ALLIED CAPITAL CORP, POS 8C, 2001-01-19

ALLIED CAPITAL CORP
POS 8C, 2001-01-19

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<PAGE> 1

As filed with the Securities and Exchange Commission on January 19, 2001

REGISTRATION NO. 333-43534
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM N-2

REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

<TABLE>
<C> <S>
[ ] PRE-EFFECTIVE AMENDMENT NO.
[X] POST-EFFECTIVE AMENDMENT NO. 1
</TABLE>

ALLIED CAPITAL CORPORATION
(Exact Name of Registrant as Specified in Charter)

1919 PENNSYLVANIA AVENUE, N.W.
WASHINGTON, D.C. 20006-3434
(202) 331-1112
(Address and Telephone Number, including Area Code, of Principal Executive
Offices)

WILLIAM L. WALTON, CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER
ALLIED CAPITAL CORPORATION
1919 PENNSYLVANIA AVENUE, N.W.
WASHINGTON, D.C. 20006-3434
(Name and Address of Agent for Service)

Copies of information to:

<TABLE>
<S> <C>
STEVEN B. BOEHM
CYNTHIA M. KRUS
SUTHERLAND ASBILL & BRENNAN LLP
1275 PENNSYLVANIA AVENUE, N.W.
WASHINGTON, D.C. 20004-2415
</TABLE>

Approximate Date of Proposed Public Offering:
From time to time after the effective date of the Registration Statement.

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

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

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO
SECTION 8(a), MAY DETERMINE.

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<PAGE> 2

PROSPECTUS

$310,500,000

[ALLIED CAPITAL LOGO]

COMMON STOCK
PREFERRED STOCK
DEBT SECURITIES
------------------------

Please read this prospectus, and the accompanying prospectus supplement, if any,
before investing, and keep it for future reference. It contains important
information about the Company.

To learn more about the Company, you may want to look at the Statement of
Additional Information dated , 2001 (known as the "SAI"). For a free copy
of the SAI, contact us at:

Allied Capital Corporation
1919 Pennsylvania Avenue, N.W.
Washington, DC 20006
1-888-818-5298

The Company has filed the SAI with the U.S. Securities and Exchange Commission
and has incorporated it by reference into this prospectus. The SAI's table of
contents appears on page 81 of this prospectus.

The Commission maintains an Internet website (http://www.sec.gov) that contains
the SAI, material incorporated by reference and other information about the
Company.

Our common stock is traded on the Nasdaq National Market under the symbol
"ALLC." As of , 2001, the last reported sales price for the common
stock was $ .

We may offer, from time to time, up to $310,500,000 of our common stock, par
value $0.0001 per share, preferred stock, or debt securities in one or more
offerings. All shares of common stock, preferred stock, and debt securities that
are offered under this prospectus are collectively referred to herein as the
"Securities."

The Securities may be offered at prices and on terms to be described in one or
more supplements to this prospectus. In the case of our common stock, the
offering price per share less any underwriting commissions or discounts will not
be less than the net asset value per share of our common stock at the time we
make the offering.

We are an internally managed closed-end management investment company that has
elected to be regulated as a business development company under the Investment
Company Act of 1940, as amended.

Our investment objective is to achieve current income and capital gains. We seek
to achieve our investment objective by investing primarily in private businesses
in a variety of industries throughout the United States. No assurances can be
given that we will continue to achieve our objective.

YOU SHOULD REVIEW THE INFORMATION INCLUDING THE RISK OF LEVERAGE, SET FORTH
UNDER "RISK FACTORS" ON PAGE 8 OF THIS PROSPECTUS BEFORE INVESTING IN
SECURITIES OF THE COMPANY.

------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATIONS TO THE CONTRARY
IS A CRIMINAL OFFENSE.
------------------------
THIS PROSPECTUS MAY NOT BE USED TO CONSUMMATE SALES OF SECURITIES UNLESS
ACCOMPANIED BY A PROSPECTUS SUPPLEMENT.
------------------------

, 2001

<PAGE> 3

WE HAVE NOT AUTHORIZED ANY DEALER, SALESMAN OR OTHER PERSON TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN THOSE CONTAINED OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS OR ANY ACCOMPANYING SUPPLEMENT TO
THIS PROSPECTUS. YOU MUST NOT RELY UPON ANY INFORMATION OR REPRESENTATION NOT
CONTAINED OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS OR THE ACCOMPANYING
PROSPECTUS SUPPLEMENT AS IF WE HAD AUTHORIZED IT. THIS PROSPECTUS AND ANY
PROSPECTUS SUPPLEMENT DO NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF
ANY OFFER TO BUY ANY SECURITY OTHER THAN THE REGISTERED SECURITIES TO WHICH THEY
RELATE, NOR DO THEY CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY ANY SECURITIES IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO
MAKE SUCH AN OFFER OR SOLICITATION IN SUCH JURISDICTION. THE INFORMATION
CONTAINED IN THIS PROSPECTUS AND ANY PROSPECTUS SUPPLEMENT IS ACCURATE AS OF THE
DATES ON THEIR COVERS.

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

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.......................................... 1
Selected Consolidated Financial Data........................ 5
Risk Factors................................................ 8
The Company................................................. 12
Use of Proceeds............................................. 14
Price Range of Common Stock and Distributions............... 15
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 16
Senior Securities........................................... 36
Business.................................................... 40
Portfolio Companies......................................... 52
Determination of Net Asset Value............................ 58
Management.................................................. 58
Tax Status.................................................. 66
Certain Government Regulations.............................. 71
Dividend Reinvestment Plan.................................. 73
Description of Securities................................... 74
Plan of Distribution........................................ 79
Legal Matters............................................... 80
Safekeeping, Transfer and Dividend Paying Agent and
Registrar................................................. 80
Independent Public Accountants.............................. 80
Table of Contents of Statement of Additional Information.... 81
Index to Financial Statements............................... 82
</TABLE>

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

(i)
<PAGE> 4

PROSPECTUS SUMMARY

The following summary contains basic information about this offering. It
may not contain all the information that is important to an investor. For a more
complete understanding of this offering, we encourage you to read this entire
document and the documents to which we have referred.

Our current business and investment portfolio resulted from the merger of
five affiliated companies on December 31, 1997. The companies that merged were
Allied Capital Corporation (old), Allied Capital Corporation II, Allied Capital
Advisers, Inc. ("Advisers"), Allied Capital Commercial Corporation and Allied
Capital Lending Corporation. The five companies are referred to as the
predecessor companies.

All information in this prospectus, unless otherwise indicated, has been
presented as if the predecessor companies had merged as of the beginning of the
earliest period presented. In this prospectus or any accompanying prospectus
supplement, unless otherwise indicated, the "Company", "ACC", "we", "us" or
"our" refer to the post-merger Allied Capital Corporation and its subsidiaries.

THE COMPANY (Page 12)

We are a business development company and provide private investment
capital to private and undervalued public companies in a variety of different
industries throughout the United States. We have been investing in growing
businesses for over 40 years and have financed thousands of companies
nationwide. As of January 2001, our investment activity is focused in two areas:

- private finance, and

- commercial real estate finance, primarily the purchase of commercial
mortgage-backed securities ("CMBS").

Our investment portfolio includes:

- long-term unsecured loans with equity features,

- commercial mortgage-backed securities,

- commercial mortgage loans, and,

- until December 28, 2000, small senior loans, including SBA 7(a)
guaranteed loans.

We identify loans and investments through our numerous relationships with:

- mezzanine and private equity investors,

- investment banks, and

- other intermediaries, including professional services firms.

In order to increase our sourcing and origination activities, we have three
regional offices in New York, Chicago and San Francisco. We centralize our
credit approval function and service our loans through an experienced staff of
professionals at our headquarters in Washington, DC.

We have an advantageous tax structure, as compared to operating companies,
that allows for the "pass-through" of income to our shareholders through
dividends without the imposition of a corporate level of taxation. See
"Taxation."

We are an internally managed diversified closed-end management investment
company that has elected to be regulated as a business development company
("BDC") under the Investment Company Act of 1940, as amended ("1940 Act"). Our
investment objective is to achieve current income and capital gains. We seek to
achieve our investment objective by investing in growing businesses in a variety

1
<PAGE> 5

of industries throughout the United States.
As a BDC, we are required to meet regulatory tests, the most significant
relating to its investments and borrowings. A BDC is required to invest at least
70% of its assets in private or thinly traded public, U.S.-based companies. A
BDC must maintain a coverage ratio of assets to senior securities of at least
200%. See "Business -- Certain Government Regulations."

We are quoted on the Nasdaq National Market and trade under the symbol
"ALLC."

THE OFFERING (Page 77)

We may offer, from time to time, up to $310,500,000 of our Securities, on
terms to be determined at the time of offering.

Securities may be offered at prices and on terms described in one or more
supplements to this prospectus. In the case of the offering of our common stock,
the offering price per share less any underwriting commission or discount will
not be less than the net asset value per share of our common stock at the time
we make the offering.

Our Securities may be offered directly to one or more purchasers, through
agents designated from time to time by us, or to or through underwriters or
dealers. The supplement to this prospectus relating to the offering will
identify any agents or underwriters involved in the sale of our Securities, and
will set forth any applicable purchase price, fee and commission or discount
arrangement between our agents and us or among our underwriters or the basis
upon which such amount may be calculated.

We may not sell Securities without delivering a prospectus supplement
describing the method and terms of the offering of our Securities.

USE OF PROCEEDS (Page 14)

Unless otherwise specified in the prospectus supplement accompanying this
prospectus, we intend to use the net proceeds from selling Securities for
general corporate purposes, which may include investments in private and
undervalued public companies, purchase of CMBS, repayment of indebtedness,
acquisitions and other general corporate purposes.

DISTRIBUTIONS (Page 15)

We pay quarterly dividends to holders of our common stock. The amount of
our quarterly dividends is determined by the board of directors. Other types of
Securities will likely pay distributions in accordance with their terms.

DIVIDEND REINVESTMENT PLAN (Page 71)

We have adopted an "opt out" dividend reinvestment plan ("DRIP plan") for
our common stockholders. Under the DRIP plan, if your shares of common stock are
registered in your name, your dividends will be automatically reinvested in
additional shares of our common stock unless you "opt out" of the DRIP plan.

PRINCIPAL RISK FACTORS (Page 8)

Investment in Securities involves certain risks relating to our structure
and our investment objective that you should consider before purchasing
Securities.

As a BDC, our consolidated portfolio includes securities primarily issued
by privately held companies. These investments may involve a high degree of
business and financial risk, and they are generally illiquid. A large number of
entities and individuals compete for the same kind of investment opportunities
as we do.

2
<PAGE> 6

We borrow funds to make investments in private businesses. As a result, we
are exposed to the risks of leverage, which may be considered a speculative
investment technique. Borrowings, also known as leverage, magnify the potential
for gain and loss on amounts invested and, therefore increase the risks
associated with investing in our securities.

Also, we are subject to certain risks associated with investing in
non-investment grade CMBS, valuing our portfolio, changing interest rates,
accessing additional capital, fluctuating quarterly results, and operating in a
regulated environment. In addition, the loss of pass-through tax treatment could
have a material adverse effect on our total return, if any.

CERTAIN ANTI-TAKEOVER
PROVISIONS (Page 76)

Our charter and bylaws, as well as certain statutory and regulatory
requirements, contain certain provisions that may have the effect of
discouraging a third party from making an acquisition proposal for the Company.
These anti-takeover provisions may inhibit a change in control in circumstances
that could give the holders of our common stock the opportunity to realize a
premium over the market price for our common stock.

RECENT DEVELOPMENTS (Page 12)

On October 31, 2000, Allied Capital and BLC Financial Services, Inc.
("BLC") signed a merger agreement whereby Allied Capital agreed to acquire BLC
in a stock for stock tax-free exchange, whereby each outstanding share of BLC
common stock is to be converted into 0.180 shares of Allied Capital common
stock. Allied Capital issued approximately 4.2 million shares of common stock as
a result of this transaction. The effect of the merger was to create an
independently managed, private portfolio company of Allied Capital that would
focus exclusively on small business lending, including the origination of SBA
7(a) loans. The merger was approved by the BLC shareholders, and consummated on
December 31, 2000. Immediately thereafter, BLC changed its name to Business Loan
Express, Inc. ("BLX"). To ensure continuity, Allied Capital and BLC agreed that
certain officers, directors and shareholders would continue to own 5.1% of BLX.
In addition, in a separate transaction, on December 31, 2000, Allied Capital
acquired Futuronics Corporation for approximately $9.1 million in cash.
Futuronics owns 9.6% of BLX common stock on a diluted basis.

As part of the merger, on December 28, 2000, Allied Capital recapitalized
its small business lending subsidiary, Allied Capital SBLC Corporation ("Allied
SBLC"), as an independently managed private portfolio company. Allied SBLC
established a separate board of directors, and the employees and operations
attributed to the Allied Capital Express operations were transferred to Allied
SBLC. On January 2, 2001, Allied SBLC was merged into BLX, and BLX now has a
total of 22 offices nationwide, and SBA Preferred Lender status in 64 markets.

3
<PAGE> 7

FEES AND EXPENSES

This table describes the various costs and expenses that an investor in our
Securities will bear directly or indirectly.

<TABLE>
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES
Sales load (as a percentage of offering price)(1)....... --%
Dividend reinvestment plan fees(2)...................... None
ANNUAL EXPENSES (AS A PERCENTAGE OF CONSOLIDATED NET ASSETS
ATTRIBUTABLE TO COMMON STOCK)(3)
Operating expenses(4)................................... 3.9%
Interest payments on borrowed funds(5).................. 6.2%
-----
Total annual expenses(6)........................... 10.1%
=====
</TABLE>

-------------------------
(1) In the event that the Securities to which this prospectus relates are sold
to or through underwriters, a corresponding prospectus supplement will
disclose the applicable sales load.

(2) The expenses of the Company's DRIP plan are included in "Operating
expenses." The Company has no cash purchase plan. The participants in the
DRIP plan will bear a pro rata share of brokerage commissions incurred with
respect to open market purchases, if any. See "Dividend Reinvestment Plan."

(3) "Consolidated net assets attributable to common stock" equals net assets
(i.e., total assets less total liabilities and preferred stock) at September
30, 2000.

(4) "Operating expenses" represent the estimated operating expenses of the
Company for the year ending December 31, 2000 excluding interest on
indebtedness. Operating expenses exclude the formula and cut-off awards. See
"Management -- Compensation Plans."

(5) The "Interest payments on borrowed funds" percentage is based on estimated
interest payments for the year ending December 31, 2000 divided by
consolidated net assets attributable to common stock at September 30, 2000.
The Company had outstanding borrowings of $762.2 million at September 30,
2000. This percentage for the year ended December 31, 1999 was 5.2%. See
"Risk Factors."

(6) "Total annual expenses" is based on estimated expenses for the year ending
December 31, 2000. "Total annual expenses" as a percentage of consolidated
net assets attributable to common stock are higher than the total annual
expenses percentage would be for a company that is not leveraged. The
Company borrows money to leverage its net assets and increase its total
assets. The Securities and Exchange Commission requires that "Total annual
expenses" percentage be calculated as a percentage of net assets, rather
than the total assets, including assets that have been funded with borrowed
monies. If the "Total annual expenses" percentage were calculated instead as
a percentage of consolidated total assets, "Total annual expenses" for the
Company would be 5.4% of consolidated total assets.

EXAMPLE

The following example, required by the Commission, demonstrates the
projected dollar amount of total cumulative expenses that would be incurred over
various periods with respect to a hypothetical investment in the Company. In
calculating the following expense amounts, we assumed we would have no
additional leverage and that our operating expenses would remain at the levels
set forth in the table above. In the event that shares to which this prospectus
relates are sold to or through underwriters, a corresponding prospectus
supplement will restate this example to reflect the applicable sales load.

<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000
investment, assuming a 5.0% annual return........ $101 $301 $499 $988
</TABLE>

Although the example assumes (as required by the Commission) a 5.0% annual
return, our performance will vary and may result in a return of greater or less
than 5.0%. In addition, while the example assumes reinvestment of all dividends
and distributions at net asset value, participants in the DRIP plan may receive
shares of common stock that we issue at or above net asset value or are
purchased by the administrator of the DRIP plan, at the market price in effect
at the time, which may be higher than, at, or below net asset value. See
"Dividend Reinvestment Plan."

THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE EXPENSES, AND
THE ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
4
<PAGE> 8

SELECTED CONSOLIDATED FINANCIAL DATA

You should read the consolidated financial information below with the
Consolidated Financial Statements and Notes thereto included in this prospectus.
Financial information for the years ended December 31, 1999, 1998, 1997, 1996
and 1995 has been derived from audited financial statements. The selected
financial data reflects the operations of the Company with all periods restated
as if the predecessor companies had merged as of the beginning of the earliest
period presented. Quarterly financial information is derived from unaudited
financial data, but in the opinion of management, reflects all adjustments
(consisting only of normal recurring adjustments) which are necessary to present
fairly the results for such interim periods. Interim results at and for the nine
months ended September 30, 2000 are not necessarily indicative of the results
that may be expected for the year ending December 31, 2000. SEE "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" ON
PAGE 13 FOR MORE INFORMATION. This financial information does not reflect the
effect of the BLC merger, which was consummated on December 31, 2000. See
"Recent Developments" on page 12 for more information.

<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
------------------ ------------------------------------------------
2000 1999 1999 1998 1997 1996 1995
(IN THOUSANDS, -------- ------- -------- ------- ------- ------- -------
EXCEPT PER SHARE DATA) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Interest and related portfolio
income:
Interest.................... $129,768 $84,419 $119,772 $79,921 $86,882 $77,541 $61,550
Premiums from loan
dispositions.............. 10,752 9,032 14,284 5,949 7,277 4,241 2,796
Post-merger gain on
securitization of
commercial mortgage
loans..................... -- -- -- 14,812 -- -- --
Investment advisory fees and
other income.............. 9,334 5,411 7,084 6,056 3,246 3,155 4,471
-------- ------- -------- ------- ------- ------- -------
Total interest and
related portfolio
income............... 149,854 98,862 141,140 106,738 97,405 84,937 68,817
-------- ------- -------- ------- ------- ------- -------
Expenses:
Interest.................... 41,645 24,173 34,860 20,694 26,952 20,298 12,355
Employee.................... 14,709 11,303 16,136 11,829 10,258 8,774 8,031
Administrative.............. 10,711 8,476 12,350 11,921 8,970 8,289 6,888
Merger...................... -- -- -- -- 5,159 -- --
-------- ------- -------- ------- ------- ------- -------
Total operating
expenses............. 67,065 43,952 63,346 44,444 51,339 37,361 27,274
Formula and cut-off
awards(1)................. 4,797 5,188 6,753 7,049 -- -- --
-------- ------- -------- ------- ------- ------- -------
Portfolio income before net
realized and unrealized
gains..................... 77,992 49,722 71,041 55,245 46,066 47,576 41,543
-------- ------- -------- ------- ------- ------- -------
Net realized and unrealized
gains:
Net realized gains.......... 23,095 16,448 25,391 22,541 10,704 19,155 12,000
Net unrealized gains
(losses).................. (267) 1,475 2,138 1,079 7,209 (7,412) 9,266
-------- ------- -------- ------- ------- ------- -------
Total net realized and
unrealized gains..... 22,828 17,923 27,529 23,620 17,913 11,743 21,266
-------- ------- -------- ------- ------- ------- -------
Income before minority interests
and income taxes.............. 100,820 67,645 98,570 78,865 63,979 59,319 62,809
Minority interests.............. -- -- -- -- 1,231 2,427 546
Income tax expense.............. -- -- -- 787 1,444 1,945 1,784
-------- ------- -------- ------- ------- ------- -------
Net increase in net assets
resulting from operations..... $100,820 $67,645 $ 98,570 $78,078 $61,304 $54,947 $60,479
======== ======= ======== ======= ======= ======= =======
</TABLE>

5
<PAGE> 9

<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
------------------ ------------------------------------------------
(IN THOUSANDS, 2000 1999 1999 1998 1997 1996 1995
EXCEPT PER SHARE DATA) -------- ------- -------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE:
Basic earnings per common
share......................... $ 1.43 $ 1.14 $ 1.64 $ 1.50 $ 1.24 $ 1.19 $ 1.38
Diluted earnings per common
share......................... $ 1.42 $ 1.14 $ 1.64 $ 1.50 $ 1.24 $ 1.17 $ 1.37
Dividends per common share(2)... $ 1.36 $ 1.20 $ 1.60 $ 1.43 $ 1.71 $ 1.23 $ 1.09
Weighted average common shares
outstanding - basic(3)........ 70,604 59,077 59,877 51,941 49,218 46,172 43,697
Weighted average common shares
outstanding - diluted(3)...... 70,777 59,239 60,044 51,974 49,251 46,733 44,010
</TABLE>

<TABLE>
<CAPTION>
AT AT DECEMBER 31,
SEPTEMBER 30, --------------------------------------------------------
2000 1999 1998 1997 1996 1995
------------- ---------- ---------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Portfolio at value...... $1,638,207 $1,228,497 $ 807,119 $703,331 $612,411 $532,311
Portfolio at cost....... 1,632,598 1,222,901 803,479 697,030 618,319 530,807
Total assets............ 1,731,773 1,290,038 856,079 807,775 713,360 605,434
Total debt
outstanding(4)........ 762,150 592,850 334,350 347,663 274,997 200,339
Preferred stock issued
to SBA(4)............. 7,000 7,000 7,000 7,000 7,000 7,000
Shareholders' equity.... 933,329 667,513 491,358 420,060 402,134 367,192
Shareholders' equity per
common share (NAV).... $ 11.56 $ 10.20 $ 8.79 $ 8.07 $ 8.34 $ 8.26
Common shares
outstanding at period
end(3)................ 80,754 65,414 55,919 52,047 48,238 44,479
</TABLE>

<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30, YEAR ENDED DECEMBER 31,
----------------------- --------------------------------------------------------
2000 1999 1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER DATA:
New portfolio
investments........... $ 640,196 $ 534,017 $ 751,871 $ 524,530 $364,942 $283,295 $216,175
Loan repayments......... 117,939 120,563 145,706 138,081 233,005 179,292 111,731
Loan sales(5)........... 151,833 120,871 198,368 81,013 53,912 27,715 29,726
Total assets managed at
period end(6)......... 2,053,652 1,435,036 1,577,296 1,143,548 935,720 822,450 702,567
Realized gains.......... 24,664 21,606 31,536 25,757 15,804 30,417 16,679
Realized losses......... (1,569) (5,158) (6,145) (3,216) (5,100) (11,262) (4,679)
</TABLE>

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

(1) See "Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Results of Operations -- Comparison of Nine Months Ended
September 30, 2000 and 1999 and Fiscal Years Ended December 31, 1999, 1998,
and 1997."

(2) Distributions are based on taxable income, which differs from income for
financial reporting purposes. In 1997, Allied Capital Corporation (old)
distributed $0.34 per common share representing the 844,914 shares of Allied
Capital Lending Corporation distributed in conjunction with the merger. The
distribution resulted in a partial return of capital. Also in conjunction
with the merger, the Company distributed $0.17 per common share representing
the undistributed earnings of the predecessor companies at December 31,
1997.

(3) Excludes 259,983 common shares and 516,779 common shares held in the
deferred compensation trust at or for the nine months ended September 30,
2000 and 1999, respectively, and 516,779 common shares and 810,456 common
shares held in the deferred compensation trust at or for the year ended
December 31, 1999 and 1998, respectively.

(4) See "Senior Securities" on page 36 for more information regarding the
Company's level of indebtedness.

(5) Excludes loans sold through securitization in January 1998. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Results of Operations -- Comparison of Fiscal Years Ended
December 31, 1999, 1998, and 1997."

(6) Total assets managed includes the Company's assets and assets managed on
behalf of others.
6
<PAGE> 10

<TABLE>
<CAPTION>
2000 1999
--------------------------- -------------------------------------
(IN THOUSANDS, QTR 3 QTR 2 QTR 1 QTR 4 QTR 3 QTR 2 QTR 1
EXCEPT PER SHARE DATA) ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
QUARTERLY DATA:
Total interest and
related portfolio
income.............. $55,992 $49,965 $43,897 $42,278 $37,998 $33,186 $27,678
Portfolio income
before net realized
and unrealized
gains............... 30,719 24,700 22,573 21,319 19,273 16,619 13,830
Net increase in net
assets resulting from
operations.......... 36,449 34,790 29,581 30,925 26,944 22,121 18,580
Basic earnings per
common share........ $ 0.48 $ 0.50 $ 0.45 $ 0.49 $ 0.44 $ 0.38 $ 0.33
Diluted earnings per
common share........ 0.48 0.50 0.45 0.49 0.44 0.38 0.33
Net asset value per
common share(1)..... 11.56 10.96 10.44 10.20 9.66 9.17 9.00
Dividends declared per
common share........ 0.46 0.45 0.45 0.40 0.40 0.40 0.40
</TABLE>

<TABLE>
<CAPTION>
1998
-------------------------------------
(IN THOUSANDS, QTR 4 QTR 3 QTR 2 QTR 1
EXCEPT PER SHARE DATA) ------- ------- ------- -------
<S> <C> <C> <C> <C>
QUARTERLY DATA:
Total interest and
related portfolio
income.............. $25,974 $22,546 $21,321 $36,897
Portfolio income
before net realized
and unrealized
gains............... 11,776 9,401 9,148 24,920
Net increase in net
assets resulting from
operations.......... 16,631 14,906 14,476 32,065
Basic earnings per
common share........ $ 0.31 $ 0.29 $ 0.28 $ 0.62(2)
Diluted earnings per
common share........ 0.31 0.29 0.28 0.61(2)
Net asset value per
common share(1)..... 8.79 8.22 8.21 8.26
Dividends declared per
common share........ 0.38 0.35 0.35 0.35
</TABLE>

-------------------------
(1) We determine net asset value per common share as of the last day of the
quarter. The net asset values shown are based on outstanding shares at the
end of each period, excluding common shares held in the Company's deferred
compensation trust.

(2) During the first quarter of 1998, the Company recorded a gain from a
post-merger securitization transaction of $14.8 million, or $0.28 per common
share.

WHERE YOU CAN FIND
ADDITIONAL INFORMATION

We have filed with the Commission a registration statement on Form N-2
together with all amendments and related exhibits under the Securities Act of
1933, as amended (the "Securities Act"). The registration statement contains
additional information about us and the registered securities being offered by
this prospectus. You may inspect the registration statement and the exhibits
without charge at the Securities and Exchange Commission at 450 Fifth Street,
NW, Washington, DC 20549. You may obtain copies from the Commission at
prescribed rates.

We file annual, quarterly and special reports, proxy statements and other
information with the Commission. You can inspect, without charge, at the public
reference facilities of the Commission at 450 Fifth Street, NW, Washington, DC
20549. The Commission also maintains a web site at http://www.sec.gov that
contains reports, proxy statements and other information regarding public
companies, including our Company. You can also obtain copies of these materials
from the public reference section of the Commission at 450 Fifth Street, NW,
Washington, DC 20549, at prescribed rates. Please call the Commission at
202-942-8090 for further information on the public reference room. Copies may
also be obtained, after paying a duplicating fee, by electronic request to
[email protected] or by written request to Public Reference Section,
Washington, DC 20549-0102. You can also inspect reports and other information we
file at the offices of the Nasdaq Stock Market, 1735 K Street, NW, Washington,
DC 20006.

7
<PAGE> 11

RISK FACTORS

Investing in the Company involves a number of significant risks and other
factors relating to the structure and investment objective of the Company. As a
result, there can be no assurance that the Company will achieve its investment
objective. In addition to the information contained in this prospectus, you
should consider carefully the following information before making investments in
the Securities.

INVESTING IN PRIVATE COMPANIES INVOLVES A HIGH DEGREE OF RISK. Our
portfolio consists primarily of long-term loans to and investments in private
companies. Investments in private businesses involve a high degree of business
and financial risk, which can result in substantial losses and accordingly
should be considered speculative. There is generally no publicly available
information about the companies in which we invest, and we rely significantly on
the diligence of our employees and agents to obtain information in connection
with the Company's investment decisions. In addition, some smaller businesses
have narrower product lines and market shares than their competition, and may be
more vulnerable to customer preferences, market conditions or economic
downturns, which may adversely affect the return on, or the recovery of, our
investment in such businesses.

OUR FINANCIAL RESULTS COULD BE NEGATIVELY IMPACTED IF BLX FAILS TO PERFORM
AS EXPECTED. BLX is our largest portfolio investment. Our financial results
could be negatively impacted if BLX, as a portfolio company, fails to perform as
expected.

OUR BORROWERS MAY DEFAULT ON THEIR PAYMENTS. The Company makes unsecured,
subordinated loans and invests in equity securities, which may involve a higher
degree of repayment risk. We primarily invest in and lend to companies that may
have limited financial resources and that may be unable to obtain financing from
traditional sources. Numerous factors may affect a borrower's ability to repay
its loan, including the failure to meet its business plan, a downturn in its
industry or negative economic conditions. Deterioration in a borrower's
financial condition and prospects may be accompanied by deterioration in the
collateral for the loan.

OUR PORTFOLIO OF INVESTMENTS IS ILLIQUID. We acquire most of our
investments directly from private companies. The majority of the investments in
our portfolio will be subject to restrictions on resale or otherwise have no
established trading market. The illiquidity of most of our portfolio may
adversely affect our ability to dispose of loans and securities at times when it
may be advantageous for us to liquidate such investments.

INVESTMENTS IN NON-INVESTMENT GRADE COMMERCIAL MORTGAGE-BACKED SECURITIES
MAY BE ILLIQUID AND MAY HAVE A HIGHER RISK OF DEFAULT. The commercial
mortgage-backed securities ("CMBS") in which we invest are non-investment grade,
which means that nationally recognized statistical rating organizations rate
them below the top four investment-grade rating categories (i.e., "AAA" through
"BBB"), and are sometimes referred to as "junk bonds.". The non-investment grade
CMBS tend to be less liquid, may have a higher risk of default and may be more
difficult to value. Non-investment grade securities usually provide a higher
yield than do investment-grade bonds, but with the higher return comes greater
risk. Non-investment grade securities are considered speculative, and their
capacity to pay principal and interest in accordance with the terms of their
issue is not ensured.

OUR PORTFOLIO INVESTMENTS ARE RECORDED AT FAIR VALUE AS DETERMINED BY THE
BOARD OF DIRECTORS IN ABSENCE OF READILY ASCERTAINABLE PUBLIC MARKET
VALUES. Pursuant to the requirements of the Investment Company Act of 1940
("1940 Act"), the Board of Directors is required to value each asset quarterly,
and we are required to carry our

8
<PAGE> 12

portfolio at fair value as determined by the Board of Directors. Since there is
typically no public market for the loans and equity securities of the companies
in which we make investments, our Board of Directors estimates the fair value of
these loans and equity securities pursuant to a written valuation policy and a
consistently applied valuation process. Unlike banks, we are not permitted to
provide a general reserve for anticipated loan losses; we are instead required
by the 1940 Act to specifically value each individual investment and record an
unrealized loss for an asset that we believe has become impaired. Without a
readily ascertainable market value, the estimated value of our portfolio of
loans and equity securities may differ significantly from the values that would
be placed on the portfolio if there existed a ready market for the loans and
equity securities. We adjust quarterly the valuation of our portfolio to reflect
the Board of Directors' estimate of the current realizable value of each
investment in our portfolio. Any changes in estimated value are recorded in the
Company's statement of operations as "Net unrealized gains (losses)."

WE BORROW MONEY WHICH MAGNIFIES THE POTENTIAL FOR GAIN OR LOSS ON AMOUNTS
INVESTED AND MAY INCREASE THE RISK OF INVESTING IN OUR COMPANY. We borrow from,
and issue senior debt securities to, banks, insurance companies and other
lenders. Lenders of these senior securities have fixed dollar claims on our
consolidated assets that are superior to the claims of our common shareholders.
Borrowings, also known as leverage, magnify the potential for gain or loss on
amounts invested and, therefore, increase the risks associated with investing in
our securities. If the value of our consolidated assets increases, then
leveraging would cause the net asset value attributable to the Company's common
stock to increase more sharply than it would have had we not leveraged.
Conversely, if the value of our consolidated assets decreases, leveraging would
cause net asset value to decline more sharply than it otherwise would have had
we not leveraged. Similarly, any increase in our consolidated income in excess
of consolidated interest payable on the borrowed funds would cause our net
income to increase more than it would without the leverage, while any decrease
in our consolidated income would cause net income to decline more sharply than
it would have had we not borrowed. Such a decline could negatively affect our
ability to make common stock dividend payments. Leverage is generally considered
a speculative investment technique.

At September 30, 2000, the Company had $762.2 million of outstanding
indebtedness, bearing a weighted annual interest cost of 8.1%. In order for us
to cover these annual interest payments on indebtedness, we must achieve annual
returns on our September 30, 2000 portfolio of at least 3.6%.

Illustration. The following table illustrates the effect of leverage on
returns from an investment in our common stock assuming various annual returns,
net of expenses. The calculations in the table below are hypothetical and actual
returns may be higher or lower than those appearing below.

