ALLIED CAPITAL LENDING CORP, 497, 1996-07-26

ALLIED CAPITAL LENDING CORP
497, 1996-07-26

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<PAGE> 1

SUPPLEMENT DATED JULY 22, 1996,
TO PROSPECTUS DATED APRIL 29, 1996

ALLIED CAPITAL LENDING CORPORATION

The Company has received from existing stockholders, during the
Subscription Period (from May 6, 1996 through June 4, 1996) for the rights
offering of the Company's common stock just completed (the "Offer" or "Rights
Offering"), subscriptions for 548,887 Shares at a Subscription Price of $13.04
per Share, which was 95% of the average of the last reported sales price of a
share of the Company's common stock on the Nasdaq National Market on each of the
last five trading days of the Subscription Period. The gross proceeds from the
Rights Offering were approximately $7,157,500 before deducting the solicitation
fees of approximately $132,000 (equal to 2.50% of the Subscription Price for
each Share issued as a result of the soliciting efforts of broker-dealers that
have executed and delivered a Soliciting Dealer Agreement to the Company) and
before deducting the offering costs payable by the Company. The net proceeds to
the Company from the Rights Offering (after deducting the solicitation fees but
before deducting the offering costs) were approximately $7,025,500.

As disclosed in the prospectus dated April 29, 1996 (the "Prospectus"), the
Company reserved the right to offer and sell to Additional Offerees any Shares
not subscribed for in the Rights Offering ("unsubscribed-for Shares") (see
Prospectus page 16--"Sales of Shares Subsequent to the Offer"). Having exercised
its discretion to increase the number of shares offered (see Prospectus page 2)
by 15% (i.e., 94,336 Shares in addition to the original 628,909 Shares for an
aggregate total of 723,245 Shares), the Company intends now to proceed with a
public offering of the total 174,358 unsubscribed-for Shares (the "Public
Offering").

Following the completion of the Rights Offering and the subsequent issuance
of additional shares of the Company's common stock in connection with the
payment of its quarterly dividend (see Prospectus page 26-- "Dividend
Reinvestment Plan"), 4,943,163 shares of the Company's common stock were
outstanding, 25.2% of which continued to be owned by Allied I. Following the
completion of the Public Offering, Allied I's ownership of the Company's common
stock is anticipated to represent 24.3% of the Company's shares then
outstanding. (See Prospectus page 17--"Organization".)

In the Public Offering, the Shares of the Company's common stock are
offered by Lehman Brothers Inc. (the "Underwriter"), subject to prior sale,
when, as and if delivered to and accepted by the Underwriter, and subject to its
right to reject orders in whole or in part. The principal business address of
Lehman Brothers Inc. is Three World Financial Center, New York, New York
10285-1900. Lehman Brothers Inc. is a broker-dealer registered under the
Securities Exchange Act of 1934 and is a member of the National Association of
Securities Dealers, Inc. ("NASD").

The Underwriter has advised the Company that it proposes to offer the
Shares to the public at $12.74 per Share. The price to be paid by the public of
$12.74 per Share in the Public Offering is $0.30 per Share less than the
Subscription Price paid by existing stockholders in the Rights Offering and
thereby reflects the cash dividend of that amount paid on June 28, 1996, to
stockholders of record as of June 14, 1996. The last sale price for a share of
the Company's common stock on Nasdaq on July 19, 1996 was $13.75. There can be
no assurance that the Shares will trade subsequent to the Public Offering at or
above this price. After the Public Offering of the Shares, the Underwriter may
change the price at which the Shares are offered to the public.

The Company will allow underwriting discounts of $0.326 per Share, or 2.56%
of the offering price, to the Underwriter for sales of Shares in the Public
Offering. Accordingly, the "Sales Load (as a percentage of offering price)" set
forth under "Fees and Expenses" on Prospectus page 4 is 2.56% in the Public
Offering as opposed to 2.50% in the Rights Offering.

In the Public Offering, the aggregate Subscription Price, Sales Load, and
Proceeds (before deduction of offering costs) to the Company will be $2,221,321,
$56,841, and $2,164,480, respectively. Offering costs incurred in connection
with both the Rights Offering and the Public Offering are currently estimated to
be $272,000.

The Underwriter has agreed, subject to the terms and conditions set forth
in the underwriting agreement by and among the Company, Advisers, and the
Underwriter (the "Underwriting Agreement"), to purchase from the Company, and
the Company has agreed to sell to the Underwriter, the 174,358 unsubscribed-for
Shares.

S-1
<PAGE> 2

The Underwriting Agreement provides that the obligations of the Underwriter
to purchase the Shares listed above are subject to certain conditions. The
Underwriting Agreement also provides that the Underwriter is committed to
purchase, and the Company is obligated to sell, all of the unsubscribed-for
Shares offered by the Prospectus, as supplemented hereby, if any of the Shares
being sold pursuant to the Underwriting Agreement are purchased.

The Underwriter has informed the Company that it does not intend to confirm
sales to any account over which it exercises discretionary authority. During the
Subscription Period, the Underwriter purchased 33,303 shares and sold 40,744
shares in its capacity as a market maker in the Company's common stock.

The Company and Advisers, as its investment adviser, have agreed to
indemnify the Underwriter against certain liabilities, including liabilities
under the Securities Act of 1933, or to contribute to payments that the
Underwriter may be required to make in respect thereof.

Lehman Brothers Inc., which is acting as Underwriter in the Public
Offering, from time to time offers investment banking services to the Company,
for which it receives customary compensation. Lehman Brothers Inc. is the lender
on the Company's $20 million line of credit expiring September 27, 1996 (see
Prospectus page 23). Anthony T. Garcia, a Director of the Company, is Senior
Vice President of Lehman Brothers Inc.

By letter dated June 7, 1996, the Company has received notification from
the SBA that it could proceed with the reorganization described on Prospectus
page 17. Exemptive relief being sought from the Commission for the
reorganization is still pending.

IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT
A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR OTHERWISE. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.

S-2
<PAGE> 3

PROSPECTUS
628,909 SHARES

ALLIED CAPITAL LENDING CORPORATION
COMMON STOCK
------------------------
Allied Capital Lending Corporation (the "Company") is issuing to the
stockholders of record of the outstanding shares of its
common stock at the close of business on April 26, 1996 ("the Record Date")
non-transferable rights (the "Subscription Rights"). Each stockholder of the
Company will be issued one Subscription Right for each whole share of the
Company held as of the Record Date, and will be entitled to subscribe for and
purchase from the Company up to one (1) authorized but heretofore unissued share
of the Company's common stock for each five (5) Subscription Rights held (the
"Primary Subscription"), aggregating a total of 628,909 shares of common stock.
Shares of common stock of the Company offered through this Prospectus are
referred to as the "Shares." No certificates or other physical rights will be
distributed. Stockholders who fully exercise their Subscription Rights will be
entitled to the additional privilege of subscribing for, subject to certain
limitations and subject to allocation or increase, any Shares not acquired by
exercise of Subscription Rights (the "Over-Subscription Privilege"). The Primary
Subscription and the Over-Subscription Privilege collectively comprise the
"Offer." The Company may, at its sole discretion, increase the number of Shares
subject to subscription by up to 15%, or up to 94,336 Shares, for an aggregate
total of 723,245 Shares available under the Offer. No fractional Subscription
Rights will be issued and no fractional Shares will be issued upon exercise of
Subscription Rights. Subscription Rights are non-transferable and will not be
admitted for trading or quotation on any exchange and therefore may not be
purchased or sold. Only persons who are stockholders of the Company on the
Record Date may subscribe. Beneficial owners whose shares are held of record by
Cede & Co., nominee for The Depository Trust Company ("DTC"), or by any other
depository or nominee are also eligible to participate. The Company may offer
and sell any Shares not sold in the Offer, including any or all of the Shares,
to certain other investors. See "The Offer--Sales of Shares Subsequent to the
Offer," page 16. Stockholder inquires should be directed to Shareholder
Communications Corporation, the Information Agent and Offering Coordinator, at
(800) 221-5724 ext. 331.

