk and original maturities of
three months or less at the acquisition date. Cash and cash equivalents
consisted of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, ------------------------
1996 1995 1994
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash........................................................... $ 166 $ 214 $ --
Repurchase agreements.......................................... 1,071 2,806 1,297
------ ------
Total..................................................... $ 1,237 $ 3,020 $ 1,297
====== ======
</TABLE>

On March 31, 1996 and December 31, 1995, the Company had purchased
$1,071,000 and $2,806,000, respectively, of overnight repurchase agreements
collateralized by U.S. government securities under agreements to resell on April
1, 1996 and January 2, 1996, respectively.

Incentive Stock Option Plan. Statement of Financial Accounting Standards
No. 123, issued in October 1995, established new accounting standards for
stock-based compensation plans and is effective for fiscal years beginning after
December 15, 1995. This new standard will have no material impact on the
Company's financial statements.

Reclassifications. Certain reclassifications have been made to the 1995,
1994 and 1993 financial statements to conform with the 1996 financial statement
presentation.

NOTE 3. INVESTMENTS

The Company and the Partnership originate loans to qualified small
businesses in conjunction with the SBA Section 7(a) and SBA Section 504 loan
programs, respectively.

Under the Section 7(a) loan program, the Company originates loans that are
guaranteed by the SBA and are collateralized, generally with first liens on real
estate and/or personal property of the borrower. The SBA guarantees repayment
between 75 percent and 80 percent of up to a $1,000,000 face amount and a
maximum of three months of accrued interest on the guaranteed portion of the
loans originated. The Company generally sells the guaranteed portion of its
loans into the secondary market, and retains the rights to service such loans.
The loans generally provide for an annual variable rate of interest equal to the
then prevailing prime rate, as reported in The Wall Street Journal, plus 2.75
percent. The Wall Street Journal prime interest rate was 8.25 percent at March
31, 1996 and 8.5 percent at December 31, 1995 and 1994. The loans generally have
a term of seven to 25 years and may be prepaid without penalty. The principal
balance of the sold portions of such loans serviced by the Company was
approximately $101,000,000, $97,000,000 and $82,000,000 at March 31, 1996,
December 31, 1995 and 1994, respectively.

F-8
<PAGE> 35

ALLIED CAPITAL LENDING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The Partnership originates real estate loans to qualified small businesses
pursuant to the Section 504 loan program and originates companion loans to
Section 7(a) guaranteed loans. Under the Section 504 loan program, small
businesses can purchase or build real estate with very favorable long-term debt.
Loans the Partnership finances through the Section 504 loan program are
structured such that the entrepreneur provides at least 10 percent of the
project cost in equity, the Partnership provides 50 percent of the project cost
in a 20-year floating rate first mortgage, and a local certified development
company (CDC) provides a 20-year fixed rate second mortgage loan for the
remaining 40 percent of the project cost. Both loans are fully amortizing and
the Partnership loan provides for an annual variable rate of interest equal to
the then prevailing prime rate, as reported in The Wall Street Journal, plus up
to 2.75 percent. The also may originate senior loans secured by real estate as a
companion loan to the Section 7(a) guaranteed loans. The companion loan is
similar in terms to the Section 7(a) guaranteed loan with the exception that the
companion loan is senior in debt priority to the Section 7(a) guaranteed loan,
and carries no government guarantee.

At March 31, 1996, December 31, 1995 and 1994, loans with a cost basis of
$1,723,000, $3,835,000 and $979,000, respectively, were not performing and were
not accruing interest.

Total investments consisted of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, ------------------------
1996 1995 1994
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
At amortized cost:
Guaranteed portion under Section 7(a) program.............. $ 5,403 $ 10,275 $ 11,808
Unguaranteed portion under Section 7(a) program............ 26,789 33,223 21,127
Section 504 program and companion loans.................... 12,340 3,804 --
------- -------
Total................................................... $44,532 $ 47,302 $ 32,935
======= =======
At value:
Guaranteed portion under Section 7(a) program.............. $ 5,403 $ 10,275 $ 11,808
Unguaranteed portion under Section 7(a) program............ 26,613 33,068 20,963
Section 504 program and companion loans.................... 12,340 3,804 --
------- -------
Total................................................... $44,356 $ 47,147 $ 32,771
======= =======
</TABLE>

For federal income tax purposes the unrealized depreciation for all
securities, based on cost, and the aggregate cost of total investments as of
March 31, 1996 were $176,000 and $44,532,000, respectively, and as of December
31, 1995 were $155,000 and $47,302,000, respectively.

NOTE 4. EXCESS SERVICING ASSET

When the Company sells the guaranteed portion of a Section 7(a) loan it has
originated into the secondary market, it retains the unguaranteed portion and
the right to service the entire loan. The Company recognizes premium income
equal to the difference between the amount received from the purchaser and the
carrying principal amount of the guaranteed portion sold plus the value of the
servicing rights retained in excess of a normal servicing fee (excess servicing
asset). The value of the excess servicing asset at the transaction date is based
on various factors including premiums realized on comparable transactions in the
secondary market and comparable market bids with normal servicing rates on SBA
loans.

F-9
<PAGE> 36

ALLIED CAPITAL LENDING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 5. INVESTMENT ADVISORY AGREEMENT

The Company has entered into an investment advisory agreement with
Advisers, which is approved at least annually by the board of directors or by
vote of a majority of the outstanding voting securities of the Company, as that
term is defined in the 1940 Act. The agreement may be terminated at any time on
sixty days' notice, without penalty, by the board of directors or by a vote of a
majority of the outstanding voting securities 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 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 investment activities, legal and accounting 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
stockholders, 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 borrower in connection with an investment are treated as commitment
fees and are received by the Company, 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 company which is not related to such
investment transaction or management assistance.

As compensation for its services to and the expenses paid for the account
of the Company, Advisers is paid, quarterly in arrears, a fee equal to 0.625
percent per quarter of the quarter-end value of the Company's consolidated total
assets, less interim investments, cash and cash equivalents plus 0.125 percent
per quarter of the quarter-end value of consolidated interim investments, cash
and cash equivalents. These fees on an annual basis approximate 2.5 percent on
consolidated invested assets, and 0.5 percent on consolidated interim
investments, cash and cash equivalents. Advisory fees for 1993 included the
Company's pro rata share of the former Parent's investment advisory fee and
other costs of approximately $505,000.

NOTE 6. DIVIDENDS AND DISTRIBUTIONS

The Company's board of directors declared and the Company paid a dividend
of $0.30 per share for the first quarter of 1996. The Company's board of
directors declared and the Company paid dividends of $0.30 per share for the
fourth quarter, $0.29 per share for the third quarter, $0.2825 per share for the
second quarter and $0.27 per share for the first quarter of 1995. The Company's
board of directors also declared an extra distribution in December 1995 of
$0.0775 per share, which was paid to stockholders on January 31, 1996, for a
total distribution in 1995 equal to $1.22 per share.

The distributions of taxable income declared by the board of directors for
1995, 1994 and 1993 were considered ordinary income for federal income tax
purposes.

The first quarter 1996 distribution of $0.30 per share was comprised of
cash payments and issuance of the Company's shares pursuant to the Company's
dividend reinvestment plan in the amounts of $0.29 and $0.01, per share,
respectively. The 1995 distributions of $1.22 per share were comprised of cash
payments and issuance of the Company's shares pursuant to the Company's dividend
reinvestment plan in the amounts of $1.18 and $0.04, per share, respectively.
The 1994 distributions of $1.08 per share were comprised of cash payments and
issuance of the Company's common shares pursuant to the Company's dividend
reinvestment plan in the amounts of $1.07 and $0.01, per share, respectively.
1993 distributions were paid in cash.

F-10
<PAGE> 37

ALLIED CAPITAL LENDING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 7. NOTES PAYABLE

The Company has a $19,000,000 secured line of credit with a bank which
expires December 31, 1996. The interest rate associated with this line of credit
is equal to one-month LIBOR plus 2.2 percent per annum, payable monthly. As of
March 31, 1996, December 31, 1995 and 1994, the Company was paying interest at
7.51 percent, 7.95 percent and 8.50 percent per annum, respectively, on the
amounts outstanding under this line. The line of credit requires a quarterly
facility fee of 0.375 percent per annum on the unused portion of the line of
credit. As of March 31, 1996 and December 31, 1995, the Company had outstanding
borrowings under the secured line of credit equal to $8,950,000 and $13,335,000,
respectively.