ASSUMED RETURN ON THE COMPANY'S PORTFOLIO
(NET OF EXPENSES)

<TABLE>
<CAPTION>
-20% -10% -5% 0% 5% 10% 20%
------ ------ ------ ----- ---- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Corresponding return to shareholder(1).... -43.8% -25.2% -15.9% -6.6% 2.6% 11.9% 30.5%
</TABLE>

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

(1)The calculation assumes (i) $1,731.8 million in total assets, (ii) an average
cost of funds of 8.1%, (iii) $762.2 million in debt outstanding and (iv)
$933.3 million of shareholders' equity.

9
<PAGE> 13

WE MAY NOT BORROW MONEY UNLESS WE MAINTAIN ASSET COVERAGE FOR INDEBTEDNESS
OF AT LEAST 200% WHICH MAY IMPACT RETURNS TO SHAREHOLDERS. We must maintain
asset coverage for a class of senior security representing indebtedness of at
least 200%. Our ability to achieve our investment objective may depend in part
on our continued ability to maintain a leveraged capital structure by borrowing
from banks or other lenders on favorable terms. There can be no assurance that
we will be able to maintain such leverage. If asset coverage declines to less
than 200%, we may be required to sell a portion of our investments when it is
disadvantageous to do so. As of September 30, 2000, our asset coverage for
indebtedness was 236%.

CHANGES IN INTEREST RATES MAY AFFECT OUR COST OF CAPITAL AND PORTFOLIO
INCOME. Because we borrow money to make investments, our income is dependent
upon the difference between the rate at which we borrow funds and the rate at
which we invest these funds. As a result, there can be no assurance that a
significant change in market interest rates will not have a material adverse
effect on our portfolio income. In periods of sharply rising interest rates, our
cost of funds would increase, which would reduce our portfolio income before net
realized and unrealized gains. However, there would be no effect on the return,
if any, that could be generated from our equity interests. We use a combination
of long-term and short-term borrowings and equity capital to finance our
investing activities. Investments originated for sale generally carry variable
rates and are financed with short-term variable rate debt. Our long-term
fixed-rate investments are financed with long-term fixed-rate debt and equity.
We may use interest rate risk management techniques in an effort to limit our
exposure to interest rate fluctuations. Such techniques may include various
interest rate hedging activities to the extent permitted by the 1940 Act.

BECAUSE WE MUST DISTRIBUTE INCOME, WE WILL CONTINUE TO NEED ADDITIONAL
CAPITAL TO GROW. We will continue to need capital to fund incremental growth in
our investments. Historically, we have borrowed from financial institutions and
have issued equity securities. A reduction in the availability of funds from
financial institutions could limit our ability to grow. We must distribute at
least 90% of our taxable net operating income excluding net realized long-term
capital gains to our stockholders to maintain our regulated investment company
("RIC") status. As a result such earnings will not be available to fund
investment originations. We expect to continue to borrow from financial
institutions and sell additional equity securities. If we fail to obtain funds
from such sources or from other sources to fund our investments, it could limit
our ability to grow, which could have a material adverse effect on the value of
the Company's common stock. In addition, as a business development company
("BDC"), we are generally required to maintain a ratio of at least 200% of total
assets to total borrowings, which may restrict our ability to borrow in certain
circumstances.

OUR PRIVATE FINANCE INVESTMENTS MAY NOT PRODUCE CAPITAL GAINS. Private
finance investments are typically structured as debt securities with a
relatively high fixed rate of interest and with an equity feature such as
conversion rights, warrants or options. As a result, private finance investments
generate interest income from the time they are made, and may also produce a
realized gain from an accompanying equity feature. We cannot be sure that our
portfolio will generate a current return or capital gains.

LOSS OF PASS-THROUGH TAX TREATMENT WOULD SUBSTANTIALLY REDUCE NET ASSETS
AND INCOME AVAILABLE FOR DIVIDENDS. We have operated the Company so as to
qualify to be taxed as a RIC under Subchapter M of the Internal Revenue Code of
1986, as amended ("Code"). If we meet source of income, diversification and
distribution requirements, the

10
<PAGE> 14

Company qualifies for pass-through tax treatment. If the Company fails to
qualify as a RIC, the Company would become subject to federal income tax as if
it were an ordinary corporation, which would substantially reduce our net assets
and the amount of income available for distribution to our shareholders. The
Company would cease to qualify for pass-through tax treatment if it were unable
to comply with these requirements, or if it ceased to qualify as a BDC under the
1940 Act. We also could be subject to a 4% excise tax and/or corporate level
income tax if we fail to make required distributions.

WE OPERATE IN A COMPETITIVE MARKET FOR INVESTMENT OPPORTUNITIES. We
compete for investments with many other companies and individuals, some of whom
have greater resources than we do. Increased competition would make it more
difficult for us to purchase or originate investments at attractive prices. As a
result of this competition, sometimes we may be precluded from making otherwise
attractive investments.

CHANGES IN THE LAW OR REGULATIONS THAT GOVERN THE COMPANY COULD HAVE A
MATERIAL IMPACT ON THE COMPANY OR OUR OPERATIONS. We are regulated by the
Commission and the SBA. In addition, changes in the laws or regulations that
govern BDCs, RICs, real estate investment trusts ("REITs"), SBICs and SBLCs may
significantly affect our business. Any change in the law or regulations that
govern our business could have a material impact on the Company or its
operations. Laws and regulations may be changed from time to time, and the
interpretations of the relevant laws and regulations also are subject to change.

QUARTERLY RESULTS MAY FLUCTUATE AND MAY NOT BE INDICATIVE OF FUTURE
QUARTERLY PERFORMANCE. The Company's quarterly operating results could
fluctuate and therefore, you should not rely on quarterly results to be
indicative of the Company's performance in future quarters. Factors that could
cause quarterly operating results to fluctuate include, among others, variations
in the investment origination volume, variation in timing of prepayments,
variations in and the timing of the recognition of realized and unrealized gains
or losses, the degree to which we encounter competition in our markets and
general economic conditions.

DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

INFORMATION CONTAINED OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS, AND
THE ACCOMPANYING PROSPECTUS SUPPLEMENT, IF ANY, MAY CONTAIN "FORWARD-LOOKING
STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995, WHICH CAN BE IDENTIFIED BY THE USE OF FORWARD-LOOKING TERMINOLOGY SUCH
AS "MAY," "WILL," "EXPECT," "INTEND," "ANTICIPATE," "ESTIMATE" OR "CONTINUE" OR
THE NEGATIVE THEREOF OR OTHER VARIATIONS OR SIMILAR WORDS OR PHRASES. THE
MATTERS DESCRIBED IN "RISK FACTORS" AND CERTAIN OTHER FACTORS NOTED THROUGHOUT
THIS PROSPECTUS, AND THE ACCOMPANYING PROSPECTUS SUPPLEMENT, IF ANY, AND IN ANY
EXHIBITS TO THE REGISTRATION STATEMENT OF WHICH THIS PROSPECTUS, AND THE
ACCOMPANYING PROSPECTUS SUPPLEMENT, IF ANY, IS A PART, CONSTITUTE CAUTIONARY
STATEMENTS IDENTIFYING IMPORTANT FACTORS WITH RESPECT TO ANY SUCH FORWARD-
LOOKING STATEMENTS, INCLUDING CERTAIN RISKS AND UNCERTAINTIES, THAT COULD CAUSE
ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE IN SUCH FORWARD-LOOKING
STATEMENTS.

11
<PAGE> 15

THE COMPANY

Our Company is principally engaged in lending to and investing in private
and undervalued public companies. The Company is organized in the state of
Maryland and is an internally managed closed-end management investment company
that has elected to be regulated as a business development company (as defined
above, a "BDC") under the 1940 Act.

We operate one wholly owned subsidiary that has also elected to be
regulated as a BDC. Allied Investment Corporation ("Allied Investment") is
licensed by the Small Business Administration ("SBA") as a Small Business
Investment Company ("SBIC"). Prior to December 28, 2000, we operated Allied
Capital SBLC Corporation ("Allied SBLC"), which is licensed by the SBA as a
Small Business Lending Company ("SBLC") and is a participant in the SBA Section
7(a) Guaranteed Loan Program. See "Recent Developments." In addition, we have a
real estate investment trust subsidiary, Allied Capital REIT, Inc. ("Allied
REIT").

Our executive offices are located at 1919 Pennsylvania Avenue, NW,
Washington, DC 20006 and our telephone number is (202) 331-1112. In addition, we
have three regional offices in New York, Chicago and San Francisco. We also have
an office in Frankfurt, Germany.

RECENT DEVELOPMENTS

On October 31, 2000, Allied Capital and BLC Financial Services, Inc.
("BLC") signed a merger agreement whereby Allied Capital agreed to acquire BLC
in a stock for stock tax-free exchange. The effect of the merger was to create
an independently managed, private portfolio company of Allied Capital that would
focus exclusively on small business lending, including the origination of SBA
7(a) loans.

The merger agreement provided that the merger would be completed if
approved by the BLC shareholders and the SBA, and all other conditions of the
merger agreement were satisfied or waived. BLC held a special meeting of its
shareholders on December 31, 2000 and the merger was approved. The SBA approved
the merger, and all other conditions of the merger were satisfied or waived. The
merger was consummated on December 31, 2000. Immediately thereafter, BLC changed
its name to Business Loan Express, Inc. ("BLX").

The merger was effected through a stock for stock exchange. Each share of
BLC common stock is to be exchanged for 0.180 shares of Allied Capital common
stock.

To ensure continuity, Allied Capital and BLC agreed that certain officers,
directors and shareholders, including BLC's chief executive officer and chief
financial officer, would continue as owners of BLX, and would collectively own
5.1% of BLX, by exchanging all but a portion of their shares in the merger.

In addition, in a separate transaction, Allied Capital agreed to acquire
Futuronics Corporation for approximately $9.1 million in cash. Futuronics is a
non-reporting holding company that is inactive but owns 9.6% of BLC common stock
on a diluted basis. Officers and directors of BLC and affiliated parties owned
80% of Futuronics on a diluted basis.

As part of these transactions, on December 28, 2000, Allied Capital
recapitalized Allied SBLC as an independently managed private portfolio company.
Allied SBLC

12
<PAGE> 16

established a separate board of directors, and the employees and operations
attributed to Allied Capital Express, including the online loan origination
technology, were transferred to Allied SBLC. Allied Capital restructured its
previous intercompany debt owed to it by Allied SBLC as $74.8 million in
subordinated debt now owed by the new portfolio company. On January 2, 2001,
Allied SBLC was merged into BLX and Allied Capital received approximately $25
million in BLX preferred stock in exchange for its equity in Allied SBLC.

BLX is currently financed with a combination of senior and subordinated
debt, and preferred and common equity. Allied Capital, directly and through its
ownership of Futuronics, owns 94.9% of BLX. Allied Capital's investment in BLX
is expected to generate interest income and dividends. In addition, we believe
there is opportunity to add value to the new portfolio company and to position
the investment for a future capital gain.

BLX now has a total of 22 offices nationwide, and SBA Preferred Lender
status in 64 markets. BLX believes it will be a technology leader in online
small business loan origination, and will have significant online loan
origination relationships as well as solid core broker relationships in the
small business community. Upon completion of the Futuronics acquisition,
Futuronics exchanged its shares of BLC common stock for Class B common stock.
Allied Capital then owned and controlled 9.6% of BLC through Futuronics'
ownership of BLC common stock.

13
<PAGE> 17

USE OF PROCEEDS

Unless otherwise specified in the prospectus supplement accompanying this
prospectus, we intend to use the net proceeds from selling Securities for
general corporate purposes, which may include investment in private and
undervalued public companies, purchase of commercial mortgage-backed securities,
repayment of indebtedness, acquisitions and other general corporate purposes.

We raise equity from time to time using a shelf registration statement. We
raise new equity when we have a clear use of proceeds for attractive investment
opportunities. Historically, this process has enabled us to raise equity on an
accretive basis for existing shareholders of our common stock.

We anticipate that substantially all of the net proceeds of any offering of
Securities will be used, as described above, within six months, but in no event
longer than two years. Pending investment, we intend to invest the net proceeds
of any offering of Securities in time deposits, income-producing securities with
maturities of three months or less that are issued or guaranteed by the federal
government or an agency of the federal government, and high quality debt
securities maturing in one year or less from the time of investment. Our ability
to achieve our investment objective may be limited to the extent that the net
proceeds of any offering, pending full investment, are held in time deposits and
other short-term instruments.

14
<PAGE> 18

PRICE RANGE OF COMMON STOCK AND DISTRIBUTIONS

Our common stock is traded on the Nasdaq National Market under the symbol
"ALLC." The following table lists the high and low closing sales prices for the
Company's common stock. The stock quotations are interdealer quotations and do
not include markups, markdowns or commissions. On , 2001, the last
reported closing sale price of the common stock was $ per share.

<TABLE>
<CAPTION>
CLOSING SALE PRICE
------------------
HIGH LOW
------- -------
<S> <C> <C>
YEAR ENDED DECEMBER 31, 1998
First Quarter.................................. $27.688 $21.000
Second Quarter................................. 29.000 21.750
Third Quarter.................................. 24.813 14.938
Fourth Quarter................................. 18.875 12.500
YEAR ENDED DECEMBER 31, 1999
First Quarter.................................. $20.250 $16.500
Second Quarter................................. 24.000 17.000
Third Quarter.................................. 23.813 20.250
Fourth Quarter................................. 23.125 16.750
YEAR ENDING DECEMBER 31, 2000
First Quarter.................................. $19.688 $16.063
Second Quarter................................. 18.688 16.563
Third Quarter.................................. 21.125 17.438
Fourth Quarter................................. 21.375 18.500
YEAR ENDING DECEMBER 31, 2001
First Quarter..................................
</TABLE>

Our common stock continues to trade in excess of net asset value. There can
be no assurance, however, that we will maintain a premium to net asset value.

We pay quarterly dividends to stockholders of our common stock. The amount
of our quarterly dividends is determined by the Board of Directors. The
Company's board has established a dividend policy to review the dividend rate
quarterly and to adjust the quarterly dividend rate as the Company's earnings
momentum builds. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Equity Capital and Dividends" and
"Taxation." We cannot assure that we will achieve investment results or maintain
a tax status that will permit any particular level of dividend payment.

Our credit facilities limit our ability to declare dividends if we default
under certain provisions.

We have adopted an "opt out" dividend reinvestment plan ("DRIP plan") for
our common stockholders. Under the DRIP plan, if your shares of our common stock
are registered in your name, your dividends will be automatically reinvested in
additional shares of common stock unless you "opt out" of the DRIP plan.

15
<PAGE> 19

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

The information contained in this section should be read in conjunction
with the Selected Consolidated Financial Data and the Company's Consolidated
Financial Statements and Notes thereto. The Company's financial results, and the
following discussion of these results, do not reflect the effect of the BLC
merger, which was consummated on December 31, 2000. See "Recent Developments"
for more information.

OVERVIEW

The Company provides private investment capital to private and undervalued
public companies in a variety of different industries and in diverse geographic
locations. Our lending and investment activity is focused in three areas:

- Private finance

- Commercial real estate finance, and

- Small business loans originated for sale under our Allied Capital Express
brand name.

The Company's portfolio composition at September 30, 2000, and December 31,
1999, 1998 and 1997 was as follows:

<TABLE>
<CAPTION>
AT
AT DECEMBER 31,
SEPTEMBER 30, ------------------
2000 1999 1998 1997
------------- ---- ---- ----
<S> <C> <C> <C> <C>
Private Finance................................. 59% 53% 48% 29%
Commercial Real Estate Finance.................. 37% 42% 44% 64%
Small Business Finance.......................... 4% 5% 8% 7%
</TABLE>

The Company's earnings depend primarily on the level of interest and
related portfolio income and net realized and unrealized gains earned on the
Company's investment portfolio after deducting interest paid on borrowed capital
and operating expenses. Interest income results from the stated interest rate
earned on a loan and the amortization of loan origination points and discounts.
The level of interest income is directly related to the balance of the
investment portfolio multiplied by the weighted average yield on the portfolio.
The Company's ability to generate interest income is dependent on economic,
regulatory and competitive factors that influence interest rates and loan
originations, and the Company's ability to secure financing for its investment
activities.

16
<PAGE> 20

PORTFOLIO AND INVESTMENT ACTIVITY

Total portfolio investment activity and yields were as follows:

<TABLE>
<CAPTION>
AT DECEMBER 31,
AT SEPTEMBER 30, --------------------------
2000 1999 1998 1997
---------------- -------- ------ ------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Portfolio at Value............ $1,638.2 $1,228.5 $807.1 $703.3
Yield......................... 13.9% 13.0% 12.5% 11.7%
</TABLE>

<TABLE>
<CAPTION>
FOR THE THREE FOR THE NINE
MONTHS ENDED MONTHS ENDED FOR THE YEARS
SEPTEMBER 30, SEPTEMBER 30, ENDED DECEMBER 31,
--------------- --------------- ------------------------
2000 1999 2000 1999 1999 1998 1997
------ ------ ------ ------ ------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
New Investments...... $237.8 $191.5 $640.2 $534.0 $751.9 $524.5 $364.9
Repayments........... $ 59.1 $ 48.7 $117.9 $120.6 $145.7 $138.0 $233.0
Sales................ $ 34.7 $ 52.9 $151.8 $120.9 $198.4 $304.4 $ 53.9
</TABLE>

PRIVATE FINANCE

Private finance investment activity and yields were as follows:

<TABLE>
<CAPTION>
AT DECEMBER 31,
AT SEPTEMBER 30, ------------------------
2000 1999 1998 1997
---------------- ------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Portfolio at Value.............. $967.5 $647.0 $388.6 $204.7
Yield........................... 14.6% 14.2% 14.6% 12.6%
</TABLE>

<TABLE>
<CAPTION>
FOR THE THREE FOR THE NINE
MONTHS ENDED MONTHS ENDED FOR THE YEARS
SEPTEMBER 30, SEPTEMBER 30, ENDED DECEMBER 31,
--------------- --------------- -----------------------
2000 1999 2000 1999 1999 1998 1997
------ ------ ------ ------ ------ ------ -----
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
New Investments...... $148.5 $110.4 $387.6 $237.6 $346.7 $236.0 $66.7
Repayments........... $ 49.6 $ 38.3 $ 88.8 $ 86.5 $ 87.5 $ 41.3 $66.5
</TABLE>

The private finance portfolio increased 50% from December 31, 1999 to
September 30, 2000 and 67% and 90% during the years ended December 31, 1999 and
1998, respectively. The Company's increasing capital base has enabled it to make
larger private finance investments, supporting the increase in originations for
the third quarter of 2000 and for 1999 and 1998. During the three months ended
September 30, 2000, the Company originated 10 investments with an average
investment size of $14.0 million and a weighted average current yield on loans
and debt securities of 15.7%. Investments during the third quarter of 2000
included an investment in Wilmar Industries, Inc. for $33.7 million. As a part
of this transaction, Wilmar repaid in full the $30 million investment that the
Company provided in May 2000. During the nine months ended September 30, 2000,
the Company originated 26 investments with an average investment size of $14.0
million and a weighted average current yield on loans and debt securities of
15.3%. During 1999, the Company originated 27 investments with an average
investment size of $12.4 million

17
<PAGE> 21

and a weighted average current yield on loans and debt securities of 13.6%.
During 1998, the Company originated 22 investments with an average investment
size of $10.2 million and a weighted average current yield on loans and debt
securities of 14.0%. The current yield on the private finance portfolio will
fluctuate over time depending on the equity "kicker" or warrants received with
each financing. Private finance investments are generally structured such that
equity kickers may provide an additional investment return of up to 10%.

During the second quarter of 2000, the Company began an initiative to
invest in and strategically partner with select private equity funds focused on
investments in technology and the new economy. The strategy for these fund
investments is to provide solid investment returns and build strategic
relationships with the fund managers and their portfolio companies. The Company
believes that it will have opportunities to co-invest with the funds as well as
finance their portfolio companies as they mature.

The Company believes that the fund investment strategy is an excellent
means of participating in technology investing through a diverse pooled
investment portfolio. The fund concept allows the Company to participate in a
pooled investment return without exposure to the risk of any single technology
investment. During 2000, the Company committed a total of $41.2 million to seven
private equity funds. The committed amount is expected to be invested over the
next three years. The Company has funded $4.4 million of this commitment during
the nine months ended September 30, 2000.

COMMERCIAL REAL ESTATE FINANCE

Commercial real estate finance investment activity and yields were as
follows:

<TABLE>
<CAPTION>
AT DECEMBER 31,
AT SEPTEMBER 30, ------------------------
2000 1999 1998 1997
---------------- ------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Portfolio at Value.............. $600.0 $520.0 $355.0 $451.6
Yield........................... 13.2% 12.3% 10.4% 11.4%
</TABLE>

<TABLE>
<CAPTION>
FOR THE THREE FOR THE NINE
MONTHS ENDED MONTHS ENDED FOR THE YEARS
SEPTEMBER 30, SEPTEMBER 30, ENDED DECEMBER 31,
------------- --------------- ------------------------
2000 1999 2000 1999 1999 1998 1997
----- ----- ------ ------ ------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
New Investments...... $52.6 $46.4 $143.7 $216.2 $288.7 $214.6 $249.0
Repayments........... $ 6.5 $ 9.2 $ 20.8 $ 20.0 $ 51.5 $ 92.5 $154.5
Sales................ $ 1.6 $27.7 $ 53.1 $ 60.6 $ 86.1 $256.9 $ 0.0
</TABLE>

The commercial real estate finance portfolio increased 15% from December
31, 1999 to September 30, 2000 and increased 46.5% and decreased 21.4% for the
years ended December 31, 1999 and 1998, respectively. During 1999 and 1998, the
Company began to migrate its portfolio from investments in lower yielding
commercial mortgage loans to higher yielding real estate investments.

During 1998, the Company reduced its commercial mortgage loan origination
activity for its own portfolio due to declining interest rates and began to sell
its loans to other lenders. Then, beginning in the fourth quarter of 1998, the
Company began to take

18
<PAGE> 22

advantage of a unique market opportunity to acquire non-investment grade
commercial mortgage-backed securities ("CMBS") at significant discounts from the
face amount of the bonds. Turmoil in the CMBS market created a lack of liquidity
for the traditional buyers of non-investment grade bonds. As a result, yields on
these collateralized bonds increased, thus providing an attractive investment
opportunity. The Company believes that CMBS is an attractive asset class because
of the yields that can be earned on a security that is fully secured by
commercial mortgage loans. The Company opportunistically purchased CMBS
throughout 1999, and has continued to do so during 2000. However, the Company
has begun to curtail its CMBS investment activity to maintain a balanced
portfolio and does not currently expect to purchase additional CMBS during the
fourth quarter of 2000. In addition, during the third quarter of 2000, the
Company decided to begin to liquidate its portfolio of BB+ and BB rated bonds.

The underlying pool of approximately 2,600 loans that are collateral for
our CMBS had underwritten loan to value ("LTV") and debt service coverage ratios
("DSCR") as follows.

<TABLE>
<CAPTION>
LOAN TO VALUE RANGES $ %
-------------------- ------------- ---
(IN MILLIONS)
<S> <C> <C>
Less than 60%....................................... $ 1,544.5 12%
60 - 65%............................................ 961.9 8%
65 - 70%............................................ 2,051.8 16%
70 - 75%............................................ 4,247.2 33%
75 - 80%............................................ 3,727.8 29%
Greater than 80%.................................... 214.2 2%
--------- ---
$12,747.4 100%
========= ===
Weighted average LTV................................ 70.1%
</TABLE>

<TABLE>
<CAPTION>
DEBT SERVICE COVERAGE
RATIO RANGES $ %
--------------------- ------------- ---
(IN MILLIONS)
<S> <C> <C>
1.00 - 1.25......................................... $ 3,178.3 25%
1.26 - 1.50......................................... 7,174.7 56%
1.51 - 1.75......................................... 1,487.9 12%
1.76 - 2.00......................................... 440.6 3%
Greater than 2.00................................... 465.9 4%
--------- ---
$12,747.4 100%
========= ===
Weighted average DSCR............................... 1.40
</TABLE>

The increase in the commercial real estate portfolio during 2000 and 1999
was primarily due to the purchase of CMBS. The Company purchases CMBS at
significant discounts from the face amount of the bonds. During the third
quarter of 2000, the Company purchased $48.8 million in CMBS with a face value
of $101.3 million and a weighted average yield to maturity of 15.0% after
assuming a 1% loss rate on the underlying collateral mortgage pool. During the
nine months ended September 30, 2000 the Company purchased $124.3 million in
CMBS with a face value of $244.6 million and a weighted average yield to
maturity of 14.7% after assuming a 1% loss rate on the underlying collateral
mortgage pool. In 1999, the Company purchased $245.9 million in

19
<PAGE> 23

CMBS with a face value of $507.9 million and a weighted average yield to
maturity of 14.6% after assuming a 1% loss rate on the underlying collateral
mortgage pool. At September 30, 2000, the face value of the entire purchased
CMBS portfolio was $813.8 million, our cost of acquiring the securities was
$405.4 million and our unamortized discount was $406.3 million. The yield on the
purchased CMBS portfolio was 14.7% as of September 30, 2000.

The Company has been liquidating much of its whole commercial mortgage loan
portfolio so that it can redeploy the proceeds into higher yielding assets and
for the three months ended September 30, 2000, the Company sold $1.6 million of
commercial mortgage loans. For the nine months ended September 30, 2000, the
Company sold $53.1 million of commercial mortgage loans. At September 30, 2000,
the Company's whole commercial loan portfolio had been reduced to $105.9 million
from $154.1 million at December 31, 1999. During 1999, the Company sold $86.1
million of commercial mortgage loans.

The decrease in the commercial real estate portfolio during 1998 was due to
the sale through securitization of approximately $295 million in lower yielding
commercial mortgage loans, and the sale of whole loans to third parties
aggregating approximately $33.5 million.

SMALL BUSINESS FINANCE

During the second quarter of 1999, the Company combined its whole
commercial real estate loan origination activity with its SBA 7(a) lending
activity in order to increase its loans originated for sale business under the
Allied Capital Express brand name. Through Allied Capital Express, the Company
provides small business and commercial real estate loans up to $3 million. The
majority of the loans originated in this area are originated for sale, generally
at premiums of up to 10% of the loan amount.

Allied Capital Express loan activity and yields were as follows:

<TABLE>
<CAPTION>
AT DECEMBER 31,
AT SEPTEMBER 30, ---------------------
2000 1999 1998 1997
---------------- ----- ----- -----
(IN MILLIONS)
<S> <C> <C> <C> <C>
Portfolio at Value................. $70.7 $61.4 $63.6 $47.1
Yield.............................. 12.3% 11.5% 11.2% 11.4%
</TABLE>

<TABLE>
<CAPTION>
FOR THE THREE FOR THE NINE
MONTHS ENDED MONTHS ENDED FOR THE YEARS ENDED
SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31,
------------- -------------- ----------------------
2000 1999 2000 1999 1999 1998 1997
----- ----- ------ ----- ------ ----- -----
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
New Investments...... $36.7 $34.7 $109.0 $80.2 $116.5 $73.9 $49.2
Repayments........... $ 3.0 $ 1.2 $ 8.3 $ 9.9 $ 6.7 $ 4.2 $12.0
Sales................ $33.1 $25.2 $ 98.8 $60.3 $112.3 $47.5 $53.9
</TABLE>

Allied Capital Express loan origination activity for 2000 and 1999
increased due to the opening of new regional office locations and from
opportunities created by our Internet site launched in the fall of 1999. Loans
in the Allied Capital Express program are originated for sale; therefore, the
increase in loan sales is the result of the increase in originations. In
addition, beginning in 1999, the Company began to sell 90% of the unguaranteed
portion

20
<PAGE> 24

of SBA 7(a) loans through a structured finance agreement with a commercial paper
conduit. Allied Capital Express targets small commercial real estate loans that
are, in many cases, originated in conjunction with SBA 7(a) loans. SBA 7(a)
loans are originated with variable interest rates priced at spreads ranging from
1.75% to 2.75% over the prime lending rate.

On October 31, 2000, Allied Capital and BLC Financial Services, Inc.
("BLC") signed a merger agreement whereby Allied Capital agreed to acquire BLC
in a stock for stock tax-free exchange. The effect of the merger was to create
an independently managed, private portfolio company of Allied Capital that would
focus exclusively on small business lending, including the origination of SBA
7(a) loans.

The merger was effected through a stock for stock exchange. Each share of
BLC common stock, is to be exchanged for 0.180 shares of Allied Capital common
stock.

As part of these transactions, on December 28, 2000, Allied Capital
recapitalized Allied SBLC as an independently managed private portfolio company.
Allied SBLC established a separate board of directors, and the employees and
operations attributed to Allied Capital Express, including the online loan
origination technology, were transferred to Allied SBLC. Allied Capital
restructured its previous intercompany debt owed to it by Allied SBLC as $74.8
million in subordinated debt now owed by the new portfolio company. On January
2, 2001, Allied SBLC was merged into BLX and Allied Capital received
approximately $25 million in BLX preferred stock in exchange for its equity in
Allied SBLC.

21
<PAGE> 25

RESULTS OF OPERATIONS

COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999

The following table summarizes Allied Capital's operating results for the
nine months ended September 30, 2000 and 1999:

<TABLE>
<CAPTION>
FOR THE NINE
MONTHS ENDED
SEPTEMBER 30,
------------------- PERCENT
2000 1999 CHANGE CHANGE
-------- -------- -------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
INTEREST AND RELATED PORTFOLIO INCOME
Interest...................................... $129,768 $84,419 $45,349 54%
Premiums from loan dispositions............... 10,752 9,032 1,720 19%
Investment advisory fees and other income..... 9,334 5,411 3,923 73%
-------- ------- ------- -----
Total interest and related portfolio
income............................. 149,854 98,862 50,992 52%
-------- ------- ------- -----
EXPENSES
Interest...................................... 41,645 24,173 17,472 72%
Employee...................................... 14,709 11,303 3,406 30%
Administrative................................ 10,711 8,476 2,235 26%
-------- ------- ------- -----
Total operating expenses.............. 67,065 43,952 23,113 53%
-------- ------- ------- -----
Formula and cut-off awards.................... 4,797 5,188 (391) (8%)
-------- ------- ------- -----
Portfolio income before net realized
and unrealized gains............... 77,992 49,722 28,270 57%
-------- ------- ------- -----
NET REALIZED AND UNREALIZED GAINS
Net realized gains............................ 23,095 16,448 6,647 40%
Net unrealized gains (losses)................. (267) 1,475 (1,742) (118%)
-------- ------- ------- -----
Total net realized and unrealized
gains.............................. 22,828 17,923 4,905 27%
-------- ------- ------- -----
Net increase in net assets resulting from
operations.................................... $100,820 $67,645 $33,175 49%
======== ======= ======= =====
Diluted earnings per share...................... $ 1.42 $ 1.14 $ 0.28 25%
======== ======= ======= =====
Weighted average shares outstanding - diluted... 70,777 59,239 11,538 19%
</TABLE>

Total interest and related portfolio income increased for the nine months
ended September 30, 2000 by 52% as compared to the nine months ended September
30, 1999. Total interest and related portfolio income is primarily a function of
the level of interest income earned and the balance of portfolio assets. In
addition, total interest and related

22
<PAGE> 26

portfolio income includes premiums from loan dispositions, prepayment premiums,
and investment advisory fees and other income.

<TABLE>
<CAPTION>
FOR THE NINE
MONTHS ENDED
SEPTEMBER 30,
---------------------
2000 1999
--------- --------
(IN MILLIONS, EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C>
Total Interest and Related Portfolio Income........... $149.9 $98.9
Per share............................................. $ 2.11 $1.67
</TABLE>

The increase in interest income earned results primarily from continued
growth of the Company's investment portfolio and the Company's focus on
increasing its overall portfolio yield. The Company's investment portfolio,
excluding non-interest bearing equity interests in portfolio companies,
increased by 44% to $1,485.0 million at September 30, 2000 from $1,033.6 million
at September 30, 1999. The weighted average yield on the interest bearing
investments in the portfolio at September 30, 2000 and 1999 was as follows:

<TABLE>
<CAPTION>
AT
SEPTEMBER 30,
--------------
2000 1999
----- -----
<S> <C> <C>
Private Finance....................................... 14.6% 14.0%
Commercial Real Estate Finance........................ 13.2% 11.8%
Small Business Finance................................ 12.3% 10.9%
Total Portfolio....................................... 13.9% 12.6%
</TABLE>

Included in net premiums from loan dispositions are premiums from loan
sales and premiums received on the early repayment of loans. Premiums from loan
sales were $8.7 million and $5.2 million for the nine months ended September 30,
2000 and 1999, respectively. This premium income results primarily from the
premium paid by purchasers of loans originated through Allied Capital Express,
less the origination commissions associated with the loans sold. The Company
sold $98.8 million and $60.3 million of loans originated through Allied Capital
Express during the nine months ended September 30, 2000 and 1999, respectively.
The Company also sold commercial mortgage loans totaling $53.1 million and $60.6
million for the nine months ended September 30, 2000 and 1999, respectively.