THE SUBSCRIPTION PRICE PER SHARE WILL BE 95% OF THE AVERAGE OF THE LAST REPORTED
SALE PRICE OF A SHARE OF COMMON STOCK ON THE NASDAQ NATIONAL MARKET ("NASDAQ")
ON THE DATE OF EXPIRATION OF THE OFFER (THE "PRICING DATE") AND EACH OF THE FOUR
PRECEDING BUSINESS DAYS. SEE "THE OFFER," PAGE 11. The Offer will dilute the
voting power of the common stock owned by stockholders who do not fully exercise
their Subscription Rights. Stockholders who do not fully exercise their
Subscription Rights should expect, upon completion of the Offer, to own a
smaller proportional interest in the Company than before the Offer.

Allied Capital Corporation ("Allied I"), which owns approximately 28% of the
Company's outstanding common stock, will not participate in this Offer;
therefore shares held by Allied I on the Record Date have not been included in
the calculation of the Shares registered for the Offer.

THE OFFER WILL COMMENCE ON MAY 6, 1996 AND WILL EXPIRE AT 5:00 P.M. EASTERN
TIME, ON JUNE 4, 1996 (THE "EXPIRATION DATE"), UNLESS EXTENDED AS DESCRIBED
HEREIN.

The Company, a Maryland corporation, is a closed-end, management investment
company that has elected to be regulated as a business development company
("BDC"). The outstanding shares of the Company are quoted on the Nasdaq National
Market under the symbol "ALCL." The Company is a small business lending company
("SBLC") licensed by the U.S. Small Business Administration ("SBA"). Its
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.

FOR THE RISKS OF LEVERAGE, SEE "THE COMPANY--RISK FACTORS--RISKS OF LEVERAGE,"
PAGE 22.

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 without charge upon written or
oral request at the address or telephone number of Advisers listed above. As
indicated at some points in this Prospectus, certain information in the
Statement of Additional Information is incorporated in this Prospectus by
reference. See page 27 of this Prospectus for the table of contents of the
Statement of Additional Information.

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

<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
ESTIMATED ESTIMATED ESTIMATED
SUBSCRIPTION SALES PROCEEDS TO
PRICE(1) LOAD(2) THE COMPANY(3)(4)
<S> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------
Per Share.................................. $13.91 $0.3478 $13.56
- -----------------------------------------------------------------------------------------------------------------
Total(5)................................... $8,748,124 $218,735 $8,529,389
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
</TABLE>

(Footnotes on the following page)

The date of this Prospectus and of the Statement of Additional Information is
April 29, 1996.
<PAGE> 4

(Footnotes from previous page)

(1) The Estimated Subscription Price is computed as 95% of the average of the
last reported sale price of the Company's common stock on the Nasdaq
National Market on April 25, 1996 and each of the four preceding business
days.

(2) In connection with the Offer, the Company will pay to certain broker-dealers
soliciting the exercise of Subscription Rights solicitation fees equal to
2.5% of the Subscription Price for each Share issued as a result of their
soliciting efforts. The Company has agreed to indemnify such broker-dealers
against certain liabilities under the Securities Act of 1933, as amended.
See "The Offer--Soliciting Fees," page 13.

(3) Before deduction of offering costs incurred related to this offering,
payable by the Company, estimated at $181,701.

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

(5) Assumes all Subscription Rights are exercised at the Estimated Subscription
Price. Pursuant to the Over-Subscription Privilege and the sale of Shares to
certain other investors upon completion of the Offer, the Company may, at
its sole discretion, increase the number of Shares offered by up to 15%. If
the Company increases the number of Shares subject to Subscription by 15%,
the aggregate maximum Estimated Subscription Price, Estimated Sales Load and
Estimated Proceeds to the Company will be $10,060,338, $251,545 and
$9,808,793, respectively.

2
<PAGE> 5

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 which 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
24. The Company's business includes making loans to small
businesses that are partially guaranteed by the U.S.
Small Business Administration ("SBA") and as such, it is
a small business lending company ("SBLC"). The Company
participates either, directly or through its Subsidiary,
in two SBA programs--the Section 7(a) Loan Program and
the Section 504 Loan Program. The Company also generates
companion loans to accompany the Section 7(a) loans,
which are not guaranteed by the SBA. See "The Company,"
page 18.

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, or other loans. See
"The Company-- Business of the Company," page 17.

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. As an
SBLC, the Company is subject to regulation by the SBA,
and as a result is exposed to the business risks of
changes in government regulations that may have an
adverse impact on the Company. In addition, because the
Company and the Subsidiary borrow funds, the Company is
exposed to the risks of leverage, which may be considered
a speculative investment technique. See "The
Company--Risk Factors," page 20.

SUBSCRIPTION RIGHTS AND
PRIMARY SUBSCRIPTION The Company is offering to stockholders of record as of
the close of business on April 26, 1996 (the "Record
Date") the right to subscribe for an aggregate of 628,909
Shares of common stock of the Company. Each such
stockholder is being issued one (1) Subscription Right
for each full share of common stock owned on the Record
Date. No fractional Subscription Rights will be issued.
The Subscription Rights entitle a stockholder to acquire
at the Subscription Price (as defined in this Prospectus)
one (1) Share for each five (5) Subscription Rights held.
Subscription Rights may be exercised at any time during
the Subscription Period, which commences on May 6, 1996
and ends at 5:00 p.m., Eastern Time, on June 4, 1996 (the
"Expiration Date") unless extended as described herein.
The part of the Offer pursuant to which a stockholder is
entitles to purchase up to one (1) Share for each five
(5) Subscription Rights held at the Subscription Price is
referred to as the "Primary Subscription." See "The
Offer--Terms of the Offer," page 11.

OVER-SUBSCRIPTION
PRIVILEGE AND POSSIBLE
INCREASE IN SHARES
OFFERED Any stockholder who fully exercises all Subscription
Rights is entitled to subscribe for Shares that were not
otherwise subscribed for pursuant to the Primary
Subscription (the "Over-Subscription Privilege"). Shares
acquired through the Over-Subscription Privilege are
subject to allotment. The Company may, in its sole
discretion, issue up to an additional 15% of the Shares
available in the Primary Subscription. See "The
Offer--Over-Subscription Privilege and Possible Increase
in Shares Offered," page 11.

DILUTIVE EFFECT The Primary Subscription will dilute the ownership
interest and voting power of stockholders who do not
fully exercise their Subscription Rights. Stockholders
who do not fully exercise their Subscription Rights
should expect, upon comple-

3
<PAGE> 6

tion of the Offer, to own a smaller proportional interest
in the Company than before the Offer. The
Over-Subscription Privilege and the Company's
discretionary ability to increase by up to 15% the number
of Shares offered will likely result in further dilution
to stockholders, including those who fully exercise their
Subscription Rights to subscribe for Shares pursuant to
the Primary Subscription. See "The Offer--Dilutive
Effects," page 13.