The Company had a $2,000,000 unsecured line of credit with a bank, which
charged interest at The Wall Street Journal prime rate plus 0.25 percent per
annum, payable monthly, and expired April 24, 1996. As of March 31, 1996,
December 31, 1995 and 1994, the Company was paying interest at 8.50 percent,
8.75 percent and 8.75 percent per annum, respectively, on the amounts
outstanding under this line. The line of credit required a quarterly facility
fee of 0.375 percent per annum on the unused portion of the line of credit. As
of March 31, 1996 and December 31, 1995, the Company had outstanding borrowings
under the unsecured line of credit equal to $775,000 and $1,055,000,
respectively.

The Partnership has a credit agreement whereby the Partnership can borrow
up to $20,000,000 in order to finance its loans to small business concerns. This
credit agreement bears interest at a rate equal to one-month LIBOR plus 2
percent per annum, payable monthly, and expires on September 27, 1996. As of
March 31, 1996 and December 31, 1995, the Partnership was paying interest of
7.44 percent and ranging from 7.75 to 7.93 percent per annum, respectively, on
the amounts outstanding under this line. The agreement requires a quarterly
facility fee of 0.15 percent per annum on the unused portion of the line. As of
March 31, 1996 and December 31, 1995, the Partnership had outstanding borrowings
under this agreement equal to $6,283,000 and $4,524,000, respectively.

NOTE 8. SHAREHOLDERS' EQUITY

The Company has a dividend reinvestment plan (the Plan). Stockholders of
record are automatically enrolled in the Plan, and the Plan is considered an
"opt-out" plan. The Company may instruct 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 and including the dividend payment date. During 1995 and 1994, the
Company issued 14,536 and 1,980 new shares pursuant to the Plan at an average
price of $12.60 per share and $10.63 per share, respectively.

The Company has an incentive stock option plan (ISO plan) which provides
for the granting of stock options or shares to the Company's officers. The
number of shares of the Company's stock available for option under the plan
total 504,860. Options may be granted under the ISO plan at a price not less
than the market value of the underlying shares on the date of the grant and in
any event not less than the original offering price of the Company's shares
($15) and are exercisable over a ten-year period. The ISO plan also permits 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. Holders of ten percent or more of the Company's stock must
exercise their options within a five year period.

Officers of the Company may borrow from the Company the funds necessary to
exercise vested options. There were no loans outstanding at March 31, 1996,
December 31, 1995 or 1994.

F-11
<PAGE> 38

ALLIED CAPITAL LENDING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

A summary of the activity in the ISO plan is as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1995 1994 1993
THREE MONTHS --------------- --------------- ---------------
ENDED MARCH 31,
1996
---------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Options outstanding at beginning of period......... 493,290 283,310 266,640 --
Options granted.................................... -- 266,646 50,000 266,640
Options exercised.................................. -- -- -- --
Options canceled................................... (26,664) (56,666) (33,330) --
------- ------- -------
Options outstanding at end of period............... 466,626 493,290 283,310 266,640
======= ======= =======
Options available for grant........................ 38,234 11,570 221,550 26,860
Options exercisable................................ 286,638 259,974 153,318 79,992
Option prices per share:
Granted.......................................... $ -- $ 15.00 $ 15.00 $ 15.00
Exercised........................................ $ -- $ -- $ -- $ --
Canceled......................................... $ 15.00 $ 15.00 $ 15.00 $ --
</TABLE>

NOTE 9. COMMITMENTS AND CONTINGENCIES

The Company had total loan commitments outstanding at March 31, 1996 and
December 31, 1995 to various qualified small businesses totaling $45,000,000 and
$33,000,000, respectively.

In connection with the sale of the guaranteed portion of loans in 1992, the
Internal Revenue Service may assert that these transactions subject the Company
to a liability for income taxes of up to $845,000 for that year. If the Internal
Revenue Service in the future asserts such a claim, management and tax counsel
believe that the Company has valid defenses for the position that such
transactions do not subject the Company to a liability for additional income
taxes; however, the Company has an agreement with the former Parent pursuant to
which the Company is indemnified against such liability if asserted.

NOTE 10. CONCENTRATIONS OF CREDIT RISK

The Company and the Partnership place their cash in financial institutions
and at times, cash held in checking accounts may be in excess of the FDIC
insurance limit.

NOTE 11. QUARTERLY FINANCIAL HIGHLIGHTS (UNAUDITED)
<TABLE>
<CAPTION>
1995
------------------------------------
QTR 1 QTR 2 QTR 3 QTR 4
------ ------ ------ ------
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C> <C>
Total investment income..................................... $1,827 $1,771 $2,327 $2,131
Net investment income....................................... $1,394 $1,231 $1,580 $1,233
Net increase in net assets resulting from operations........ $1,345 $1,248 $1,402 $1,257
Per share................................................... $ 0.31 $ 0.29 $ 0.32 $ 0.29

F-12
<PAGE> 39

ALLIED CAPITAL LENDING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

<TABLE>
<CAPTION>
1994
------------------------------------
QTR 1 QTR 2 QTR 3 QTR 4
------ ------ ------ ------
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C> <C>
Total investment income..................................... $1,137 $1,512 $1,537 $1,879
Net investment income....................................... $ 873 $1,213 $1,242 $1,550
Net increase in net assets resulting from operations........ $ 856 $1,228 $1,306 $1,141
Per share................................................... $ 0.20 $ 0.28 $ 0.30 $ 0.26
</TABLE>

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

F-13
<PAGE> 40

ALLIED CAPITAL LENDING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

REPORT OF INDEPENDENT ACCOUNTANT

To the Board of Directors and Stockholders
Allied Capital Lending Corporation

We have audited the consolidated balance sheet of Allied Capital Lending
Corporation as of December 31, 1995 and 1994, including the consolidated
statement of investments in small business concerns as of December 31, 1995 and
1994 and the related consolidated statements of operations, changes in net
assets and cash flows for each of the three years in the period ended December
31, 1995 and the selected per share data presented as financial highlights for
each of the five years in the period ended December 31, 1995. 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, 1995 and 1994. 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 Lending Corporation as of December 31, 1995 and 1994,
and the consolidated results of their operations, changes in net assets and cash
flows for each of the three years in the period ended December 31, 1995, and the
selected per share data for each of the five years in the period ended December
31, 1995 in conformity with generally accepted accounting principles.

As explained in Note 2, the consolidated financial statements include
securities valued at $47,147,000 as of December 31, 1995 and $32,771,000 as of
December 31, 1994, (85% and 87%, 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 2, 1996

F-14
<PAGE> 41

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

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 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.

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

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary............................... 2
Fees and Expenses..................... 2
Available Information................. 4
Financial Highlights.................. 4
Public Trading and Net Asset Value
Information......................... 8
The Offer............................. 9
The Company........................... 10
Management............................ 17
Authorized Classes of Securities...... 19
Description of Common Stock........... 19
Reports and Independent Public
Accountant.......................... 20
Custodian, Transfer and Dividend
Paying Agent and Registrar.......... 20
Table of Contents of Statement of
Additional Information.............. 21
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 21
Financial Statements.................. F-1
</TABLE>

1,244,914 SHARES

ALLIED CAPITAL
LENDING CORPORATION

COMMON STOCK

---------------------------
PROSPECTUS
, 1996
---------------------------

PART B

INFORMATION REQUIRED IN A STATEMENT OF ADDITIONAL INFORMATION
<PAGE> 43

SUBJECT TO COMPLETION:

The date of issuance of this preliminary Statement of Additional Information is
November 7, 1996.