Prepayment premiums were $2.1 million, and $3.8 million for the nine months
ended September 30, 2000 and 1999, respectively. While the scheduled maturities
of private finance and commercial real estate loans range from five to ten
years, it is not unusual for the Company's borrowers to refinance or pay off
their debts to the Company ahead of schedule. Because the Company seeks to
finance primarily seasoned, performing companies, such companies at times can
secure lower cost financing as their balance sheets strengthen, or as more
favorable interest rates become available. Therefore, the Company generally
structures its loans to require a prepayment premium for the first three to five
years of the loan.

Our operating expenses include interest, employee and administrative
expenses. The Company's largest expense is interest on indebtedness. The
fluctuations in interest expense during the nine months ended September 30, 2000
and 1999 are attributable to changes in the level of borrowings by the Company
and its subsidiaries under various notes payable

23
<PAGE> 27

and debentures and revolving credit facilities. The Company's borrowing activity
and weighted average interest cost, including fees and closing costs, were as
follows:

<TABLE>
<CAPTION>
AT AND FOR THE
NINE MONTHS
ENDED
SEPTEMBER 30,
---------------
2000 1999
------ ------
(IN MILLIONS)
<S> <C> <C>
Total Outstanding Debt................................. $762.2 $537.9
Average Outstanding Debt............................... $684.3 $414.1
Weighted Average Cost.................................. 8.1% 7.4%
BDC Asset Coverage*.................................... 236% 223%
</TABLE>

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

*As a BDC, the Company is generally required to maintain a ratio of 200% of
total assets to total borrowings.

Employee expenses include salaries and employee benefits. The increase in
salaries and employee benefits for the periods presented reflects the increase
in total employees, combined with wage increases and the experience level of
employees hired. Total employees were 136 and 124 at September 30, 2000 and
1999, respectively. The Company has been an active recruiter for experienced
investment and operational personnel, and the Company will continue to actively
recruit and hire new professionals throughout 2000 to support anticipated
portfolio growth.

Administrative expenses include the leases for the Company's headquarters
in Washington, DC, and its regional offices. Administrative expenses also
include travel costs, stock record expenses, directors' fees, legal and
accounting fees and various other expenses. The increase in administrative
expenses for the nine months ended September 30, 2000 as compared to the nine
months ended September 30, 1999 was primarily the result of increases in costs
associated with the growth of the Company and new regional offices.

Net realized gains resulted from the sale of equity securities associated
with certain private finance investments and the realization of unamortized
discount resulting from the sale and early repayment of private finance and
commercial mortgage loans, offset by losses on investments.

<TABLE>
<CAPTION>
FOR THE NINE
MONTHS ENDED
SEPTEMBER 30,
-------------
2000 1999
----- -----
(IN MILLIONS)
<S> <C> <C>
Realized Gains........................................... $24.7 $21.6
Realized Losses.......................................... (1.6) (5.2)
----- -----
Net Realized Gains....................................... $23.1 $16.4
===== =====
Net Unrealized Gains (Losses)............................ $(0.3) $ 1.5
===== =====
</TABLE>

Realized gains of $24.7 million for the nine months ended September 30,
2000, resulted primarily from transactions involving seven portfolio companies,
Southwest PCS, L.P. ($11.5 million), Grant Television, Inc. ($5.4 million),
Julius Koch USA, Inc. ($1.7 million), Wilmar Industries, Inc. ($1.2 million),
Hotelevision ($1.0 million), FTI Consulting, Inc. ($0.7 million) and Panera
Bread Co. ($0.7 million). During the second quarter of 2000, the Company had the
opportunity to sell its equity interest in Southwest

24
<PAGE> 28

PCS, L.P. ("SWPCS") to SWPCS's parent company. The Company sold its equity
interest in exchange for two notes totaling $12.5 million. The first note was a
short-term full recourse note for $5.0 million, bearing interest at a rate of
15% per annum. This first note was repaid on September 30, 2000. The second note
was a two-year full recourse note for $7.5 million, bearing interest at 15% per
annum. The second note is secured by the equity interest sold by the Company.
The Company reversed previously recorded unrealized appreciation of $6.2 million
when these gains were realized. Realized gains for the nine months ended
September 30, 1999 of $21.6 million resulted primarily from transactions
involving three portfolio companies. The Company reversed previously recorded
unrealized appreciation of $8.3 million when these 1999 gains were realized.

Realized losses of $1.6 million and $5.2 million for the nine months ended
September 30, 2000 and 1999, respectively, resulted from the liquidation of
certain portfolio investments. Losses realized for the nine months ended
September 30, 2000 and 1999 had been recognized in NIA over time as unrealized
depreciation when the Company determined that the respective portfolio
security's value had become impaired. Thus, the Company reversed previously
recorded unrealized depreciation totaling $1.3 million and $4.7 million when the
related losses were realized for the nine months ended September 30, 2000 and
1999, respectively.

Net unrealized losses of $0.3 million and net unrealized gains of $1.5
million for the nine months ended September 30, 2000 and 1999, respectively,
consisted of valuation changes resulting from the Board of Directors' valuation
of the Company's assets and the effect of reversals of unrealized appreciation
or depreciation resulting from realized gains or losses. During the third
quarter of 2000, a portfolio company, NETtel Communications, Inc. ("NETtel")
filed for bankruptcy protection. The Company has a $22 million senior debt and
preferred stock investment in NETtel. Due to the portfolio company's current
situation, in the third quarter the Company decreased the value of its principal
investment in NETtel by recording unrealized depreciation of $8.5 million,
reversed previously recorded unrealized appreciation of $1.4 million and placed
the senior debt on non-accrual status. At September 30, 2000, net unrealized
appreciation in the portfolio totaled $4.3 million and was composed of
unrealized appreciation of $44.0 million, resulting primarily from appreciated
equity interests in portfolio companies, and unrealized depreciation of $39.7
million, resulting primarily from underperforming loan and equity interests in
the portfolio. At September 30, 1999, net unrealized appreciation in the
portfolio totaled $3.9 million and was composed of unrealized appreciation of
$31.8 million and unrealized depreciation of $27.9 million.

Net realized and unrealized gains can vary substantially on a quarterly
basis. Therefore, quarterly net realized and unrealized gains should not be
annualized to predict expected annual results.

The Company employs a standard grading system for the entire portfolio.
Grade 1 is used for those investments from which a capital gain is expected.
Grade 2 is used for investments performing in accordance with plan. Grade 3 is
used for investments that require closer monitoring; however, no loss of
interest or principal is expected. Grade 4 is used for investments for which
some loss of contractually due interest is expected, but no loss of principal is
expected. Grade 5 is used for investments for which some loss of principal is
expected and the investment is written down to net realizable value.

25
<PAGE> 29

At September 30, 2000, the Company's portfolio was graded as follows:

<TABLE>
<CAPTION>
PORTFOLIO PERCENTAGE OF
GRADE AT VALUE TOTAL PORTFOLIO
----- ------------- ---------------
(IN MILLIONS)
<S> <C> <C>
1............................................. $ 156.0 9.5%
2............................................. 1,362.6 83.2%
3............................................. 40.0 2.4%
4............................................. 54.2 3.3%
5............................................. 25.4 1.6%
-------- ------
$1,638.2 100.0%
======== ======
</TABLE>

Included in the Grade 5 portfolio at September 30, 2000 are private finance
investments totaling $18.1 million at value, or 1.1% of the Company's total
portfolio based on the valuation of the Board of Directors. The value of these
Grade 5 private finance investments has been reduced from an aggregate cost of
$48.0 million in order to reflect the Company's estimate of the net realizable
value of these investments upon disposition. This reduction in value has been
recorded as unrealized depreciation over several years in the Company's
earnings. The Company continues to follow its historical practices of working
with a troubled portfolio company in order to recover the maximum amount of the
Company's investment, but records unrealized depreciation for the expected full
amount of the potential loss when such exposure is identified. Grade 5 private
finance investments at December 31, 1999, 1998 and 1997 totaled $12.6 million,
$6.4 million and $12.9 million at value, or 1.0%, 0.8% and 1.8% of the Company's
total portfolio, respectively.

At September 30, 2000, the credit quality of the Company's CMBS portfolio
remained strong, with less than 0.2% in delinquencies. The yield used to accrue
interest on this portfolio assumes a 1% loss rate on the entire underlying
collateral mortgage pool.

For the total investment portfolio, loans greater than 120 days delinquent
were $51.7 million at value at September 30, 2000, or 3.2% of the total
portfolio. Included in this category are loans valued at $13.5 million that are
fully secured by real estate. Loans greater than 120 days delinquent generally
do not accrue interest. Loans greater than 120 days delinquent at December 31,
1999 were $18.6 million at value, or 1.5% of the total portfolio, which included
$11.7 million that were fully secured by real estate. Because we are a provider
of long-term privately negotiated investment capital, it is not atypical for us
to defer payment of principal or interest from time to time. As a result, the
amount of our portfolio that is greater than 120 days delinquent may vary from
quarter to quarter. The terms of our private finance agreements frequently
provide an opportunity for our portfolio companies to restructure their debt and
equity capital. During such restructuring, we may not receive or accrue interest
or dividend payments. We price our investment portfolio to provide adequate
current returns for our shareholders assuming that a portion of the portfolio at
any time may not be accruing interest currently. We also price our investments
for a total return including current interest or dividends plus capital gains
from the sale of equity securities. Therefore, the amount of loans greater than
120 days delinquent is not necessarily an indication of future principal loss or
loss of anticipated investment return. The Company's portfolio grading system is
used as a means to assess loss of investment return (Grade 4 assets) or loss of
investment principal (Grade 5 assets).

The Company has elected to be taxed as a regulated investment company
("RIC") under Subchapter M of the Internal Revenue Code of 1986, as amended
("Code"). As

26
<PAGE> 30

long as the Company qualifies as a RIC, the Company is not taxed on its
investment company taxable income or realized capital gains, to the extent that
such income or gains are distributed, or deemed to be distributed, to
shareholders on a timely basis. Annual tax distributions may differ from NIA for
the fiscal year due to timing differences in the recognition of income and
expenses, returns of capital and net unrealized appreciation or depreciation,
which are not included in taxable income.

In order to maintain its RIC status, the Company must, in general, (1)
derive at least 90% of its gross income from dividends, interest, gains from the
sale of securities and other specified types of income; (2) meet investment
diversification requirements as defined in the Code; and (3) distribute annually
to shareholders at least 90% of its investment company taxable ordinary income.
The Company intends to take all steps necessary to continue to meet the RIC
qualifications. However, there can be no assurance that the Company will
continue to elect or qualify for such treatment in future years.

The weighted average common shares outstanding used to compute basic
earnings per share were 70.6 million and 59.1 million for the nine months ended
September 30, 2000 and 1999, respectively. The increases in the weighted average
shares reflect the issuance of new shares and the issuance of shares pursuant to
a dividend reinvestment plan.

All per share amounts included in management's discussion and analysis have
been computed using the weighted average shares used to compute diluted earnings
per share, which were 70.8 million and 59.2 million for the nine months ended
September 30, 2000 and 1999, respectively.

27
<PAGE> 31

COMPARISON OF THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997

The following table summarizes Allied Capital's operating results for the
years ended December 31, 1999, 1998 and 1997:

<TABLE>
<CAPTION>
PERCENT PERCENT
1999 1998 CHANGE CHANGE 1998 1997 CHANGE CHANGE
-------- -------- -------- ------- -------- -------- -------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST AND RELATED PORTFOLIO INCOME
Interest............................ $119,772 $79,921 $ 39,851 50% $79,921 $86,882 $(6,961) (8%)
Premiums from loan dispositions..... 14,284 5,949 8,335 140% 5,949 7,277 (1,328) (18%)
Post-Merger gain on securitization
of commercial mortgage loans...... -- 14,812 (14,812) (100%) 14,812 -- 14,812 100%
Investment advisory fees and other
income............................ 7,084 6,056 1,028 17% 6,056 3,246 2,810 87%
-------- ------- -------- ----- ------- ------- ------- -----
Total interest and related
portfolio income............ 141,140 106,738 34,402 32% 106,738 97,405 9,333 10%
-------- ------- -------- ----- ------- ------- ------- -----
EXPENSES
Interest............................ 34,860 20,694 14,166 68% 20,694 26,952 (6,258) (23%)
Employee............................ 16,136 11,829 4,307 36% 11,829 10,258 1,571 15%
Administrative...................... 12,350 11,921 429 4% 11,921 8,970 2,951 33%
Merger.............................. -- -- -- -- -- 5,159 (5,159) (100%)
-------- ------- -------- ----- ------- ------- ------- -----
Total operating expenses...... 63,346 44,444 18,902 43% 44,444 51,339 (6,895) (13%)
-------- ------- -------- ----- ------- ------- ------- -----
Formula and cut-off awards.......... 6,753 7,049 (296) (4%) 7,049 -- 7,049 100%
-------- ------- -------- ----- ------- ------- ------- -----
Portfolio income before net
realized and unrealized
gains....................... 71,041 55,245 15,796 29% 55,245 46,066 9,179 20%
-------- ------- -------- ----- ------- ------- ------- -----
NET REALIZED AND UNREALIZED GAINS
Net realized gains.................. 25,391 22,541 2,850 13% 22,541 10,704 11,837 111%
Net unrealized gains................ 2,138 1,079 1,059 98% 1,079 7,209 (6,130) (85%)
-------- ------- -------- ----- ------- ------- ------- -----
Total net realized and
unrealized gains............ 27,529 23,620 3,909 17% 23,620 17,913 5,707 32%
-------- ------- -------- ----- ------- ------- ------- -----
Income before minority interests and
income taxes........................ 98,570 78,865 19,705 25% 78,865 63,979 14,886 23%
Minority interests.................... -- -- -- -- -- 1,231 (1,231) (100%)
Income tax expense.................... -- 787 (787) (100%) 787 1,444 (657) (45%)
-------- ------- -------- ----- ------- ------- ------- -----
Net increase in net assets resulting
from operations..................... $ 98,570 $78,078 $ 20,492 26% $78,078 $61,304 $16,774 27%
======== ======= ======== ===== ======= ======= ======= =====
Diluted earnings per share............ $ 1.64 $ 1.50 $ 0.14 9% $ 1.50 $ 1.24 $ 0.26 21%
======== ======= ======== ===== ======= ======= ======= =====
Weighted average shares outstanding -
diluted............................. 60,044 51,974 8,070 16% 51,974 49,251 2,723 6%
</TABLE>

Net increase in net assets resulting from operations (NIA) results from
total interest and related portfolio income earned, less total expenses incurred
in the operations of the Company, plus net realized and unrealized gains or
losses. NIA as a percentage of average shareholders equity, which is also known
as return on equity, was 17%, 17% and 15% for the years ended December 31, 1999,
1998 and 1997, respectively. NIA, excluding the formula and cut-off award, in
1999 and 1998 as a percentage of average shareholders' equity was 18.6% and
18.8%, respectively.

Total interest and related portfolio income is primarily a function of the
level of interest income earned and the balance of portfolio assets. In
addition, total interest and

28
<PAGE> 32

related portfolio income includes premiums from loan dispositions, prepayment
premiums, and investment advisory fees and other income.

<TABLE>
<CAPTION>
1999 1998 1997
------- ------- ------
(IN MILLIONS, EXCEPT PER
SHARE AMOUNTS)
<S> <C> <C> <C>
Total Interest and Related Portfolio Income..... $141.1 $106.7 $97.4
Per share....................................... $ 2.35 $ 2.05 $1.97
</TABLE>

The increase in interest income earned results primarily from continued
growth of the Company's investment portfolio and the Company's focus on
increasing its overall portfolio yield. The Company's investment portfolio,
excluding non-interest bearing equity interests in portfolio companies,
increased by 51% to $1,141.2 million at December 31, 1999 from $757.7 million at
December 31, 1998, and increased by 14% during 1998 from $666.5 million at
December 31, 1997. The weighted average yield on the interest bearing
investments in the portfolio at December 31, 1999, 1998 and 1997 was as follows:

<TABLE>
<CAPTION>
1999 1998 1997
----- ----- -----
<S> <C> <C> <C>
Private Finance................................. 14.2% 14.6% 12.6%
Commercial Real Estate Finance.................. 12.3% 10.4% 11.4%
Small Business Finance.......................... 11.5% 11.2% 11.4%
Total Portfolio................................. 13.0% 12.5% 11.7%
</TABLE>

Included in net premiums from loan dispositions are premiums from loan
sales and premiums received on the early repayment of loans. Premiums from loan
sales were $10.5 million, $3.8 million and $3.2 million for the years ended
December 31, 1999, 1998 and 1997, respectively. This premium income results
primarily from the premium paid by purchasers of loans originated through Allied
Capital Express, less the origination commissions associated with the loans
sold. In addition to selling the guaranteed portion of the SBA 7(a) loans, in
1999 the Company began to sell 90% of the unguaranteed portion of SBA 7(a) loans
through a structured finance agreement with a commercial paper conduit. The 176%
increase in premiums from loan sales in 1999 is primarily the result of a
significant increase in the sale of the guaranteed SBA 7(a) loans and
unguaranteed portions of SBA 7(a) loans. SBA 7(a) loan sales were $93.7 million,
$37.0 million and $43.4 million for the years ended December 31, 1999, 1998 and
1997, respectively.

Prepayment premiums were $3.8 million, $2.2 million and $4.1 million for
the years ended December 31, 1999, 1998 and 1997, respectively. While the
scheduled maturities of private finance and commercial real estate loans range
from five to ten years, it is not unusual for the Company's borrowers to
refinance or pay off their debts to the Company ahead of schedule. Because the
Company seeks to finance primarily seasoned, performing companies, such
companies at times can secure lower cost financing as their balance sheets
strengthen, or as more favorable interest rates become available. Therefore, the
Company generally structures its loans to require a prepayment premium for the
first three to five years of the loan.

Total interest and related portfolio income for 1998 includes a one-time
gain on sale of $14.8 million resulting from a commercial mortgage loan
securitization transaction that was completed in January 1998. Excluding the
1998 gain on sale, total interest and related portfolio income increased for the
year ended December 31, 1999 by 53% as compared to the year ended December 31,
1998. The proceeds of $238.4 million from this transaction were used to repay
outstanding debt.

29
<PAGE> 33

Our operating expenses include interest, employee and administrative
expenses. The Company's single largest expense is interest on indebtedness. The
fluctuations in interest expense during 1999, 1998 and 1997 are attributable to
changes in the level of borrowings by the Company and its subsidiaries under
various notes payable and debentures and revolving credit facilities. The
Company's borrowing activity and weighted average interest cost, including fees
and closing costs, were as follows:

<TABLE>
<CAPTION>
1999 1998 1997
------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
Total Outstanding Debt......................... $592.9 $334.4 $347.7
Average Outstanding Debt....................... $461.5 $261.3 $336.8
Weighted Average Cost.......................... 7.9% 7.5% 7.3%
BDC Asset Coverage*............................ 228% 273% 243%
</TABLE>

-------------------------
* As a BDC, the Company is generally required to maintain a ratio of 200% of
total assets to total borrowings.

Employee expenses include salaries and employee benefits. The increase in
salaries and employee benefits for the periods presented reflects the increase
in total employees, combined with wage increases and the experience level of
employees hired. Total employees were 129, 106 and 80 at December 31, 1999, 1998
and 1997, respectively. The Company has been an active recruiter throughout 1999
and 1998 for experienced investment and operational personnel, and the Company
will continue to actively recruit and hire new professionals in 2000 to support
anticipated portfolio growth.

Administrative expenses include the leases for the Company's headquarters
in Washington, DC, and its regional offices. Administrative expenses also
include travel costs, stock record expenses, directors' fees, legal and
accounting fees and various other expenses. The increase in administrative
expenses from 1998 to 1999 was primarily the result of increases in costs
associated with the new headquarters and four new regional offices. The increase
in administrative expenses from 1997 to 1998 was partially the result of twelve
full months of costs associated with two new offices that were established in
the third and fourth quarters of 1997.

In 1997, the Company incurred Merger expenses totaling $5.2 million, which
consisted primarily of investment banking fees of $3.1 million, legal fees of
$1.0 million and costs associated with the solicitation of proxies of
approximately $0.6 million.

For the years ended December 31, 1999, 1998 and 1997, employee and
administrative costs as a percentage of total interest and related portfolio
income less interest expense plus net realized and unrealized capital gains was
21%, 22% and 22%, respectively.

The formula and cut-off awards totaled $6.8 million and $7.0 million, or
$0.11 per share and $0.14 per share, for the years ended December 31, 1999 and
1998, respectively.

The formula award expense totaled $6.2 million for each of the years ended
December 31, 1999 and 1998. The formula award was designed as an incentive
compensation program that would replace canceled stock options that were
canceled as a result of the Company's 1997 Merger and would balance share
ownership among key officers. The formula award vests over a three-year period,
on the anniversary date of the Merger, beginning on December 31, 1998. Assuming
all officers who received a formula

30
<PAGE> 34

award remain with the Company over the vesting period, the Company will expense
the remaining formula award of approximately $6.2 million during 2000.

The cut-off award expense totaled $0.6 million and $0.8 million for the
years ended December 31, 1999 and 1998, respectively. The cut-off award was
designed to cap the appreciated value in unvested options at the Merger
announcement date in order to set the foundation to balance option awards upon
the Merger. The cut-off award will only be payable if the award recipient is
employed by the Company on a future vesting date. Total cut-off award that will
vest in 2000 is estimated at $0.5 million.

Net realized gains resulted from the sale of equity securities associated
with certain private finance investments and commercial mortgage loans and the
realization of unamortized discount resulting from the sale and early repayment
of private finance and commercial mortgage loans, offset by losses on
investments. Realized gains and losses for the years ended December 31, 1999,
1998 and 1997 were as follows:

<TABLE>
<CAPTION>
1999 1998 1997
----- ----- -----
(IN MILLIONS)
<S> <C> <C> <C>
Realized Gains.................................... $31.5 $25.8 $15.8
Realized Losses................................... (6.1) (3.3) (5.1)
----- ----- -----
Net Realized Gains................................ $25.4 $22.5 $10.7
===== ===== =====
Net Unrealized Gains.............................. $ 2.1 $ 1.1 $ 7.2
===== ===== =====
</TABLE>

Realized gains of $31.5 million during 1999 primarily resulted from
transactions involving six portfolio companies, Radio One, Inc. ($10.5 million),
COHR, Inc. ($5.3 million), Grant Broadcasting Systems II ($5.1 million), Jack
Henry and Associates, Inc. ($3.6 million), Precision Industries Co. ($3.3
million), and Enterprise Software ($0.8 million). The Company reversed
previously recorded unrealized appreciation of $14.6 million when gains were
realized in 1999. Realized gains in 1998 and 1997 resulted primarily from
transactions involving 10 and 6 portfolio companies, respectively.

Realized losses in 1999, 1998 and 1997 represented 0.5%, 0.4 % and 0.6% of
the Company's total assets, respectively. Realized losses of $6.1 million during
1999 resulted primarily from the liquidation of one portfolio investment,
CeraTech Holdings Corporation ($2.5 million). The remaining losses consisted of
several losses of less than $0.5 million each. Losses realized in 1999 had been
recognized in NIA over time as unrealized depreciation when the Company
determined that the respective portfolio security's value had become impaired.
Thus, the Company reversed previously recorded unrealized depreciation totaling
$5.4 million, $3.6 million and $6.7 million when the related losses were
realized in 1999, 1998, and 1997, respectively.

Net unrealized gains for 1999, 1998 and 1997 consisted of valuation changes
resulting from the Board of Directors' valuation of the Company's assets and the
effect of reversals of unrealized appreciation or depreciation resulting from
realized gains or losses. At December 31, 1999, net unrealized appreciation in
the portfolio totaled $4.5 million and was composed of unrealized appreciation
of $32.1 million, resulting primarily from appreciated equity interests in
portfolio companies, and unrealized depreciation of $27.6 million resulting
primarily from underperforming loan and equity interests in the portfolio. At
December 31, 1998 and 1997, net unrealized appreciation in the portfolio totaled
$2.4 million and $1.3 million, respectively, and was composed of unrealized
appreciation of

31
<PAGE> 35

$27.3 million and $19.2 million, and unrealized depreciation of $24.9 million
and $17.9 million, respectively.

At December 31, 1999, the Company's portfolio was graded as follows:

<TABLE>
<CAPTION>
PORTFOLIO PERCENTAGE OF
GRADE AT VALUE TOTAL PORTFOLIO
----- ------------- ---------------
(IN MILLIONS)
<S> <C> <C>
1........................................... $ 156.0 12.7%
2........................................... 1,002.9 81.7%
3........................................... 22.5 1.8%
4........................................... 32.2 2.6%
5........................................... 14.9 1.2%
-------- ------
$1,228.5 100.0%
======== ======
</TABLE>

Included in the Grade 5 portfolio are private finance investments totaling
$12.6 million at value at December 31, 1999, or 1.0% of the Company's total
portfolio based on the valuation of the Board of Directors. The value of these
Grade 5 private finance investments has been reduced from an aggregate cost of
$31.3 million in order to reflect the Company's estimate of the net realizable
value of these investments upon disposition. This reduction in value has been
recorded previously as unrealized depreciation over several years in the
Company's earnings. The Company continues to follow its historical practices of
working with a troubled portfolio company in order to recover the maximum amount
of the Company's investment, but records unrealized depreciation for the
expected full amount of the potential loss when such exposure is identified.
Grade 5 private finance investments at December 31, 1998 and 1997 totaled $6.4
million and $12.9 million at value, or 0.8% and 1.8% of the Company's total
portfolio, respectively.

At December 31, 1999, the credit quality of the Company's CMBS portfolio
remained strong, and delinquencies in the underlying collateral pool were
negligible. The yield used to accrue interest on this portfolio assumes a 1%
loss rate on the entire underlying collateral mortgage pool.

For the total investment portfolio, loans greater than 120 days delinquent
were $18.6 million at value at December 31, 1999, or 1.5% of the total
portfolio. Included in this category are loans valued at $11.7 million that are
fully secured by real estate. Loans greater than 120 days delinquent generally
do not accrue interest. In addition, the Company is not accruing interest on a
$14.2 million investment that was not yet 120 days delinquent at December 31,
1999, but is expected to be in this category in the first quarter of 2000. Loans
greater than 120 days delinquent at December 31, 1998 were $10.4 million at
value, or 1.3% of the total portfolio, which included $6.6 million that were
fully secured by real estate. Because we are a provider of long-term privately
negotiated investment capital, it is not atypical for us to defer payment of
principal or interest from time to time.

32
<PAGE> 36

As a result, the amount of our portfolio that is greater than 120 days
delinquent may vary from quarter to quarter. The terms of our private finance
agreements frequently provide an opportunity for our portfolio companies to
restructure their debt and equity capital. During such restructuring, we may not
receive or accrue interest or dividend payments. We price our investment
portfolio to provide adequate current returns for our shareholders assuming that
a portion of the portfolio at any time may not be accruing interest currently.
We also price our investments for a total return including current interest or
dividends plus capital gains from the sale of equity securities. Therefore, the
amount of loans greater than 120 days delinquent is not necessarily an
indication of future principal loss or loss of anticipated investment return.
The Company's portfolio grading system is used as a means to assess loss of
investment return (Grade 4 assets) or loss of investment principal (Grade 5
assets).

The weighted average common shares outstanding used to compute basic
earnings per share were 59.9 million, 51.9 million and 49.2 million for the
years ended December 31, 1999, 1998 and 1997, respectively. The increases in the
weighted average shares reflect the issuance of new shares and the issuance of
shares pursuant to a dividend reinvestment plan.

All per share amounts included in management's discussion and analysis have
been computed using the weighted average shares used to compute diluted earnings
per share, which were 60.0 million, 52.0 million and 49.3 million for the years
ended December 31, 1999, 1998 and 1997, respectively.

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

CASH AND CASH EQUIVALENTS

At September 30, 2000, the Company had $26.2 million in cash and cash
equivalents. The Company invests otherwise uninvested cash in U.S. government or
agency-issued or guaranteed securities that are backed by the full faith and
credit of the United States, or in high quality, short-term repurchase
agreements fully collateralized by such securities. The Company's objective is
to manage to a low cash balance and fund new originations with its credit
facilities.

DEBT

The Company had outstanding debt at September 30, 2000 as follows:

<TABLE>
<CAPTION>
ANNUAL ANNUAL PORTFOLIO
AMOUNT INTEREST RETURN TO COVER
OUTSTANDING COST(1) INTEREST PAYMENTS(2)
------------- -------- --------------------
(IN MILLIONS)
<S> <C> <C> <C>
Notes payable and debentures:
Unsecured long-term notes payable.... $419.0 7.7% 1.9%
SBA debentures....................... 77.5 8.5% 0.4%
Auction rate reset note.............. 75.0 8.6% 0.4%
OPIC loan............................ 5.7 6.6% 0.0%
------ ---- ----
Total notes payable and
debentures.................. $577.2 7.9% 2.7%
------ ---- ----
Revolving credit facilities:
Revolving line of credit............. $185.0 8.7% 0.9%
====== ---- ----
Total debt.................... $762.2 8.1% 3.6%
====== ==== ====
</TABLE>

-------------------------
(1) The annual interest cost includes the cost of commitment fees and other
facility fees.

(2) The annual portfolio return to cover interest payments is calculated as the
September 30, 2000 annualized cost of debt per class of financing divided by
total assets at September 30, 2000.

33
<PAGE> 37

UNSECURED LONG-TERM NOTES PAYABLE. The Company has issued long-term debt
to institutional lenders, primarily insurance companies. The notes have five- or
seven-year maturities. The notes require payment of interest only semi-annually,
and all principal is due upon maturity.

On October 24, 2000, the Company closed on $125 million of five-year
unsecured long-term debt, financed primarily by insurance companies. The
five-year notes were priced at 8.54% and have substantially the same terms as
the Company's existing long-term debt. The proceeds from this debt were used to
repay borrowings from the revolving line of credit.

SBA DEBENTURES. The Company, through its SBIC subsidiary, has debentures
payable to the SBA with terms of ten years. The notes require payment of
interest only semi-annually, and all principal is due upon maturity. The Company
may borrow up to $105 million from the SBA under the SBIC program. At September
30, 2000, the Company has a commitment to borrow up to an additional $21 million
from the SBA. The commitment expires on September 30, 2004.

AUCTION RATE RESET NOTE. On August 31, 2000, the Company completed a
private placement of a $75 million Auction Rate Reset Senior Note Series A. The
note matures on December 2, 2002 and bears interest at the London Inter-Bank
Offer Rate ("LIBOR") plus 175 basis points which adjusts quarterly. Interest is
due quarterly and the Company, at its option, may pay or defer such interest
payments.

REVOLVING LINE OF CREDIT. The Company has a two-year, $417.5 million
unsecured revolving line of credit that expires in May 2002. This facility may
be expanded up to $500 million. At the Company's option, the credit facility
bears interest at a rate equal to (i) the one-month LIBOR plus 1.25% or (ii) the
higher of (a) the Bank of America, N.A. prime rate or (b) the Federal Funds rate
plus 0.50%. The credit facility requires monthly payments of interest, and all
principal is due upon maturity.

EQUITY CAPITAL AND DIVIDENDS

The Company raises debt and equity capital for continued investment in
growing businesses. Because the Company is a RIC, it distributes its income and
requires external capital for growth. Because the Company is a BDC, it is
limited in the amount of debt capital it may use to fund its growth, since it is
generally required to maintain a ratio of 200% of total assets to total
borrowings, or approximately 1 to 1 debt to equity capital ratio.

To support its growth during the nine months ended September 30, 2000, the
Company raised $250.9 million in new equity capital, of which $108.9 million was
raised during the three months ended September 30, 2000, primarily through the
sale of shares from its shelf registration statement. At September 30, 2000,
total shareholders' equity had increased to $933.3 million. The Company issues
equity from time to time using a shelf registration statement. The Company
issues new equity when it has a clear use of proceeds for attractive investment
opportunities. Historically, this process has enabled the Company to raise
equity on an accretive basis for existing shareholders.

The Company's Board has established a dividend policy for 2000 to review
the dividend rate quarterly, and to adjust the quarterly dividend rate
throughout the year as the Company's earnings momentum builds. In 1999, the
Board had established a dividend policy of level quarterly dividends of $0.40
per common share, for an annual total

34
<PAGE> 38

distribution of $1.60 per common share to approximate annual taxable income. The
Board changed its dividend policy for 2000 because of the Company's significant
portfolio growth and continued growth in ordinary taxable income. For the first
and second quarter of 2000, the Board declared a $0.45 per common share
dividend. For the third and fourth quarters of 2000, the Board declared a
dividend of $0.46 per common share.

As a result of growth in ordinary taxable income combined with the
increased size and diversity of the Company's portfolio and its projected future
capital gains, the Company's Board of Directors will continue to evaluate
whether to retain or distribute capital gains as they occur. The new policy will
allow the Company to continue to distribute some capital gains, but will also
allow the Company to retain gains that exceed a normal capital gains
distribution level, and therefore avoid any unusual spike in dividends in any
one year. The new policy also enables the Board to selectively retain gains to
support future growth.