SOLICITING FEES In connection with the Offer, the Company has agreed to
pay to broker-dealers who have solicited beneficial
owners, whose shares of the Company's stock are held by
broker-dealers in nominee name, fees equal to 2.5% of the
Subscription Price per Share for each Share issued upon
the exercise of Subscription Rights as a result of their
soliciting efforts. See "The Offer--Soliciting Fees,"
page 13.

IMPORTANT DATES TO REMEMBER

<TABLE>
<CAPTION>
EVENT DATE
- --------------------------------------------------------------------------------------------
<S> <C>
Record Date............................................................... April 26, 1996
Subscription Period....................................................... May 6-June 4, 1996*
Expiration Date of the Offer.............................................. June 4, 1996*
Pricing Date.............................................................. June 4, 1996*
Subscription Forms and payment for Shares due+............................ June 4, 1996*
Notices of Guaranteed Delivery due+....................................... June 4, 1996*
Subscription Forms pursuant to Notices of Guaranteed Delivery due......... June 7, 1996*
Confirmation to participants.............................................. June 14, 1996*
Payment pursuant to Notices of Guaranteed Delivery due.................... June 28, 1996*
Final collections or rebates for Shares due............................... June 28, 1996*
</TABLE>

- ---------------
* Unless the Offer is extended to a date not later than June 7, 1996.
+ A stockholder exercising Subscription Rights must deliver to the Subscription
Agent by the Expiration Date either (1) a Subscription Form and payment for
Shares or (2) a Notice of Guaranteed Delivery.

SALES OF SHARES
SUBSEQUENT TO THE
OFFER Following the completion of the Offer, the Company may
offer and sell Shares not sold pursuant to the Offer to
other investors. See "The Offer--Sales of Shares
Subsequent to the Offer," page 16.

PRINCIPAL TRADING
MARKET Nasdaq National Market under the symbol "ALCL." See
"Public Trading and Net Asset Value Information," page
10.

FEES AND EXPENSES

<TABLE>
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES
Sales Load (as a percentage of offering price)................................. 2.50%(1)
Dividend Reinvestment Plan Fees................................................ none(2)
ANNUAL EXPENSES (as a percentage of consolidated net assets attributable to
common shares(3))
Investment Advisory Fees....................................................... 3.58%(4)
Interest Payments on Borrowed Funds............................................ 4.40%(5)
Other Expenses................................................................. 1.14%(6)
-----
Total Annual Expenses.................................................. 9.12%(7)
=====
</TABLE>

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

(1) Broker-dealers that have executed and delivered a Soliciting Dealer
Agreement and have solicited the exercise of Subscription Rights will
receive fees of 2.5% of the Subscription Price per Share for each Share
issued as a result of their soliciting efforts. These fees will be borne by
the Company and indirectly by all of the Company's stockholders, including
those who do not exercise their Subscription Rights. In

4
<PAGE> 7

the event that Shares are sold otherwise than through the Offer, a
corresponding supplement to this Prospectus will disclose any additional
sales load.

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

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

(4) Pursuant to Commission 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 24) 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% (which excluded the anticipated net proceeds of
the Offer). 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 18.

(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% (which excluded the anticipated net proceeds of
the Offer). See "The Company--Risk Factors--Risks of Leverage," page 22.

(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% (which excluded the anticipated net proceeds of the Offer).

(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 31, 1996, which
significantly reduces the consolidated net assets attributable to common
shares on which the "Total Annual Expenses" percentage is required, by the
Commission, 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 on a pro forma basis after giving effect to the
anticipated net proceeds of the Offer.

<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.

5
<PAGE> 8

AVAILABLE INFORMATION

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

The Company also furnishes annual reports to stockholders, which include
annual financial information that has been audited and reported on, with an
opinion expressed, by independent accountants, and quarterly unaudited summary
financial information. See "Reports and Independent Accountants," page 27.

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
27.

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>

6
<PAGE> 9

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)
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
(UNAUDITED)

<CAPTION>
<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).......... $ -- $ -- $ 0.08(3) $ 1.08 $ 1.22 $ 0.27 $ 0.30
</TABLE>

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

(1) Prior to the Company's initial public offering, which was consummated in
November 1993, the Company's former sole stockholder, Allied Capital
Corporation ("former Parent"), 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 the former Parent. 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 initial public
offering, and dividends for the nine months ended September 30, 1993. 1991
excludes a return of capital paid to the Company's former Parent.

(3) 1993 is based on 4,368,420 shares outstanding subsequent to the initial
public offering, 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 ("Subsidiary") 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 and
has 99% limited partnership interest in the Subsidiary. Accordingly, the
consolidated financial statements of the Company include the accounts of the
Company and this Subsidiary 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 are not necessarily
indicative of the operating results to be expected for the year ending
December 31, 1996.

7
<PAGE> 10

QUARTERLY FINANCIAL HIGHLIGHTS
(IN THOUSANDS)
(unaudited)

<TABLE>
<CAPTION>
1994 1995 1996
------------------------------------ ------------------------------------ ------
QTR 1 QTR 2 QTR 3 QTR 4 QTR 1 QTR 2 QTR 3 QTR 4 QTR 1
------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <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
Net investment income....... $ 873 $1,213 $1,242 $1,550 $1,394 $1,231 $1,580 $1,233 $1,411
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
Per share................... $ 0.20 $ 0.28 $ 0.30 $ 0.26 $ 0.31 $ 0.29 $ 0.32 $ 0.29 $ 0.30
</TABLE>

SENIOR SECURITIES
(at end of fiscal year, consolidated)

Certain information about the various classes of senior securities issued
by the Company and its consolidated subsidiary 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>

8
<PAGE> 11

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

(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 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 (the "1940 Act").

9
<PAGE> 12

PUBLIC TRADING AND NET ASSET VALUE INFORMATION

Shares of the Company's common stock are traded 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%
</TABLE>

The last sale price for a share of the Company's common stock on Nasdaq on
April 25, 1996 was $14.375.

10
<PAGE> 13

THE OFFER

TERMS OF THE OFFER

The Company is offering to its stockholders of record on the Record Date
the right to subscribe for Shares. Each Record Date stockholder is being issued
one (1) Subscription Right for each share of common stock owned on the Record
Date. The number of Subscription Rights to be issued to each stockholder will be
rounded down to the nearest whole number of shares and no fractional
Subscription Rights will be issued. The Subscription Rights entitle a
stockholder to acquire, pursuant to the Primary Subscription at the Subscription
Price, one (1) Share for each five (5) Subscription Rights held. Subscription
Rights may be exercised at any time during the Subscription Period, which
commences on May 6, 1996, and ends as of 5:00 p.m., Eastern Time, on June 4,
1996 (the "Expiration Date"), unless extended by the Company until 5:00 p.m.
Eastern Time on a date no later than June 7, 1996.

In addition, any stockholder who fully exercises all Subscription Rights
issued to him or a stockholder who has less than five (5) Subscription Rights
and therefore cannot participate in the Primary Subscription is entitled to
subscribe for Shares which were not otherwise subscribed for in the Primary
Subscription. Shares acquired through this Over-Subscription Privilege are
subject to allocation or increase, which is more fully discussed below under
"Over-Subscription Privilege."