1,244,914 SHARES

ALLIED CAPITAL LENDING CORPORATION

COMMON STOCK
------------------------

STATEMENT OF ADDITIONAL INFORMATION

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

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE IN THE LOCATION
STATEMENT OF RELATED
OF ADDITIONAL DISCLOSURE IN
INFORMATION THE PROSPECTUS
------------- --------------
<S> <C> <C>
CHANGE OF NAME...................................................... B-2 17
MANAGEMENT.......................................................... B-2 24
Directors and Certain Officers.................................... B-2 --
Compensation...................................................... B-5 --
Stock Options..................................................... B-7 --
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES................. B-7 --
INVESTMENT ADVISORY AND OTHER SERVICES.............................. B-8 --
Investment Advisory Agreement..................................... B-8 24-25
Custodian Services................................................ B-9 27
Accounting Services............................................... B-9 27
TAX STATUS.......................................................... B-10 26
</TABLE>

B-1
<PAGE> 44

CHANGE OF NAME

The Company changed its name from "Allied Lending Corporation" to "Allied
Capital Lending Corporation" in September 1993 in anticipation of its initial
public offering in November 1993.

MANAGEMENT

DIRECTORS AND CERTAIN OFFICERS

The directors and certain officers of the Company as of September 30, 1996
are listed below together with their respective positions with the Company and a
brief statement of their principal occupations during the past five years and
any positions held with affiliates of the Company:

<TABLE>
<CAPTION>
POSITION(S) HELD PRINCIPAL OCCUPATION(S) DURING PAST FIVE
NAME, ADDRESS(1) AND AGE WITH THE COMPANY (5) YEARS
- -------------------------- ------------------------- -----------------------------------------
<S> <C> <C>
David Gladstone* Chairman of the Board and Employed by Allied Capital Corporation
(Age 54) Chief Executive ("Allied I") or Allied Capital Advisers,
Officer(2) Inc. ("Advisers") since 1974; Chairman
and Chief Executive Officer of Allied I,
Allied Capital Corporation II ("Allied
II"), Allied Capital Commercial
Corporation ("Allied Commercial"), and
Advisers; Director, President, and Chief
Executive Officer of Business Mortgage
Investors, Inc. ("BMI"); Director of The
Riggs National Corporation (bank holding
company); Trustee of The George
Washington University. He has served as a
director of the Company since 1976.
George C. Williams*(3) Director Director of Allied I, Allied II, Allied
(Age 70) Commercial, and of Advisers. Employed by
Allied I or Advisers as President,
Chairman or Vice Chairman from 1959-1996.
He has served as a director of the
Company since 1976.
Katherine C. Marien* Director, President and Employed by Advisers since 1992;
(Age 47) Chief Operating Executive Vice President of Allied I,
Officer(2) Allied II, Allied Commercial, BMI, and
Advisers; Executive Vice President of the
Company from 1992 to 1994; Financial
Consultant with Wilks & Schwartz
Broadcasting from 1990 to 1992; Financial
Consultant to USA Mobile Communications,
Inc. from 1991 to 1992; Senior Vice
President of Communications Equity
Associates from 1989 to 1991. She has
served as a director of the Company since
1995.
Jon W. Barker Director Associate with Grubb & Ellis (commercial
(Age 52) real estate firm) since 1993; Vice
President of Shannon & Luchs Company
(commercial real estate firm) from 1979
to 1993. He has served as a director of
the Company since 1993.
</TABLE>

B-2
<PAGE> 45

<TABLE>
<CAPTION>
POSITION(S) HELD PRINCIPAL OCCUPATION(S) DURING PAST FIVE
NAME, ADDRESS(1) AND AGE WITH THE COMPANY (5) YEARS
- -------------------------- ------------------------- -----------------------------------------
<S> <C> <C>
Eleanor Deane Bierbower Director(2) Financial consultant since 1992; Managing
(Age 39) Partner of Deane Investment Company L.P.
since 1992; Chief Credit Officer of
Palmer National Bank from 1988 to 1992.
She has served as a director of the
Company since 1993.

Robert V. Fleming II Director(2) Principal of Hoskinson Davis & Fleming
(Age 43) (real estate firm) since 1984; Member of
the Board of Consultants of Riggs Bank
N.A.; Trustee of the National Child
Research Center; Member of the Associates
Board of National Rehabilitation
Hospital. He has served as a director of
the Company since 1993.

Anthony T. Garcia* Director Senior Vice President of Lehman Brothers
(Age 40) Inc.; Director of Allied Commercial. He
has served as a director of the Company
since 1993.

Arthur H. Keeney III Director President, Chief Executive Officer,
(Age 52) Chairman of the Executive Committee, and
Director of The East Carolina Bank since
1995; Vice President and General Manager
of The OMG Company (manufacturer of
electronic training devices) from 1994 to
1995; Recruiting Consultant with Don
Richards and Associates, Inc. (personnel
services provider) from 1993 to 1994;
Executive Director of the American
Foundation for Urologic Disease from 1991
to 1993; Executive Vice President at
Signet Bank from 1983 to 1991. He has
served as a director of the Company since
1995.

Robin B. Martin Director(2) President and Chief Executive Officer of
(Age 47) The Deer River Group (broadcasting
consulting firm) since 1978. Trustee of
Rensselaer Polytechnic Institute since
1986; Chairman Emeritus of The Corcoran
Gallery of Art. He has served as a
director of the Company since May 1996.

G. Cabell Williams III(3) Executive Vice President Employed by Advisers since 1981;
(Age 42) Director, Chief Operating Officer and
President of Allied I; Executive Vice
President of Allied II, Allied
Commercial, Advisers, and BMI.

Jon A. DeLuca Executive Vice President, Employed by Advisers since 1994;
(Age 34) Treasurer, and Chief Executive Vice President, Treasurer, and
Financial Officer Chief Financial Officer of Allied I,
Allied II, Allied Commercial, BMI, and
Advisers. Manager of Entrepreneurial
Services at Coopers & Lybrand from 1986
to 1994.
</TABLE>

B-3
<PAGE> 46

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

* These directors are, or may be deemed to be, "interested persons" of the
Company within the meaning of the 1940 Act.

(1) Unless otherwise indicated, the address of directors and officers of the
Company is 1666 K Street, N.W., 9th Floor, Washington, D.C. 20006-2803.

(2) Member of the Executive Committee, which is intended, during intervals
between meetings of the Board of Directors, to exercise all powers of the
Board in the management and direction of the business and affairs of the
Company, except where action by the Board is required by applicable law.

(3) George C. Williams is the father of G. Cabell Williams III.

COMPENSATION

The Company 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 receive cash compensation from the Company's
investment adviser. The Company, from time to time, grants stock options to its
officers under the Company's Incentive Stock Option Plan.

Each director receives a fee of $1,000 for each meeting of the Board of
Directors of the Company or the Subsidiaries or each separate committee meeting
attended, and $500 for each committee meeting held on the same day as a Board
meeting. There is no duplication of directors' fees and expenses even if some
directors also take action on behalf of the Subsidiaries. In addition, on
December 26, 1995 each non-officer director (Ms. Bierbower and Messrs. Barker,
Fleming, Garcia, Frank L. Langhammer and Keeney) received a one-time grant of
options to purchase 10,000 shares of the Company's common stock at $15.00 per
share pursuant to the Company's Stock Option Plan. On May 13, 1996 Mr. Martin, a
non-officer director first elected to the Board in May 1996, similarly received
a one-time grant of options to purchase 10,000 shares of the Company's common
stock at $15.00 per share. The exercise price of those grants was the minimum
provided under the Company's Stock Option Plan. Mr. Langhammer's unvested
options to purchase 6,667 shares were canceled by their terms when he stepped
down as a director in May 1996; his vested options to purchase 3,333 shares
expired on July 12, 1996 without being exercised.

The following table sets forth certain details of compensation paid to
directors during 1995, as well as compensation paid for serving as a director of
the two other investment companies to which the Company may be deemed related.

B-4
<PAGE> 47

COMPENSATION TABLE

<TABLE>
<CAPTION>
PENSION OR ESTIMATED TOTAL COMPENSATION
AGGREGATE RETIREMENT BENEFITS ANNUAL FROM COMPANY AND
COMPENSATION FROM ACCRUED AS PART OF BENEFITS UPON RELATED COMPANIES
NAME AND POSITION THE COMPANY(1) COMPANY EXPENSES RETIREMENT PAID TO DIRECTORS(2)
- -------------------------------- ----------------- ------------------- ------------- --------------------
<S> <C> <C> <C> <C>
David Gladstone................. $ 9,000 $ 0 $ 0 $ 25,000
Chairman of the Board and
Chief Executive Officer
George C. Williams.............. 9,000 0 0 24,000
Vice Chairman of the Board(3)
Katherine C. Marien............. 4,000 0 0 4,000
Director, President and Chief
Operating Officer
Jon W. Barker................... 10,000 0 0 10,000
Director
Eleanor Deane Bierbower......... 8,000 0 0 8,000
Director
Robert V. Fleming II............ 10,000 0 0 10,000
Director
Anthony T. Garcia............... 7,000 0 0 7,000
Director
Arthur H. Keeney III............ 7,000 0 0 7,000
Director
</TABLE>

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

(1) Consists only of directors' fees.