The Company plans to maintain a strategy of financing its operations,
dividend requirements and future investments with cash from operations, through
borrowings under short- or long-term credit facilities or other debt securities,
through asset sales, or through the sale or issuance of new equity capital. The
Company will utilize its short-term credit facilities only as a means to bridge
to long-term financing. The Company evaluates its interest rate exposure on an
ongoing basis. The Company maintains a matched-funding philosophy that focuses
on matching the estimated maturities of its loan and investment portfolio to the
estimated maturities of its borrowings. The Company also manages its interest
rate risk by financing floating-rate assets with similar term floating-rate
liabilities and fixed-rate assets with similar term fixed-rate liabilities. To
the extent deemed necessary, the Company may hedge variable and short-term
interest rate exposure through interest rate swaps or other techniques. At
September 30, 2000, the Company's debt to equity ratio was less than 1 to 1. The
Company's weighted average cost of funds was 8.1% at September 30, 2000. There
are no significant maturities of long-term debt until 2002. The Company believes
that it has access to capital sufficient to fund its ongoing investment and
operating activities, and from which to pay dividends.

35
<PAGE> 39

SENIOR SECURITIES

Information about our senior securities is shown in the following tables as
of the fiscal year ended December 31, unless otherwise noted. The "--" indicates
information which the Commission expressly does not require to be disclosed for
certain types of senior securities.

UNSECURED LONG-TERM NOTES
PAYABLE
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........................ 0 0 -- N/A
1996........................ 0 0 -- N/A
1997........................ 0 0 -- N/A
1998........................ 180,000,000 2,734 -- N/A
1999........................ 419,000,000 2,283 -- N/A
2000 (as of September 30)... 419,000,000 2,357 -- N/A

SBA DEBENTURES(5)
1990........................ $ 40,450,000 $3,397 $-- N/A
1991........................ 49,800,000 3,834 -- N/A
1992........................ 49,800,000 5,789 -- N/A
1993........................ 49,800,000 6,013 -- N/A
1994........................ 54,800,000 3,695 -- N/A
1995........................ 61,300,000 2,868 -- N/A
1996........................ 61,300,000 2,485 -- N/A
1997........................ 54,300,000 2,215 -- N/A
1998........................ 47,650,000 2,734 -- N/A
1999........................ 62,650,000 2,283 -- N/A
2000 (as of September 30)... 77,450,000 2,357 -- N/A

AUCTION RATE RESET NOTE
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........................ 0 0 -- N/A
1996........................ 0 0 -- N/A
1997........................ 0 0 -- N/A
1998........................ 0 0 -- N/A
1999........................ 0 0 -- N/A
2000 (as of September 30)... 75,000,000 2,357 -- N/A
</TABLE>

36
<PAGE> 40

<TABLE>
<CAPTION>
TOTAL AMOUNT
OUTSTANDING INVOLUNTARY
EXCLUSIVE OF ASSET LIQUIDATING AVERAGE
TREASURY COVERAGE PREFERENCE MARKET VALUE
CLASS AND YEAR SECURITIES(1) PER UNIT(2) PER UNIT(3) PER UNIT(4)
-------------- ------------- ----------- ----------- --------------
<S> <C> <C> <C> <C>
OVERSEAS PRIVATE INVESTMENT
CORPORATION LOAN
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........................ 0 0 -- N/A
1996........................ 8,700,000 2,485 -- N/A
1997........................ 8,700,000 2,215 -- N/A
1998........................ 5,700,000 2,734 -- N/A
1999........................ 5,700,000 2,283 -- N/A
2000 (as of September 30)... 5,700,000 2,357 -- N/A

REVOLVING LINES OF CREDIT
1990........................ $ 0 $ 0 $-- N/A
1991........................ 0 0 -- N/A
1992........................ 0 0 -- N/A
1993........................ 0 0 -- N/A
1994........................ 32,226,000 3,695 -- N/A
1995........................ 20,414,000 2,868 -- N/A
1996........................ 45,099,000 2,485 -- N/A
1997........................ 38,842,000 2,215 -- N/A
1998........................ 95,000,000 2,734 -- N/A
1999........................ 82,000,000 2,283 -- N/A
2000 (as of September 30)... 185,000,000 2,357 -- N/A

MASTER REPURCHASE AGREEMENT
AND MASTER LOAN AND
SECURITY AGREEMENT
1990........................ $ 0 $ 0 $-- N/A
1991........................ 0 0 -- N/A
1992........................ 0 0 -- N/A
1993........................ 0 0 -- N/A
1994........................ 23,210,000 3,695 -- N/A
1995........................ 0 0 -- N/A
1996........................ 85,775,000 2,485 -- N/A
1997........................ 225,821,000 2,215 -- N/A
1998........................ 6,000,000 2,734 -- N/A
1999........................ 23,500,000 2,283 -- N/A
2000 (as of September 30)... 0 0 -- N/A
</TABLE>

37
<PAGE> 41

<TABLE>
<CAPTION>
TOTAL AMOUNT
OUTSTANDING INVOLUNTARY
EXCLUSIVE OF ASSET LIQUIDATING AVERAGE
TREASURY COVERAGE PREFERENCE MARKET VALUE
CLASS AND YEAR SECURITIES(1) PER UNIT(2) PER UNIT(3) PER UNIT(4)
-------------- ------------- ----------- ----------- --------------
<S> <C> <C> <C> <C>
SENIOR NOTE PAYABLE(6)
1990........................ $ 0 $ 0 $-- N/A
1991........................ 0 0 -- N/A
1992........................ 20,000,000 5,789 -- N/A
1993........................ 20,000,000 6,013 -- N/A
1994........................ 20,000,000 3,695 -- N/A
1995........................ 20,000,000 2,868 -- N/A
1996........................ 20,000,000 2,485 -- N/A
1997........................ 20,000,000 2,215 -- N/A
1998........................ 0 0 -- N/A
1999........................ 0 0 -- N/A
2000 (as of September 30)... 0 0 -- N/A

BONDS PAYABLE
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........................ 98,625,000 2,868 -- N/A
1996........................ 54,123,000 2,485 -- N/A
1997........................ 0 0 -- N/A
1998........................ 0 0 -- N/A
1999........................ 0 0 -- N/A
2000 (as of September 30)... 0 0 -- N/A

REVERSE REPURCHASE AGREEMENTS(7)
1990........................ $ 28,361,000 $3,397 $-- N/A
1991........................ 2,761,000 3,834 -- N/A
1992........................ 0 0 -- N/A
1993........................ 0 0 -- N/A
1994........................ 0 0 -- N/A
1995........................ 0 0 -- N/A
1996........................ 0 0 -- N/A
1997........................ 0 0 -- N/A
1998........................ 0 0 -- N/A
1999........................ 0 0 -- N/A
2000 (as of September 30)... 0 0 -- N/A
</TABLE>

38
<PAGE> 42

<TABLE>
<CAPTION>
TOTAL AMOUNT
OUTSTANDING INVOLUNTARY
EXCLUSIVE OF ASSET LIQUIDATING AVERAGE
TREASURY COVERAGE PREFERENCE MARKET VALUE
CLASS AND YEAR SECURITIES(1) PER UNIT(2) PER UNIT(3) PER UNIT(4)
-------------- ------------- ----------- ----------- --------------
<S> <C> <C> <C> <C>
REDEEMABLE CUMULATIVE PREFERRED STOCK(5)
1990........................ $ 1,000,000 $ 308 $100 N/A
1991........................ 1,000,000 338 100 N/A
1992........................ 1,000,000 526 100 N/A
1993........................ 1,000,000 546 100 N/A
1994........................ 1,000,000 351 100 N/A
1995........................ 1,000,000 277 100 N/A
1996........................ 1,000,000 242 100 N/A
1997........................ 1,000,000 217 100 N/A
1998........................ 1,000,000 267 100 N/A
1999........................ 1,000,000 225 100 N/A
2000 (as of September 30)... 1,000,000 243 100 N/A

NON-REDEEMABLE CUMULATIVE PREFERRED
STOCK(5)
1990........................ $ 6,000,000 $ 308 $100 N/A
1991........................ 6,000,000 338 100 N/A
1992........................ 6,000,000 526 100 N/A
1993........................ 6,000,000 546 100 N/A
1994........................ 6,000,000 351 100 N/A
1995........................ 6,000,000 277 100 N/A
1996........................ 6,000,000 242 100 N/A
1997........................ 6,000,000 217 100 N/A
1998........................ 6,000,000 267 100 N/A
1999........................ 6,000,000 225 100 N/A
2000 (as of September 30)... 6,000,000 243 100 N/A
</TABLE>

-------------------------
(1) Total amount of each class of senior securities outstanding at the end of
the period presented.

(2) The asset coverage ratio for a class of senior securities representing
indebtedness is calculated as the Company's consolidated total assets, less
all liabilities and indebtedness not represented by senior securities,
divided by senior securities representing indebtedness. This asset coverage
ratio is multiplied by $1,000 to determine the Asset Coverage Per Unit. The
asset coverage ratio for a class of senior securities that is preferred
stock is calculated as the Company's consolidated total assets, less all
liabilities and indebtedness not represented by senior securities, divided
by senior securities representing indebtedness, plus the involuntary
liquidation preference of the preferred stock (see footnote 3). The Asset
Coverage Per Unit for preferred stock is expressed in terms of dollar
amounts per share.

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

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

(5) Issued by the Company's SBIC subsidiary to the SBA. These categories of
senior securities are not subject to the asset coverage requirements of the
1940 Act. See "Certain Government Regulations -- SBA Regulations."

(6) The Company was the obligor on $15 million of the senior notes. The
Company's SBIC subsidiary was the obligor on the remaining $5 million, which
is not subject to the asset coverage requirements of the 1940 Act.

(7) U.S. government agency guaranteed loans sold under agreements to repurchase.
The Company was advised by the Staff of the Commission that these reverse
repurchase agreements were not considered a class of senior security
representing indebtedness and thus were not subject to the asset coverage
requirements of the 1940 Act.

39
<PAGE> 43

BUSINESS

As a business development company, we provide private investment capital to
private companies and undervalued public companies in a variety of different
industries and in diverse geographic locations throughout the United States. We
have been investing in growing businesses for over 41 years and have financed
thousands of private companies nationwide. Today, our investment activity is
focused in two areas:

- Private finance and

- Commercial real estate finance, primarily the purchase of CMBS.

Our investment portfolio consists primarily of long-term unsecured loans
with equity features, commercial mortgage-backed securities, and commercial
mortgage loans. Until December 28, 2000, our portfolio also included small
senior loans, including SBA 7(a) guaranteed loans. See "Recent Developments." At
September 30, 2000, our investment portfolio totaled $1.6 billion. The Company's
investment objective is to achieve current income and capital gains.

PRIVATE FINANCE

We provide long-term debt and equity financing to private companies
nationwide. Our private finance activities target a market niche between the
senior debt financing provided by traditional lenders, such as banks, commercial
finance companies and insurance companies, and the equity capital provided by
private equity investors.

Our private financing is generally used to fund growth, buyouts, note
purchases, acquisitions, recapitalizations, and bridge financings. We generally
invest in private companies though, from time to time, we may invest in
undervalued public companies that lack access to public capital and whose
securities may not be marginable. We target two types of companies when seeking
new investments. The first type of company we seek is a market leader in a
stable industry that has demonstrated over many years of operations that it can
successfully achieve its business plan and thereby achieve our investment
objective. The second type of company we seek is an emerging company in a
growing industry that is positioned for significant growth. We have spent over
41 years refining our highly selective investment discipline, which is founded
on seeking portfolio companies having key characteristics and targeting specific
industries.

We originate investments generally ranging in size from $5 million to $30
million, and for the nine months ended September 30, 2000 and the year ended
December 31, 1999 our average investment size was $14.0 million and $12.4
million, respectively. Our private finance investments are generally structured
as an unsecured, subordinated loan that carries a relatively high fixed interest
rate (generally 12% to 18%), with interest-only payments in the early years and
payments of both principal and interest in the later years, with maturities of
five to ten years. Approximately 98% of the investments in the private finance
portfolio have fixed rates of interest. Our private finance investments
typically include equity features, such as warrants or options to buy a minority
interest in the portfolio company. We also make preferred and common equity
investments, particularly when we see unique opportunities to profit from the
growth of an emerging company. At September 30, 2000, 84% of the private finance
portfolio consisted of debt securities, and 16% consisted of equity securities.
Our private finance portfolio is geographically diverse, and includes
investments in a wide variety of industries, including business services,
consumer products, telecommunications, industrial products and broadcasting.

40
<PAGE> 44

Capital providers for the finance of private companies can be generally
categorized as shown in the diagram below:

<TABLE>
<S> <C> <C> <C> <C> <C> <C>
CAPITAL PROVIDER Banks Commercial Insurance Allied Private Private
Finance Companies/ Capital Mezzanine Equity
Companies High Yield Funds Funds
Market
-----------------------------------------------------------------------------------------------------
PRIMARY Senior, Asset-based Large Unsecured Unsecured Equity
BUSINESS short-term lending >$30 million long-term long-term
FOCUS debt credits debt with debt with
equity equity
upside upside

Preferred Preferred
and common and common
equity equity
-----------------------------------------------------------------------------------------------------
TYPICAL PRICING LIBOR+ [graphic of arrow stretching between 'LIBOR+' and 30%+
SPECTRUM* '30%+']
</TABLE>

---------------
* Based on market experience of our marketing and investment professionals.

Banks are primarily focused on providing senior secured and unsecured
short-term debt. They typically do not provide meaningful long-term unsecured
loans. Commercial finance companies are primarily focused on providing senior
secured long-term debt. The private insurance company and high-yield debt
markets are focused primarily on very large financing transactions, typically in
excess of the financings we do. We generally do not compete with banks,
commercial finance companies, or the insurance company/high yield market.
Instead, we compete directly with the private mezzanine sector of the private
equity market. Private mezzanine funds are also focused on providing unsecured
long-term debt to private companies for the types of transactions discussed
above. We believe that we have key structural and operational advantages when
compared to private mezzanine funds.

Our scale of operations, equity capital base, and successful track record
as a private finance investor has enabled us to borrow long-term capital to
leverage our returns on our common equity. Therefore, our access to debt capital
reduces our total cost of capital. In many cases, a private mezzanine fund is
unable to access the debt capital markets, and therefore must achieve an
unleveraged equity return for their investors. Our lower cost of capital gives
us a pricing advantage when competing for new investments. In addition, the
perpetual nature of our corporate structure enables us to be a better long-term
partner for our portfolio companies than a traditional mezzanine fund, which
typically has a finite life.

We estimate that we fund approximately 2% of all the private finance
investments that we review. When assessing a prospective investment, we look for
a company that has achieved, or has the potential to achieve, market leadership
in a niche, critical mass, and a sustainable cash flow. We also look for
companies that, because of their industry and business plan, can demonstrate
minimal vulnerability to changes in economic cycles. Since our debt securities
are primarily unsecured in nature, we look for companies in industries that are
non-cyclical, cash flow intensive, and can demonstrate a high return on their
invested capital. We generally do not target companies in industries where
businesses tend to be vulnerable to changes in economic cycles, are capital
intensive, and have low returns on their invested capital. We generally target
and do not target the following industries,

41
<PAGE> 45

though we will consider investments in any industry if the prospective company
demonstrates unique characteristics that make it an attractive investment
opportunity:

INDUSTRIES TARGETED
NON-CYCLICAL/CASH FLOW INTENSIVE/
HIGH RETURN ON CAPITAL
---------------------------------------
Business services

Education

Consumer products
Light industrial products

Broadcasting

INDUSTRIES NOT TARGETED
CYCLICAL/CAPITAL INTENSIVE/
LOW RETURN ON CAPITAL
---------------------------------------

Heavy manufacturing

Natural resources

Most retail

Low value-add distribution
Agriculture
Transportation

Construction

Another critical element of our investment discipline is to invest in
companies with a significant equity capital base, and a strong private equity
sponsor. For example, in 1999, 77% of our private financings were completed in
conjunction with private equity firms, which provided capital that is junior to
ours. We believe strong equity sponsorship significantly strengthens our
position as a long-term lender. A strong equity sponsor provides not only strong
equity capital beneath our investment, but also provides a reliable source of
additional equity capital if the portfolio company requires additional
financing. Private equity sponsors also help us confirm our own due diligence
findings when assessing a new investment opportunity, and they provide
assistance and leadership to the portfolio company's management team throughout
our investment period.

We target a total return of 25% for our private finance investments. The
typical private finance structure focuses, first and foremost, on the protection
of our investment principal. Our debt instruments generally provide for a
contractual interest rate ranging from 12% to 18%, which provides current
interest income. The debt instruments also have restrictive covenants that
protect our interests in the transaction. The warrants we receive with our debt
securities generally require only a minimal cost to exercise, and thus as the
portfolio company appreciates in value, we achieve additional investment return
from this equity interest. We seek to achieve additional investment returns of
2% to 10% from the appreciation and sale of our warrants.

Generally, our warrants expire five years after the related debt is repaid.
The warrants typically include registration rights, which allow us to sell the
securities if the portfolio company completes a public offering. In most cases,
the warrants also have a put option that requires that the borrower repurchase
our equity position after a specified period of time at a formula price or at
its fair market value. Most of the gains we realize from our warrant portfolio
arise as a result of the sale of the portfolio company to another business, or
through a recapitalization. Historically, we have not been dependent on the
public equity markets for the sale of our warrant positions. With respect to
preferred or common equity investments, we target an investment return of 25% to
40%.

We hold a portion of our private finance investments in a wholly owned
subsidiary, Allied Investment Corporation. Allied Investment is a BDC and is
licensed and regulated by the Small Business Administration to operate as a
small business investment company ("SBIC"). See "Certain Government Regulations"
below for further information about SBIC regulation.

42
<PAGE> 46

In addition to funding private finance investments as described above,
during the second quarter of 2000 we made commitments to invest in select
technology-oriented private equity funds. In addition to the return we expect to
achieve from these investments, we believe we can achieve substantial strategic
benefits from these funds, including technology expertise from private finance
portfolio companies, co-investment opportunities and increased dealflow. We may
make additional commitments to other such funds, but expect our total investment
in this area to remain a small percentage of our total portfolio.

COMMERCIAL REAL ESTATE FINANCE

COMMERCIAL MORTGAGE LOANS. We have been a commercial real estate lender
for many years, and maintain a small whole commercial mortgage loan portfolio.
During 1998, we significantly reduced our middle-market commercial real estate
lending activities, because we believed that the market was under-pricing
commercial real estate loans, and that the returns on senior commercial real
estate loans were below a level that would result in a fair return on equity for
our shareholders. We, however, continue to see a strong demand for small
commercial mortgage loans that can be attractively priced for sale to banks and
other financial institutions. As a result of this market demand, we combined our
small real estate lending with our SBA lending activity to form Allied Capital
Express, which is discussed below.

Since 1999, we have been liquidating a significant portion of our whole
commercial mortgage loan portfolio. We believe that we can redeploy the proceeds
into higher yielding investments. We continue to derive income from the interest
charged on the whole commercial mortgage loan portfolio through contractual
interest and amortization of discounts.

COMMERCIAL MORTGAGE-BACKED SECURITIES. The same pricing pressures that
caused us to reduce our origination of commercial mortgage loans in 1998 created
significant liquidity problems for many other real estate lenders who had
remained active lenders as pricing declined throughout 1998. In the fourth
quarter of 1998, many of these lenders experienced severe liquidity constraints
that caused them to exit the commercial mortgage-backed securities market. This
liquidity turmoil in the real estate capital markets created a unique
opportunity for us to acquire newly issued, non-investment grade commercial
mortgage-backed securities ("Purchased CMBS") at significant discounts from the
face amount of the bonds and at attractive yields.

As an investor, we believe that Purchased CMBS has attractive risk/return
characteristics. The Purchased CMBS in which we invest are non-investment grade,
which means that nationally recognized statistical rating organizations rate
them below the top four investment-grade rating categories (i.e., "AAA" through
"BBB"), and are sometimes referred to as "junk bonds." Unlike most "junk bonds,"
which are typically unsecured debt instruments, the non-investment grade
Purchased CMBS in which we invest are secured by mortgage loans with real estate
collateral. Our Purchased CMBS are fully collateralized by senior mortgage loans
on commercial real estate properties where the loans are, on average, supported
by a 30% equity investment. We acquire our Purchased CMBS on the initial
issuance of the CMBS bond offering, and are able to underwrite and negotiate to
purchase the securities at a significant discount from their face amount,
generally resulting in an estimated yield to maturity ranging from 13% to 16%.
Our negotiated discount and estimated yield to maturity assumes a 1% loss rate
on the entire underlying commercial

43
<PAGE> 47

mortgage loan collateral pool, which takes into consideration certain business
and economic uncertainties and contingencies. We find the yields for Purchased
CMBS very attractive given their collateral protection.

We believe this risk/return dynamic exists in this market today because
there are significant barriers to entry for a non-investment grade CMBS
investor. First, non-investment grade CMBS are long-term investments and require
long-term investment capital. Our capital structure, which is in excess of 50%
equity capital, is well suited for this asset class. Second, when we purchase
CMBS in an initial issuance, we re-underwrite every mortgage loan in the
underlying collateral pool, and we meet with the issuer to discuss the nature
and type of loans we will accept into the pool. We have significant commercial
mortgage loan underwriting expertise, both in terms of the number of
professionals we employ and the depth of their commercial real estate
experience. Access to this type of expertise is another barrier to entry into
this market.

As a non-investment grade CMBS investor, we recognize that non-investment
grade securities have a higher degree of risk than do investment grade bonds.
Non-investment grade securities are considered speculative, and their capacity
to pay principal and interest in accordance with the terms of their issue is not
ensured. They tend to be less liquid, may have a higher risk of default, and may
be more difficult to value. We invest in non-investment grade CMBS represented
by the "BB" to non-rated tranches of a CMBS issuance. Due to the underlying
structure of the CMBS issuances, our CMBS tranches receive principal payments
only after the securities that are senior to our securities are repaid. Thus, if
losses are incurred in the underlying mortgage loan collateral pool, we would
experience these losses.

To mitigate this risk, we perform extensive due diligence prior to an
investment in Purchased CMBS. When we evaluate a CMBS investment, we use the
same underwriting procedures and criteria for the mortgage loans in the
collateral pool as we do for all of the loans we originate. These underwriting
procedures and criteria are described in detail below. We will only invest in
CMBS when we believe, as a result of our underwriting procedures, that the
underlying mortgage pool adequately secures our position. Our portfolio of CMBS
is secured by approximately 2,600 commercial real estate properties located in
diverse geographic locations across the United States in a wide variety of
property types, including retail, multi-family housing, office, and hospitality.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations" for a summary of the loan to value ratios and debt service coverage
ratios of the mortgage loans securing our Purchased CMBS investments.

Our Purchased CMBS activity complements our private finance activity
because it provides a steady stream of recurring interest income. In order to
maintain a balanced investment portfolio, we expect to limit our Purchased CMBS
activity to approximately 20% to 25% of total assets.

ALLIED CAPITAL EXPRESS

On December 28, 2000, we established Allied SBLC as an independently
managed private portfolio company. Allied SBLC established a separate board of
directors, and the employees and operations attributed to Allied Capital
Express, including the online loan origination technology, were transferred to
Allied SBLC.

44
<PAGE> 48

On January 2, 2001, following the consummation of the BLC merger, we merged
Allied SBLC into BLX; BLX now operates as an independently managed private
portfolio company. See "Recent Developments."

Allied Capital Express originated loans for financings of up to $3 million
in size, including SBA 7(a) guaranteed loans. These loans were co-originated or
sold to banks and other financial institutions for premiums ranging from 5% to
10% of the loan amount. We also sold these loans for a retained servicing spread
that ranged from 1% to 5% of the outstanding loan balance for the period that
the loan remains outstanding. Following the merger with BLC, the Company will
receive interest income and dividends from its loans to and preferred equity
investments in BLX, rather than the premium income it had generated from Allied
Capital Express. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" for more information.

INVESTMENT ADVISORY SERVICES

We are a registered investment adviser, pursuant to the Investment Advisers
Act of 1940, and have certain investment advisory agreements to manage private
investment funds. The revenue generated from these agreements is not material to
the Company's operations.

LOAN SOURCING

Over the last two years, we have significantly increased the scope of our
sales and marketing activity by opening new regional offices and increasing our
sales and marketing staff. To source new investment opportunities, we work with
thousands of intermediaries including:

- private mezzanine and equity investors;

- investment banks;

- business and mortgage brokers;

- national retail financial services companies; and

- banks, law firms and accountants.

We believe that our experience and reputation provide a competitive
advantage in originating new investments. We have established an extensive
network of investment referral relationships over our 41-year history. We are
recognized as a pioneer in the private finance industry, and have developed a
reputation in the commercial real estate finance market for our ability to
finance complex transactions.

INVESTMENT APPROVAL AND UNDERWRITING PROCEDURES

In assessing new investment opportunities, we maintain conservative credit
standards based on our underwriting guidelines, a thorough due diligence
process, and a centralized credit approval process requiring committee review,
all of which are described below. The combination of conservative underwriting
standards and our credit-oriented culture has resulted in a record of minimal
realized losses.

PRIVATE FINANCE. We generally require that the companies in which we
invest demonstrate strong market position, sales growth, positive cash flow, and
profitability, as discussed above. We emphasize the quality of management, and
seek experienced entrepreneurs with a management track record, relevant industry
experience and a significant equity stake in the business. In a typical private
financing, we thoroughly review, analyze and substantiate, through due
diligence, the business plan and operations of the potential portfolio company.
We perform financial due diligence, often with assistance of

45
<PAGE> 49

an accounting firm; perform operational due diligence, often with the assistance
of an industry consultant; study the industry and competitive landscape; and
conduct numerous reference checks with current and former employees, customers,
suppliers and competitors. The typical private finance transaction requires two
to three months of diligence and structuring before funding occurs.

Private finance transactions are approved by an investment committee
consisting of our most senior private finance professionals and chaired by our
Chairman and Chief Executive Officer. The private finance approval process
benefits from the experience of the investment committee members and from the
experience of our other investment professionals who together with the committee
members, on average, have over eleven years of professional experience. For
every transaction of $10 million or greater, we also require approval from the
Executive Committee of the Board of Directors in addition to the investment
committee approval. Even after all such approvals are received, due diligence
must be successfully completed with final investment committee approval before
funds are disbursed to a new portfolio company.

PURCHASED CMBS. We receive extensive packages of information regarding the
mortgage loans comprising a CMBS pool. We work with the issuer, the investment
bank, and the rating agencies in performing our diligence on a CMBS purchase.
The typical CMBS purchase takes between two to three months to complete because
of the breadth and depth of our diligence procedures. We re-underwrite all of
the underlying commercial mortgage loans securing the CMBS. We challenge the
estimate of underwriteable cash flow and challenge necessary carve-outs, such as
replacement reserves. We study the trends of the industry and geographic
location of each property, and independently assess our own estimate of the
anticipated cash flow over the period of the loan. Our loan officers physically
inspect most of the collateral properties, and assess appraised values based on
our own opinion of comparable market values.

Based on the findings of our diligence procedures, we may reject certain
mortgage loans from inclusion in the pool. We then formulate our negotiated
purchase price and discount to achieve an effective yield on our investment over
a ten-year period to approximate 13% to 16%. In computing this estimated yield,
we assume a 1% loss rate on the entire underlying mortgage pool.

CMBS transactions are approved by an investment committee and, because of
their size, every CMBS transaction is reviewed and approved by the Executive
Committee of the Board of Directors. The investment committee for CMBS
transactions consists of our most senior commercial real estate professionals
and is chaired by our Chairman and Chief Executive Officer.

COMMERCIAL REAL ESTATE FINANCE. When we evaluate commercial mortgage
loans, we generally receive an initial package of information that typically
includes underwriting information that was developed by the borrower. Typical
underwriting information that is required from potential borrowers in order to
conduct appropriate due diligence includes: financial statements of the
borrower, appraisals, rent rolls and lease information, environmental reports,
structural and engineering reports, and any other information deemed appropriate
under the circumstances. Our underwriting process includes assessing the
borrower's estimated earnings and current cash flow coverage, the
creditworthiness of the borrower, the net worth and financial strength of the
borrower, the estimated current liquidation value of the related mortgaged
property, the financial strength of the significant tenants, and any other
collateral. We also study trends in the borrower's industry and in real estate
values in the borrower's geographic region. Our loan officers inspect the

46
<PAGE> 50

property during the due diligence process, and value the property using
internally developed valuation analyses.

Commercial mortgage loans are approved by an investment committee, which is
composed of the Company's most senior commercial real estate finance investment
professionals. For loans of $10 million or greater, the Executive Committee of
the Board of Directors must also approve the transaction, as described above.

PORTFOLIO MANAGEMENT

PORTFOLIO DIVERSITY. We monitor the portfolio to maintain both industry
and geographic diversity. We currently do not have a policy with respect to
"concentrating" (i.e., investing 25% or more of our total assets) in any
industry or group of industries and currently our portfolio is not concentrated.
We may or may not concentrate in any industry or group of industries in the
future.

LOAN SERVICING. Our loan servicing staff is responsible for routine loan
servicing, which includes:

- delinquency monitoring;

- payment processing;

- borrower inquiries;

- escrow analysis and processing;

- third-party reporting; and

- insurance and tax administration.

In addition, our staff is responsible for special servicing activities
including delinquency monitoring and collection, workout administration and
management of foreclosed assets.

PORTFOLIO MONITORING AND VALUATION

We use a grading system in order to help us monitor the credit quality of
our portfolio and the potential for capital gains. The grading system assigns
grades to investments from 1 to 5, and the portfolio was graded at September 30,
2000 as follows:

<TABLE>
<CAPTION>
PERCENTAGE
PORTFOLIO AT OF TOTAL
GRADE DESCRIPTION VALUE PORTFOLIO
----- ----------- ------------- ----------
(IN MILLIONS)
<C> <S> <C> <C>
1 Probable capital gain $ 156.0 9.5%
2 Performing security 1,362.6 83.2%
Close monitoring -- no loss of principal or interest
3 expected 40.0 2.4%
4 Workout -- Some loss of interest expected 54.2 3.3%
5 Workout -- Some loss of principal expected 25.4 1.6%
-------- ------
$1,638.2 100.0%
======== ======
</TABLE>

The 1940 Act requires that the Board of Directors value each asset in the
portfolio on a quarterly basis. We are not permitted to have a general loan loss
reserve, but instead must value each specific investment. We have a written
valuation policy that governs the valuation of our assets, and we follow a
consistent valuation process quarterly. In valuing each individual investment,
we consider the financial performance of each portfolio company, loan payment
histories, indications of potential equity realization events, current
collateral values and determine whether the value of the asset should be
increased through

47
<PAGE> 51

unrealized appreciation or decreased through unrealized depreciation. After each
investment professional has made his or her determination of value, members of
senior management review the valuations. These valuations are then presented to
the board of directors for review and approval.

As a general rule, we do not value our loans above principal balance, but
loans are subject to depreciation events when the asset is considered impaired.
Also as a general rule, equity securities may be assigned appreciation if
circumstances warrant. With respect to private equity securities, each
investment is valued using industry valuation benchmarks, and then the value is
assigned a discount reflecting the illiquid nature of the investments as well as
our minority, non-control position. When an external event such as a purchase
transaction, public offering, or subsequent equity sale occurs, the pricing
indicated by the external event is used to corroborate our private equity
valuation. Equity securities in public companies that carry certain restrictions
on sale are generally valued at a discount from the public market value of the
securities. Restricted and unrestricted publicly traded stocks may also be
valued at discounts due to the size of our investment, restrictions on trading
or market liquidity concerns.

We monitor loan delinquencies in order to assess the appropriate course of
action and overall portfolio quality. With respect to our private finance
portfolio, investment professionals closely monitor the status and performance
of each individual investment throughout each quarter. Through the process,
investments that may require closer monitoring are generally detected early, and
for each such investment, an appropriate course of action is determined. For the
private finance portfolio, loan delinquencies or payment default is not
necessarily an indication of credit quality or the need to pursue active workout
of a portfolio investment. Because we are a provider of long-term privately
negotiated investment capital, it is not atypical for us to defer payment of
principal or interest from time to time. As a result, the amount of our private
finance portfolio that is delinquent may vary. The terms of our private finance
agreements frequently provide an opportunity for our portfolio companies to
restructure their debt and equity capital. During such restructuring, we may not
receive or accrue interest or dividend payments. Our senior investment
professionals actively work with the portfolio company in these instances to
negotiate an appropriate course of action.

We price our private finance investment portfolio to provide adequate
current returns for our shareholders assuming that a portion of the portfolio at
any time may not be accruing interest currently. We also price our investments
for a total return including current interest or dividends plus capital gains
from sale of equity securities. Therefore, the amount of loans that are
delinquent is not necessarily an indication of future principal loss or loss of
anticipated investment return. The Company's portfolio grading system is used as
a means to assess loss of investment return (Grade 4 assets) or loss of
investment principal (Grade 5 assets).

With respect to our real estate secured portfolio and SBA 7(a) portfolio,
the following outlines the treatment of each delinquency category:

30 Days Past Due Our loan servicing staff monitors loans and contacts
borrowers for collection.

60 Days Past Due We generally transfer loans to professionals
responsible for special servicing activity for
monitoring, collection and development of a workout
plan, if necessary.