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

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

OVER-SUBSCRIPTION PRIVILEGE AND POSSIBLE INCREASE IN SHARES OFFERED

If some stockholders do not exercise all of the Subscription Rights issued
to them, then any Shares for which a Subscription Form and payment have not been
received from stockholders in the Primary Subscription will be offered by means
of the Over-Subscription Privilege to those stockholders who have exercised all
of the Subscription Rights issued to them and who wish to acquire additional
Shares. Stockholders who exercise all of the Subscription Rights issued to them
or a stockholder who has less than five (5) Subscription Rights and therefore
cannot participate in the Primary Subscription should also indicate on the
Subscription Form how many Shares they wish to acquire through this
Over-Subscription Privilege. There is no limit to the number of Shares that may
be requested through the Over-Subscription Privilege. If sufficient Shares
remain in excess of those for which Subscription Rights are exercised in the
Primary Subscription, then all requests for additional Shares, pursuant to the
Over-Subscription Privilege, will be honored in full.

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

11
<PAGE> 14

THE SUBSCRIPTION PRICE

The Subscription Price per Share is 95% of the average of the last reported
sale price of a share of the Company's common stock on the Nasdaq National
Market on the date of expiration of the Offer (the "Pricing Date") and each of
the four preceding business days. Since the Expiration Date of the Offer
coincides with the Pricing Date, stockholders exercising their Subscription
Rights will not know the Subscription Price per Share at the time they exercise
their Subscription Rights. It may be more or less than the Estimated
Subscription Price of $13.91 per Share. See "Confirmation of Purchase," page 15.

SUBSCRIPTION PERIOD

The Offer commences on May 6, 1996 and expires at 5:00 p.m., Eastern Time,
on June 4, 1996, unless extended by the Company until 5:00 p.m. Eastern Time on
a date no later than June 7, 1996. The Subscription Rights and the
Over-Subscription Privilege will expire on the Expiration Date and may not be
exercised after that date. All Subscription Forms must be received by American
Stock Transfer & Trust Company ("Subscription Agent") no later than the
Expiration Date, unless Subscription is effected through a Notice of Guaranteed
Delivery, as described herein.

Net asset value per common share at March 31, 1996 was $7.51. The Company
has, as required by the Commission's registration form for the Offer, undertaken
to suspend the Offer until it amends this Prospectus if, subsequent to the
effective date of the Company's registration statement, the Company's net asset
value declines more than 10% from its consolidated net asset value last
determined prior to the effective date. Accordingly, the Company will notify
stockholders of any such decline. A subscribing stockholder will have no right
to cancel such subscriptions or rescind a purchase after the Subscription Agent
has received payment, except that Subscription Forms and payments received
during any period that the Offer is suspended as described above will be
returned to the stockholder for resubmission once such suspension has ended.

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

PURPOSE OF THE OFFER

The Board of Directors of the Company has concluded that additional capital
should be raised for the Company through an offering of its common stock. The
Company has determined that new lending opportunities exist, but the Company
lacks the liquidity to take full advantage of them. This additional capital will
increase the Company's equity base and allow the Company to continue to grow by
leveraging against it. Because the Company, as a regulated investment company
within the meaning of Subchapter M of the Internal Revenue Code, must distribute
essentially all of its income to its stockholders each year to avoid unfavorable
federal income tax consequences, the Company cannot increase its equity base by
retaining net income and must instead raise additional capital to achieve this
goal.

The Company's Board of Directors has voted to authorize the Offer. Three of
the Company's directors who voted to authorize the Offer are affiliated with
Advisers and, therefore, could benefit indirectly from the Offer. These three
directors, plus one other director who voted to authorize the Offer, are
"interested persons" of the Company within the meaning of the 1940 Act. Four
other directors, constituting a majority of the directors who are not
"interested persons" of the Company, also voted to authorize the Offer. Advisers
may benefit from the Offer, and any sale of common stock subsequent to the
Offer, because its fee is based on the total consolidated assets of the Company.
See "Management--Investment Adviser," page 24. It is not possible to predict
precisely the amount of additional compensation Advisers might receive as a
result of the Offer because it is not known how many Shares will be subscribed
for and because the proceeds of the Offer will be invested in additional
portfolio securities, which may fluctuate in value.

12
<PAGE> 15

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

DILUTIVE EFFECTS

The Company expects that the Offer will not result in a reduction of the
net asset value per share of the Company's common stock because the stock has
historically traded, and continues to trade as of the date of this Prospectus,
at a price that represents a premium over net asset value. Accordingly, the
price of Shares sold in the Offer are expected to exceed their net asset value.
See "Public Trading and Net Asset Value Information," page 10.

Any stockholder who chooses not to participate in the Offer, should expect
to own a smaller proportional interest in the Company upon completion of the
Offer. The Primary Subscription will dilute the ownership interest and voting
power of stockholders who do not fully exercise their Subscription Rights. The
Over-Subscription Privilege and the Company's discretionary ability to increase
by up to 15% the number of Shares offered will likely result in further dilution
to stockholders, including those who fully exercise their Subscription Rights to
subscribe for Shares pursuant to the Primary Subscription. See "Sales of Shares
Subsequent to the Offer," page 16.

SOLICITING FEES

In connection with the Offer, the Company has agreed to pay to certain
broker-dealers that have executed and delivered a Soliciting Dealer Agreement
fees equal to 2.5% of the Subscription Price per Share for all Shares issued as
a result of their soliciting efforts. Shareholder Communications Corporation
will provide offering coordinator services, including coordination among
soliciting broker-dealers. See "Expenses of the Offer," page 16.

SUBSCRIPTION AGENT

The Subscription Agent for the Offer is American Stock Transfer & Trust
Company, 40 Wall Street, 46th Floor, New York, New York 10005, which will
receive, for its administrative, processing, invoicing and other services as
Subscription Agent, a fee of $35,000 and reimbursement for all out-of-pocket
expenses related to the Offer. The Subscription Agent is also the transfer agent
for the Company's common stock. Stockholders may contact the Subscription Agent
at (718) 921-8200.

Stockholders should mail or deliver Subscription Forms and acceptable forms
of payment for Shares to the Subscription Agent in time to be received no later
than 5:00 p.m. Eastern Time on the Expiration Date by one of the following
methods at the following address:

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

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

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

13
<PAGE> 16

INFORMATION AGENT AND OFFERING COORDINATOR

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

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

Stockholders may also contact their respective brokers, banks, trust
companies or other record holder for additional information with respect to the
Offer.

HOW TO SUBSCRIBE

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

PAYMENT FOR SHARES

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

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

(2) Alternatively, a Record Owner may send payment for the Shares acquired
pursuant to the Primary Subscription, together with the Subscription
Form, to the Subscription Agent based on the Estimated Subscription
Price of $13.91 per Share. To be accepted, such payment, together with
the Subscription Form, must be made payable to "Allied Capital Lending
Corporation" and received by the Subscription Agent prior to 5:00 p.m.
Eastern Time on the Expiration Date, unless the Offer is extended. All
payments by a stockholder must be made in United States dollars either
by money order or check and drawn on a bank located in the United
States of America.

14
<PAGE> 17

NOMINEES WHO ELECT TO EFFECT PARTICIPATION IN THE OFFER THROUGH DTC MAY BE
SUBJECT TO CERTAIN ADDITIONAL PROCEDURAL REQUIREMENTS. NOMINEES SHOULD CONTACT
DTC DIRECTLY FOR MORE INFORMATION.

IF METHOD (2) DESCRIBED ABOVE IS USED, EACH SUBSCRIPTION FORM MUST BE
ACCOMPANIED BY FULL PAYMENT IN ORDER TO BE ACCEPTED.