(2) Comprised solely of amounts paid as compensation to directors by the
Company, Allied I and Allied II.

(3) George C. Williams resigned as Vice Chairman, effective May 1996, but
remains a director of the Company.

Under Commission rules applicable to BDCs, the Company is required to set
forth certain information regarding compensation paid from the Company during
the last three fiscal years to its Chief Executive Officer and its President and
the four other most highly compensated officers of the Company on December 31,
1995. However, the Company 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 Advisers, which pays
all of their cash compensation. The following chart summarizes the grants of
options by the Company to the named executive officers during the past three
fiscal years including the securities underlying those options, and any long
term incentive plan ("LTIP") payouts.

B-5
<PAGE> 48

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG-TERM COMPENSATION AWARDS
--------------------------------------------
SECURITIES PAYOUTS
RESTRICTED UNDERLYING ------------
NAMES AND PRINCIPAL POSITION YEAR STOCK AWARD(S) OPTIONS LTIP PAYOUTS
- -------------------------------------------------- ---- -------------- ---------- ------------
<S> <C> <C> <C> <C>
David Gladstone................................... 1993 $0 66,660 $0
Chairman and Chief Executive 1994 0 0 0
Officer 1995 0 19,998 0

George C. Williams................................ 1993 0 13,332 0
Vice Chairman(1) 1994 0 0 0
1995 0 0 0

Katherine C. Marien............................... 1993 0 66,660 0
President and Chief 1994 0 0 0
Operating Officer 1995 0 33,330 0

John M. Scheurer.................................. 1993 0 6,666 0
Executive Vice President 1994 0 0 0
1995 0 6,666 0

G. Cabell Williams III............................ 1993 0 13,332 0
Executive Vice President 1994 0 0 0
1995 0 6,666 0

Joan M. Sweeney................................... 1993 0 13,332 0
Executive Vice President........................ 1994 0 0 0
1995 0 6,666 0
</TABLE>

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

(1) George C. Williams resigned as an officer of Advisers and the Company,
effective May 1996.

STOCK OPTIONS

On September 7, 1993, the Company's stockholders approved the Allied
Capital Lending Corporation Incentive Stock Option Plan (the "Plan") under which
an aggregate of 293,500 shares were reserved for grant to officers of the
Company. On February 18, 1994, the Board of Directors unanimously adopted an
amendment to the Plan to allow grants of options to be made to directors of the
Company who are not officers of the Company ("non-officer directors") and to
increase the number of shares available under the Plan to 504,860. This
amendment was approved by the Company's stockholders on May 20, 1994. The
Company then sought an order for exemptive relief from the Commission to allow
the Company to grant options to non-officer directors, which order was granted
on December 26, 1995. The following summary of the Plan's principal provisions
are qualified by reference to the actual text of the Plan itself.

PURPOSE OF THE PLAN. The purpose of the Plan is to advance the interests
of the Company by providing directors and officers who have substantial
responsibility for the direction and management of the Company with additional
incentives, to increase their proprietary interest in the success of the
Company, to reward outstanding performance, and to attract and retain executive
personnel of outstanding ability.

ADMINISTRATION. Except as to the non-officer director participants, the
Plan is administered by the Compensation Committee comprised of at least two of
the "non-interested" members of the Company's Board of Directors (the
"Committee"). The Committee interprets the Plan and may prescribe, amend and
rescind rules and regulations relating to the Plan and to make all other
determinations necessary for its administration, other than with respect to
grants for non-officer directors' options.

PARTICIPANTS. The participation of non-officer directors is determined
according to the 10,000 shares formula described above in connection with the
proposed amendments to the Plan. The Committee determines and designates those
officers of the Company who are eligible to participate in the Plan. The
Committee will also determine the number of shares to be offered to each
optionee. In making these

B-6
<PAGE> 49

determinations, the Committee takes into account the past service of the
optionee and potential contributions to the success of the Company, and such
other factors as the Committee deems relevant to accomplish the purposes of the
Plan. Approximately 20 persons, including directors and officers, are eligible
to participate in the stock option plan. The maximum number of shares that may
be purchased upon the exercise of stock options granted under this Plan is
504,860, including 60,000 options granted for shares to non-officer directors.

Options are not transferable other than by the laws of descent and
distribution, and during an optionee's lifetime are exercisable only by the
optionee.

EXERCISE OF OPTIONS. Options are exercisable at a price equal to the fair
market value of the stock of the Company at the time the option is granted,
except with respect to options granted to any holder of 10% or more of the
Company's outstanding shares, in which case the exercise price is not less than
110% of the current fair market value. The aggregate fair market value
(determined at the time the option is granted) of the shares exercisable for the
first time by any optionee during any calendar year may not exceed $100,000. The
day on which the Committee approves the granting of an option is considered the
date on which the option is granted. For purposes of the Plan, the fair market
value of the stock is the closing price of the shares as quoted on the Nasdaq
National Market for the business day preceding the date in question.

Options granted to officers may contain such other terms and conditions as
the Committee deems advisable, including but not limited to being exercisable
only in installments. Options granted to different optionees or at different
times need not contain similar provisions, but in any event options shall not be
granted at a price below the Company's initial public offering price of $15 per
share. Each option states the period or periods of time within which the option
may be exercised by the optionee, which may not exceed ten years from the date
the option is granted. The option period may not exceed five years if the option
is awarded to a holder of 10% or more of the Company's outstanding shares.

All rights to exercise options terminate 60 days after an optionee ceases
to be a director or an officer of the Company for any cause other than death or
total and permanent disability. If an optionee's tenure is terminated for any
reason other than death or total and permanent disability before expiration of
his option and before he has fully exercised it, the optionee has the right to
exercise the option during the balance of the 60-day period. If an optionee dies
or becomes totally and permanently disabled before expiration of the option
without fully exercising it, he or the executors or administrators or legatees
or distributees of the optionee's estate shall, as may be provided at the time
of grant, have the right, within one year after the optionee's death or total
and permanent disability, to exercise the option in whole or in part before the
expiration of its term.

PAYMENT FOR SHARES. Full payment for shares purchased must be made at the
time of exercising the option. At the request of the officer-optionee, however,
the Board may authorize the Company to lend to such officer-optionee, as of the
date of exercise, an amount equal to the exercise price of the option. The loan
will (a) have a term of not more than ten years, (b) become due within 60 days
after the recipient ceases to be an officer of the Company, (c) bear interest at
a rate not less than the prevailing applicable federal rate at the time the loan
is made, and in no event less than the prevailing rate applicable to 90-day
United States Treasury bills, and (d) be fully collateralized at all times,
which collateral may include securities issued by the Company. Loan terms and
conditions may be changed by the Board to comply with applicable Internal
Revenue Service ("IRS") and Commission regulations. Loans made for the purpose
of exercising options are subject to Regulation G of the Federal Reserve Board.

EFFECT OF CHANGE IN SHARES OF THE COMPANY SUBJECT TO PLAN. If there is a
change in the number of outstanding shares of stock of the Company through the
declaration of stock dividends, stock splits, or combinations or exchanges of
shares, or otherwise, the number of shares available for option, the shares
subject to an option, and the option prices shall be appropriately adjusted.

AMENDMENT AND TERMINATION. The Board may modify, revise or terminate the
Plan at any time, but may not modify or revise any material provision of the
Plan without stockholder approval, except for such modifications or revisions as
may be necessary to ensure the Plan's compliance with applicable law. The Plan,
as amended, will terminate when there have been granted options on the total
number of shares with respect to

B-7
<PAGE> 50

which options may be granted, by action of the Board of Directors, or on
February 18, 2004, whichever occurs first.