48
<PAGE> 52

90 Days Past Due Our accounting department reviews loans in
conjunction with the professional responsible for
special servicing to determine whether the loans
should be placed on a non-accrual status or whether a
valuation adjustment is required.

120 Days Past Due Generally, we place such loans on non-accrual status
and the loan is an active workout.

INVESTMENT GAINS AND LOSSES

As an investor focused primarily on debt investments, our investment
decisions are based on credit dynamics. Our underwriting focuses on the
preservation of principal, and we will pursue our available means to recover our
capital investment. As a result of this investment discipline and credit
culture, we have a history of low levels of loan losses, and have a demonstrated
track record of successfully resolving troubled credit situations with minimal
losses. Our realized gains from the sale of our equity interests have
historically exceeded losses, as is reflected in the chart below.

<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
----------------------- ------------------------------------------------------
2000 1999 1999 1998 1997 1996 1995
---------- ---------- ---------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Realized gains....... $ 24,664 $ 21,606 $ 31,536 $ 25,757 $ 15,804 $ 30,417 $ 16,679
Realized losses...... $ (1,569) $ (5,158) $ (6,145) $ (3,216) $ (5,100) $(11,262) $ (4,679)
Net realized gains... $ 23,095 $ 16,448 $ 25,391 $ 22,541 $ 10,704 $ 19,155 $ 12,000
Total assets......... $1,731,773 $1,169,531 $1,290,038 $856,079 $807,775 $713,360 $605,434
Realized losses/
Total assets....... 0.09% 0.4% 0.5% 0.4% 0.6% 1.6% 0.8%
</TABLE>

EMPLOYEES

At September 30, 2000, we employed 136 individuals including investment and
portfolio management professionals, operations professionals and administrative
staff. The majority of these individuals are located in the Washington, DC
office. As part of the BLC merger, 37 Allied Capital employees were transferred
to BLX as full-time employees of the new portfolio company. We believe that our
relations with our employees are excellent.

LEGAL PROCEEDINGS

We are a party to certain lawsuits in the normal course of our business.
While the outcome of these legal proceedings cannot at this time be predicted
with certainty, we do not expect that these proceedings will have a material
effect upon our financial condition or results of operations.

49
<PAGE> 53

PORTFOLIO COMPANIES

The following is a listing of our portfolio companies in which we had an
equity investment at September 30, 2000. This list does not include BLX, which
became a portfolio company on December 31, 2000 as a result of the BLC merger.
See "Recent Developments." We make available significant managerial assistance
to our portfolio companies. Other than loans to the portfolio company, our only
relationship with each portfolio company is our investment. For information
relating to the amount and general terms of our loans to portfolio companies,
see the Consolidated Statement of Investments and Notes thereto at September 30,
2000 at pages F-5 to F-11.

<TABLE>
<CAPTION>
PERCENTAGE
NAME AND ADDRESS NATURE OF ITS TITLE OF SECURITIES OF CLASS
OF PORTFOLIO COMPANY PRINCIPAL BUSINESS HELD BY THE COMPANY HELD(1)
-------------------- ------------------ ------------------- -------------
<S> <C> <C> <C>
Acme Paging, L.P. .............. Paging Services Limited Partnership 1.8%
1336 Basswood, Suite F Interests
Schaumburg, IL 60173
Allied Office Products.......... Office Products Warrants to Purchase 4.9%
75 Route 17 South Retailer Common Stock
Hasbrouck Heights, NJ 07604
American Barbecue & Grill,
Inc. ......................... Restaurant Chain Warrants to Purchase 17.3%
7300 W. 110th Street, Suite
570 Common Stock
Overland Park, KS 66210
ASW Holding Corporation......... Steel Wool Manufacturer Warrants to Purchase 5.0%
2825 W. 31st Street Common Stock
Chicago, IL 60623
Aurora Communications, LLC...... Radio Stations Redeemable Preferred 3.2%
3 Stamford Landing, Suite 210 Equity Interest
46 Southfield Avenue
Stamford, CT 06902
Avborne, Inc. .................. Aviation Services Warrants to Purchase 2.5%
c/o Trivest, Inc. Company Common Stock
2665 S. Bayshore Dr., Suite
800
Miami, FL 33133-5462
Border Foods, Inc. ............. Mexican Ingredient & Series A Convertible 9.4%
J Street Deming Food Product Preferred Stock
Industrial Park Manufacturer Warrants to Purchase 6.2%
Deming, NM 88030 Common Stock
Cahill-Warnock Strategic
Partners Fund II, L.P......... Private Equity Fund Limited Partnership 4.2%
One South Street Interest
Suite 2150
Baltimore, MD 21202
CampGroup, LLC.................. Recreational Camp Warrants to Purchase 2.6%
4 New King Street Operator Common Stock
White Plains, NY 10604
Candlewood Hotel Company........ Extended Stay Series A Convertible 5.0%
9342 East Central Facilities Preferred Stock
Wichita, KS 67206
Celebrities, Inc. .............. Radio Stations Warrants to Purchase 25.0%
408-412 W. Oakland Park Common Stock
Boulevard
Ft. Lauderdale, FL 33311-1712
Colibri Holding Corporation..... Outdoor Living Product Common Stock 3.4%
2201 S. Walbash Street Retailer Warrants to Purchase 2.0%
Denver, CO 80231 Common Stock
Component Hardware Group........ Designer & Developer Preferred Stock 9.1%
1890 Swarthmore Ave. of Hardware Common Stock 8.2%
P.O. Box 2020 Components
Lakewood, NJ 08701
Convenience Corporation of
America....................... Convenience Store Chain Series A Preferred Stock 10.0%
711 N. 108th Court Warrants to Purchase 4.0%
Omaha, NE 68154 Senior Preferred Stock
</TABLE>

50
<PAGE> 54

<TABLE>
<CAPTION>
PERCENTAGE
NAME AND ADDRESS NATURE OF ITS TITLE OF SECURITIES OF CLASS
OF PORTFOLIO COMPANY PRINCIPAL BUSINESS HELD BY THE COMPANY HELD(1)
-------------------- ------------------ ------------------- -------------
<S> <C> <C> <C>
Cooper Natural Resources,
Inc. ......................... Sodium Sulfate Producer Warrants to Purchase 25.2%
P.O. Box 1477 Common Stock
Seagraves, TX 79360
CorrFlex Graphics, LLC.......... Packaging Manufacturer Warrants to Purchase 4.8%
P.O. Box 1337 Common Stock
Monroe, NC 28110 Options to Purchase 1.0%
Common Stock
Cosmetic Manufacturing.......... Cosmetic Manufacturer Options to Purchase 22.5%
Resources, LLC Shares
11312 Penrose Street
Sun Valley, CA 91352
Coverall North America, Inc..... Commercial Cleaning Warrants to Purchase 15.0%
500 West Cypress Creek Rd. Service Common Stock
Ste. 580
Ft. Lauderdale, FL 33309
Csabai Canning Factory Rt. ..... Food Processing Hungarian Quotas 9.2%
5600 Bekescasba
Bekis: vt 52-54 Hungary
CyberRep.Com (formerly
Unitel, Inc.)................. Operator of Call Service Warrants to Purchase 22.5%
Centers
8300 Greensboro Drive, 6th
Floor Common Stock
McLean, VA 22102
DeVlieg-Bullard, Inc. .......... Tool Manufacturer Warrants to Purchase 1.7%
One Gorham Island Common Stock
Westport, CT 06680
Directory Investment
Corporation................... Telephone Directories Common Stock 50.0%
1919 Pennsylvania Avenue, N.W.
Washington, DC 20006
Directory Lending Corporation... Telephone Directories Common Stock 50.0%
1919 Pennsylvania Avenue, N.W.
Washington, DC 20006
Drilltec Patents & Technologies
Company, Inc.................. Drill Pipe Packager Warrants to Purchase 15.0%
10875 Kempwood Drive, Suite 2 Common Stock
Houston, TX 77043
eCentury Capital Partners,
L.P........................... Private Equity Fund Limited Partnership 44.8%
1101 Connecticut Ave, NW Interest
7th Floor
Washington, DC 20036
EDM Consulting, LLC............. Environmental Common Stock 25.0%
14 Macopin Avenue Consulting
Montclair, NJ 07043
Esquire Communications Ltd. .... Court Reporting Warrants to Purchase 3.0%
216 E. 45th Street, 8th floor Services Common Stock
New York, NY 10017
E-Talk Corporation (formerly
Teknekron Infoswitch
Corporation).................. Telecommunications Warrants to Purchase 5.5%
4425 Cambridge Road Software Provider Common Stock
Fort Worth, TX 76155-2692
ExTerra Credit Recovery,
Inc. ......................... Consumer Finance Preferred Stock 0.9%
35 Lennon Lane, Suite 200 Common Stock 0.7%
Walnut Creek, CA 94598 Warrants to Purchase 0.7%
Common Stock
Executive Greetings, Inc. ...... Personalized Business Warrants to Purchase 1.5%
120 Industrial Park Access
Road Products Common Stock
New Hartford, CT 06057
F.A. Television Holdings, LLC... Cable Television Preferred Units 60.0%
1919 Pennsylvania Ave N.W.
Washington, DC 20006
</TABLE>

51
<PAGE> 55

<TABLE>
<CAPTION>
PERCENTAGE
NAME AND ADDRESS NATURE OF ITS TITLE OF SECURITIES OF CLASS
OF PORTFOLIO COMPANY PRINCIPAL BUSINESS HELD BY THE COMPANY HELD(1)
-------------------- ------------------ ------------------- -------------
<S> <C> <C> <C>
Fairchild Industrial Products
Company....................... Industrial Controls Warrants to Purchase 20.0%
3920 Westpoint Boulevard Manufacturer Common Stock
Winston-Salem, NC 27013
FTI Consulting, Inc. ........... Litigation Support Warrants to Purchase 9.3%
2021 Research Drive Services Common Stock
Annapolis, MD 21401
Galaxy American Communications,
LLC........................... Cable Television Warrants to Purchase 6.0%
1220 N. Main Street Operator Common Stock
Sikeston, MO 63801
Garden Ridge Corporation........ Home Decor Retailer Series A Preferred Stock 2.6%
650 Madison Avenue Common Stock 4.7%
New York, NY 10022
Gibson Guitar Corporation ...... Guitar Manufacturer Warrants to Purchase 3.0%
1818 Elm Hill Pike Common Stock
Nashville, TN 37210
Ginsey Industries, Inc. ........ Bathroom Accessories Convertible Debentures 7.0%
281 Benigno Boulevard Manufacturer Warrants to Purchase 16.0%
Bellmawr, NJ 08031 Common Stock
Global Communications I, LLC.... Communications and Preferred Equity 59.3%
201 East 69th Street Media Businesses Interest
New York, NY 10021 Options for Common 59.3%
Membership Interest
Grant Broadcasting System II.... Television Stations Warrants to Purchase 25.0%
919 Middle River Drive, Common Stock
Suite 409 Warrants to Purchase 25.0%
Ft. Lauderdale, FL 33304 Common Stock in
Affiliate Company
Grant Television, Inc. ......... Television Stations Equity Interest 20.0%
(See Grant Broadcasting System
II)
HealthASPex, Inc................ Third Party Common Stock 24.0%
2812 Trinity Square Drive Administrator Preferred Stock 24.0%
Carrollton, TX 75006
HMT Inc. ....................... Storage Tank Common Stock 27.3%
1422 FM 1960 W. Maintenance & Warrants to Purchase 10.0%
Suite 350 Repair Common Stock
Houston, TX 77068
Hotelevision, Inc. ............. Hotel Cable-TV Preferred Stock 4.4%
599 Lexington Avenue Network
Suite 2300
New York, NY 10022
Icon International, Inc. ....... Corporate Barter Series A Preferred Stock 3.5%
281 Tressor Boulevard Services Series B Preferred Stock 3.5%
8th Floor
Stamford, CT 06901
Impact Innovations Group
(formerly J3 Technology
Services Corporation)......... Information Technology Warrants to Purchase 4.0%
5825 Glenridge Drive Services Provider Common Stock
Building II, Suite 107
Atlanta, GA 30328
International Filler
Corporation................... Cellulose and Fiber Common Stock 11.0%
50 Bridge Street Producer Warrants to Purchase 2.9%
North Tonawanda, NY 14120 Common Stock
iSolve Incorporated............. B-to-B e-Commerce Series A 2.9%
281 Tresser Boulevard Preferred Stock
Two Stamford Plaza Common Stock 1.1%
Stamford, CT 06901
JRI Industries, Inc. ........... Machinery Manufacturer Warrants to Purchase 7.5%
2958 East Division Common Stock
Springfield, MO 65803
</TABLE>

52
<PAGE> 56

<TABLE>
<CAPTION>
PERCENTAGE
NAME AND ADDRESS NATURE OF ITS TITLE OF SECURITIES OF CLASS
OF PORTFOLIO COMPANY PRINCIPAL BUSINESS HELD BY THE COMPANY HELD(1)
-------------------- ------------------ ------------------- -------------
<S> <C> <C> <C>
Julius Koch USA, Inc. .......... Cord Manufacturer Warrants to Purchase 45.0%
387 Church Street Common Stock
New Bedford, MA 02745
Kirker Enterprises, Inc. ....... Nail Enamel Warrants to Purchase 22.5%
55 East 6th Street Manufacturer Common Stock
Paterson, NJ 07524 Equity Interest in 5.0%
Affiliate Company
Kirkland's, Inc. ............... Home Furnishing Series D Preferred Stock 3.3%
P.O. Box 7222 Retailer Warrants to Purchase 4.2%
Jackson, TN 38308-7222 Common Stock
Kyrus Corporation............... Value-Added Reseller, Warrants to Purchase 8.0%
25 Westridge Market Place Computer Systems Common Stock
Chandler, NC 28715
Liberty-Pittsburgh Systems,
Inc. ......................... Business Forms Printing Common Stock 21.2%
265 Executive Drive
Plainview, NY 11803
Logic Bay Corporation........... Computer-Based Series C Redeemable 29.4%
7900 International Drive Training Developer Preferred Stock
Suite 750
Minneapolis, MN 55425
Love Funding Corporation........ Mortgage Services Series D Preferred Stock 26.0%
1220 19th Street, NW, Suite
801
Washington, DC 20036
Master Plan, Inc. .............. Healthcare Outsourcing Common Stock 15.6%
21540 Plummer Street
Chatsworth, CA 91311
Med Assets.com, Inc. ........... Healthcare Outsourcing Series B Convertible 8.5%
21540 Plummer Street Preferred Stock
Chatsworth, CA 91311 Warrants to Purchase 5.3%
Preferred Stock
Mid-Atlantic Venture Fund IV,
L.P........................... Private Equity Fund Limited Partnership 9.7%
128 Goodman Drive Interest
Bethlehem, PA 18015
Midview Associates, L.P. ....... Residential Land Warrants to purchase 35.0%
2 Eaton Street, Suite 1101 Development partnership interests
Hampton, VA 23669
Monitoring Solutions, Inc. ..... Air Emissions Common Stock 25.0%
4303 South High School Road Monitoring Warrants to Purchase 50.0%
Indianapolis, IN 46241 Common Stock
Morton Grove Pharmaceuticals,
Inc........................... Generic Drug Redeemable Convertible 27.8%
6451 West Main Street Manufacturer Preferred Stock
Morton Grove, IL 60053
Morton Industrial Group......... Friction Materials Common Stock 0.2%
5305 Oakbrook Parkway Manufacturer
Norcross, GA 30093
MVL Group....................... Market Research Warrants to Purchase 8.0%
1061 E. Indiantown Road Service Common Stock
Suite 300
Jupiter, FL 33477
NETtel Communications, Inc. .... Integrated Series B Convertible 2.5%
1023 31st Street, N.W. Communications Preferred Stock
Washington, DC 20007 Provider Series C Convertible 6.0%
Preferred Stock
Series D Convertible 21.5%
Preferred Stock
Warrants to Purchase 1.8%
Common Stock
</TABLE>

53
<PAGE> 57

<TABLE>
<CAPTION>
PERCENTAGE
NAME AND ADDRESS NATURE OF ITS TITLE OF SECURITIES OF CLASS
OF PORTFOLIO COMPANY PRINCIPAL BUSINESS HELD BY THE COMPANY HELD(1)
-------------------- ------------------ ------------------- -------------
<S> <C> <C> <C>
NETtel Corporation.............. Integrated Series A Convertible 21.5%
1023 31st Street, N.W. Communications Preferred Stock
Washington, DC 20007 Provider
Nobel Learning Communities,
Inc. ......................... Educational Services Series D Convertible 100.0%
1400 N. Providence Road, Preferred Stock
Suite 3055 Warrants to Purchase 13.1%
Media, PA 19063 Common Stock
North American Archery, LLC
(formerly Golden Eagle/
Satellite Archery, LLC)....... Sporting Equipment Convertible Debentures 26.9%
1733 Gunn Highway Manufacturer
Odessa, FL 33556
Nursefinders, Inc. ............. Home Healthcare Warrants to Purchase 3.4%
1200 Copeland Road, Suite 200 Providers Common Stock
Arlington, TX 76011
Opinion Research Corporation.... Corporate Marketing Warrants to Purchase 8.0%
P.O. Box 183 Research Firm Common Stock
Princeton, NJ 08542
Oriental Trading Company,
Inc........................... Direct Marketer Redeemable Preferred 1.7%
108th Street, 4206 South of Toys Stock
Omaha, Nebraska 68137 Class A Common Stock 1.7%
Warrants to Purchase 1.4%
Common Stock
Outsource Partners, Inc. ....... Outsourced Facility Warrants to Purchase 4.0%
200 Mansell Court East Services Provider Common Stock
Suite 500 Warrants to Purchase 4.0%
Roswell, GA 30076 Preferred Stock
Packaging Advantage
Corporation................... Personal Care, Common Stock 9.9%
4633 Downey Road Household and Warrants to Purchase 5.5%
Los Angeles, CA 90058 Disinfectant Product Common Stock
Packager
PF.Net Communications, Inc. .... Fiber Optic Network Warrants to Purchase 0.6%
677 Washington Blvd. Common Stock
Stamford, CT 06912
Physician Specialty
Corporation................... Physician Management Redeemable Preferred 3.1%
1150 Lake Hearn Drive Services Provider Stock
Atlanta, GA 30342 Convertible Preferred 3.0%
Stock
Warrants to Purchase 1.9%
Common Stock
Pico Products, Inc. ............ Satellite/Television Common Stock 5.0%
12500 Foothill Boulevard Component Warrants to Purchase 15.0%
Lakeview Terr., CA 91342 Manufacturer Common Stock
Polaris Pool Systems, Inc. ..... Pool Cleaner Warrants to Purchase 2.1%
P.O. Box 1149 Manufacturer Common Stock
San Marcos, CA 92079-1149
Professional Paint, Inc......... Paint Manufacturer Common Stock 11.0%
3900 Joliet Street Series A-1 Senior 100.0%
Denver, CO 80239 Exchangeable Preferred
Stock
Progressive International
Corporation .................. Retail Kitchenware Common Stock 0.0%
6111 S. 228th Street Redeemable Preferred 12.5%
P.O. Box 97045 Stock
Kent, WA 98064 Warrants to Purchase 6.2%
Common Stock
Schwinn/GT...................... Bicycle Manufacturer/ Warrants to Purchase 0.7%
1690 38th Street Distributor Common Stock
Boulder, CO 80301
Seasonal Expressions, Inc....... Decorative Ribbon Series A Preferred Stock 100.0%
230 5th Avenue, Suite 1007 Manufacturer
New York, NY 10001
</TABLE>

54
<PAGE> 58

<TABLE>
<CAPTION>
PERCENTAGE
NAME AND ADDRESS NATURE OF ITS TITLE OF SECURITIES OF CLASS
OF PORTFOLIO COMPANY PRINCIPAL BUSINESS HELD BY THE COMPANY HELD(1)
-------------------- ------------------ ------------------- -------------
<S> <C> <C> <C>
Soff-Cut Holdings, Inc.......... Concrete Sawing Common Stock 2.7%
1112 Olympic Drive Equipment Manufacturer Series A Preferred Stock 4.0%
Corona, CA 91719 Warrants to Purchase 6.7%
Common Stock
Spa Lending Corporation......... Health Spas Series A Preferred Stock 100.0%
1919 Pennsylvania Avenue, N.W. Series B Preferred Stock 68.4%
Washington, DC 20006 Series C Preferred Stock 46.3%
Common Stock 62.1%
Startec Communications, Inc. ... Integrated Common Stock 1.3%
10411 Motor City Drive Communications Warrants to 0.9%
Bethesda, MD 20852 Service Provider Purchase Common Stock
Sure-Tel, Inc. ................. Telephone Services Series A Convertible 41.7%
5 North McCormick Company Redeemable Preferred
Oklahoma City, OK 73127 Stock
Warrants to Purchase 9.6%
Common Stock
Total Foam, Inc. ............... Packaging Systems Common Stock 49.0%
P.O. Box 688
Ridgefield, CT 06877
Tubbs Snowshoe Company, LLC. ... Snowshoe Manufacturer Warrants to Purchase 7.7%
52 River Road Common Units
Stowe, VT 05672 Common Units of 10.9%
Affiliate Company
United Pet Group, Inc. ......... Manufacturer of Pet Warrants to Purchase 0.8%
125 High Street Supply Products Common Stock
Boston, MA 02110
Venturehouse Group LLC.......... Private Equity Fund Common Equity Interest 1.5%
1780 Tysons Blvd., Suite 400
McLean, VA 22102
Walker Investment Fund, II,
L.P........................... Private Equity Fund Limited Partnership 5.1%
3060 Washington Road Interest
Suite 200
Glenwood, MD 21738
Warn Industries................. Sport Utility Accessories Warrants to Purchase 4.3%
12900 S.E. Capps Rd. Manufacturer Common Stock
Clackamas, OR 97015
Williams Brothers Lumber
Company....................... Builders' Supplies Warrants to Purchase 14.1%
3165 Pleasant Hill Road Common Stock
Duluth, GA 30136
Wilmar Industries, Inc. ........ Repair and Maintenance Warrants to Purchase 3.0%
303 Harper Drive Product Distributor Common Stock
Moorestown, NJ 08057
Wilshire Restaurant, Inc. ...... Restaurant Chain Warrants to Purchase 3.0%
1100 Town & Country Road Common Stock
Suite 1300
Orange, CA 92868-4654
Woodstream Corporation.......... Pest Control Equity Interest 13.8%
69 North Locust Street Manufacturer Warrants to Purchase 7.2%
Lititz, PA 17543 Common Stock
Wyo-Tech Acquisition
Corporation................... Vocational School Common Stock 99.0%
4373 N. 3rd Street Preferred Stock 100.0%
Laramie, WY 82072
</TABLE>

---------------
(1) Percentages shown for warrants and options held represent the percentage of
class of security we may own, on a fully diluted basis, assuming we exercise
our warrants or options.

55
<PAGE> 59

DETERMINATION OF NET ASSET VALUE

We determine the net asset value per share of our common stock quarterly.
The net asset value per share is equal to the value of our total assets minus
liabilities and preferred stock divided by the total number of common stock
outstanding.

Portfolio assets are carried at fair value as determined by the board of
directors under our valuation policy. As a general rule, we do not value the
Company's loans above cost, but loans are subject to depreciation events when
the asset is considered impaired. Also as a general rule, equity securities may
be assigned appreciation if circumstances warrant. With respect to private
equity securities, each investment is valued using industry valuation
benchmarks, and then the value is assigned a discount reflecting the illiquid
nature of the investment as well as our minority, non-control position. When an
external event such as a purchase transaction, public offering, or subsequent
equity sale occurs, the pricing indicated by the external event is used to
corroborate our private equity valuation. Equity securities in public companies
that carry certain restrictions on sale are generally valued at a discount from
the public market value of the securities. Restricted and unrestricted publicly
traded stocks may also be valued at discounts, due to the size of our investment
or market liquidity concerns.

Determination of fair value involves subjective judgments that cannot be
substantiated by auditing procedures. Accordingly, under current standards, the
accountants' opinion on the Company's financial statements in our annual report
refers to the uncertainty with respect to the possible effect on the financial
statements of such valuation.

MANAGEMENT

The Board of Directors supervises the management of our Company. The
responsibilities of each director include, among other things, the oversight of
the loan approval process, the quarterly valuation of our assets, and oversight
of our financing arrangements. The board of directors maintains an Executive
Committee, Audit Committee, Compensation Committee, and Nominating Committee,
and may establish additional committees in the future. All of the Company's
directors also serve as directors of its subsidiaries.

Our investment decisions in each business area are made by investment
committees comprised of the Company's most senior investment professionals. No
one person is primarily responsible for making recommendations to a committee.

The Company is internally managed and our investment professionals manage
our portfolio and the portfolios of companies for which we serve as investment
adviser. These investment professionals have extensive experience in managing
investments in private growing businesses in a variety of industries and in
diverse geographic locations, and are familiar with our approach of lending and
investing. Because the Company is internally managed, we pay no investment
advisory fees, but instead we pay the operating costs associated with employing
investment management professionals.

STRUCTURE OF BOARD OF DIRECTORS

The Company's Board of Directors is classified into three approximately
equal classes with three-year terms, with only one of the three classes expiring
each year. Directors serve until their successors are elected and qualified.

56
<PAGE> 60

DIRECTORS

Information regarding the board of directors is as follows:

<TABLE>
<CAPTION>
DIRECTOR EXPIRATION
NAME AGE POSITION SINCE(1) OF TERM
---- --- -------- -------- ----------
<S> <C> <C> <C> <C>
William L. Walton*........... 51 Chairman, Chief Executive
Officer and President 1986 2001
George C. Williams, Jr.*..... 74 Chairman Emeritus 1964 2001
Brooks H. Browne............. 51 Director 1990 2001
John D. Firestone............ 57 Director 1993 2002
Anthony T. Garcia............ 44 Director 1991 2002
Lawrence I. Hebert........... 54 Director 1989 2002
John I. Leahy................ 70 Director 1994 2003
Robert E. Long............... 69 Director 1972 2001
Warren K. Montouri........... 71 Director 1986 2003
Guy T. Steuart II............ 69 Director 1984 2003
T. Murray Toomey, Esq........ 77 Director 1959 2003
Laura W. van Roijen.......... 48 Director 1992 2002
</TABLE>

---------------
* Interested persons of the Company, as defined in the 1940 Act.

(1) Includes service as a director of any of the predecessor companies.

EXECUTIVE OFFICERS

Information regarding the Company's executive officers is as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
William L. Walton............ 51 Chairman, Chief Executive Officer and President
Joan M. Sweeney.............. 41 Managing Director and Chief Operating Officer
Scott S. Binder.............. 46 Managing Director
Samuel B. Guren.............. 53 Managing Director
Philip A. McNeill............ 41 Managing Director
John M. Scheurer............. 48 Managing Director
Thomas H. Westbrook.......... 37 Managing Director
G. Cabell Williams, III ..... 46 Managing Director
Penni F. Roll................ 35 Executive Vice President and Chief Financial
Officer
</TABLE>

BIOGRAPHICAL INFORMATION

DIRECTORS

William L. Walton has been the Chairman, Chief Executive Officer and
President of the Company since 1997. William Walton is Chairman and Chief
Executive Officer of Allied Capital Corporation. He has served on Allied
Capital's board of directors since 1986, and was named Chairman and CEO in
February 1997. Mr. Walton has an extensive background in general management,
marketing, strategic planning, mergers and acquisitions and financial analysis.
Mr. Walton previously served as Managing Director of New York-based Butler
Capital Corporation 1987-1991 and was the personal venture capital advisor for
William S. Paley, founder and Chairman of CBS. In addition, he was a Senior

57
<PAGE> 61

Vice President in Lehman Brother Kuhn Loeb's Investment Banking Group. Mr.
Walton also founded and managed two start-up businesses in the emerging
education industry (1992-1996). He received both a B.A. and a M.B.A. from
Indiana University.

George C. Williams, Jr. is Chairman Emeritus of the Company. Mr. Williams
was an officer of the predecessor companies from the later of 1959 or the
inception of the relevant entity and President or Chairman and Chief Executive
Officer of the predecessor companies from the later of 1964 or each entity's
inception until 1991. Mr. Williams is the father of G. Cabell Williams III, an
executive officer of the Company.

Brooks H. Browne has been the President of Environmental Enterprises
Assistance Fund since 1993. Mr. Browne is a director of SEAF, Corporation
Financiera Ambiental (Panama), Empresas Ambientales de Centro America (Costa
Rica) and Yayasan Bina Usaha Lingkungan (Indonesia) (environmental nonprofit or
investment funds).

John D. Firestone has been a Partner of Secor Group (venture capital) since
1978. Mr. Firestone is a director of Business Mortgage Investors, Inc., Security
Storage Company of Washington, DC, Bryn Mawr Bank Corporation and the National
Organization on Disability. Mr. Firestone is an Advisory Board member of
GeoPortals.com.

Anthony T. Garcia is currently a private investor. Mr. Garcia was General
Manager of Breen Capital Group (investor in tax liens) from 1997 to 2000. Mr.
Garcia was a Senior Vice President of Lehman Brothers Inc. from 1985 to 1996.

Lawrence I. Hebert has been a director of Riggs National Corporation since
1988. He also serves as a director of Riggs Investment Management Corporation
and Riggs Bank Europe Limited (indirect subsidiaries of Riggs National
Corporation). Mr. Hebert is the President and a director of Perpetual
Corporation (owner of Allbritton Communications Company and Allnewsco, Inc.) and
the Chairman and Chief Executive Officer of Allbritton Communications Company
(owner of television stations). Mr. Hebert is a director of Allnewsco, Inc.
(news programming service), the President of Westfield News Advertiser, Inc.
(owner of a television station and newspapers), and a trustee of The Allbritton
Foundation. Mr. Hebert was Vice President of University Bancshares, Inc. (a
Texas bank holding company) from 1975 to 1997.

John I. Leahy has been the President of Management and Marketing Associates
(a management consulting firm) since 1986. Mr. Leahy was the President and Group
Executive Officer, Western Hemisphere of Black & Decker Corporation from 1982 to
1985. Mr. Leahy is a director of Kar Kraft Systems, Inc., The Wills Group and
Chairman of Gallagher Fluid Seals, Inc. Mr. Leahy is a trustee of St. Mary's
Seminary & University and Trustee Emeritus of Loyola College Sellinger School of
Business.

Robert E. Long is the Managing Director of Goodwyn, Long & Black Investment
Management, Inc. and has been the Chairman and Chief Executive Officer of
Emerald City Radio Partners, LLC since 1997. Mr. Long has been the President and
Chief Executive Officer of Business News Network, Inc. from 1995 to 1998, was
the Chairman and Chief Executive Officer of Southern Starr Broadcasting Group,
Inc. from 1991 to 1995, and a director and the President of Potomac Asset
Management, Inc. from 1983 to 1991. Mr. Long is a director of Ambase Inc., AHL
Shipping Company, Inc., CSC Scientific, Inc., and Global Travel, Inc.

58
<PAGE> 62

Warren K. Montouri has been a Partner of Montouri & Roberson (real estate
investment firm) since 1980. Mr. Montouri was a director of C&S/Sovran Bank from
1970 to 1990, a director of Sovran Financial Corporation from 1989 to 1990, a
director of NationsBank, N.A. from 1990 to 1996, a director of BB&T Bank
(formerly Franklin National Bank) since 1996, a trustee of Suburban Hospital
from 1991 to 1994, and a trustee of The Audubon Naturalist Society from 1979 to
1985.

Guy T. Steuart II has been a director and President of Steuart Investment
Company (manages, operates, and leases real and personal property and holds
stock in operating subsidiaries engaged in various businesses) since 1960. Mr.
Steuart is Trustee Emeritus of Washington and Lee University.

T. Murray Toomey, Esq. has been an attorney at law since 1949. Mr. Toomey
is a director of The National Capital Bank of Washington and Federal Center
Plaza Corporation. He is also a trustee of The Catholic University of America.

Laura W. van Roijen has been a private real estate investor since 1992. Ms.
van Roijen was the Chairman of CWV & Associates (RTC qualified contracting firm)
from 1991 to 1994, a director and the Treasurer of Black Possum Inc. (retail
concern) from 1994 to 1996, the President of Volta Place, Inc. (real estate
advisory firm) from 1991 to 1994, and Vice President (from 1986 to 1991) and
Market Director (from 1989 to 1991) of Citicorp Real Estate, Inc.

EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS

Joan M. Sweeney, Managing Director and Chief Operating Officer, has been
employed by the Company since 1993. Ms. Sweeney oversees all company operations
and is responsible for strategic planning, financial management, information
technology, marketing, investor relations, and all regulatory compliance. Ms.
Sweeney also has direct responsibility for the Company's small business lending
operations through Allied Capital Express. Prior to joining the Company, Ms.
Sweeney spent ten years of her career consulting with private and small public
companies at both Ernst & Young and Coopers & Lybrand. Ms. Sweeney was a member
of the SEC Division of Enforcement in the late 1980s.

Scott S. Binder, Managing Director, has worked with the Company since 1991
and is responsible for the Company's telecommunications and new media
investments within the private finance group. Prior to joining the Company, Mr.
Binder formed and was President of Overland Communications Group, which owned
and operated cable television systems and radio stations. He also has worked in
the specialty finance and leasing industry.