CONFIRMATION OF PURCHASE

Within eight (8) business days following the expiration of the Offer (the
"Confirmation Date"), a confirmation will be sent by the Subscription Agent to
each stockholder (or, if shares are held by a Nominee on the Record Date, to
such Nominee) showing: (i) the number of Shares acquired through the Primary
Subscription; (ii) the number of Shares, if any, acquired through the
Over-Subscription Privilege; (iii) the per Share and total Subscription Price
for the Shares; and (iv) the amount payable by the stockholder to the Company or
any excess to be refunded by the Company to the stockholder, in each case based
on the Subscription Price as determined on the Pricing Date.

In the case of any stockholder who exercises a right to acquire Shares
through the Over-Subscription Privilege, any excess payment which would
otherwise be refunded to the Stockholder will be applied by the Company toward
payment for Shares acquired through exercise of the Over-Subscription Privilege.
Any further payment required from a stockholder must be received by the
Subscription Agent within ten (10) business days after the Confirmation Date,
and any excess payment to be refunded by the Company to a stockholder will be
mailed by the Subscription Agent to the stockholder within ten (10) business
days after the Confirmation Date.

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

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

DELIVERY OF SHARES

Stockholders who have any shares held in the Company's Dividend
Reinvestment Plan, which is administered by the Company's transfer agent (the
"Plan"), will have any Shares acquired, either pursuant to the Primary
Subscription or to the Over-Subscription Privilege, credited to their accounts
in the Plan. Stock certificates will not be issued for Shares credited to Plan
accounts unless specifically requested.

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

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

In the event that the Offer does not result in all Shares being fully
subscribed for after allocating Shares pursuant to the Over-Subscription
Privilege, the Company may offer the remaining Shares to certain other
investors. See "Sales of Shares Subsequent to the Offer," page 16.

A SAMPLE CALCULATION OF A SUBSCRIPTION

Assume, for example, that you own 1,002 shares of the Company's common
stock as of the Record Date. Dividing that number by 5 and dropping the
fraction, if any, gives you 200. Assuming that you elect to exercise all of your
Subscription Rights pursuant to the Primary Subscription, in the first blank of
the Subscription Form, Part I, enter 200 Shares and fill in the total estimated
subscription price for the Shares, which is 200

15
<PAGE> 18

multiplied by $13.91, the Estimated Subscription Price per Share, which totals
$2,782. If you choose to subscribe for additional Shares pursuant to the
Over-Subscription Privilege or if you are a stockholder who has less than five
(5) Subscription Rights, enter the number of Shares you wish to purchase on the
next line of the Subscription Form, and again calculate the estimated
subscription price by multiplying the number of Shares by $13.91. Assuming you
decide to purchase 100 Shares pursuant to the Over-Subscription Privilege, enter
100 Shares and $1,391 on the second line. Then enter the total amount due,
$4,173, on the third line of the Subscription Form. After otherwise completing
and signing the form, send it to the Subscription Agent (or your Nominee if your
Shares are held by a Nominee) with an acceptable form of payment for this total
amount.

The Company will, in any event, accept your Primary Subscription to the
extent of the 200 Shares. Depending on the number of Shares subscribed for by
other stockholders, the Company may also accept your over-subscription to the
extent of the additional 100 Shares for which you have subscribed or some
smaller number, possibly as small as zero, and will confirm to you in writing
how many Shares you have been allocated in total. If your over-subscription is
accepted for some number of Shares that is smaller than the requested number,
the Subscription Agent will, after the close of the Subscription Period, send
you a check for the amount, without interest, of your subscription in excess of
the amount for which your subscription has been accepted. If the Subscription
Price is lower than the Estimated Subscription Price of $13.91 per Share, you
will receive a refund; if the Subscription Price is higher than the Estimated
Subscription Price, you will be notified of the additional amount due. You will
then, in due course, receive a certificate for the number of Shares for which
your subscription has been accepted, or otherwise be credited for the Shares if
your Shares are held in the Company's Dividend Reinvestment Plan or by a
Nominee.

Stockholders who are Record Owners. Stockholders who are Record Owners can
choose between either method described under "Payment for Shares," page 14. If
only a short amount of time is remaining prior to the Expiration Date, option
(1) will permit delivery of the Subscription Form and payment after the
Expiration Date.

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

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

SALES OF SHARES SUBSEQUENT TO THE OFFER

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

EXPENSES OF THE OFFER

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

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<PAGE> 19

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

USE OF PROCEEDS

The Company anticipates that proceeds of the Offering will be used, in
accordance with the Company's investment objective, to achieve a high level of
current income by making loans at least partially guaranteed by the SBA, as well
as loans made in conjunction with such loans, and other loans. The Company
anticipates that substantially all of the proceeds of the offering will be
invested in the manner described above within one year, and in any event within
two years.

THE COMPANY

ORGANIZATION

The Company was incorporated in 1976 and is engaged in the business of
making loans to small businesses, including loans that are partially guaranteed
by the SBA pursuant to the Section 7(a) Loan Program. The Company is a
closed-end management investment company that elected in 1993 to be regulated as
a BDC under the 1940 Act. The Company is also a small business lending company
("SBLC") licensed by the SBA. In April 1995, the Company formed the Subsidiary
in order to participate in the SBA 504 Loan Program and make other small
business loans. The Company is the general partner and a 99% limited partner of
the Subsidiary. Advisers serves as the investment adviser of the Company under
an investment advisory agreement.

Prior to consummation of the Company's initial public offering in November
1993, the Company was a wholly owned subsidiary of Allied Capital Corporation
("Allied I"). After that date, Allied I continued to hold a significant number
of the Company's shares, but has agreed to divest itself of such shares by
December 31, 1998 through public offerings, private placements, distributions to
Allied I stockholders or otherwise. Accordingly, Allied I will not participate
in the Offer. In late December 1994, Allied I declared an extra distribution to
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 the stockholders of Allied I.
That distribution reduced Allied I's ownership of the Company's shares 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. Allied I's holdings of the Company's shares
represented approximately 28% of the Company's shares outstanding at March 31,
1996.

The Company is anticipating a reorganization of its corporate structure and
is in the process of seeking exemptive relief from the Commission and permission
from the SBA for the new structure. Under this proposed new structure, the
Company would become a holding company with two wholly owned subsidiaries
("Subsidiary I" and "Subsidiary II"). The Company will transfer its SBLC license
and all Section 7(a) loans and related assets to Subsidiary I in return for 100%
of Subsidiary I's stock. The Company will contribute its 99% limited partnership
interest in its Subsidiary and all of its loans and related assets to Subsidiary
II in return for 100% of its stock. Simultaneous with this transaction,
Subsidiary II will purchase the 1% limited partnership interest of the
Subsidiary not owned by the Company from the limited partner at a nominal
purchase price. The Company believes the new structure will provide the Company
and its proposed Subsidiaries with greater flexibility to operate within certain
regulatory constraints and further improve its ability to generate loans.

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<PAGE> 20

BUSINESS OF THE COMPANY

The business of the Company is to make loans to small businesses. It does
this primarily through participation in two SBA programs the Section 7(a) Loan
Program and the Section 504 Loan Program. The Company also generates companion
loans to accompany the Section 7(a) loans.

The Section 7(a) Guaranteed 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 temporarily
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 late 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 and
expand its operations with additional small business loan programs. The Company
continues to explore other financial products and is pursuing entry into other
loan programs to diversify its 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 the process of
loan approval and disbursements. As of December 31, 1995, the Company was a
Preferred Lender in the Washington, DC area and in Richmond, Virginia. In
February 1996, the Company was granted Preferred Lender status by the SBA in 45
additional regional markets.