If the Company determines that the listing, registration or qualification
of the stock subject to an option upon any securities exchange or under any
state or federal law, or the consent or approval of any government or other
regulatory body, is necessary or desirable as a condition of, or in connection
with, the granting of such option or the issue or purchase of stock thereunder,
the option may not be exercised unless such listing, registration,
qualification, consent or approval has been effected or obtained free of any
conditions not acceptable to the Company. No option will expire during any
period when the right to exercise an option is so suspended. The Committee will
extend its term for a further period so as to afford the optionee a reasonable
opportunity to exercise the option, except that no option may be exercised more
than ten years after it was granted.

RESALE OF STOCK ACQUIRED PURSUANT TO OPTIONS. In most instances, the
optionee must wait until at least six months after the grant of the option
before selling the shares obtained upon its exercise to avoid liability under
Section 16 of the Securities Exchange Act of 1934. Any sales by optionees who
may be deemed "affiliates" of the Company must be made pursuant to registration
under the Securities Act of 1933 or pursuant to Rule 144 under the Act.

FEDERAL TAX CONSEQUENCES. When a non-statutory stock option is exercised,
the Company is entitled to a deduction equal to the difference between the fair
market value of the stock acquired upon exercise over the price paid for the
stock. The Company is generally not entitled to any deduction with respect to an
ISO; however, if an optionee disposes of stock acquired with an ISO within two
years of the date on which the option was granted or one year of the date of
exercise, the Company is entitled to a deduction equal to the lesser of (1) the
excess of the fair market value of the stock over the price paid, or (2) the
gain actually realized by the optionee on disposition.

The following table sets forth, for the Company's Chief Executive Officer
and its President and the four other most highly compensated officers of
Advisers, who were also officers of the Company on December 31, 1995, the
details relating to option grants by the Company in 1995 and the potential
realizable value of each grant, as prescribed to be calculated by the
Commission.

<TABLE>
<CAPTION>
OPTION GRANTS IN LAST FISCAL YEAR
----------------------------------------------------------------------------------
POTENTIAL
REALIZABLE VALUE AT
ASSUMED ANNUAL
RATES OF STOCK
PERCENT OF PRICE APPRECIATION
NUMBER OF TOTAL OPTIONS OVER 10-YEAR
SECURITIES GRANTED TO EXERCISE TERM(1)
UNDERLYING EMPLOYEES PRICE PER EXPIRATION -------------------
NAME OPTIONS GRANTED IN 1995 SHARE DATE 5% 10%
- ------------------------------- --------------- ------------- --------- ---------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
David Gladstone................ 19,998 9.7% $ 15.00 02/15/05 $58,351 $270,596
George C. Williams............. 0 N/A N/A N/A N/A N/A
Katherine C. Marien............ 33,330 16.1% $ 15.00 02/15/05 $97,252 $450,994
John M. Scheurer............... 6,666 3.2% $ 15.00 02/15/05 $19,450 $ 90,199
G. Cabell Williams III......... 6,666 3.2% $ 15.00 02/15/05 $19,450 $ 90,199
Joan M. Sweeney................ 6,666 3.2% $ 15.00 02/15/05 $19,450 $ 90,199
</TABLE>

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

(1) Potential realizable value is net of the option exercise price but before
any tax liabilities that may be incurred. These amounts represent certain
assumed rates of appreciation, as mandated by the Commission. Actual gains,
if any, on stock option exercises are dependent on the future performance
of the shares, overall market conditions, and the continued employment of
the option holder. The potential realizable value may not necessarily be
realized.

B-8
<PAGE> 51

CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES

As of September 30, 1996, there were 5,122,060 shares of the Company's
common stock outstanding. The following table sets forth certain information as
of September 30, 1996 regarding the shares of the Company's common stock
beneficially owned by the two persons known by the Company to own beneficially
more than 5% of the Company's common stock, as well as all directors and
executive officers as a group:

<TABLE>
<CAPTION>
NAME AND ADDRESS NUMBER OF PERCENTAGE
OF BENEFICIAL OWNER SHARES OWNED OF CLASS
- --------------------------------------------------------------------- ------------ ----------
<S> <C> <C>
Allied Capital Corporation (1)....................................... 1,244,914(2) 24.3%
1666 K Street, NW, Ninth Floor, Washington, DC 20006
Liberty Investment Management........................................ 363,751(3) 7.4%
2502 Rocky Point Drive, Suite 500, Tampa, FL 33607
All directors and executive officers as a group (12 in number)(4)
</TABLE>

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

(1) Allied Capital Corporation has agreed to vote its Shares on all matters only
in the same proportion as the shares voted by the Company's public
stockholders.

(2) Shares owned of record.

(3) Shares owned beneficially.

(4) Included in the total number of shares beneficially owned are 173,298 shares
underlying unexercised stock options that are exercisable within 60 days of
September 30, 1996, and 6,000 shares owned by the Allied Employee Stock
Ownership Plan, for which David Gladstone and G. Cabell Williams III are
co-trustees and share voting power.

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 quoted on the Nasdaq National Market under the symbol "ALLA".

Advisers currently employs thirty-eight (38) investment and other
professionals, as well as thirty (30) other employees. David Gladstone, Chairman
and Chief Executive Officer of Advisers, has 22 years of experience in making
the types of investments 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.

All investments of the Company must be approved by a credit committee
composed of the senior investment officers of Advisers, including David
Gladstone and Katherine C. Marien. Additionally, the Board of Directors of the
Company reviews and approves or ratifies all loans made by the Company.

Among the Company's directors, David Gladstone, Katherine C. Marien and
Anthony T. Garcia are each, and George C. Williams may be deemed to be, an
"interested person," as that term is defined in the 1940 Act, of the Company.

Advisers is at this time a party to investment advisory agreements with the
Company and with Allied I and Allied II, both business development companies
which, directly or through one or more small business investment company
subsidiaries, specialize in making 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 Partnership and
Allied Technology Partnership, engaged substantially in the same business as the
Allied I and Allied II but no longer making new investments. Advisers serves as
the investment manager of those two limited partnerships.

B-9
<PAGE> 52

All of these entities co-invest with one another, pursuant to exemption relief
received from the Commission. 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, 1996, total assets under Advisers' management was
$ million.

CUSTODIAN SERVICES

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

ACCOUNTING SERVICES

The firm of Matthews, Carter and Boyce was the independent accountant for
the Company for the year ended December 31, 1995 and has been selected to serve
as such for the year ending December 31, 1996 by the Board of Directors, and
such selection was ratified by the stockholders of the Company at its annual
meeting in May 1996. Its business address is: 8200 Greensboro Drive, Suite 1000,
McLean, Virginia 22102-3864. Its phone number is (703) 761-4600. Matthews,
Carter and Boyce is also the independent accountant for the Partnership.

Matthews, Carter and Boyce, or its predecessor, has served as the Company's
independent accountant since its inception and has no financial interest in the
Company. The expense recorded during the fiscal year ended December 31, 1995,
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 review of the filings by
the Company of reports and registration statements with the Commission, the SBA
or other regulatory authorities) and for nonaudit services, the fees for which
the latter aggregated approximately 17% of the total fees. 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.

TAX STATUS

The Company, which has elected to be regulated as a "business development
company" under the 1940 Act, has qualified and expects to continue to qualify as
a regulated investment company ("RIC") under the Code. As such, the Company is
not subject to federal income tax on that part of its investment company taxable
income (consisting generally of net investment income and net short-term capital
gains, if any) and any net capital gain (the excess of net long-term capital
gain over net short-term capital loss) that it distributes to its stockholders.
It is the Company's intention to distribute substantially all such income and
gains.