Samuel B. Guren, Managing Director, joined the Company in 1999. He joined
the Company to develop the Company's private equity investment business. Mr.
Guren has more than 26 years of venture capital investing experience. Prior to
joining the Company, Mr. Guren was the Senior Managing Partner at Baird Capital.
He also served as a Senior Managing Partner at William Blair Venture Partners
for 15 years.

Philip A. McNeill, Managing Director, has been employed by the Company
since 1993 and is responsible for co-managing the Company's private finance
group. Before joining the Company, he served as a vice president of M&T Capital
Corporation. Prior to entering the private finance industry, he was founding
director of Western Oklahoma National Bank, and structured and managed numerous
privately negotiated investments.

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John M. Scheurer, Managing Director, has been employed by the Company since
1991 and manages the Company's real estate finance group. He has more than 22
years of experience in commercial finance and real estate lending and
management. Prior to joining the Company, Mr. Scheurer worked in various
capacities with Capital Recovery Advisors, Inc. and First American Bank. He also
started his own company, The Scheurer Company, and co-founded Hunter &
Associates, a major leasing and consulting real estate firm in the Washington,
DC area.

Thomas H. Westbrook, Managing Director, has been with the Company since
1991 and is responsible for the Company's business services investments within
the private finance group. Prior to joining the Company, Mr. Westbrook worked
with North Carolina Enterprise Fund and was a lending officer in NationsBank's
corporate lending unit. He is the former president of the southern RASBIC and
has served on the NASBIC Board of Governors.

G. Cabell Williams, III, Managing Director, has been employed by the
Company since 1981 and is responsible for co-managing the operations of the
Company's private finance group. He has over 19 years of private finance
experience, and has structured numerous types of private debt and equity finance
transactions. Mr. Williams has served in many capacities during his tenure with
the Company.

Penni F. Roll, Principal and Chief Financial Officer, has been employed by
the Company since 1995. Ms. Roll is responsible for the Company's financial
management and reporting, accounting, loan servicing, special servicing,
portfolio monitoring and regulatory compliance activities. Prior to joining the
Company, she spent seven years in the financial services practice at KPMG Peat
Marwick, including serving as a Manager from 1993 to 1995.

EMPLOYMENT AGREEMENTS

During the first half of 2000, the Company engaged independent compensation
consulting firms to assist in comparing the compensation programs of Allied
Capital with those of companies that compete with Allied Capital for talent. The
consultants specifically studied the private equity industry, the commercial
finance industry, and other market participants. The market data indicated that
the compensation packages for the Company's most senior executives needed to be
more competitive, in order for the Company to ensure the retention of its key
executives.

The Company's status as a BDC specifically limits the types of compensation
that may be paid to employees in the form of cash and at-the-market stock
options. The BDC rules prohibit, among other things, the use of restricted stock
as compensation. In addition, while the Company provides at-the-market stock
options as a significant portion of compensation, unexercised options do not
accrue dividends, and as a result, participants in the Company's stock option
plan are unable to receive a significant portion of the total return attributed
to a share of the Company's common stock on unexercised options. During 1999,
approximately 66% of the total return generated from an investment in the
Company's common stock was derived from dividends paid during the year.

As a result, during the second quarter of 2000, the Company entered into
employment agreements with nine senior executives of the Company, including
William L. Walton, the Company's Chairman and CEO, Joan M. Sweeney, Managing
Director and Chief Operating Officer, and G. Cabell Williams III, Managing
Director. Each of the

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agreements provides for a three-year term, with annual renewals thereafter, and
specifies each executive's compensation during the term of the agreement, in
accordance with the achievement of certain performance standards.

The annual base salary on the effective date of the employment agreements
of Mr. Walton, Ms. Sweeney, and Mr. Williams was $405,000, $256,500, and
$256,500, respectively. The Board of Directors has the right to increase the
base salary during the term of the employment agreement. In addition, each
employment agreement states that the Board of Directors may provide, at their
sole discretion, an annual cash bonus. This bonus is to be determined with
reference to each executive's performance in accordance with performance
criteria to be determined by the Board in its sole discretion. Under each
agreement, each executive also is entitled to participate in the Company's
Amended Stock Option Plan, and to receive all other awards and benefits
previously granted to each executive including split dollar life insurance.

In addition, each employment agreement provides for a long-term cash
retention award for the performance period from 2001 through 2003. The long-term
cash retention award will vest and be payable in six equal installments on June
30th and December 31st of each year from 2001 through 2003. Mr. Walton will be
eligible for a long-term cash retention award of $3,375,000, or $1,125,000 per
year, over the performance period; Ms. Sweeney will be eligible for $2,550,000,
or $850,000 per year; Mr. Williams will be eligible for $2,115,000, or $705,000
per year.

Employment will terminate if the term of the agreement expires without
written agreement of both parties. The executive has the right to voluntarily
terminate employment at any time with 30 days' notice, and in such case, the
employee will not receive any severance pay. Among other things, the employment
agreements prohibit the solicitation of employees from the Company in the event
of an executive's departure for a period of two years.

If employment is terminated with cause, the employee will not receive any
severance pay. If employment is terminated without cause during the term of the
agreement, the executive shall be entitled to severance pay for a period not to
exceed 36 months for Mr. Walton; 30 months for Ms. Sweeney; and 24 months for
Mr. Williams. Severance pay shall include the continuation of the employee's
base salary, and the greater of (a) the average of the annual bonuses paid
during the preceding three years, or (b) the amount of the last annual bonus
paid to the employee. In addition, the executive shall be entitled to receive
any payments under the long-term cash retention award that would have vested and
been payable during the severance period. However, stock options would cease to
vest during the severance period.

If, within 12 months after a change of control (as defined in the
employment agreements) termination of employment occurs either by the executive
officer or the Company, the executive officer shall not be entitled to severance
pay, but will instead be entitled to lump sum compensation as well as certain
other benefits. For Mr. Walton, this lump sum is equal to three years of base
salary and bonus (as calculated for severance pay), plus an amount equal to
$5,565,000. For Ms. Sweeney, this lump sum is equal to two and a half years of
base salary and bonus, plus an amount equal to $2,600,000. For Mr. Williams,
this lump sum is equal to two years of base salary and bonus, plus an amount
equal to $2,350,000. Under the terms of the agreement, the Company would also
provide compensation to offset any applicable excise tax penalties imposed on
the executive under section 4999 of the IRC code.

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The other six employment agreements carry terms substantially similar to
those of Mr. Williams' agreement, as described herein.

COMPENSATION PLANS

STOCK OPTION PLAN

The Company's stock option plan (the "Stock Option Plan") is intended to
encourage stock ownership in the Company by officers, thus giving them a
proprietary interest in the Company's performance. The Stock Option Plan was
approved by shareholders at the Special Meeting of Shareholders on November 26,
1997. On May 9, 2000, the Company's stockholders amended the Stock Option Plan
to increase the authorized shares under the plan to 12,350,000 shares as well as
make certain other administrative changes.

The Committee's principal objective in awarding stock options to the
eligible officers of the Company is to align each optionee's interests with the
success of the Company and the financial interests of its stockholders by
linking a portion of such optionee's compensation with the performance of the
Company's stock and the value delivered to stockholders.

Stock options are granted under the Stock Option Plan at a price not less
than the prevailing market value and will have value only if the Company's stock
price increases. The Committee determines the amount and features of the stock
options, if any, to be awarded to optionees. The Committee evaluates a number of
criteria, including the past service of each such optionee to the Company, the
present and potential contributions of such optionee to the success of the
Company and such other factors as the Committee shall deem relevant in
connection with accomplishing the purposes of the Stock Option Plan, including
the recipient's current stock holdings, years of service, position with the
Company and other factors. The Committee does not apply a formula assigning
specific weights to any of these factors when making its determination. The
Committee awards stock options on a subjective basis and such awards depend in
each case on the performance of the officer under consideration.

For the nine months ended, September 30, 2000, a total of 3,832,112 options
were granted, including grants made by the Company's compensation committee to
certain officers and automatic grants to non-officer directors of the Company.
For the year ended December 31, 1999, 1,287,736 options were granted. These
options generally vest over a five-year period except that grants to non-officer
directors vest immediately. See "Control Persons and Principal Holders of
Securities" in the SAI for currently exercisable options granted to certain
executive officers and non-officer directors.

On September 8, 1999, the Company received approval from the Commission to
grant options under the Stock Option Plan to non-officer directors. On that
date, each incumbent non-officer director received options to purchase 10,000
shares, and pursuant to the Commission order, each will receive options to
purchase 5,000 shares each year thereafter on the date of the annual meeting of
stockholders. New directors will receive options to purchase 10,000 shares upon
election to the board, and options to purchase 5,000 shares each year thereafter
on the date of the annual meeting.

The Stock Option Plan is designed to satisfy the conditions of Section 422
of the Code so that options granted under the Stock Option Plan may qualify as
"incentive stock options." To qualify as "incentive stock options," options may
not become exercisable for

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the first time in any year if the number of incentive options first exercisable
in that year multiplied by the exercise price exceeds $100,000.

FORMULA AWARD AND CUT-OFF AWARD

FORMULA AWARD. The Formula Award was designed as an incentive compensation
program that would replace stock options of the predecessor companies that were
cancelled as a result of the Company's 1997 merger, and would balance share
ownership among key officers. Assuming all officers meet the vesting
requirement, the Company would accrue the Formula Award in equal amounts of
approximately $6.4 million, over the three-year period on the anniversary of the
merger date (December 31) in 1998, 1999 and 2000, and will vest automatically in
the event of a change of control of the Company. The Formula Award expense for
the nine months ended September 30, 2000 and the year ended December 31, 1999
totaled $4.3 million and $6.2 million, respectively. If an officer terminates
employment with the Company prior to the vesting of any part of the Formula
Award, that amount is forfeited to the Company. The terms of the Formula Award
require that the award be contributed to the Company's deferred compensation
plan, and used to purchase shares of the Company in the open market. See
"Deferred Compensation Plan." The amount of the Formula Awards received by
certain executive officers in 1999 is provided in the SAI.

On January 2, 2001, the trust that holds the deferred compensation plan
distributed shares of the Company's common stock with a value of $4,383,165
representing the final portion of the Formula Award that vested on December 31,
2000. These shares are held in restricted accounts at a brokerage firm.

CUT-OFF AWARD. The Cut-Off Award was designed to cap the appreciated value
in unvested options at the merger announcement date in order to set the
foundation to balance option awards upon the merger. The Cut-Off Award, in the
aggregate, was computed to be $2.9 million, and was equal to the difference
between the market price of the shares of stock underlying the canceled options
under the old plans of the predecessor companies at August 14, 1997, less the
exercise prices of the options. The Cut-Off Award is payable for each canceled
option as the canceled option would have vested, and vests automatically in the
event of a change of control. The Cut-Off Award is payable only if the award
recipient is employed by the Company on the future vesting date. The Cut-Off
Award expense for the nine months ended September 30, 2000 and the year ended
December 31, 1999 totaled $0.5 million and $0.6 million, respectively. The
amount of the Cut-Off Award received by certain executive officers in 1999 is
provided in the SAI.

EMPLOYEE STOCK OWNERSHIP PLAN AND 401(K) PLAN

Until December 31, 1999, the Company maintained an Employee Stock Ownership
Plan (the "ESOP"). All eligible employees (i.e., employees with one (1) year of
service who are at least 21 years of age) of the Company were eligible
participants in the ESOP. Pursuant to this qualified plan, during 1999 the
Company contributed 5% of each eligible participant's total cash compensation
for the year (up to $160,000) to a plan account on the participant's behalf,
which fully vests over a two-year period. The contribution with respect to
compensation in excess of $160,000 was made to the deferred compensation plan.
The ESOP used substantially all of these cash contributions to purchase shares
of the Company. At December 31, 1999, the ESOP held 0.4% of the outstanding
shares of the

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Company, and all of these shares had been allocated to participants' plan
accounts. On December 31, 1999 the ESOP was terminated.

In October 1999, the Company established a 401(k) plan (the "401(k) Plan"),
to replace the existing ESOP. All employees who are at least 21 years of age
have the opportunity to contribute pre-tax salary deferrals into the 401(k) Plan
up to $10,500, and to direct the investment of these contributions. The 401(k)
Plan allows eligible participants to invest in shares of the Company's common
stock among other investment options. In addition, beginning in 2000, the
Company will contribute to each eligible participant (i.e., employees with one
(1) year of service), 5% of each participant's total cash compensation for the
year, up to $170,000, to each participant's plan account on the participant's
behalf, which fully vests at the time of contribution. The contribution with
respect to compensation in excess of $170,000 is made to the Deferred
Compensation Plan.

Generally, participants, including the executive officers, transferred the
balance of their ESOP account, including shares of the Company, into the 401(k)
Plan on March 16, 2000. On September 30, 2000, the 401(k) Plan held less than
0.3% of the outstanding shares of the Company.

DEFERRED COMPENSATION PLAN

The Company maintains a deferred compensation plan (the "Deferred
Compensation Plan"). The Deferred Compensation Plan is a funded plan that
provides for the deferral of compensation by employees and consultants of the
Company. Any employee or consultant of the Company is eligible to participate in
the plan at such time and for such period as designated by the board of
directors. The Deferred Compensation Plan is administered through a trust, and
the Company funds this plan through cash contributions. The Deferred
Compensation Plan holds the unvested shares of the Company's common stock
purchased in connection with the Formula Award.

TAX STATUS

The following discussion is a general summary of the material United States
federal income tax considerations applicable to the Company and to an investment
in the common stock. This summary does not purport to be a complete description
of the income tax considerations applicable to such an investment. The
discussion is based upon the Code, Treasury Regulations, and administrative and
judicial interpretations, each as of the date of this prospectus and all of
which are subject to change. You should consult your own tax advisor with
respect to tax considerations that pertain to your purchase of the common stock.

This summary is intended to apply to investments in common stock and
assumes that investors hold the common stock as capital assets. This summary
does not discuss all aspects of federal income taxation relevant to holders of
the common stock in light of particular circumstances, or to certain types of
holders subject to special treatment under federal income tax laws, including
dealers in securities, pension plans and trusts and financial institutions. This
summary does not discuss any aspects of U.S. estate and gift tax or foreign,
state or local tax. It does not discuss the special treatment under federal
income tax laws that could result if the Company invested in tax-exempt
securities or certain other investment assets.

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This summary does not discuss the consequences of investments in preferred
stock or debt securities of the Company. The tax consequences of an offering of
preferred stock or debt securities of the Company will be discussed in a
prospectus supplement relating to or for such offering.

Except as specifically indicated herein, this summary is intended to apply
to U.S. Stockholders (as defined below) and does not purport to discuss all U.S.
federal income tax consequences to persons who are not U.S. Stockholders
("Non-U.S. Stockholders") from an investment in the common stock. (A "U.S.
Stockholder" generally is a stockholder who is (i) a citizen or resident of the
United States, (ii) a corporation, partnership or other entity created in or
organized under the laws of the United States or any political subdivision
thereof, (iii) an estate, the income of which is subject to United States
federal income taxation regardless of its source, or (iv) a trust subject to the
supervision of a court within the United States and the control of a United
States person.) Non-U.S. Stockholders should consult their own tax advisors to
discuss the consequences of an investment in the common stock.

TAXATION AS A RIC

The Company intends to be treated for tax purposes as a "regulated
investment company" or "RIC" under Subchapter M of the Code. If the Company (i)
qualifies as a RIC and (ii) distributes to stockholders in a timely manner at
least 90% of its "investment company taxable income," as defined in the Code
(i.e., net investment income, including accrued original issue discount, and net
short-term capital gain) (the "90% Distribution Requirement") each year, it will
not be subject to federal income tax on the portion of its investment company
taxable income and net capital gain (i.e., net long-term capital gain in excess
of net short-term capital loss) it distributes (or treats as "deemed
distributed") to stockholders. In addition, if the Company distributes in a
timely manner the sum of (i) 98% of its ordinary income for each calendar year,
(ii) 98% of its capital gain net income for the one-year period ending December
31 in that calendar year, and (iii) any income not distributed in prior years,
the Company will not be subject to the 4% nondeductible federal excise tax on
certain undistributed income of RICs (the "Excise Tax Avoidance Requirements").
The Company generally will endeavor to distribute (or treat as deemed
distributed) to stockholders all of its investment company taxable income and
its net capital gain, if any, for each taxable year so that it will not incur
federal income or excise taxes on its earnings. The Company will be subject to
federal income tax at the regular corporate rate for any amounts of investment
company taxable income or net capital gain not distributed (or deemed
distributed) to the stockholders.

In order to qualify as a RIC for federal income tax purposes, the Company
must, among other things: (a) continue to qualify as a BDC under the 1940 Act,
(b) derive in each taxable year at least 90% of its gross income from dividends,
interest, payments with respect to securities loans, gains from the sale of
stock or other securities, or other income derived with respect to its business
of investing in such stock or securities (the "90% Income Test"); and (c)
diversify its holdings so that at the end of each quarter of the taxable year
(i) at least 50% of the value of the Company's assets consists of cash, cash
items, U.S. government securities, securities of other RICs, and other
securities if such other securities of any one issuer do not represent more than
5% of the Company's assets or more than 10% of the outstanding voting securities
of the issuer, and (ii) no more than 25% of the value of the Company's assets is
invested in the securities (other than U.S. government securities or securities
of other RICs) of one issuer or of two or more issuers

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that are controlled (as determined under applicable Code rules) by the Company
and are engaged in the same or similar or related trades or businesses (the
"Diversification Tests"). The failure of one or more of the Company's
subsidiaries to continue to qualify as RICs could adversely affect the Company's
ability to satisfy the Diversification Tests.

If the Company acquires or is deemed to have acquired debt obligations that
were issued originally at a discount or that otherwise are treated under
applicable tax rules as having original issue discount, it must include in
income each year a portion of the original issue discount that accrues over the
life of the obligation regardless of whether cash representing such income is
received by it in the same taxable year. Any amount accrued as original issue
discount will be included in the Company's investment company taxable income for
the year of accrual and may have to be distributed to the stockholders in order
to satisfy the 90% Distribution Requirement or the Excise Tax Avoidance
Requirements even though the Company has not received any cash representing such
income.

Although it does not currently intend to do so, if the Company were to
invest in certain options, futures, or forward contracts, it may be required to
report income from such investments on a mark-to-market basis, which could
result in the Company recognizing unrealized gains and losses for federal income
tax purposes even though it may not realize such gains and losses when it
ultimately disposes of such investments. The Company could also be required to
treat such gains and losses as 60% long-term capital gain or loss and 40%
short-term capital gain or loss regardless of its holding period for the
investments. In addition, if the Company were to engage in certain hedging
transactions, including hedging transactions in options, future contracts, and
straddles, or other similar transactions, it will be subject to special tax
rules (including constructive sale, mark-to-market, straddle, wash sale, and
short sale rules), the effect of which may be to accelerate income to the
Company, defer losses to the Company, cause adjustments in the holding periods
of the Company's securities, convert long-term capital gains into short-term
capital gains or convert short-term capital losses into long-term capital
losses. These rules could affect the Company's investment company taxable income
or net capital gain for a taxable year and thus affect the amounts that the
Company would be required to distribute to its stockholders pursuant to the 90%
Distribution Requirement and the Excise Tax Avoidance Requirements for such
year.

Although it does not presently expect to do so, the Company is authorized
to borrow funds and to sell assets in order to satisfy distribution
requirements. However, under the 1940 Act, the Company is not permitted to make
distributions to stockholders while the Company's debt obligations and other
senior securities are outstanding unless certain "asset coverage" tests are met.
Moreover, the Company's ability to dispose of assets to meet its distribution
requirements may be limited by other requirements relating to its status as a
RIC, including the Diversification Test. If the Company disposes of assets in
order to meet the 90% Distribution Requirement or the Excise Tax Avoidance
Requirements, the Company may make such dispositions at times that, from an
investment standpoint, are not advantageous.

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

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distributions or deemed distributions may be characterized as long-term capital
gain in the hands of stockholders.

The remainder of this Summary assumes that the Company qualifies as a RIC
and satisfies the 90% Distribution Requirement.

TAXATION OF STOCKHOLDERS

Distributions of the Company generally are taxable to stockholders as
ordinary income or capital gains. Distributions of the Company's investment
company taxable income will be taxable as ordinary income to stockholders to the
extent of the Company's current or accumulated earnings and profits, whether
paid in cash or reinvested in additional common stock. Distributions of the
Company's net capital gains properly designated by the Company as "capital gain
dividends" will be taxable to a stockholder as long-term capital gains
regardless of the stockholder's holding period for his or her common stock and
regardless of whether paid in cash or reinvested in additional common stock.
Distributions in excess of the Company's earnings and profits first will reduce
a stockholder's adjusted tax basis in such stockholder's common stock and, after
the adjusted basis is reduced to zero, will constitute capital gains to such
stockholder. For a summary of the tax rates applicable to capital gains,
including capital gain dividends, see the discussion below.

At the Company's option, the Company may elect to retain some or all of its
net capital gains for a tax year, but designate the retained amount as a "deemed
distribution." In that case, among other consequences, the Company will pay tax
on the retained amount for the benefit of its stockholders, the stockholders
will be required to report their share of the deemed distribution on their tax
returns as if it had been distributed to them, and the stockholders will report
a credit for the tax paid thereon by the Company. The amount of the deemed
distribution net of such tax will be added to the stockholder's cost basis for
his or her common stock. Since the Company expects to pay tax on any retained
net capital gains at its regular corporate capital gain tax rate, and since that
rate is in excess of the maximum rate currently payable by individuals on
long-term capital gains, the amount of tax that individual stockholders will be
treated as having paid will exceed the amount of tax that such stockholders
would be required to pay on the retained net capital gains. A stockholder that
is not subject to U.S. federal income tax or tax on long-term capital gains
should be able to file a return on the appropriate form or a claim for refund
that allows such stockholder to recover the taxes paid on his or her behalf. In
the event the Company chooses this option, it must provide written notice to the
stockholders prior to the expiration of 60 days after the close of the relevant
tax year.

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.

You should consider the tax implications of buying common stock just prior
to a distribution. Even if the price of the common stock includes the amount of
the forthcoming distribution, you may be taxed upon receipt of the distribution
and will not be entitled to offset the distribution against the tax basis in
your common stock.

You may recognize taxable gain or loss if you sell or exchange your common
stock. The amount of the gain or loss will be measured by the difference between
your adjusted tax basis in your common stock and the amount of the proceeds you
receive in exchange

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for such stock. Any gain or loss arising from (or, in the case of distributions
in excess of earnings and profits, treated as arising from) the sale or exchange
of common stock generally will be a capital gain or loss. This capital gain or
loss normally will be treated as a long-term capital gain or loss if you have
held your common stock 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 common stock held for six months or less generally will be
treated as a long-term capital loss to the extent of the amount of capital gain
dividends received (or treated as deemed distributed) with respect to such stock
and, for this purpose, the special rules of Section 852(b)(4)(C) of the Code
generally apply in determining the holding period of such stock. In addition,
all or a portion of any loss realized upon a taxable disposition of common stock
may be disallowed if other shares of the Company's common stock are purchased
(under the Company's DRIP or otherwise) within 30 days before or after the
disposition.

In general, non-corporate stockholders currently are subject to a maximum
federal income tax rate of 20% (subject to reduction in certain situations) on
their net long-term capital gain (the excess of net long-term capital gain over
net short-term capital loss) for a taxable year (including a long-term capital
gain derived from an investment in the common stock), while other income may be
taxed at rates as high as 39.6%. Corporate taxpayers currently are 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. Non-corporate stockholders with net capital
losses for a year (i.e., capital losses in excess of capital gains) generally
may deduct up to $3,000 of such losses against their ordinary income each year;
any net capital losses of a non-corporate stockholder in excess of $3,000
generally may be carried forward and used in subsequent years as provided in
Section 1212(b) of the Code. Corporate stockholders generally may not deduct any
net capital losses for a year, but may carryback such losses for three years or
carry forward such losses for five years.

The Company will send to each of its stockholders, as promptly as possible
after the end of each calendar 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 IRS. Distributions may also be subject to additional state, local, and
foreign taxes depending on a stockholder's particular situation. The Company's
ordinary income dividends to corporate stockholders may, if certain conditions
are met, qualify for the dividends received deduction to the extent that the
Company has received qualifying dividend income during the taxable year; capital
gain dividends distributed by the Company are not eligible for the dividends
received deduction.

A Non-U.S. Stockholder may be subject to withholding of U.S. federal tax at
a 30% rate (or lower applicable treaty rate) on distributions (including certain
redemptions of common stock) from the Company. Accordingly, investment in the
Company is likely to be appropriate for a Non-U.S. Stockholder only if such
person can utilize a foreign tax credit or corresponding tax benefit in respect
of such withholding tax. Non-U.S. Stockholders should consult their own tax
advisors with respect to the U.S. federal income and withholding tax, and state,
local, and foreign tax, consequences of an investment in the common stock.

The Company may be required to withhold U.S. federal income tax at a rate
of 31% ("backup withholding") from all taxable distributions payable to (i) any
stockholder who fails to furnish the Company with its correct taxpayer
identification number or a certificate

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<PAGE> 72

that the stockholder is exempt from backup withholding, and (ii) any stockholder
with respect to whom the IRS notifies the Company that the stockholder has
failed to properly report certain interest and dividend income to the IRS and to
respond to notices to that effect. The Company may be required to report
annually to the IRS and to each Non-U.S. Stockholder the amount of dividends
paid to such stockholder and the amount, if any, of tax withheld pursuant to the
backup withholding rules with respect to such dividends. This information may
also be made available to the tax authorities in the Non-U.S. Stockholder's
country of residence. Backup withholding is not an additional tax. Any amounts
withheld under the backup withholding rules from payments made to a stockholder
may be refunded or credited against such stockholder's United States federal
income tax liability, if any, provided that the required information is
furnished to the IRS.

YOU SHOULD CONSULT YOUR OWN TAX ADVISOR WITH RESPECT TO THE PARTICULAR TAX
CONSEQUENCES TO YOU OF AN INVESTMENT IN THE COMPANY, INCLUDING THE POSSIBLE
EFFECT OF ANY PENDING LEGISLATION OR PROPOSED REGULATION.

CERTAIN GOVERNMENT REGULATIONS

We operate in a highly regulated environment. The following discussion
generally summarizes certain regulations.

BUSINESS DEVELOPMENT COMPANY ("BDC"). A business development company is
defined and regulated by the Investment Company Act of 1940. It is a unique kind
of investment company that primarily focuses on investing in or lending to small
private companies and making managerial assistance available to them. A BDC may
use capital provided by public shareholders and from other sources to invest in
long-term, private investments in growing small businesses. A BDC provides
shareholders the ability to retain the liquidity of a publicly traded stock,
while sharing in the possible benefits, if any, of investing in privately owned
growth companies.

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

(1) Securities purchased in transactions not involving any public offering,
the issuer of which is an eligible portfolio company. An eligible
portfolio company is defined to include any issuer that (a) is
organized and has its principal place of business in the United States,
(b) is not an investment company other than an SBIC wholly owned by a
BDC (our investments in Allied Investment, Allied SBLC and certain
other subsidiaries generally are Qualifying Assets), and (c) does not
have any class of publicly traded securities with respect to which a
broker may extend margin credit;

(2) Securities received in exchange for or distributed with respect to
securities described in (1) above or pursuant to the exercise of
options, warrants, or rights relating to such securities; and

(3) Cash, cash items, government securities, or high quality debt
securities (within the meaning of the 1940 Act), maturing in one year
or less from the time of investment.

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<PAGE> 73

To include certain securities described above as Qualifying Assets for the
purpose of the 70% test, a BDC must make available to the issuer of those
securities significant managerial assistance such as providing significant
guidance and counsel concerning the management, operations, or business
objectives and policies of a portfolio company, or making loans to a portfolio
company. We will provide managerial assistance on a continuing basis to any
portfolio company that requests it, whether or not difficulties are perceived.

As a BDC, the Company is entitled to issue senior securities in the form of
stock or senior securities representing indebtedness, including debt securities
and preferred stock, as long as each class of senior security has an asset
coverage of at least 200% immediately after each such issuance. This limitation
is not applicable to borrowings by our SBIC or SBLC subsidiaries, and therefore
any borrowings by these subsidiaries are not included in this asset coverage
test. See "Risk Factors."

We have adopted a Code of Ethics that establishes procedures for personal
investments and restricts certain transactions by the Company's personnel. See
"Where You Can Find More Information."

We may not change the nature of our business so as to cease to be, or
withdraw our election as, a BDC unless authorized by vote of a "majority of the
outstanding voting securities," as defined in the 1940 Act, of our shares. Since
we made our BDC election, we have not made any substantial change in the nature
of our business.

REGULATED INVESTMENT COMPANY ("RIC"). Our status as a RIC enables us to
avoid the cost of federal and state taxation, and as a result achieve pre-tax
investment returns. We believe that this tax advantage enables us to achieve
strong equity returns without having to aggressively leverage our balance sheet.

In order to qualify as a RIC, the Company must, among other things:

(1) Derive at least 90% of its gross income from dividends, interest,
payments with respect to securities loans, gains from the sale of stock
or other securities or other income derived with respect to its
business of investing in such stock or securities.

(2) Diversify its holdings so that

(a) at least 50% of the value of the Company's assets consists of cash,
cash items, U.S. government securities, securities of other RICs and
other securities if such other securities of any one issuer do not
represent more than 5% of the Company's assets and 10% of the
outstanding voting securities of the issuer, and

(b) no more than 25% of the value of the Company's assets are invested
in securities (other than U.S. government securities) of one issuer,
or of two or more issuers that are controlled by the Company.

(3) Distribute at least 90% of its "investment company taxable income" each
tax year to its shareholders. In addition, if a RIC distributes in a
timely manner (or treats as "deemed distributed") 98% of its capital
gain net income for each one year period ending on December 31 and
distributes 98% of its ordinary income for each calendar year, it will
not be subject to the 4% nondeductible federal excise tax on certain
undistributed income of RICs.

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SBA REGULATIONS. Allied Investment is an SBIC and Allied SBLC is an SBLC.

SBIC REGULATIONS. Allied Investment, a wholly owned subsidiary of the
Company, is licensed by the SBA as an SBIC under Section 301(c) of the Small
Business Investment Act of 1958, as amended (the "1958 Act"), and has elected to
be regulated as a BDC.

SBICs are authorized to stimulate the flow of private equity capital to
eligible small businesses. Under present SBA regulations, eligible small
businesses include businesses that have a net worth not exceeding $18 million
and have average annual fully taxed net income not exceeding $6 million for the
most recent two fiscal years. In addition, an SBIC must devote 20% of its
investment activity to "smaller" concerns as defined by the SBA. A smaller
concern is one that has a net worth not exceeding $6 million and has average
annual fully taxed net income not exceeding $2 million for the most recent two
fiscal years. SBA regulations also provide alternative size standard criteria to
determine eligibility, which depend on the industry in which the business is
engaged and are based on such factors as the number of employees and gross
sales. According to SBA regulations, SBICs may make long-term loans to small
businesses, invest in the equity securities of such businesses, and provide them
with consulting and advisory services. Allied Investment provides long-term
loans to qualifying small businesses; equity investments and consulting and
advisory services are typically provided only in connection with such loans.

Allied Investment is periodically examined and audited by the SBA staff to
determine its compliance with SBIC regulations.

Allied Investment has the opportunity to sell to the SBA subordinated
debentures with a maturity of up to ten years, up to an aggregate principal
amount of $105 million. This limit generally applies to all financial assistance
provided by the SBA to any licensee and its "associates," as that term is
defined in SBA regulations. Historically, an SBIC was also eligible to sell
preferred stock to the SBA. Allied Investment had received $77.5 million of
subordinated debentures and $7.0 million of preferred stock investments from the
SBA at September 30, 2000; as a result of the $105 million limit, the Company is
limited on its ability to apply for additional financing from the SBA. Interest
rates on the SBA debentures currently outstanding have a weighted average
interest cost of 8.5%.

SBLC REGULATIONS. Allied SBLC is licensed to operate as an SBLC and is
periodically examined and audited by the SBA staff for purposes of determining
compliance with SBA regulations, including its participation in the Preferred
Lenders Program. See "SBA 7(a) Lending", and "Recent Developments" above. The
SBA approved the merger with BLC prior to the consummation.

DIVIDEND REINVESTMENT PLAN

We have adopted an "opt out" dividend reinvestment plan ("DRIP plan").
Under the DRIP plan, if you own shares of common stock registered in your own
name, our transfer agent, acting as reinvestment plan agent, will automatically
reinvest any dividend in additional shares of common stock. Shareholders may
change enrollment status in the DRIP plan at any time by contacting either the
plan agent or the Company.

A shareholder's ability to participate in a DRIP plan may be limited
according to how the shares of common stock are registered. A nominee may
preclude beneficial owners holding shares in street name from participating in
the DRIP plan. Shareholders who wish to participate in a DRIP plan may need to
register their shares of common stock in their

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own name. Shareholders will be informed of their right to opt out of the DRIP
plan in the Company's annual and quarterly reports to shareholders. Shareholders
who hold shares in the name of a nominee should contact the nominee for details.