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.

As permitted by SBA regulations, the Company systematically sells to
investors, without recourse, the guaranteed portion of its loans. Under
legislation adopted in 1993, a fee at the rate of 0.4% per annum on the
outstanding principal balance of such loans sold in the secondary market was
payable to the SBA. Such loan sales by the Company 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 on the guaranteed portion of loans approved by the SBA
after October 12, 1995 to 0.5% per annum regardless of sale to the secondary
market. The SBA also is entitled to a fee of 50% of any cash premium in excess
of 10% received on loan sales. The Company continues to service sold loans for a
normal 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 March 31, 1996, the Company was servicing
approximately $145 million aggregate principal amount of loans, of which
approximately 70% had been sold to investors.

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 22.

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<PAGE> 21

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 the Company generally does not intend to concentrate its loans
in any industry. At March 31, 1996, the Company had in its portfolio or was
servicing loans to, among others, 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, which 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.

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 its Subsidiary, in the SBA
504 Loan Program. Under the SBA 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 (through its Subsidiary) 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 its Subsidiary, the Company also began providing
companion or "piggyback" loans ("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 Company finances its Section 504 loans and companion loans with two
lines of credit that the Subsidiary has with an investment bank and a commercial
bank. The line of credit with the investment bank has a $20 million borrowing
capacity and expires September 27, 1996. In addition, the Company's Subsidiary
entered into a new line of credit with a commercial bank in April 1996 to borrow
up to $15 million which expires May 31, 1997. See "Risk Factors -- Bank Loans,"
page 22.

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 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 not closed
unless approved or ratified by the Board of Directors of the Company and, in the
case of Section 7(a) loans, by the SBA. If and when a loan

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<PAGE> 22

referred by a regional associate is closed, such organization 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 5% 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 visit.

The Company's Operation as a BDC

As a BDC, the Company may not acquire any assets other than "Qualifying
Assets" or certain non-investment operating 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"). The principal categories
of Qualifying Assets relevant to the business of the Company are the following:

(1) Securities purchased in transactions not involving any public offering
from the issuer of such securities, which issuer is an eligible
portfolio company. An eligible portfolio company is defined generally
as any issuer that is organized and has its principal place of business
in the United States, that is not an investment company, and does not
have any class of publicly traded securities with respect to which a
broker may extend margin credit.

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

In addition, to treat securities described in (1) above as a Qualifying
Asset for the purpose of the 70% test, a BDC must make available to the issuer
of those securities significant managerial assistance. Making available
significant managerial assistance means, among other things, any arrangement
whereby the BDC, through its directors, officers or employees, offers to
provide, and, if accepted, does provide, significant guidance and counsel
concerning the management, operations or business objectives and policies of a
portfolio company. Managerial assistance is made available to the borrowers by
the loan officers of Advisers 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 Company also provides management assistance and counseling on
a continuing basis to any portfolio company that requests it, whether or not
difficulties are perceived. The Company's officers and directors are highly
experienced in providing this type of managerial assistance to small businesses.
The Company may not change the nature of its business so as to cease to be, or
withdraw its election as a BDC unless authorized by vote of a majority (as
defined in the 1940 Act), of the Company's shares. As a BDC, the Company is
entitled to borrow money and issue senior securities representing indebtedness
as long as each class of senior security representing indebtedness has asset
coverage to the extent of at least 200%.

RISK FACTORS

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

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.

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<PAGE> 23

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 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.

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 on which two monthly
payments have not been made in the months in which they are 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 refund any premium that it has
received on the sale when the loan is repurchased by the SBA from the secondary
market. Moreover, under its guaranty the SBA will pay only the principal of the
guaranteed amount 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 such loans, but there is no assurance
that such consent, if sought, will be forthcoming or that a market for such
loans could be found 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 interest
rates which, being variable, may become unduly burdensome or otherwise come to
appear unattractive to some borrowers as market rates increase. Moreover, rising
interest rates may tend to reduce the premium that the Company receives on
resales 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 SBA 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 regulatory constraints on the types of loans that they are able
to offer. Also, many participants in the guaranteed loan program do not have the
same degree of expertise as does the Company in tailoring loans to meet the
SBA's requirements and, accordingly, the Company is frequently in a position to
obtain 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 is limited as to the
amount of indebtedness it may have. The Company 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 at a lower cost.

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<PAGE> 24

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.

Risks of leverage. The Company (including the Subsidiary) intends 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, 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 would had the
borrowings or preferred stock financings not occurred. Decreases in the value of
the consolidated investments below their value at the time of acquisition,
however, would cause the Company's consolidated net asset value attributable to
common shares to decline more sharply than it would if the senior funds had not
been borrowed or otherwise obtained. Similarly, any increase in the Company's
consolidated rate of income in excess of consolidated interest payable on the
borrowed funds or dividends payable on the preferred stock would cause its net
income to increase more than it would without the leverage, while any decrease
in its consolidated rate of income would cause net income to decline more
sharply than it would had the funds not been borrowed or otherwise obtained for
investment. Moreover, the costs of borrowing may exceed the income from the
portfolio securities purchased with the borrowed funds, and a decline in net
asset value may result if the investment performance of the additional
securities purchased fail to cover the cost to the Company. Such a decline in
net asset value could negatively affect the Company's ability to make common
stock dividend payments. Also, if asset coverage for 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 ability to achieve additional leverage on favorable terms by
borrowing from banks, or other lenders, and there can be no assurance that such
additional leverage can in fact be achieved.

The Company had outstanding the following sources of financing as of March
31, 1996:

<TABLE>
<CAPTION>
ANNUAL RATE OF
INTEREST PAYMENTS ANNUAL PORTFOLIO
AMOUNT ------------------------------------- RETURN TO COVER
CLASS OUTSTANDING INITIAL AS OF MARCH 31, 1996 INTEREST PAYMENTS(1)
- ----------------------------- ----------- ------------- -------------------- ---------------------
<S> <C> <C> <C> <C>
Unsecured line of credit..... $ 775,000 9% 8.50% 0.39%
Secured lines of credit...... $15,233,000 7.875%-8.122% 7.44%-7.51% 3.77%
</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 March 31, 1996. The "Annual Portfolio Return to
Cover Interest Payments" on all senior securities outstanding as of March
31, 1996 combined is 4.16%.

Bank Loans. At March 31, 1996, the Company had an unsecured revolving line
of credit agreement with a commercial bank which permitted the Company to borrow
up to $2 million with interest payable monthly at a variable rate equal to The
Wall Street Journal prime rate plus 0.25% per annum and required payment of a
quarterly facility fee of 0.375% per annum on the unused portion of the line.
This unsecured line of credit was canceled in April 1996.

At March 31, 1996, the Company had a secured revolving line of credit
agreement with the same commercial bank which permits the Company to borrow up
to $19 million with interest payable monthly at one-month LIBOR plus 2.2% per
annum. The agreement requires payment of a quarterly facility fee of

22
<PAGE> 25

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. This
secured line of credit agreement was amended in April 1996 to increase maximum
borrowings to $20 million. No other terms were amended.

The financial covenants of these line of credit agreements 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 agreement) of at least 1.5 to 1.

At March 31, 1996, the Company's Subsidiary had a secured revolving line of
credit agreement with an investment bank which allows the Subsidiary to borrow
up to $20 million with interest payable monthly at one-month LIBOR plus 2% per
annum, requires payment of a quarterly facility fee of 0.15% per annum on the
unused portion of the line, and expires September 27, 1996. Principal payments
are not required until the loan's maturity.