The "Distribution Requirement," in order to qualify for that treatment, is
that the Company must distribute to its stockholders for each taxable year at
least 90% of its investment company taxable income. The Company must also meet
the following additional requirements: (1) The Company must derive at least 90%
of its gross income each taxable year from dividends, interest, payments with
respect to securities loans, and gains from the sale or other disposition of
securities or foreign currencies, or other income (including gains from options,
futures, or forward contracts) derived with respect to its business of investing
in securities or those currencies ("Income Requirement"); (2) The Company must
derive less than 30% of its gross income each taxable year from gains (without
including losses) on the sale or other disposition of securities, or any of the
following, that were held for less than three months--options, futures, or
forward contracts (other than those on foreign currencies), or foreign
currencies (or options, futures, or forwards thereon) that are not directly
related to the Company's principal business of investing in securities (or
options and futures with respect thereto) ("Short-Short Limitation"); (3) At the
close of each quarter of the Company's taxable year, at least 50% of the value
of its total assets must be represented by cash and cash items, U.S. Government
securities, securities of other RIC's, and other securities that, with respect
to any one issuer, do not exceed 5%

B-10
<PAGE> 53

of the value of the Company's total assets and that do not represent more than
10% of the outstanding voting securities of the issuer; and (4) At the close of
each quarter of the Company's taxable year, not more than 25% of the value of
its total assets may be invested in securities (other than U.S. Government
securities or the securities of other RIC's) of any one issuer.

The Company will be subject to a nondeductible 4% excise tax if the Company
does not distribute at least 98% of its net investment income and net capital
gains on a timely basis. The Company intends to make sufficient distributions to
avoid this 4% excise tax.

The Company, formerly a wholly owned subsidiary of Allied I, originates
loans which are partially guaranteed by the SBA. The Company then sells the
guaranteed portion of these loans in the secondary market. In connection with
the sale of the guaranteed portion of loans in 1992, the IRS may assert that
these transactions subject the Company to a liability for income taxes of up to
$845,000 for that year. If the IRS in the future asserts such a claim,
management and tax counsel believe that the Company has valid defenses for the
position that such transactions do not subject the Company to a liability for
additional income taxes; however, the Company has an agreement with Allied I
pursuant to which the Company is indemnified against such liability if asserted.

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
tax status as a RIC, including the Short-Short Limitation and the
diversification requirements. If the Company disposes of assets in order to meet
the distribution requirements, it may make such dispositions at times which,
from an investment standpoint, are not advantageous.

If the Company fails to satisfy the Distribution Requirement or otherwise
fails to qualify as a RIC 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 RIC, a
portion of its distributions may be characterized as long-term capital gain in
the hands of stockholders.

Dividends paid by the Company from net investment income, the excess of net
short-term capital gain over net long-term capital loss, and original issue
discount or certain market discount income will be taxable to stockholders as
ordinary income to the extent of the Company's current or accumulated earnings
and profits. Distributions paid by the Company from the excess of net long-term
capital gain over net short-term capital loss will be taxable as long-term
capital gains 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 other appropriate form that allows them to recover the
excess 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.

B-11
<PAGE> 54

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.
Withholding from dividends and distributions also is required for stockholders
who otherwise are subject to backup withholding. Backup withholding is not an
additional tax, and any amounts withheld may be credited against a stockholder's
U.S. federal income tax liability.

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

The Company will send to each of its stockholders, as promptly as possible
after the end of each fiscal year, a notice detailing, on a per share 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 IRS.

The foregoing is only a general summary of some of the important federal
income tax considerations generally affecting the Company and its stockholders.
No attempt is made to present a complete explanation of the federal tax
treatment of the Company's activities. Potential investors are urged to consult
their own tax advisors for more detailed information and for information
regarding any applicable state, local, or foreign taxes.

B-12
<PAGE> 55

PART C

OTHER INFORMATION

ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS

1. FINANCIAL STATEMENTS

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

Consolidated Balance Sheet--March 31, 1996 (unaudited) and December 31,
1995 and 1994

Consolidated Statement of Operations--For the Three Months Ended March 31,
1996 and 1995 (unaudited) and the Years Ended December 31, 1995, 1994 and
1993

Consolidated Statement of Changes in Net Assets--For the Three Months Ended
March 31, 1996 and 1995 (unaudited) and the Years Ended December 31, 1995,
1994 and 1993

Consolidated Statement of Cash Flows--For the Three Months Ended March 31,
1996 and 1995 (unaudited) and the Years Ended December 31, 1995, 1994 and
1993

Consolidated Statement of Investments in Small Business Concerns--March 31,
1996 (unaudited) and December 31, 1995 and 1994

Notes to Consolidated Financial Statements

Report of Independent Accountants

2. EXHIBITS

<TABLE>
<S> <C>
a. Amended and Restated Articles of Incorporation of the Registrant(1)
b. By-Laws of the Registrant, as amended(6)
c. None
d.1 Specimen certificate of Registrant's Common Stock, par value $0.0001, the rights of
holders of which are defined in Exhibits a and b(7)
e. Registrant's Dividend Reinvestment Plan(1)
f. None
g. Investment Advisory Agreement between Registrant and Allied Capital Advisers, Inc.
("Advisers")(2)
h. None
i. Registrant's Incentive Stock Option Plan, as amended(5)
j. Custodian Agreement between Riggs Bank N.A. (formerly known as The Riggs National Bank
of Washington, D.C.) and the Registrant, dated February 27, 1989(4)
k.1 Tax Indemnification Agreement dated November 12, 1993 between the Registrant and
Allied Capital Corporation(3)
k.2 Amended and Restated Line of Credit, Security and Pledge Agreement, dated February 26,
1996 and as amended April 18, 1996, and Promissory Note dated February 26, 1996,
between the Company and Riggs Bank N.A. (formerly known as The Riggs National Bank of
Washington, D.C.)(7)
k.4 Form of agreement between the Company and its regional associates(4)
k.7 Line of Credit, Security and Pledge Agreement and Promissory Note, dated April 18,
1996, between ACLC Limited Partnership and Riggs Bank N.A.(7)
k.8 First Amendment to the Line of Credit, Security and Pledge Agreement dated October 18,
1996, between ACLC Limited Partnership and Riggs Bank, N.A.*
l. Opinion of Sutherland, Asbill & Brennan, L.L.P. 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.1 Powers of Attorney for certain signatories of this Registration Statement*
</TABLE>

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

* Filed herewith.

** To be filed pre-effective amendment.

C-1
<PAGE> 56

(1) Incorporated by reference to an exhibit of the same designation
accompanying the Company's initial registration statement on Form N-2 (File
No. 33-68836), as filed with the Commission on September 15, 1993.

(2) Incorporated by reference to Exhibit A to the Company's definitive proxy
statement relating to its annual meeting of stockholders held on May 9,
1995 (File No. 0-22832).

(3) Incorporated by reference to Exhibit 10(c) to the Form 10-K filed by Allied
Capital Corporation for the year ended December 31, 1993 (File No. 814-97).

(4) Incorporated by reference to an exhibit accompanying Pre-Effective
Amendment No. 1 to the Company's registration statement on Form N-2 (File
No. 33-68836), as filed with the Commission on November 1, 1993.

(5) Incorporated by reference to Exhibit B to the Company's definitive proxy
statement relating to its annual meeting of stockholders held on May 20,
1994 (File No. 0-22832).

(6) Incorporated by reference to Exhibit 3(ii) filed with the Company's Annual
Report on Form 10-K for the year ended December 31, 1995 (File No.
0-22832).

(7) Incorporated by reference to an exhibit of the same designation
accompanying Pre-Effective Amendment No. 1 to the Company's registration
statement on Form N-2 (File No. 333-02185), as filed with the Commission on
April 26, 1996.

ITEM 25. MARKETING ARRANGEMENTS

The Company has no marketing arrangements to be disclosed pursuant to this
Item.

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............... $
NASD Filing Fee...................................................
Blue Sky Fees and Expenses........................................ 0
Printing and Conversion Expenses.................................. 15,000
Legal Fees and Expenses........................................... 30,000
Accountant's Fees and Expenses.................................... 5,000
--------
Total................................................... $
========
</TABLE>

C-2
<PAGE> 57

ITEM 27. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL

<TABLE>
<S> <C>
Allied Capital Lending Corporation (the Registrant)--Maryland
Partnership:
ACLC Limited Partnership--Maryland.............................................. 99%
Subsidiaries:
Allied Capital SBLC Corporation--Maryland
Allied Capital Credit Corporation--Maryland
Allied Capital Corporation(1)*--Maryland
Subsidiaries:
Allied Investment Corporation--Maryland......................................... 100%
Allied Capital Financial Corporation--Maryland.................................. 100%
Allied Development Corporation--District of Columbia............................ 100%
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%
Business Mortgage Investors, Inc.*--Maryland
Subsidiaries:
BMI Holdings, Inc.--Maryland.................................................... 100%
BMI Acceptance Corporation--Maryland............................................ 100%
Allied Capital Funding LLC**--Delaware
Allied Capital Mortgage LLC*--Delaware
Allied Capital Midwest LLC*--Delaware
Allied Capital Advisers, Inc.--Maryland
Subsidiary:
Allied Capital Property Corporation--Maryland................................... 100%
</TABLE>

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

* Each of these entities is, like the Registrant, advised by Advisers. By
including these entities in this item, the Registrant does not concede that
it and such other entities are "controlled by" Advisers or that such other
entities are "under common control with" the Registrant, as those terms are
defined in the 1940 Act.