All distributions to investors who do not participate (or whose nominee
elects not to participate) in the DRIP plan will be paid by check mailed
directly, or through the nominee, to the record holder by or under the
discretion of the plan agent. The plan agent is American Stock Transfer and
Trust Company, 59 Maiden Lane, New York, New York 10038. Their telephone number
is 800-937-5449.

Under the DRIP plan, we may issue new shares unless the market price of the
outstanding shares of common stock is less than 110% of the last reported net
asset value. Alternatively, the plan agent may buy shares of common stock in the
market. We value newly issued shares of common stock for the DRIP plan at the
average of the reported last sale prices of the outstanding shares of common
stock on the last five trading days prior to the payment date of the
distribution, but not less than 95% of the opening bid price on such date. The
price in the case of shares bought in the market will be the average actual cost
of such shares of common stock, including any brokerage commissions. There are
no other fees charged to shareholders in connection with the DRIP plan. Any
distributions reinvested under the plan will nevertheless remain taxable to the
shareholders.

DESCRIPTION OF SECURITIES

The following summary of the Company's capital stock and other securities
does not purport to be complete and is subject to, and qualified in its entirety
by, the Company's Amended and Restated Articles of Incorporation, as amended
(the "Charter"). Reference is made to the Charter for a detailed description of
the provisions summarized below.

On September 18, 2000, the Board of Directors voted unanimously to amend
the Company's Charter to increase its authorized capital stock (the "Capital
Stock") from 100,000,000 shares, $0.0001 par value, to 200,000,000 shares, and
authorized management to hold a special meeting of shareholders on November 15,
2000 to seek shareholder approval for such amendment. The Charter amendment was
approved by shareholders on November 15, 2000. The Charter amendment was filed
with the state of Maryland on November 17, 2000.

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

COMMON STOCK

At January , 2001, there were shares of common stock
outstanding and shares of common stock reserved for issuance under
the Amended Stock

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<PAGE> 76

Option Plan. The following are the outstanding classes of securities of the
Company as of January , 2001:

<TABLE>
<CAPTION>
(4)
(3) AMOUNT
AMOUNT HELD OUTSTANDING
(2) BY COMPANY EXCLUSIVE OF
(1) AMOUNT OR FOR ITS AMOUNTS SHOWN
TITLE OF CLASS AUTHORIZED ACCOUNT* UNDER(3)
-------------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Allied Capital
Corporation........ Common Stock 200,000,000
</TABLE>

-------------------------
* Represents shares of the Company held in a trust for the Deferred Compensation
Plan. See "Management -- Compensation Plans."

All shares of common stock have equal rights as to earnings, assets,
dividends and voting privileges and all outstanding shares of common stock are
fully paid and non-assessable. Distributions may be paid to the holders of
common stock if and when declared by the Board of Directors of the Company out
of funds legally available therefore. Our common stock has no preemptive,
conversion, or redemption rights and is freely transferable. In the event of
liquidation, each share of common stock is entitled to share ratably in all
assets of the Company that are legally available for distributions after payment
of all debts and liabilities and subject to any prior rights of holders of
Preferred Stock, if any, then outstanding. Each share of common stock 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. All shares of common stock offered hereby
will be, when issued and paid for, fully paid and non-assessable.

PREFERRED STOCK

In addition to shares of common stock, the articles of incorporation
authorizes the issuance of preferred stock ("Preferred Stock"). The Board of
Directors is authorized to provide for the issuance of Preferred Stock with such
preferences, powers, rights and privileges as the Board deems appropriate;
except that, such an issuance must adhere to the requirements for the 1940 Act.
The 1940 Act requires, among other things, that (i) immediately after issuance
and before any distribution is made with respect to common stock, the Preferred
Stock, together with all other senior securities, must not exceed an amount
equal to 50% of the Company's total assets and (ii) the holders of shares of
Preferred Stock, if any are issued, must be entitled as a class to elect two
directors at all times and to elect a majority of the directors if dividends on
the Preferred Stock are in arrears by two years or more. The Company has no
present plans to issue any shares of Preferred Stock, but believes the
availability of such stock will provide the Company with increased flexibility
in structuring future financings and acquisitions. If we offer Preferred Stock
under this prospectus, we will issue an appropriate prospectus supplement. You
should read that prospectus supplement for a description of the Preferred Stock,
including, but not limited to, whether there will be an arrearage in the payment
of dividends or sinking fund installments, if any, restrictions with respect to
the declaration of dividends, requirements in connection with the maintenance of
any ratio or assets, or creation or maintenance of reserves, or provisions for
permitting or restricting the issuance of additional securities.

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<PAGE> 77

DEBT SECURITIES

The Company may issue debt securities that may be senior or subordinated in
priority of payment. The Company will provide a prospectus supplement that
describes the ranking, whether senior or subordinated, the specific designation,
the aggregate principal amount, the purchase price, the maturity, the redemption
terms, the interest rate or manner of calculating the interest rate, the time of
payment of interest, if any, the terms for any conversion or exchange, including
the terms relating to the adjustment of any conversion or exchange mechanism,
the listing, if any, on a securities exchange, the name and address of the
trustee and any other specific terms of the debt securities.

LIMITATION ON LIABILITY OF DIRECTORS

The Company has adopted provisions in its charter and bylaws limiting the
liability of directors and officers of the Company for monetary damages. The
effect of these provisions in the charter and bylaws is to eliminate the rights
of the Company and its shareholders (through shareholders' derivative suits on
behalf of the Company) to recover monetary damages against a director or
officers for breach of the fiduciary duty of care as a director or officer
(including breaches resulting from negligent or grossly negligent behavior)
except in certain limited situations. These provisions do not limit or eliminate
the rights of the Company or any shareholder to seek non-monetary relief such as
an injunction or rescission in the event of a breach of a director's or
officer's duty of care. These provisions will not alter the liability of
directors or officers under federal securities laws.

CERTAIN ANTI-TAKEOVER PROVISIONS

The charter and bylaws of the Company and certain statutory and regulatory
requirements contain certain provisions that could make more difficult the
acquisition of the Company by means of a tender offer, a proxy contest or
otherwise. These provisions are expected to discourage certain types of coercive
takeover practices and inadequate takeover bids and to encourage persons seeking
to acquire control of the Company to negotiate first with the board of
directors. We believe that the benefits of these provisions outweigh the
potential disadvantages of discouraging such proposals because, among other
things, negotiation of such proposals might result in an improvement of their
terms. The description set forth below is intended as a summary only and is
qualified in its entirety by reference to the charter and the bylaws.

CLASSIFIED BOARD OF DIRECTORS

The charter provides for the Board of Directors to be divided into three
classes of directors serving staggered three-year terms, with each class to
consist as nearly as possible of one-third of the directors then elected to the
board. A classified board may render more difficult a change in control of the
Company or removal of incumbent management. We believe, however, that the longer
time required to elect a majority of a classified board of directors helps to
ensure continuity and stability of the Company's management and policies.

ISSUANCE OF PREFERRED STOCK

The Board of Directors of the Company, without shareholder approval, has
the authority to reclassify authorized but unissued common stock as preferred
stock and to

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<PAGE> 78

issue preferred stock. Such stock could be issued with voting, conversion or
other rights designed to have an anti-takeover effect.

MARYLAND CORPORATE LAW

The Company is subject to the Maryland Business Combination Statute and the
Control Share Acquisition Statute, as defined below. The partial summary of the
foregoing statutes contained in this prospectus is not intended to be complete
and reference is made to the full text of such states for their entire terms.

BUSINESS COMBINATION STATUTE. Certain provisions of the Maryland Law
establish special requirements with respect to "business combinations" between
Maryland corporations and "interested shareholders" unless exemptions are
applicable (the "Business Combination Statute"). Among other things, the
Business Combination Statute prohibits for a period of five years a merger or
other specified transactions between a company and an interested shareholder and
requires a super majority vote for such transactions after the end of such
five-year period.

"Interested shareholders" are all persons owning beneficially, directly or
indirectly, 10% or more of the outstanding voting stock of a Maryland
corporation. "Business combinations" include certain mergers or similar
transactions subject to a statutory vote and additional transactions involving
transfer of assets or securities in specified amounts to interested shareholders
or their affiliates.

Unless an exemption is available, a "business combination" may not be
consummated between a Maryland corporation and an interested shareholder or its
affiliates for a period of five years after the date on which the shareholder
first became an interested shareholder and thereafter may not be consummated
unless recommended by the board of directors of the Maryland corporation and
approved by the affirmative vote of at least 80% of the votes entitled to be
cast by all holders of outstanding shares of voting stock and 66 2/3% of the
votes entitled to be cast by all holders of outstanding shares of voting stock
other than the interested shareholder or its affiliates or associates, unless,
among other things, the corporation's shareholders receive a minimum price (as
defined in the Business Combination Statute) for their shares and the
consideration is received in cash or in the same form as previously paid by the
interested shareholder for its shares.

A business combination with an interested shareholder which is approved by
the board of directors of a Maryland corporation at any time before an
interested shareholder first becomes an interested shareholder is not subject to
the five-year moratorium or special voting requirements. An amendment to a
Maryland corporation charter electing not to be subject to the foregoing
requirements must be approved by the affirmative vote of at least 80% of the
votes entitled to be cast by all holders of outstanding shares of voting stock
and 66 2/3% of the votes entitled to be cast by holders of outstanding shares of
voting stock who are not interested shareholders. Any such amendment is not
effective until 18 months after the vote of shareholders and does not apply to
any business combination of a corporation with a shareholder who became an
interested shareholder on or prior to the date of such vote.

CONTROL SHARE ACQUISITION STATUTE. The Maryland Law imposes limitations on
the voting rights of shares acquired in a "control share acquisition." The
control share statute defines a "control share acquisition" to mean the
acquisition, directly or indirectly, of "control shares" subject to certain
exceptions. "Control shares" of a Maryland corporation

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<PAGE> 79

are defined to be voting shares of stock which, if aggregated with all other
shares of stock previously acquired by the acquiror, would entitle the acquiror
to exercise voting power in electing directors with one of the following ranges
of voting power:

(1) one-fifth or more but not less than one-third;

(2) one-third or more but less than a majority; or

(3) a majority of all voting power.

Control shares do not include shares which the acquiring person is entitled
to vote as a result of having previously obtained shareholder approval. Control
shares of a Maryland corporation acquired in a control share acquisition have no
voting rights except to the extent approved by a vote of two-thirds of the votes
entitled to be cast by shareholders in the election of directors, excluding
shares of stock as to which the acquiring person, officers of the corporation
and directors of the corporation who are employees of the corporation are
entitled to exercise or direct the exercise of the voting power of the shares in
the election of the directors.

The control share statute also requires Maryland corporations to hold a
special meeting at the request of an actual or proposed control share acquiror
generally within 50 days after a request is made with the submission of an
"acquiring person statement," but only if the acquiring person:

(1) gives a written undertaking and, if required by the directors of the
issuing corporation, posts a bond for the cost of the meeting; and

(2) submits definitive financing agreements for the acquisition of the
control shares to the extent that financing is not provided by the
acquiring person.

In addition, unless the issuing corporation's charter or bylaws provide
otherwise, the control share statute provides that the issuing corporation,
within certain time limitations, shall have the right to redeem control shares
(except those for which voting rights have previously been approved) for "fair
value" as determined pursuant to the control share statue in the event:

(1) there is a shareholder vote and the grant of voting rights is not
approved; or

(2) an "acquiring person statement" is not delivered to the target within
10 days following a control share acquisition.

Moreover, unless the issuing corporation's charter or bylaws provide
otherwise, the control share statute provides that if, before a control share
acquisition occurs, voting rights are accorded to control shares which result in
the acquiring person having majority voting power, then all shareholders other
than the acquiring person have appraisal rights as provided under the Maryland
Law. An acquisition of shares may be exempted from the control share statute
provided that a charter or bylaw provision is adopted for such purpose prior to
the control share acquisition by any person with respect to the Company. The
control share acquisition statute does not apply to shares acquired in a merger,
consolidation or share exchange to which the corporation is a party.

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REGULATORY RESTRICTIONS

Allied Investment, a wholly owned subsidiary, is an SBIC and Allied SBLC,
which was a wholly owned subsidiary through December 28, 2000, is an SBLC. The
SBA prohibits, without prior SBA approval, a "change of control" or transfers
which would result in any person (or group of persons acting in concert) owning
10% or more of any class of capital stock of an SBIC. A "change of control" is
any event which would result in a transfer of the power, direct or indirect, to
direct the management and policies of an SBIC or SBLC, whether through
ownership, contractual arrangements or otherwise. The SBA approved the
transactions involving Allied Capital, Allied SBLC and BLC.

PLAN OF DISTRIBUTION

We may offer, from time to time, up to $310,500,000 of our Securities. We
may sell the Securities through underwriters or dealers, directly to one or more
purchasers, through agents or through a combination of any such methods of sale.
Any underwriter or agent involved in the offer and sale of the Securities will
be named in the applicable prospectus supplement.

The distribution of the Securities may be effected from time to time in one
or more transactions at a fixed price or prices, which may be changed, at
prevailing market prices at the time of sale, at prices related to such
prevailing market prices, or at negotiated prices, provided, however, that in
the case of common stock, the offering price per share, less any underwriting
commissions or discounts, must equal or exceed the net asset value ("NAV") per
share of our common stock at the time of the offering.

In connection with the sale of the Securities, underwriters or agents may
receive compensation from the Company or from purchasers of the Securities, for
whom they may act as agents, in the form of discounts, concessions or
commissions. Underwriters may sell the Securities to or through dealers and such
dealers may receive compensation in the form of discounts, concessions or
commissions from the underwriters and/or commissions from the purchasers for
whom they may act as agents. Underwriters, dealers and agents that participate
in the distribution of the Securities may be deemed to be underwriters under the
Securities Act, and any discounts and commissions they receive from the Company
and any profit realized by them on the resale of the Securities may be deemed to
be underwriting discounts and commissions under the Securities Act. Any such
underwriter or agent will be identified and any such compensation received from
the Company will be described in the applicable prospectus supplement.

Any common stock sold pursuant to a prospectus supplement will be quoted on
the Nasdaq National Market, or another exchange on which the common stock is
traded.

Under agreements into which the Company may enter, underwriters, dealers
and agents who participate in the distribution of the Securities may be entitled
to indemnification by the Company against certain liabilities, including
liabilities under the Securities Act. Underwriters, dealers and agents may
engage in transactions with, or perform services for, the Company in the
ordinary course of business.

If so indicated in the applicable prospectus supplement, the Company will
authorize underwriters or other persons acting as the Company's agents to
solicit offers by certain institutions to purchase the Securities from the
Company pursuant to contracts providing for payment and delivery on a future
date. Institutions with which such contracts may be

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made include commercial and savings banks, insurance companies, pension funds,
investment companies, educational and charitable institutions and others, but in
all cases such institutions must be approved by the Company. The obligations of
any purchaser under any such contract will be subject to the condition that the
purchase of the Securities shall not at the time of delivery be prohibited under
the laws of the jurisdiction to which such purchaser is subject. The
underwriters and such other agents will not have any responsibility in respect
of the validity or performance of such contracts. Such contracts will be subject
only to those conditions set forth in the prospectus supplement, and the
prospectus supplement will set forth the commission payable for solicitation of
such contracts.

In order to comply with the securities laws of certain states, if
applicable, the Securities offered hereby will be sold in such jurisdictions
only through registered or licensed brokers or dealers. In addition, in certain
states, the Securities may not be sold unless they have been registered or
qualified for sale in the applicable state or an exemption from the registration
or qualification requirement is available and is complied with.

LEGAL MATTERS

The legality of the Securities offered hereby will be passed upon for the
Company by Sutherland Asbill & Brennan LLP, Washington, D.C. Certain legal
matters will be passed upon for underwriters, if any, by the counsel named in
the prospectus supplement.

SAFEKEEPING, TRANSFER AND DIVIDEND PAYING AGENT
AND REGISTRAR

The Company's and its subsidiaries' investments are held in safekeeping by
Riggs Bank, N.A. at 808 17th Street, N.W., Washington, D.C. 20006. LaSalle
National Bank, located at 25 Northwest Point Boulevard, Suite 800, Elk Grove
Village, Illinois 60007, serves as trustee with respect to assets of the Company
held for securitization purposes. American Stock Transfer and Trust Company, 59
Maiden Lane, New York, New York 10038 acts as the Company's transfer, dividend
paying and reinvestment plan agent and registrar.

INDEPENDENT PUBLIC ACCOUNTANTS

The financial statements included in this prospectus and elsewhere in the
registration statement to the extent and for the periods indicated in their
report have been audited by Arthur Andersen LLP, independent public accountants,
and is included herein in reliance upon the authority of said firm as experts in
giving said report.

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TABLE OF CONTENTS OF
STATEMENT OF ADDITIONAL INFORMATION

<TABLE>
<S> <C>
General Information and History............................. B-2
Investment Objective and Policies........................... B-2
Management.................................................. B-2
Compensation of Executive Officers and Directors....... B-2
Compensation of Directors.............................. B-3
Stock Option Awards.................................... B-4
Formula Award and Cut-off Award........................ B-5
Committees of the Board of Directors................... B-5
Control Persons and Principal Holders of Securities......... B-7
Investment Advisory Services................................ B-8
Safekeeping, Transfer and Dividend Paying Agent and
Registrar................................................. B-8
Brokerage Allocation and Other Practices.................... B-8
</TABLE>

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ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Consolidated Balance Sheet -- September 30, 2000 (unaudited)
and December 31, 1999 and 1998............................ F-1
Consolidated Statement of Operations -- For the Nine Months
ended September 30, 2000 and 1999 (unaudited) and for the
Years Ended December 31, 1999, 1998 and 1997.............. F-2
Consolidated Statement of Changes in Net Assets -- For the
Nine Months Ended September 30, 2000 and 1999 (unaudited)
and for the Years Ended December 31, 1999, 1998 and
1997...................................................... F-3
Consolidated Statement of Cash Flows -- For the Nine Months
Ended September 30, 2000 and 1999 (unaudited) and for the
Years Ended December 31, 1999, 1998 and 1997.............. F-4
Consolidated Statement of Investments -- September 30, 2000
(unaudited) and December 31, 1999......................... F-5
Notes to Consolidated Financial Statements.................. F-18
Report of Independent Public Accountants.................... F-41
</TABLE>

80
<PAGE> 84

ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET

<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, ---------------------
2000 1999 1998
------------- ---------- --------
(IN THOUSANDS, EXCEPT NUMBER OF SHARE AMOUNTS) (UNAUDITED)
<S> <C> <C> <C>
ASSETS
Portfolio at value:
Private finance (cost: 2000-$963,648;
1999-$639,171; 1998-$382,488).................. $ 967,521 $ 647,040 $388,554
Commercial real estate finance (cost:
2000-$597,358; 1999-$522,022; 1998-$356,039)... 600,030 520,029 354,980
Small business finance (cost: 2000-$71,591;
1999-$61,708; 1998-$64,952).................... 70,656 61,428 63,585
---------- ---------- --------
Total portfolio at value...................... 1,638,207 1,228,497 807,119
---------- ---------- --------
Cash and cash equivalents............................... 26,194 18,155 25,075
Other assets............................................ 67,372 43,386 23,885
---------- ---------- --------
Total assets.................................. $1,731,773 $1,290,038 $856,079
========== ========== ========

Liabilities:
Notes payable and debentures...................... $ 577,150 $ 487,350 $233,350
Revolving credit facilities....................... 185,000 105,500 101,000
Accounts payable and other liabilities............ 29,294 22,675 21,671
Dividends and distributions payable............... -- -- 1,700
---------- ---------- --------
Total liabilities............................. 791,444 615,525 357,721
---------- ---------- --------
Commitments and Contingencies
Preferred stock......................................... 7,000 7,000 7,000
Shareholders' equity:
Common stock, $0.0001 par value, 100,000,000
shares authorized; 81,014,284, 65,930,360 and
56,729,502 issued and outstanding at September
30, 2000, December 31, 1999 and 1998,
respectively................................... 8 6 6
Additional paid-in capital........................ 954,576 699,149 526,824
Common stock held in deferred compensation trust
(259,983 shares, 516,779 shares and 810,456
shares at September 30, 2000, December 31, 1999
and 1998, respectively)........................ (1,404) (6,218) (13,190)
Notes receivable from sale of common stock........ (25,926) (29,461) (23,735)
Net unrealized appreciation on portfolio.......... 4,250 4,517 2,380
Distributions in excess of earnings............... 1,825 (480) (927)
---------- ---------- --------
Total shareholders' equity.................... 933,329 667,513 491,358
---------- ---------- --------
Total liabilities and shareholders' equity.... $1,731,773 $1,290,038 $856,079
========== ========== ========
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.
F-1
<PAGE> 85

ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS

<TABLE>
<CAPTION>
FOR THE NINE MONTHS FOR THE YEARS ENDED
ENDED SEPTEMBER 30, DECEMBER 31,
------------------- ------------------------------
2000 1999 1999 1998 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) -------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Interest and related portfolio income:
Interest................................. $129,768 $84,419 $119,772 $ 79,921 $86,882
Premiums from loan dispositions.......... 10,752 9,032 14,284 5,949 7,277
Post-Merger gain on securitization of
commercial mortgage loans.............. -- -- -- 14,812 --
Investment advisory fees and other
income................................. 9,334 5,411 7,084 6,056 3,246
-------- ------- -------- -------- -------
Total interest and related portfolio
income............................. 149,854 98,862 141,140 106,738 97,405
-------- ------- -------- -------- -------
Expenses:
Interest................................. 41,645 24,173 34,860 20,694 26,952
Employee................................. 14,709 11,303 16,136 11,829 10,258
Administrative........................... 10,711 8,476 12,350 11,921 8,970
Merger................................... -- -- -- -- 5,159
-------- ------- -------- -------- -------
Total operating expenses............. 67,065 43,952 63,346 44,444 51,339
-------- ------- -------- -------- -------
Formula and cut-off awards............... 4,797 5,188 6,753 7,049 --
-------- ------- -------- -------- -------
Portfolio income before net realized and
unrealized gains............................. 77,992 49,722 71,041 55,245 46,066
-------- ------- -------- -------- -------
Net realized and unrealized gains:
Net realized gains....................... 23,095 16,448 25,391 22,541 10,704
Net unrealized gains (losses)............ (267) 1,475 2,138 1,079 7,209
-------- ------- -------- -------- -------
Total net realized and unrealized
gains.............................. 22,828 17,923 27,529 23,620 17,913
-------- ------- -------- -------- -------
Income before minority interests and income
taxes........................................ 100,820 67,645 98,570 78,865 63,979
-------- ------- -------- -------- -------
Minority interests............................. -- -- -- -- 1,231
Income tax expense............................. -- -- -- 787 1,444
-------- ------- -------- -------- -------
Net increase in net assets resulting from
operations................................... $100,820 $67,645 $ 98,570 $ 78,078 $61,304
======== ======= ======== ======== =======
Basic earnings per common share................ $ 1.43 $ 1.14 $ 1.64 $ 1.50 $ 1.24
======== ======= ======== ======== =======
Diluted earnings per common share.............. $ 1.42 $ 1.14 $ 1.64 $ 1.50 $ 1.24
======== ======= ======== ======== =======
Weighted average common shares
outstanding -- basic......................... 70,604 59,077 59,877 51,941 49,218
======== ======= ======== ======== =======
Weighted average common shares
outstanding -- diluted....................... 70,777 59,239 60,044 51,974 49,251
======== ======= ======== ======== =======
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.
F-2
<PAGE> 86

ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN NET ASSETS

<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED SEPTEMBER 30, FOR THE YEARS ENDED DECEMBER 31,
------------------- ---------------------------------
2000 1999 1999 1998 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) -------- -------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operations:
Portfolio income before realized and
unrealized gains..................... $ 77,992 $ 49,722 $ 71,041 $ 55,245 $ 46,066
Net realized gains..................... 23,095 16,448 25,391 22,541 10,704
Net unrealized gains (losses).......... (267) 1,475 2,138 1,079 7,209
Minority interests and income tax
expense.............................. -- -- -- (787) (2,675)
-------- -------- -------- -------- --------
Net increase in net assets
resulting from operations...... 100,820 67,645 98,570 78,078 61,304
-------- -------- -------- -------- --------
Shareholder distributions:
Common stock dividends................. (98,617) (71,800) (97,941) (75,087) (85,678)
Preferred stock dividends.............. (165) (165) (230) (230) (220)
-------- -------- -------- -------- --------
Net decrease in net assets
resulting from shareholder
distributions.................. (98,782) (71,965) (98,171) (75,317) (85,898)
-------- -------- -------- -------- --------
Capital share transactions:
Sale of common stock................... 250,911 103,022 164,269 69,675 --
Net decrease (increase) in notes
receivable from sale of common
stock................................ 3,535 (3,540) (5,725) 5,576 (14,120)
Issuance of common stock upon the
exercise of stock options............ 1,467 3,753 5,920 221 28,426
Issuance of common stock in lieu of
cash distributions................... 3,613 3,498 4,610 6,184 26,612
Net decrease (increase) in common stock
held in deferred compensation
trust................................ 4,814 6,303 6,972 (13,190) --
Other.................................. (562) -- (290) 71 1,602
-------- -------- -------- -------- --------
Net increase in net assets
resulting from capital share
transactions................... 263,778 113,036 175,756 68,537 42,520
-------- -------- -------- -------- --------
Total increase in net assets...... $265,816 $108,716 $176,155 $ 71,298 $ 17,926
======== ======== ======== ======== ========
Net assets at beginning of period........... $667,513 $485,117 $491,358 $420,060 $402,134
-------- -------- -------- -------- --------
Net assets at end of period................. $933,329 $593,833 $667,513 $491,358 $420,060
-------- -------- -------- -------- --------
Net asset value per common share............ $ 11.56 $ 9.58 $ 10.20 $ 8.79 $ 8.07
-------- -------- -------- -------- --------
Common shares outstanding at end of
period.................................... 80,754 61,972 65,414 55,919 52,047
======== ======== ======== ======== ========
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 87

ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS

<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED SEPTEMBER 30, FOR THE YEARS ENDED DECEMBER 31,
--------------------- ---------------------------------
2000 1999 1999 1998 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) --------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net increase in net assets resulting
from operations...................... $ 100,820 $ 67,645 $ 98,570 $ 78,078 $ 61,304
Adjustments
Net unrealized (gains) losses........ 267 (1,475) (2,138) (1,079) (7,209)
Post-Merger gain on securitization of
commercial mortgages.............. -- -- -- (14,812) --
Depreciation and amortization........ 659 599 788 702 450
Amortization of loan discounts and
fees.............................. (9,767) (6,195) (10,674) (6,032) (10,804)
Deferred income taxes................ -- -- -- -- 1,087
Minority interests................... -- -- -- -- 1,231
Changes in other assets and
liabilities....................... (8,712) (11,518) (8,712) 11,998 12,881
--------- --------- --------- --------- ---------
Net cash provided by operating
activities...................... 83,267 49,056 77,834 68,855 58,940
--------- --------- --------- --------- ---------
Cash flows from investing activities:
Portfolio investments.................. (675,379) (534,017) (751,871) (524,530) (364,942)
Repayments of investment principal..... 117,940 120,563 145,706 138,081 233,005
Proceeds from loan sales............... 151,834 120,871 198,368 81,013 53,912
Proceeds from securitization of
commercial mortgages................. -- -- -- 223,401 --
Net redemption (purchase) of U.S.
government securities................ -- -- -- 11,091 (10,301)
Collections of notes receivable from
sale of common stock................. 4,617 212 195 5,591 6,534
Other investing activities............. 3,657 (2,738) (1,754) (2,539) (182)
--------- --------- --------- --------- ---------
Net cash used in investing
activities...................... (397,331) (295,109) (409,356) (67,892) (81,974)
--------- --------- --------- --------- ---------
Cash flows from financing activities:
Sale of common stock................... 250,911 103,079 164,269 69,896 8,615
Purchase of common stock by deferred
compensation trust................... -- -- -- (19,431) --
Common dividends and distributions
paid................................. (95,004) (70,003) (95,031) (69,536) (58,194)
Special undistributed earnings
distribution paid.................... -- -- -- (8,848) --
Preferred stock dividends paid......... (165) (165) (230) (450) (220)
Net borrowings under (payments on)
notes payable and debentures......... 89,800 165,500 254,000 (69,471) 78,923
Net borrowings under (payments on)
revolving lines of credit............ 79,500 38,000 4,500 56,158 (6,257)
Other financing activities............. (2,939) (57) (2,906) (4,643) (1,237)
--------- --------- --------- --------- ---------
Net cash provided by (used in)
financing activities............ 322,103 236,354 324,602 (46,325) 21,630
--------- --------- --------- --------- ---------
Net increase (decrease) in cash and cash
equivalents............................ $ 8,039 $ (9,699) $ (6,920) $ (45,362) $ (1,404)
--------- --------- --------- --------- ---------
Cash and cash equivalents at beginning of
period................................. $ 18,155 $ 25,075 $ 25,075 $ 70,437 $ 71,841
--------- --------- --------- --------- ---------
Cash and cash equivalents at end of
period................................. $ 26,194 $ 15,376 $ 18,155 $ 25,075 $ 70,437
========= ========= ========= ========= =========
</TABLE>

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

F-4
<PAGE> 88

ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INVESTMENTS

<TABLE>
<CAPTION>
PRIVATE FINANCE SEPTEMBER 30, 2000
PORTFOLIO COMPANY -------------------
(IN THOUSANDS, EXCEPT NUMBER OF SHARES) INVESTMENT(2) COST VALUE
--------------------------------------- --------------------------------------------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
Ability One Loans $ 9,951 $ 9,951
-----------------------------------------------------------------------------------------------------------
ACE Products, Inc. Loans 14,047 14,047
-----------------------------------------------------------------------------------------------------------
Acme Paging, L.P. Debt Securities 6,961 6,961
Limited Partnership Interest 1,456 --
-----------------------------------------------------------------------------------------------------------
Allied Office Products Debt Securities 9,343 9,343
Warrants 629 629
-----------------------------------------------------------------------------------------------------------
American Barbecue & Grill, Inc. Warrants 125 125
-----------------------------------------------------------------------------------------------------------
ASW Holding Corporation Warrants 25 25
-----------------------------------------------------------------------------------------------------------
Aurora Communications, LLC Loans 14,405 14,405
Equity Interest 1,500 3,347
-----------------------------------------------------------------------------------------------------------
Avborne, Inc. Debt Securities 12,227 12,227
Warrants 1,180 1,180
-----------------------------------------------------------------------------------------------------------
Bakery Chef, Inc. Loans 15,630 15,630
-----------------------------------------------------------------------------------------------------------
Border Foods, Inc. Debt Securities 9,901 9,901
Series A Convertible Preferred Stock
(50,919 shares) 2,000 2,000
Warrants -- --
-----------------------------------------------------------------------------------------------------------
Cahill-Warnock Strategic Partners Fund Limited Partnership Interest 420 420
II, L.P.
-----------------------------------------------------------------------------------------------------------
CampGroup, LLC Debt Securities 2,550 2,550
Warrants 220 220
-----------------------------------------------------------------------------------------------------------
Candlewood Hotel Company (1) Preferred Stock (3,250 shares) 3,250 3,250
-----------------------------------------------------------------------------------------------------------
Celebrities, Inc. Loan 285 285
Warrants 12 312
-----------------------------------------------------------------------------------------------------------
Colibri Holding Corporation Loans 3,722 3,722
Common Stock (3,362 shares) 1,250 1,250
Warrants -- --
-----------------------------------------------------------------------------------------------------------
Component Hardware Group Debt Securities 10,188 10,188
Class A Preferred Stock (18,000 shares) 1,800 1,800
Common Stock (2,000 shares) 200 200
-----------------------------------------------------------------------------------------------------------
Convenience Corporation of America Debt Securities 8,355 2,738
Series A Preferred Stock (31,521 shares) 334 --
Warrants -- --
-----------------------------------------------------------------------------------------------------------
Cooper Natural Resources, Inc. Debt Securities 3,424 3,424
Warrants -- --
-----------------------------------------------------------------------------------------------------------
CorrFlex Graphics, LLC Loan 6,945 6,945
Debt Securities 4,951 4,951
Warrants -- --
Options -- --
-----------------------------------------------------------------------------------------------------------
</TABLE>

(1) Public company.
(2) Common stock, preferred stock, warrants, options and equity interests are
generally non-income producing and restricted.