The financial covenants of this line of credit agreement require the
Company and its Subsidiary to maintain a consolidated debt to total assets ratio
of less than 0.7 to 1, and the Company's common stock to have a minimum market
value of $38.2 million. The Company and its Subsidiary must maintain a
consolidated debt coverage ratio (as defined in the agreement) of at least 2 to
1.

In addition, the Company's Subsidiary entered into a new secured revolving
line of credit with a bank in April 1996 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
May 31, 1997. This line of credit will also be used to finance the Subsidiary's
loans closed under the Section 504 program and companion loans closed in
conjunction with Section 7(a) guaranteed loans.

The financial convents 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.

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........ -24.23% -21.12% -13.36% -5.60% 2.16% 9.92% 13.02%
</TABLE>

Loss of Pass-Through Tax Treatment. The Company may cease to qualify for
pass-through tax treatment if it is unable to comply with the diversification
requirements contained in Subchapter M of the Internal Revenue Code of 1986, as
amended (the "Code"). The Company may also cease to qualify as a regulated
investment company and therefore to qualify for pass-through treatment, or be
subject to a 4% excise tax, if it fails to make certain distributions. Under the
1940 Act, the Company will not be permitted to make distributions to
stockholders unless it meets certain asset coverage requirements with respect to
money borrowed and senior securities issued. See "Tax Status" in the Statement
of Additional Information. Non-availability of pass-through tax treatment would
have a materially adverse effect on the total return, if any, obtainable from an
investment in the Company's shares.

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<PAGE> 26

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 the 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 -- three are officers of the Company as well as of its investment adviser,
and one is an officer of a registered broker-dealer. Five of the other Board
members are not "interested persons," as that term is defined in the 1940 Act,
and 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, and particularly the non-interested directors, must also, at
least annually, approve the investment advisory agreement with the Company's
investment adviser and, annually and subject to stockholder ratification,
appoint the Company's independent accountants.

The audit and compensation committees of the Board of Directors, comprised
exclusively of non-interested directors, respectively review with the
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 on 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
466,626 options were outstanding, a total of 286,638 options were exercisable,
and a total of 38,234 options were available for grant at March 31, 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 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 meeting. The Company's stock option plan permits a one-time grant of
options to each member of the Board of Directors 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 $15.00 per share. The exercise price of
those grants was the minimum provided under the Company's stock option plan.

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, subject to the supervision and control of the Board of Directors of the
Company, and evaluates, structures, closes and monitors those loans made by the
Company. The Company will not 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, Advisers has the authority to
effect loans and sales of portions of loans for the Company's account. 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; a Financial Consultant to USA Mobil
Communications, Inc. from 1991 to 1992.

24
<PAGE> 27

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

As compensation for its services to and the expenses paid for the account
of the Company, Advisers is entitled to be paid quarterly, in arrears, a fee
equal to 0.625% per quarter of the quarter-end value of the Company's total
assets (other than Interim Investments and cash) and 0.125% per quarter of the
quarter-end value of the Company's Interim Investments and cash. Such fees on an
annual basis equal approximately 2.5% of the Company's total assets (other than
Interim Investments and cash) and 0.5% of the Company's Interim Investments and
cash. For the purposes of calculating the fee, the values of the Company's
assets are determined as of the end of each calendar quarter. The quarterly fee
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 and its Subsidiary as of March
31, 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 4,389,461
THE SUBSIDIARY (ACLC LIMITED PARTNERSHIP)(a):
Limited Partnership Interests................... N/A 99% 1%
</TABLE>

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

(a) The Company is the general partner of the Subsidiary.

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 4,389,461 shares were

25
<PAGE> 28

outstanding as of March 31, 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. Shares of common stock have no preemptive,
conversion, or redemption rights and are freely transferable. In the event of
liquidation, each share of common stock is entitled to its proportion of the
Company's assets after debts, expenses, and liquidation of preferred stock. Each
share is entitled to one vote and does not have cumulative voting rights, which
means that holders of a majority of the shares, if they so choose, could elect
all of the directors, and holders of less than a majority of the shares would,
in that case, be unable to elect any director. Allied I owned approximately 28%
of the Company's outstanding shares of common stock at March 31, 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. A quarterly dividend was declared in
February 1996 and paid on March 29, 1996 at a rate of $0.30 per share. Quarterly
dividends were declared in February, May, August and November 1995 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.

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

If the Company's investments do not generate sufficient income to make
distributions or dividend payments as determined by the Board of Directors, then
the Company may determine to liquidate a portion of its portfolio to fund the
distribution. Such payments may include a tax basis return of capital to the
stockholder, which, in turn, would reduce the stockholder's cost basis in the
investment and have other tax consequences. Stockholders should consult their
tax advisers for further guidance.

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. 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

26
<PAGE> 29

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.

Any stockholder who has questions about the reinvestment plan may call the
Company at (202) 973-6343 and ask for Investor Relations, or contact American
Stock Transfer & Trust Company, the plan agent, 40 Wall Street, 46th floor, New
York, New York 10005, telephone (718) 921-8200.

REPORTS AND INDEPENDENT ACCOUNTANTS

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

CUSTODIAN, TRANSFER AND DIVIDEND PAYING AGENT AND REGISTRAR

The Company's investments are held under a custodian agreement by 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.

TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION

<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, Allied Capital Lending Corporation (the Company) expanded its
product lines to small businesses as a result of the changes made to the U. S.
Small Businesses Administration (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) guaranteed
loans.

27
<PAGE> 30

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 prospectively.

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. 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 its subsidiary, entered into a
credit agreement with an investment bank whereby the subsidiary 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 Company's subsidiary 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 May 31, 1997. This line of credit will also be used to
finance the Subsidiary's loans closed under the Section 504 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 business development company (BDC), the Company must
maintain 200% asset coverage for indebtedness representing senior securities,
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.

28
<PAGE> 31

proposed new structure the Company would become a holding company with two
wholly owned subsidiaries ("Subsidiary I" and "Subsidiary II"). The Company will
transfer its SBLC license and all Section 7(a) loans and related assets to
Subsidiary I in return for 100% of Subsidiary I's stock. The Company will
contribute its 99% limited partnership interest in its Subsidiary and all of its
loans and related assets to Subsidiary II in return for 100% of its stock.
Simultaneously with this transaction, Subsidiary II will purchase the 1% limited
partnership interest of the Subsidiary not owned by the Company from the limited
partner at a nominal purchase price. The Company believes the new structure will
provide the Company and its proposed subsidiaries with greater flexibility to
operate within certain regulatory constraints and further increase its ability
to generate loans.

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.

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 its Subsidiary 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%.

29
<PAGE> 32

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 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.

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.

30
<PAGE> 33

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.

31
<PAGE> 34

ALLIED CAPITAL LENDING CORPORATION AND SUBSIDIARY

FINANCIAL STATEMENTS

INDEX TO 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> 35

ALLIED CAPITAL LENDING CORPORATION

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

DECEMBER 31,
MARCH 31, --------------------------
1996 1995 1994
----------- ----------- -----------
(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> 36

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> 37

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> 38

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> 39

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> 40

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
(Subsidiary) 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 subsidiary. Accordingly, the consolidated financial statements
of the Company include the accounts of the Company and this majority owned
subsidiary. 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 Stockholders. Distributions to stockholders are recorded
on the ex-dividend date.