** The members of Allied Capital Funding LLC are ALCC Acceptance Corporation
and BMI Acceptance Corporation.

(1) Allied Capital Corporation owned 1,244,914 shares, or approximately 24% of
the Company's outstanding common stock, at September 30, 1996. The
Registrant does not concede that it is controlled by Allied I. On matters
requiring a vote of the Company's stockholders, Allied I has agreed to vote
its shares only in the same proportion as the shares voted by the Company's
other stockholders.

ITEM 28. NUMBER OF HOLDERS OF SECURITIES

The following table presents the number of record holders of each class of
securities of the Company and the Partnership outstanding as of September 30,
1996:

<TABLE>
<CAPTION>
NUMBER OF
TITLE OF CLASS RECORD HOLDERS
--------------------------------------------------------------- --------------
<S> <C>
Common Stock................................................... 1,637*
LIBOR + 2.2% Secured Revolving Line of Credit (the Company).... 1
LIBOR + 2.7% Secured Revolving Line of Credit
(ACLC Limited Partnership)................................... 1
</TABLE>

* Estimate. The Company estimates that there are a total of 7,800
beneficial owners of its common stock.

C-3
<PAGE> 58

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 By-Laws 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 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

Advisers, 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 current director or

C-4
<PAGE> 59

executive officer of Allied Capital Advisers, Inc., in which he or she is
engaged, or has been engaged at any time during the past two fiscal years ended
December 31, 1995, is set forth below:

<TABLE>
<CAPTION>
NAME AND PRINCIPAL ADDRESS* OF
EACH COMPANY WITH WHICH THE
NAMED PERSON HAS HAD ANY CONNECTION
NAME AND THE NATURE OF SUCH CONNECTION
- ------------------------- ------------------------------------------------------------------
<S> <C>
David Gladstone.......... Chairman of the Board and Chief Executive Officer, Allied Capital
Advisers, Inc., Allied Capital Corporation, Allied Capital
Corporation II, Allied Capital Lending Corporation, and Allied
Capital Commercial Corporation; Director, President and Chief
Executive Officer, Business Mortgage Investors, Inc. and Allied
Capital Mortgage Corporation; Director, The Riggs National
Corporation, 808 17th Street, N.W., Washington, DC 20006; Trustee
of The George Washington University, 2121 I Street, N.W.,
Washington, DC 20052.
George C. Williams....... Director and formerly 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. and Allied Capital Mortgage Corporation.
Brooks H. Browne......... Director, Allied Capital Advisers, Inc.; President, Environmental
Enterprises Assistance Fund, 1901 N. Moore Street, Suite 1004,
Arlington, VA 22209.
Robert E. Long........... Director, Allied Capital Advisers, Inc.; Chairman and Chief
Executive Officer, Business Network News, 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 Myer 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 II, Allied Capital Lending
Corporation, Allied Capital Commercial Corporation, Business
Mortgage Investors, Inc. and Allied Capital Mortgage Corporation.
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.
</TABLE>

C-5
<PAGE> 60

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

* The business address of Allied Capital Advisers, Inc., Allied Capital
Corporation, Allied Capital Corporation II, Allied Capital Lending
Corporation, Allied Capital Commercial Corporation, Business Mortgage
Investors, Inc., and Allied Capital Mortgage Corporation 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.

ITEM 33. UNDERTAKINGS

1. The Registrant hereby 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.

C-6
<PAGE> 61

3. Not Applicable.

4. The Registrant herby undertakes:

a. To file, during any period in which offers or sales are being made, a
post-effective amendment to the Registration Statement:

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

(2) to reflect in the prospectus any facts 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. 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. 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. The Registrant hereby undertakes that:

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

b. for the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide
offering thereof

6. The Registrant hereby 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-7
<PAGE> 62

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 1st day of November, 1996.

ALLIED CAPITAL LENDING CORPORATION

By: /s/ David Gladstone
------------------------------------
David Gladstone
Chairman of the Board and Chief
Executive Officer

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
- ------------------------------------- ----------------------------------- ------------------
<C> <S> <C>
/s/ David Gladstone Chairman of the Board and Chief November 1, 1996
- ------------------------------------- Executive Officer (Principal
David Gladstone Executive Officer) and Director

* Director
- -------------------------------------
George C. Williams

/s/ Katherine C. Marien President and Chief Operating November 1, 1996
- ------------------------------------- Officer and Director
Katherine C. Marien

* Director
- -------------------------------------
Jon W. Barker

* Director
- -------------------------------------
Eleanor Deane Bierbower

* Director
- -------------------------------------
Robert V. Fleming II

* Director
- -------------------------------------
Anthony T. Garcia

* Director
- -------------------------------------
Arthur H. Keeney III

* Director
- -------------------------------------
Robin B. Martin

/s/ Jon A. DeLuca Executive Vice President, Treasurer November 1, 1996
- ------------------------------------- and Chief Financial Officer
Jon A. DeLuca (Principal Financial Officer and
Principal Accounting Officer)
</TABLE>

* By: /s/ Katherine C. Marien
--------------------------------

Katherine C. Marien, Attorney-in-Fact and Agent, on November 1, 1996, pursuant
to the Powers of Attorney filed herewith.
<PAGE> 63

EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ ------------------------------------------------------------------------------------
<S> <C>
k.8 First Amendment to the Line of Credit, Security and Pledge Agreement dated October
18, 1996, between ACLC Limited Partnership and Riggs Bank, N.A.*
r. Financial Data Schedule
s.1 Powers of Attorney of certain signatories of this Registration Statement
</TABLE>

<PAGE> 1

FIRST AMENDMENT TO LINE OF CREDIT,
SECURITY AND PLEDGE AGREEMENT

This First Amendment to Line of Credit, Security and Pledge Agreement
("Amendment") dated as of October 18, 1996 is entered into by ACLC Limited
Partnership (the "Borrower") and Riggs Bank N.A. (the "Lender").

WHEREAS, the Borrower and the Lender entered into that certain Line of
Credit, Security and Pledge Agreement dated April 18, 1996 (the "Agreement");
and

WHEREAS, the Borrower and the Lender wish to amend the Agreement as
provided herein;

NOW THEREFORE, the Lender and the Borrower agree as follows:

1. The Agreement is amended to delete the existing definition of
"Bridge Termination Date" in Section 11.02 of the Agreement in its entirety and
to substitute a new definition in its place reading as follows:

"Bridge Termination Date" means November 30, 1996.

2. Borrower hereby reaffirms the Agreement as amended hereby and
agrees that in all respects except as explicitly modified by the terms of this
Amendment that the Agreement shall remain in full force and effect.

3. In consideration of the Amendment contained herein, Borrower
represents, warrants and agrees that (i) there are no claims, defenses or
set-offs with respect to the Agreement, any Loan or any Note, or with respect
to the indebtedness evidenced or secured thereby or with respect to the
collection or enforcement of any of them or with respect to the collateral,
(and to the extent any claim, set-off or defense exists they are each hereby
waived and relinquished in their entirety), (ii) no Event of Default, as
defined in the Agreement, the Note or any other Loan Document, and no event
which with the lapse of time or the giving of notice or both would constitute
such an Event of Default, has occurred; (iii) Lender has made no
representations or commitments, oral or written, or undertaken any obligations
other than as expressly set forth in the Agreement, the Loan Documents and this
Amendment, (iv) except as otherwise previously disclosed in writing to the
Lender, each of the representations and warranties contained in the Agreement
are true and correct as of the date hereof and shall be deemed to be restated
and remade as of the date of this Amendment as if set out herein in their
entirety; and (v) the making, delivery and performance by the Borrower of this
Amendment and all instruments, documents and notes executed contemporaneously
herewith, have been duly authorized by all necessary corporate action, and
constitute the valid and binding obligations of the Borrower enforceable in
accordance with their terms.

4. All capitalized terms not otherwise defined in this Amendment
shall have the meanings ascribed thereto in the Agreement. Each and every of
the terms and provisions of this Amendment shall be binding upon and shall
inure to the benefit of the parties hereto and their respective heirs,
successors, personal representatives and assigns.

BORROWER EXPRESSLY REPRESENTS AND WARRANTS TO HOLDER THAT IT (A) HAS
READ EACH AND EVERY PROVISION OF THIS INSTRUMENT; (B) HAS BEEN GIVEN THE
OPPORTUNITY TO HAVE THIS INSTRUMENT REVIEWED BY COMPETENT LEGAL COUNSEL

1
<PAGE> 2
OF ITS OWN CHOOSING; AND (C) UNDERSTANDS, AGREES TO AND ACCEPTS THE PROVISIONS
HEREOF.

IN WITNESS WHEREOF, the Borrower and the Lender have executed this
Amendment as of the date first above written.

ACLC LIMITED PARTNERSHIP, a Maryland limited
partnership

By: Allied Capital Lending Corporation,
a Maryland corporation, its general partner

By: /s/ Katherine C. Marien
------------------------
Name: Katherine C. Marien
Title: President

RIGGS BANK N.A.

By: /s/ David H. Olson
-------------------
Name: David H. Olson
Title: Vice President

<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ALLIED
CAPITAL LENDING CORPORATION AND SUBSIDIARY'S CONSOLIDATED BALANCE SHEET AND
CONSOLIDATED STATEMENTS OF OPERATIONS, CHANGES IN NET ASSETS AND CASH FLOWS AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<INVESTMENTS-AT-COST> 44,532
<INVESTMENTS-AT-VALUE> 44,356
<RECEIVABLES> 703
<ASSETS-OTHER> 638
<OTHER-ITEMS-ASSETS> 5,467
<TOTAL-ASSETS> 51,164
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 18,199
<TOTAL-LIABILITIES> 18,199
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 33,318
<SHARES-COMMON-STOCK> 4,389
<SHARES-COMMON-PRIOR> 4,385
<ACCUMULATED-NII-CURRENT> (177)
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (176)
<NET-ASSETS> 32,965
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 1,591
<OTHER-INCOME> 662
<EXPENSES-NET> 842
<NET-INVESTMENT-INCOME> 1,411
<REALIZED-GAINS-CURRENT> (60)
<APPREC-INCREASE-CURRENT> (21)
<NET-CHANGE-FROM-OPS> 1,330
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 1,315
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 4
<NET-CHANGE-IN-ASSETS> 81
<ACCUMULATED-NII-PRIOR> (213)
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 314
<INTEREST-EXPENSE> 396
<GROSS-EXPENSE> 842
<AVERAGE-NET-ASSETS> 32,925
<PER-SHARE-NAV-BEGIN> 7.50
<PER-SHARE-NII> 0.32
<PER-SHARE-GAIN-APPREC> (0.02)
<PER-SHARE-DIVIDEND> 0.30
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 7.51
<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 17,461
<AVG-DEBT-PER-SHARE> 3.98

</TABLE>

<PAGE> 1

POWER OF ATTORNEY

The undersigned Director of Allied Capital Lending
Corporation, a Maryland corporation (the "Company") hereby constitutes and
appoints David Gladstone and Katherine C. Marien and each of them (with full
power to each of them to act alone), his true and lawful attorney-in-fact and
agent, with full power of substitution to each, for him and on his behalf and
in his name, place, and stead, to execute and file any of the documents
referred to below related to (i) registration under the Securities Act of 1933,
as amended (the "1933 Act"), of the offer and sale of shares of common stock
newly issued or reissued by the Company or (ii) registration under the 1933 Act
of the offer and purchase of units of other classes of outstanding securities
previously issued by the Company. Such documents shall include, but shall not
be limited, registration statements on any form or forms under the 1933 Act,
and an and all amendments and supplements thereto with all exhibits and all
instruments necessary or appropriate in connection therewith, each of said
attorneys-in-fact and agents and his or her substitutes being empowered to act
with or without the others or other, and to have full power and authority to do
or cause to be done in the name and on behalf of the undersigned each and every
act and thing requisite and necessary or appropriate with respect thereto to be
done in and about the premises in order to effectuate the same, as fully to all
intents and purposes as the undersigned might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, or any of
them, may do or cause to be done by virtue thereof.

IN WITNESS WHEREOF, the undersigned has hereunto set his hand
this 1st day of November, 1996.
/s/ David Gladstone
----------------------------------
David Gladstone
<PAGE> 2
POWER OF ATTORNEY

IN WITNESS WHEREOF, the undersigned has hereunto set his hand
this 1st day of November, 1996.
/s/ George C. Williams
----------------------------------
George C. Williams
<PAGE> 3
POWER OF ATTORNEY

IN WITNESS WHEREOF, the undersigned has hereunto set his hand
this 1st day of November, 1996.
/s/ Katherine C. Marien
----------------------------------
Katherine C. Marien
<PAGE> 4
POWER OF ATTORNEY

IN WITNESS WHEREOF, the undersigned has hereunto set his hand
this 1st day of November, 1996.
/s/ Jon W. Barker
----------------------------------
Jon W. Barker
<PAGE> 5
POWER OF ATTORNEY

IN WITNESS WHEREOF, the undersigned has hereunto set his hand
this 1st day of November, 1996.
/s/ Eleanor Deane Bierbower
----------------------------------
Eleanor Deane Bierbower
<PAGE> 6
POWER OF ATTORNEY

IN WITNESS WHEREOF, the undersigned has hereunto set his hand
this 1st day of November, 1996.
/s/ Robert V. Fleming II
----------------------------------
Robert V. Fleming II
<PAGE> 7
POWER OF ATTORNEY

IN WITNESS WHEREOF, the undersigned has hereunto set his hand
this 1st day of November, 1996.
/s/ Anthony T. Garcia
----------------------------------
Anthony T. Garcia
<PAGE> 8
POWER OF ATTORNEY

IN WITNESS WHEREOF, the undersigned has hereunto set his hand
this 1st day of November, 1996.
/s/ Arthur H. Keeney III
----------------------------------
Arthur H. Keeney III
<PAGE> 9
POWER OF ATTORNEY

IN WITNESS WHEREOF, the undersigned has hereunto set his hand
this 1st day of November, 1996.
/s/ Robin B. Martin
----------------------------------
Robin B. Martin
<PAGE> 10
POWER OF ATTORNEY

The undersigned officer of Allied Capital Lending Corporation,
a Maryland corporation (the "Company") hereby constitutes and appoints David
Gladstone and Katherine C. Marien and each of them (with full power to each of
them to act alone), his true and lawful attorney-in-fact and agent, with full
power of substitution to each, for him and on his behalf and in his name,
place, and stead, to execute and file any of the documents referred to below
related to (i) registration under the Securities Act of 1933, as amended (the
"1933 Act"), of the offer and sale of shares of common stock newly issued or
reissued by the Company or (ii) registration under the 1933 Act of the offer
and purchase of units of other classes of outstanding securities previously
issued by the Company. Such documents shall include, but shall not be limited,
registration statements on any form or forms under the 1933 Act, and an and all
amendments and supplements thereto with all exhibits and all instruments
necessary or appropriate in connection therewith, each of said
attorneys-in-fact and agents and his or her substitutes being empowered to act
with or without the others or other, and to have full power and authority to do
or cause to be done in the name and on behalf of the undersigned each and every
act and thing requisite and necessary or appropriate with respect thereto to be
done in and about the premises in order to effectuate the same, as fully to all
intents and purposes as the undersigned might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, or any of
them, may do or cause to be done by virtue thereof.

IN WITNESS WHEREOF, the undersigned has hereunto set his hand
this 1st day of November, 1996.
/s/ Jon A. DeLuca
----------------------------------
Jon A. DeLuca