F-7
<PAGE> 41

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 its Subsidiary 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> 42

ALLIED CAPITAL LENDING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The Subsidiary 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 Subsidiary 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 Subsidiary 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 subsidiary 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 Subsidiary 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> 43

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 the holders of a majority of the outstanding shares of the Company. The
agreement may be terminated at any time on sixty days' notice, without penalty,
by the Company's board of directors or by a vote of the holders of a majority of
the Company's outstanding shares and will terminate automatically in the event
of its assignment.

The Company pays all operating expenses, except those specifically required
to be borne by Advisers. The expenses paid by Advisers include the compensation
of the Company's 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> 44

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 Subsidiary has a credit agreement whereby the Subsidiary 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 subsidiary 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 Subsidiary 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> 45

ALLIED CAPITAL LENDING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

THREE MONTHS YEAR ENDED DECEMBER 31,
ENDED MARCH 31, -----------------------------------------------------
1996 1995 1994 1993
--------------- --------------- --------------- ---------------
(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 its Subsidiary place their cash in financial institutions
and at times, cash held in checking accounts may be in excess of the FDIC
insurance limit.

F-12
<PAGE> 46

ALLIED CAPITAL LENDING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

<CAPTION>
1994
------------------------------------
QTR 1 QTR 2 QTR 3 QTR 4
------ ------ ------ ------
<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> 47

REPORT OF INDEPENDENT ACCOUNTANTS

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> 48

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

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............................... 3
Fees and Expenses..................... 4
Available Information................. 6
Financial Highlights.................. 6
Public Trading and Net Asset Value
Information......................... 10
The Offer............................. 11
Use of Proceeds....................... 17
The Company........................... 17
Management............................ 24
Authorized Classes of Securities...... 25
Description of Common Stock........... 25
Reports and Independent Public
Accountants......................... 27
Custodian, Transfer and Dividend
Paying Agent and Registrar.......... 27
Table of Contents of Statement of
Additional Information.............. 27
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 27
Financial Statements.................. F-1
</TABLE>

628,909 SHARES

ALLIED CAPITAL
LENDING CORPORATION

COMMON STOCK

---------------------------
PROSPECTUS
APRIL 29, 1996
---------------------------

- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 49

723,245 SHARES

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

STATEMENT OF ADDITIONAL INFORMATION

JULY 22, 1996

This Statement of Additional Information is not a prospectus. It should be
read with the prospectus dated April 29, 1996 relating to this offering (the
"Prospectus") and the supplement thereto dated July 22, 1996, which may be
obtained by calling the Company at (202) 973-6326 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> 50

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 July 8, 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") and Allied
Capital Mortgage Corporation ("Allied
Mortgage"); 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 Employed by Allied I or Advisers from
(Age 70) 1959 to July 5, 1996; Director of Allied
I, Allied II, Allied Commercial, BMI,
Allied Mortgage and Advisers; Vice
Chairman of Allied I, Allied II, Allied
Commercial, and Advisers until May 1996.
Chairman of Allied Mortgage and BMI until
May 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, Allied
Mortgage 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.
</TABLE>

B-2
<PAGE> 51

<TABLE>
<CAPTION>
POSITION(S) HELD PRINCIPAL OCCUPATION(S) DURING PAST FIVE
NAME, ADDRESS(1) AND AGE WITH THE COMPANY (5) YEARS
- -------------------------- ------------------------- -----------------------------------------
<S> <C> <C>
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.
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 39) 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,
Rensselaer Polytechnic Institute since
1986; Chairman Emeritus, 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, Allied Mortgage and
BMI.
</TABLE>

B-3
<PAGE> 52

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

* These directors are, or may be deemed to be, "interested persons" of the
Company, as that term is defined in the Investment Company Act of 1940, as
amended (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, DC 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.

B-4
<PAGE> 53

COMPENSATION

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

During 1995, each director received a fee of $1,000 for each meeting of the
Board of Directors of the Company or each separate committee meeting attended
and $500 for each committee meeting held on the same day as a Board meeting. The
same fees will be paid in 1996. 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 cancelled 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.

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
Frank L. Langhammer............. 9,000 0 0 9,000
Director(4)
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.

(4) Frank L. Langhammer, a former director of the Company, did not stand for
re-election to the Board in May 1996.

B-5
<PAGE> 54

SUMMARY COMPENSATION TABLE

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 Advisers, who were also
officers of the Company on December 31, 1995. However, the Company has no
employees and does not pay any cash compensation to any of its officers (other
than directors' fees to those of its officers who are also directors). All of
the Company's officers are employed by 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.

<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.

B-6
<PAGE> 55

STOCK OPTIONS

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 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.

CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES

As of July 8, 1996, there were 4,943,163 shares of the Company's common
stock outstanding. The following table sets forth certain information as of July
8, 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 (Maryland)(1)............................. 1,244,914(2) 25.2%
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).... 193,659 3.9%
</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 153,318 shares
underlying unexercised stock options that are exercisable within 60 days of
July 8, 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.

B-7
<PAGE> 56

INVESTMENT ADVISORY AND OTHER SERVICES

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

As of July 8, 1996, Advisers employed thirty-three (33) investment and
other professionals, as well as thirty-six (36) other employees. David Gladstone
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 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 and
its investment adviser.

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 and Allied
Technology, engaging in the same business as the Allied I and Allied II but no
longer making new investments. Advisers serves as the investment adviser to
those two limited partnerships. All of these entities co-invest with one
another. In addition, Advisers is the investment manager of Allied Commercial, a
publicly held real estate investment trust (a "REIT"), and the co-manager of
BMI, a privately held REIT. Allied Commercial and BMI participate with one
another in buying interest-paying business loans secured by real estate. At
March 31, 1996, total assets under Advisers' management were over $721 million.

INVESTMENT ADVISORY AGREEMENT

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
disinterested directors, or by the vote of the holders of a majority, as defined
in the 1940 Act, of the outstanding voting securities of the Company. The
current agreement may, however, be terminated at any time on sixty (60) days'
notice, without the payment of any penalty, by the Board of Directors or by vote
of a majority of the Company's outstanding voting securities, as defined, and
will terminate automatically in the event of its assignment.

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, subject to the supervision and control of the Board of Directors of the
Company, and evaluates, structures, closes and monitors those loans made by the
Company. The Company will not 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, Advisers has the authority to
effect loans and sales of portions of loans for the Company's account. Some of
the directors and officers of Advisers are also directors and officers of the
Company.

B-8
<PAGE> 57

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

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 shareholders of the Company. 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 Company's subsidiary.

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 non-audit 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.

B-9
<PAGE> 58

TAX STATUS

The Company, which has elected to be treated 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 Internal Revenue Code of 1986,
as amended ("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 shareholders. 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 shareholders 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% 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 on amounts not
distributed to shareholders on a timely basis or if the Company does not
distribute at least 98% of its net investment income and net capital gains. 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 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.

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
its distribution requirements, it may make such dispositions at times which,
from an investment standpoint, are not advantageous.

If the Company fails to satisfy the 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

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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.

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 shareholders
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.

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The Company will send to each of the stockholders, as promptly as possible
after the end of each fiscal year, a notice detailing, on a per share and per
distribution basis, the amounts includible in such stockholder's taxable income
for such year as ordinary income and as long-term capital gain. In addition, the
federal tax status of each year's distributions generally will be reported to
the Internal Revenue Service.

The foregoing is only a general summary of some of the important federal
income tax considerations generally affecting the Company and its shareholders.
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 advisers for more detailed information and for information
regarding any applicable state, local, or foreign taxes.

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