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

F-5
<PAGE> 89

<TABLE>
<CAPTION>
PRIVATE FINANCE SEPTEMBER 30, 2000
PORTFOLIO COMPANY -------------------
(IN THOUSANDS, EXCEPT NUMBER OF SHARES) INVESTMENT(2) COST VALUE
--------------------------------------- --------------------------------------------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
Cosmetic Manufacturing Loan $ 870 $ 870
Resources, LLC Debt Securities 5,840 5,840
Options 87 87
-----------------------------------------------------------------------------------------------------------
Coverall North America Loan 9,690 9,690
Debt Securities 4,964 4,964
Warrants -- --
-----------------------------------------------------------------------------------------------------------
Csabai Canning Factory Rt. Hungarian Quotas (9.2%) 700 --
-----------------------------------------------------------------------------------------------------------
CTT Holdings Loan 1,186 1,186
-----------------------------------------------------------------------------------------------------------
CyberRep.com Loan 1,014 1,014
Debt Securities 10,458 10,458
Warrants 360 1,010
-----------------------------------------------------------------------------------------------------------
DeVlieg-Bullard, Inc. (1) Warrants 350 1
-----------------------------------------------------------------------------------------------------------
Directory Investment Corporation Common Stock (470 shares) 80 --
-----------------------------------------------------------------------------------------------------------
Directory Lending Corporation Series A Common Stock (34 shares) -- --
Series B Common Stock (6 shares) 8 --
Series C Common Stock (10 shares) 22 --
-----------------------------------------------------------------------------------------------------------
Drilltec Patents & Technologies Loan 10,918 8,762
Company, Inc. Debt Securities 1,500 1,500
Warrants -- --
-----------------------------------------------------------------------------------------------------------
eCentury Capital Partners, L.P. Limited Partnership Interest 1,287 1,287
-----------------------------------------------------------------------------------------------------------
EDM Consulting, LLC Debt Securities 1,875 343
Common Stock (100 shares) 250 --
-----------------------------------------------------------------------------------------------------------
El Dorado Communications, Inc. Loans 306 306
-----------------------------------------------------------------------------------------------------------
Eparfin S.A. Loan 29 29
-----------------------------------------------------------------------------------------------------------
Esquire Communications Ltd. (1) Warrants 6 --
-----------------------------------------------------------------------------------------------------------
E-Talk Corporation Debt Securities 8,768 8,768
Warrants 1,157 1,157
-----------------------------------------------------------------------------------------------------------
Ex Terra Credit Recovery, Inc. Series A Preferred Stock (500 shares) 500 500
Common Stock (2,500 shares) -- --
Warrants -- --
-----------------------------------------------------------------------------------------------------------
Executive Greetings, Inc. Debt Securities 15,866 15,866
Warrants 360 360
-----------------------------------------------------------------------------------------------------------
Fairchild Industrial Products Company Debt Securities 5,795 5,795
Warrants 280 3,628
-----------------------------------------------------------------------------------------------------------
FTI Consulting, Inc. (1) Debt Securities 14,864 14,864
Warrants 970 2,554
-----------------------------------------------------------------------------------------------------------
Galaxy American Debt Securities 31,857 31,857
Communications, LLC Warrants 500 1,250
-----------------------------------------------------------------------------------------------------------
Garden Ridge Corporation Debt Securities 26,537 26,537
Preferred Stock (1,130 shares) 1,130 1,130
Common Stock (471 shares) 613 613
-----------------------------------------------------------------------------------------------------------
Genesis Worldwide, Inc. (1) Loan 1,078 1,078
-----------------------------------------------------------------------------------------------------------
</TABLE>

(1) Public company.
(2) Common stock, preferred stock, warrants, options and equity interests are
generally non-income producing and restricted.

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

F-6
<PAGE> 90

<TABLE>
<CAPTION>
PRIVATE FINANCE SEPTEMBER 30, 2000
PORTFOLIO COMPANY -------------------
(IN THOUSANDS, EXCEPT NUMBER OF SHARES) INVESTMENT(2) COST VALUE
--------------------------------------- --------------------------------------------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
Genoa Mine Acquisition Corporation Loan $ 110 $ 110
-----------------------------------------------------------------------------------------------------------
Gibson Guitar Corporation Debt Securities 16,262 16,262
Warrants 525 1,000
-----------------------------------------------------------------------------------------------------------
Ginsey Industries, Inc. Loans 5,000 5,000
Convertible Debentures 500 500
Warrants -- 154
-----------------------------------------------------------------------------------------------------------
Global Communications, LLC Loans 8,513 8,513
Debt Securities 3,839 3,839
Equity Interest 10,467 10,467
Options 1,639 1,639
-----------------------------------------------------------------------------------------------------------
Grant Broadcasting Systems II Warrants 87 5,226
-----------------------------------------------------------------------------------------------------------
Grant Television, Inc. Equity Interest 660 660
-----------------------------------------------------------------------------------------------------------
HealthASPex, Inc. Series A Convertible Preferred Stock
(189,568 shares) 640 640
Series A Preferred Stock
(225,112 shares) 760 760
Common Stock (1,036,700 shares) -- --
-----------------------------------------------------------------------------------------------------------
HMT, Inc. Debt Securities 9,954 9,954
Common Stock (300,000 shares) 3,000 3,000
Warrants -- --
-----------------------------------------------------------------------------------------------------------
Hotelevision, Inc. Preferred Stock (310,000 shares) 310 310
-----------------------------------------------------------------------------------------------------------
Icon International, Inc. Series A Preferred Stock (13,720 shares) 1,334 1,334
Series B Preferred Stock (11,987 shares) 1,166 1,166
-----------------------------------------------------------------------------------------------------------
Impact Innovations Group Debt Securities 6,314 6,314
Warrants 1,674 1,674
-----------------------------------------------------------------------------------------------------------
Intellirisk Management Corporation Loans 19,951 19,951
-----------------------------------------------------------------------------------------------------------
International Filler Corporation Debt Securities 21,636 21,636
Common Stock (1,029,068 shares) 5,483 5,483
Warrants 420 420
-----------------------------------------------------------------------------------------------------------
iSolve Incorporated Series A Preferred Stock (14,853 shares) 874 874
Common Stock (13,306 shares) 14 14
-----------------------------------------------------------------------------------------------------------
Jakel, Inc. Loan 18,904 18,904
-----------------------------------------------------------------------------------------------------------
JRI Industries, Inc. Debt Securities 1,948 1,948
Warrants 74 74
-----------------------------------------------------------------------------------------------------------
Julius Koch USA, Inc. Debt Securities 2,598 2,598
Warrants 259 6,500
-----------------------------------------------------------------------------------------------------------
Kirker Enterprises, Inc. Warrants 348 4,493
Equity Interest 4 11
-----------------------------------------------------------------------------------------------------------
Kirkland's, Inc. Debt Securities 6,342 6,342
Preferred Stock (917 shares) 412 412
Warrants 96 96
-----------------------------------------------------------------------------------------------------------
Kyrus Corporation Debt Securities 7,716 7,716
Warrants 348 348
-----------------------------------------------------------------------------------------------------------
</TABLE>

(1) Public company.
(2) Common stock, preferred stock, warrants, options and equity interests are
generally non-income producing and restricted.

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

F-7
<PAGE> 91

<TABLE>
<CAPTION>
PRIVATE FINANCE SEPTEMBER 30, 2000
PORTFOLIO COMPANY -------------------
(IN THOUSANDS, EXCEPT NUMBER OF SHARES) INVESTMENT(2) COST VALUE
--------------------------------------- --------------------------------------------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
Liberty-Pittsburgh Systems, Inc. Debt Securities $ 3,467 $ 3,467
Common Stock (64,535 shares) 142 142
-----------------------------------------------------------------------------------------------------------
The Loewen Group, Inc. (1) High-Yield Senior Secured Debt 15,150 14,150
-----------------------------------------------------------------------------------------------------------
Logic Bay Corporation Preferred Stock (1,131,222 shares) 5,000 5,000
-----------------------------------------------------------------------------------------------------------
Love Funding Corporation Series D Preferred
Stock (26,000 shares) 359 213
-----------------------------------------------------------------------------------------------------------
Master Plan, Inc. Loan 2,000 2,000
Common Stock (156 shares) 42 3,042
-----------------------------------------------------------------------------------------------------------
MedAssets.com, Inc. Debt Securities -- --
Series B Convertible
Preferred Stock (227,665 shares) 2,049 2,049
Warrants 136 136
-----------------------------------------------------------------------------------------------------------
Mid-Atlantic Venture Fund IV, L.P. Limited Partnership Interest 1,801 1,801
-----------------------------------------------------------------------------------------------------------
Midview Associates, L.P. Warrants -- --
-----------------------------------------------------------------------------------------------------------
Monitoring Solutions, Inc. Debt Securities 1,823 243
Common Stock (33,333 shares) -- --
Warrants -- --
-----------------------------------------------------------------------------------------------------------
Morton Grove Pharmaceuticals, Inc. Loan 15,192 15,192
Redeemable Convertible Preferred Stock
(106,947 shares) 5,000 5,000
-----------------------------------------------------------------------------------------------------------
Morton Industrial Group (1) Common Stock (5,835 shares) 241 20
-----------------------------------------------------------------------------------------------------------
MVL Group Debt Securities 14,088 14,088
Warrants 651 1,920
-----------------------------------------------------------------------------------------------------------
NETtel Communications, Inc. Debt Securities 13,455 13,455
Series A Convertible Preferred Stock (400
shares) 20 --
Series B Convertible
Preferred Stock (647 shares) 5,000 --
Series C Convertible
Preferred Stock (340,523 shares) 3,000 --
Series D Convertible Preferred Stock (2,270
shares) -- --
Warrants 500 --
-----------------------------------------------------------------------------------------------------------
Nobel Learning Communities, Debt Securities 9,551 9,551
Inc. (1) Series D Convertible
Preferred Stock (265,957 shares) 2,000 2,000
Warrants 575 500
-----------------------------------------------------------------------------------------------------------
North American Loans 1,390 811
Archery, LLC Convertible Debentures 2,056 1,804
-----------------------------------------------------------------------------------------------------------
Northeast Broadcasting Group, L.P. Debt Securities 359 359
-----------------------------------------------------------------------------------------------------------
Nursefinders, Inc. Debt Securities 10,984 10,984
Warrants 900 900
-----------------------------------------------------------------------------------------------------------
Old Mill Holdings, Inc. Debt Securities 140 --
-----------------------------------------------------------------------------------------------------------
</TABLE>

(1) Public company.
(2) Common stock, preferred stock, warrants, options and equity interests are
generally non-income producing and restricted.

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

F-8
<PAGE> 92

<TABLE>
<CAPTION>
PRIVATE FINANCE SEPTEMBER 30, 2000
PORTFOLIO COMPANY -------------------
(IN THOUSANDS, EXCEPT NUMBER OF SHARES) INVESTMENT(2) COST VALUE
--------------------------------------- --------------------------------------------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
Onyx Television GmbH Common Stock (600,000 shares) $ 200 $ 200
-----------------------------------------------------------------------------------------------------------
Opinion Research Corporation (1) Debt Securities 13,996 13,996
Warrants 996 996
-----------------------------------------------------------------------------------------------------------
Oriental Trading Company, Inc. Debt Securities 12,452 12,452
Preferred Equity Interest 1,483 1,483
Common Equity Interest 17 17
Warrants -- --
-----------------------------------------------------------------------------------------------------------
Outsource Partners, Inc. Debt Securities 23,840 23,840
Warrants 826 826
-----------------------------------------------------------------------------------------------------------
Packaging Advantage Corporation Debt Securities 11,476 11,476
Common Stock (200,000 shares) 2,000 2,000
Warrants 963 963
-----------------------------------------------------------------------------------------------------------
PF.Net Communications, Inc. Debt Securities 11,500 11,500
Warrants 3,540 3,540
-----------------------------------------------------------------------------------------------------------
Physician Specialty Corporation Debt Securities 14,792 14,792
Redeemable Preferred
Stock (850 shares) 850 850
Convertible Preferred
Stock (97,411 shares) 150 150
Warrants 476 476
-----------------------------------------------------------------------------------------------------------
Pico Products, Inc. (1) Loan 1,300 1,300
Debt Securities 4,591 1,591
Common Stock (208,000 shares) 59 --
Warrants -- --
-----------------------------------------------------------------------------------------------------------
Polaris Pool Systems, Inc. Debt Securities 6,460 6,460
Warrants 1,050 1,050
-----------------------------------------------------------------------------------------------------------
Powell Plant Farms, Inc. Loan 15,502 15,502
-----------------------------------------------------------------------------------------------------------
Proeducation GmbH Loan 40 40
-----------------------------------------------------------------------------------------------------------
Professional Paint, Inc. Debt Securities 20,000 20,000
Preferred Stock (15,000 shares) 15,000 15,000
Common Stock (110,000 shares) 69 69
-----------------------------------------------------------------------------------------------------------
Progressive International Corporation Debt Securities 3,947 3,947
Preferred Stock (500 shares) 500 500
Common Stock (197 shares) 13 13
Warrants -- --
-----------------------------------------------------------------------------------------------------------
Schwinn/GT Debt Securities 10,268 10,268
Warrants 395 395
-----------------------------------------------------------------------------------------------------------
Seasonal Expressions, Inc. Series A Preferred
Stock (1,000 shares) 993 --
-----------------------------------------------------------------------------------------------------------
Soff-Cut Holdings, Inc. Debt Securities 8,432 8,432
Preferred Stock (300 shares) 300 300
Common Stock (2,000 shares) 200 200
Warrants 446 446
-----------------------------------------------------------------------------------------------------------
</TABLE>

(1) Public company.
(2) Common stock, preferred stock, warrants, options and equity interests are
generally non-income producing and restricted.

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

F-9
<PAGE> 93

<TABLE>
<CAPTION>
PRIVATE FINANCE SEPTEMBER 30, 2000
PORTFOLIO COMPANY -------------------
(IN THOUSANDS, EXCEPT NUMBER OF SHARES) INVESTMENT(2) COST VALUE
--------------------------------------- --------------------------------------------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
Southwest PCS, LLC Loan $ 7,500 $ 7,500
-----------------------------------------------------------------------------------------------------------
Southwest PCS, L.P. Debt Securities 6,461 7,378
-----------------------------------------------------------------------------------------------------------
Spa Lending Corporation Preferred Stock (28,625 shares) 545 436
Common Stock (6,208 shares) 25 18
-----------------------------------------------------------------------------------------------------------
Startec Global Communications, Inc. Debt Securities 19,807 19,807
Common Stock (258,064 shares) 3,000 3,000
Warrants -- --
-----------------------------------------------------------------------------------------------------------
SunStates Refrigerated Services, Inc. Loans 6,130 4,641
Debt Securities 2,445 1,316
-----------------------------------------------------------------------------------------------------------
Sure-Tel, Inc. Loan 207 207
Preferred Stock (1,116,902 shares) 4,536 4,536
Warrants 662 662
-----------------------------------------------------------------------------------------------------------
Sydran Food Services II, L.P. Debt Securities 12,973 12,973
-----------------------------------------------------------------------------------------------------------
Total Foam, Inc. Debt Securities 1,503 118
Common Stock (910 shares) 57 --
-----------------------------------------------------------------------------------------------------------
Tubbs Snowshoe Company, LLC Debt Securities 3,896 3,896
Warrants 54 54
Equity Interests 500 500
-----------------------------------------------------------------------------------------------------------
United Pet Group Debt Securities 4,957 4,957
Warrants 15 15
-----------------------------------------------------------------------------------------------------------
Venturehouse Group, LLC Common Equity Interest 333 333
-----------------------------------------------------------------------------------------------------------
Walker Investment Fund, II, L.P. Limited Partnership Interest 600 600
-----------------------------------------------------------------------------------------------------------
Warn Industries Debt Securities 18,972 18,972
Warrants 1,429 1,429
-----------------------------------------------------------------------------------------------------------
Williams Brothers Lumber Company Warrants 24 322
-----------------------------------------------------------------------------------------------------------
Wilmar Industries, Inc. Debt Securities 33,666 33,666
Warrants 1,181 1,181
-----------------------------------------------------------------------------------------------------------
Wilshire Restaurant Group, Inc. Debt Securities 15,000 15,000
Warrants -- --
-----------------------------------------------------------------------------------------------------------
Wilton Industries, Inc. Loan 12,836 12,836
-----------------------------------------------------------------------------------------------------------
Woodstream Corporation Debt Securities 7,581 7,581
Equity Interests 1,700 1,700
Warrants 450 450
-----------------------------------------------------------------------------------------------------------
Wyo-Tech Acquisition Corporation Debt Securities 15,068 15,068
Preferred Stock (100 shares) 3,700 3,700
Common Stock (99 shares) 100 7,100
-----------------------------------------------------------------------------------------------------------
Total private finance (114 investments) $963,648 $967,521
-----------------------------------------------------------------------------------------------------------
</TABLE>

(1) Public company.
(2) Common stock, preferred stock, warrants, options and equity interests are
generally non-income producing and restricted.

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

F-10
<PAGE> 94

<TABLE>
<CAPTION>
SEPTEMBER 30, 2000
INTEREST NUMBER OF -------------------
(IN THOUSANDS, EXCEPT NUMBER OF LOANS) RATE RANGES LOANS COST VALUE
------------------------------------------- ---------------- --------- -------- --------
<S> <C> <C> <C> <C>
COMMERCIAL REAL ESTATE FINANCE (UNAUDITED)

Commercial Mortgage Loans Up to 6.99% 4 $ 977 $ 2,675
7.00%- 8.99% 10 29,751 31,851
9.00%-10.99% 19 21,985 21,873
11.00%-12.99% 47 34,174 34,306
13.00%-14.99% 14 14,134 14,135
15.00% and above 3 1,037 1,013
-----------------------------------------------------------------------------------------------
Total commercial mortgage loans 97 $102,058 $105,853
-----------------------------------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
STATED
INTEREST FACE
-------- ----
<S> <C> <C> <C> <C>
Purchased CMBS
Mortgage Capital Funding, Series 1998-MC3 5.5% $ 61,302 $ 29,953 $ 29,953
Morgan Stanley Capital I, Series 1999-RM1 6.4% 71,640 35,920 35,972
COMM 1999-1 5.7% 105,010 55,250 55,189
Morgan Stanley Capital I, Series 1999-FNV1 6.1% 49,486 24,797 24,800
DLJ Commercial Mortgage Trust 1999-CG2 6.1% 96,622 44,439 44,439
Commercial Mortgage Acceptance Corp., Series
1999-C1 6.8% 50,449 28,251 28,176
LB Commercial Mortgage Trust, Series 1999-C2 6.7% 42,391 20,429 20,579
Chase Commercial Mortgage Securities Corp.,
Series 1999-2 6.5% 43,046 20,429 20,429
FUNB CMT, Series 1999-C4 6.5% 49,288 22,326 22,524
Heller Financial, HFCMC Series 2000 PH-1 6.8% 55,026 24,943 24,943
SBMS VII, Inc., Series 2000-NL1 7.2% 40,940 26,324 26,796
DLJ Commercial Mortgage Trust, Series 2000-CF1 7.0% 49,364 25,700 25,920
Deutsche Bank Alex. Brown, Series Comm 2000-C1 6.9% 51,452 24,593 24,385
LB-UBS Commercial Mortgage Trust, Series 2000-C4 6.9% 47,818 24,157 25,149
--------------------------------------------------------------------------------------------------
Total purchased CMBS $813,834 $ 407,511 $ 409,254
--------------------------------------------------------------------------------------------------
Residual CMBS $ 77,205 $ 77,205
Residual Interest Spread 4,213 2,713
Real Estate Owned 6,371 5,005
--------------------------------------------------------------------------------------------------
Total commercial real estate finance $ 597,358 $ 600,030
--------------------------------------------------------------------------------------------------
Small business finance $ 71,591 $ 70,656
--------------------------------------------------------------------------------------------------
Total portfolio $1,632,597 $1,638,207
--------------------------------------------------------------------------------------------------
</TABLE>

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

F-11
<PAGE> 95

ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INVESTMENTS

<TABLE>
<CAPTION>
PRIVATE FINANCE DECEMBER 31, 1999
PORTFOLIO COMPANY -------------------
(IN THOUSANDS, EXCEPT NUMBER OF SHARES) INVESTMENT(2) COST VALUE
--------------------------------------- --------------------------------------------- -------- --------
<S> <C> <C> <C>
ACE Products, Inc. Debt Securities $ 13,386 $ 13,386
-----------------------------------------------------------------------------------------------------------
Acme Paging, L.P. Debt Securities 6,618 6,618
Partnership Interest 1,456 2,100
-----------------------------------------------------------------------------------------------------------
Allied Office Products Debt Securities 9,905 9,905
Warrants -- --
-----------------------------------------------------------------------------------------------------------
American Barbecue & Grill, Inc. Warrants 125 125
-----------------------------------------------------------------------------------------------------------
ASW Holding Corporation Warrants 25 25
-----------------------------------------------------------------------------------------------------------
Aurora Communications, LLC Loans 13,370 13,370
Equity Interest 1,500 1,500
-----------------------------------------------------------------------------------------------------------
Avborne, Inc. Debt Securities 11,959 11,959
Warrants 1,180 1,180
-----------------------------------------------------------------------------------------------------------
Bakery Chef, Inc. Loans 10,967 10,967
-----------------------------------------------------------------------------------------------------------
CampGroup, LLC Debt Securities 2,491 2,491
Warrants 220 220
-----------------------------------------------------------------------------------------------------------
Candlewood Hotel Company (1) Preferred Stock (3,250 shares) 3,250 3,250
-----------------------------------------------------------------------------------------------------------
Celebrities, Inc. Loan 310 310
Warrants 12 212
-----------------------------------------------------------------------------------------------------------
Convenience Corporation of America Debt Securities 8,355 2,738
Series A Preferred Stock (31,521 shares) 334 --
Warrants -- --
-----------------------------------------------------------------------------------------------------------
Cooper Natural Resources, Inc. Debt Securities 3,460 3,460
Warrants -- 538
-----------------------------------------------------------------------------------------------------------
CorrFlex Graphics, LLC Loan 6,957 6,957
Debt Securities 4,942 4,942
Warrants -- --
Options -- --
-----------------------------------------------------------------------------------------------------------
Cosmetic Manufacturing Debt Securities 5,817 5,817
Resources, LLC Options 87 87
-----------------------------------------------------------------------------------------------------------
Coverall North America Loan 9,298 9,298
-----------------------------------------------------------------------------------------------------------
Csabai Canning Factory Rt. Hungarian Quotas (9.2%) 700 --
-----------------------------------------------------------------------------------------------------------
CyberRep.com Debt Securities 3,694 3,694
Warrants 360 1,010
-----------------------------------------------------------------------------------------------------------
DEH Printed Circuits, Inc. Warrants 250 --
-----------------------------------------------------------------------------------------------------------
DeVlieg-Bullard, Inc. (1) Warrants 350 29
-----------------------------------------------------------------------------------------------------------
Directory Investment Corporation Common Stock (470 shares) -- --
-----------------------------------------------------------------------------------------------------------
Directory Lending Corporation Series A Common Stock (34 shares) -- --
Series B Common Stock (6 shares) 8 --
Series C Common Stock (10 shares) 22 --
-----------------------------------------------------------------------------------------------------------
</TABLE>

<TABLE>
<S> <C> <C> <C>
(1) Public company.
(2) Common stock, preferred stock, warrants, options and equity interests are generally non-income
producing and restricted.
</TABLE>

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

F-12
<PAGE> 96

<TABLE>
<CAPTION>
PRIVATE FINANCE DECEMBER 31, 1999
PORTFOLIO COMPANY -------------------
(IN THOUSANDS, EXCEPT NUMBER OF SHARES) INVESTMENT(2) COST VALUE
--------------------------------------- --------------------------------------------- -------- --------
<S> <C> <C> <C>
Drilltec Patents & Technologies Loan $ 10,911 $ 8,755
Company, Inc. Debt Securities 786 786
Warrants -- --
-----------------------------------------------------------------------------------------------------------
EDM Consulting, LLC Debt Securities 1,875 343
Common Stock (100 shares) 250 --
-----------------------------------------------------------------------------------------------------------
El Dorado Communications, Inc. Loans 306 306
-----------------------------------------------------------------------------------------------------------
Eparfin S.A. Loan 29 29
-----------------------------------------------------------------------------------------------------------
Esquire Communications Ltd. (1) Warrants 6 --
-----------------------------------------------------------------------------------------------------------
Ex Terra Credit Recovery, Inc. Series A Preferred Stock (500 shares) 500 500
Common Stock (2,500 shares) -- --
Warrants -- --
-----------------------------------------------------------------------------------------------------------
Executive Greetings, Inc. Debt Securities 15,825 15,825
Warrants 360 360
-----------------------------------------------------------------------------------------------------------
Fairchild Industrial Products Company Debt Securities 5,753 5,753
Warrants 280 3,628
-----------------------------------------------------------------------------------------------------------
FTI Consulting, Inc. (1) Debt Securities 12,053 12,053
Warrants 970 970
-----------------------------------------------------------------------------------------------------------
Galaxy American Debt Securities 30,740 30,740
Communications, LLC Options -- 750
-----------------------------------------------------------------------------------------------------------
Garden Ridge Corporation Debt Securities 26,537 26,537
Preferred Stock (1,130 shares) 1,130 1,130
Common Stock (471 shares) 613 613
-----------------------------------------------------------------------------------------------------------
Genesis Worldwide, Inc. (1) Loan 1,328 1,328
Common Stock (41,644 shares) 214 81
-----------------------------------------------------------------------------------------------------------
Genoa Mine Acquisition Corporation Loan 108 108
-----------------------------------------------------------------------------------------------------------
Gibson Guitar Corporation Debt Securities 15,742 15,742
Warrants 525 1,000
-----------------------------------------------------------------------------------------------------------
Ginsey Industries, Inc. Loans 5,000 5,000
Convertible Debentures 500 500
Warrants -- 154
-----------------------------------------------------------------------------------------------------------
Global Communications, LLC Loans 2,526 2,526
Debt Securities 1,733 1,733
Equity Interest 6,867 6,867
Options 1,639 1,639
-----------------------------------------------------------------------------------------------------------
Golden Eagle/Satellite Loans 1,390 840
Archery, LLC Convertible Debentures 2,248 2,008
-----------------------------------------------------------------------------------------------------------
Grant Broadcasting Systems II Debt Securities 5,200 5,200
Warrants 87 5,226
-----------------------------------------------------------------------------------------------------------
Grant Television, Inc. Debt Securities 9,177 9,177
Warrants -- 2,500
-----------------------------------------------------------------------------------------------------------
Hotelevision, Inc. Preferred Stock (1,000,000 shares) 1,000 1,000
-----------------------------------------------------------------------------------------------------------
Icon International, Inc. Series A Preferred Stock (13,720 shares) 1,334 1,334
Series B Preferred Stock (11,987 shares) 1,166 1,166
-----------------------------------------------------------------------------------------------------------
Impact Innovations Group Debt Securities 7,841 7,841
Warrants -- --
-----------------------------------------------------------------------------------------------------------
Jakel, Inc. Loan 18,174 18,174
-----------------------------------------------------------------------------------------------------------
</TABLE>

<TABLE>
<S> <C> <C> <C>
(1) Public company.
(2) Common stock, preferred stock, warrants, options and equity interests are generally non-income
producing and restricted.
</TABLE>

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

F-13
<PAGE> 97

<TABLE>
<CAPTION>
PRIVATE FINANCE DECEMBER 31, 1999
PORTFOLIO COMPANY -------------------
(IN THOUSANDS, EXCEPT NUMBER OF SHARES) INVESTMENT(2) COST VALUE
--------------------------------------- --------------------------------------------- -------- --------
<S> <C> <C> <C>
JRI Industries, Inc. Debt Securities $ 2,134 $ 2,134
Warrants 74 74
-----------------------------------------------------------------------------------------------------------
Julius Koch USA, Inc. Debt Securities 3,502 3,502
Warrants 324 4,100
-----------------------------------------------------------------------------------------------------------
Kirker Enterprises, Inc. Warrants 348 3,495
Equity Interest 4 9
-----------------------------------------------------------------------------------------------------------
Kirkland's, Inc. Debt Securities 6,318 6,318
Warrants 96 600
-----------------------------------------------------------------------------------------------------------
Kyrus Corporation Debt Securities 7,665 7,665
Warrants 348 348
-----------------------------------------------------------------------------------------------------------
Liberty-Pittsburgh Systems, Inc. Debt Securities 3,439 3,439
Common Stock (64,535 shares) 142 142
-----------------------------------------------------------------------------------------------------------
The Loewen Group, Inc. (1) High-Yield Senior Secured Debt 15,150 14,150
-----------------------------------------------------------------------------------------------------------
Love Funding Corporation Series D Preferred
Stock (26,000 shares) 359 213
-----------------------------------------------------------------------------------------------------------
Master Plan, Inc. Common Stock (156 shares) 42 3,042
-----------------------------------------------------------------------------------------------------------
MedAssets.com, Inc. Debt Securities 3,793 3,793
Series B Convertible
Preferred Stock (227,665 shares) 2,049 2,049
Warrants 136 136
-----------------------------------------------------------------------------------------------------------
Meigher Communications, L.P. Loan 2,938 2,938
-----------------------------------------------------------------------------------------------------------
Mid Atlantic Telecom Plus, LLC Loan 11,109 11,109
-----------------------------------------------------------------------------------------------------------
Midview Associates, L.P. Warrants -- --
-----------------------------------------------------------------------------------------------------------
Monitoring Solutions, Inc. Loans 7 7
Debt Securities 1,823 243
Common Stock (33,333 shares) -- --
Warrants -- --
-----------------------------------------------------------------------------------------------------------
Morton Industrial Group (1) Common Stock (5,835 shares) 241 20
-----------------------------------------------------------------------------------------------------------
MVL Group Debt Securities 13,989 13,989
Warrants 651 651
-----------------------------------------------------------------------------------------------------------
Net-Tel Communications, Inc. Debt Securities 9,426 9,426
Series B Convertible
Preferred Stock (647 shares) 5,000 5,000
Warrants 500 500
-----------------------------------------------------------------------------------------------------------
Nobel Learning Communities, Debt Securities 9,492 9,492
Inc. (1) Series D Convertible
Preferred Stock (265,957 shares) 2,000 2,000
Warrants 575 575
-----------------------------------------------------------------------------------------------------------
Northeast Broadcasting Group, L.P. Debt Securities 384 384
-----------------------------------------------------------------------------------------------------------
Nursefinders, Inc. Debt Securities 10,922 10,922
Warrants 900 900
-----------------------------------------------------------------------------------------------------------
Old Mill Holdings, Inc. Debt Securities 140 --
-----------------------------------------------------------------------------------------------------------
Opinion Research Corporation (1) Debt Securities 13,896 13,896
Warrants 996 996
-----------------------------------------------------------------------------------------------------------
Outsource Partners, Inc. Debt Securities 23,802 23,802
Warrants 826 826
-----------------------------------------------------------------------------------------------------------
</TABLE>

<TABLE>
<S> <C> <C> <C>
(1) Public company.
(2) Common stock, preferred stock, warrants, options and equity interests are generally non-income
producing and restricted.
</TABLE>

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

F-14
<PAGE> 98

<TABLE>
<CAPTION>
PRIVATE FINANCE DECEMBER 31, 1999
PORTFOLIO COMPANY -------------------
(IN THOUSANDS, EXCEPT NUMBER OF SHARES) INVESTMENT(2) COST VALUE
--------------------------------------- --------------------------------------------- -------- --------
<S> <C> <C> <C>
Panera Bread Company (1) Warrants $ 227 $ 271
-----------------------------------------------------------------------------------------------------------
Physician Specialty Corporation Debt Securities 14,388 14,388
Redeemable Preferred
Stock (850 shares) 850 850
Convertible Preferred
Stock (97,411 shares) 150 150
Warrants 476 476
-----------------------------------------------------------------------------------------------------------
Pico Products, Inc. (1) Loan 1,300 1,300
Debt Securities 4,591 2,591
Common Stock (208,000 shares) 59 3
Warrants -- --
-----------------------------------------------------------------------------------------------------------
Polaris Pool Systems, Inc. Debt Securities 6,395 6,395
Warrants 1,050 1,050
-----------------------------------------------------------------------------------------------------------
Powell Plant Farms, Inc. Loan 15,031 15,031
-----------------------------------------------------------------------------------------------------------
Progressive International Corporation Debt Securities 3,940 3,940
Preferred Stock (500 shares) 500 500
Common Stock (197 shares) 13 13
Warrants -- --
-----------------------------------------------------------------------------------------------------------
Schwinn/GT Debt Securities 9,978 9,978
Warrants 395 395
-----------------------------------------------------------------------------------------------------------
Seasonal Expressions, Inc. Series A Preferred
Stock (1,000 shares) 993 136
-----------------------------------------------------------------------------------------------------------
Soff-Cut Holdings, Inc. Debt Securities 8,140 8,140
Warrants 446 446
Preferred Stock (300 shares) 300 300
Common Stock (2,000 shares) 200 200
-----------------------------------------------------------------------------------------------------------
Southwest PCS, L.P. Debt Securities 6,364 6,364
Options 1,000 2,000
-----------------------------------------------------------------------------------------------------------
Spa Lending Corporation Preferred Stock (28,625 shares) 469 360
Common Stock (6,208 shares) 25 18
-----------------------------------------------------------------------------------------------------------
SunStates Refrigerated Services, Inc. Loans 6,130 4,641
Debt Securities 2,445 1,316
-----------------------------------------------------------------------------------------------------------
Sure-Tel, Inc. Preferred Stock (1,116,902 shares) 3,108 3,108
Warrants 662 662
Options -- --
-----------------------------------------------------------------------------------------------------------
Sydran Food Services II, L.P. Debt Securities 11,674 11,674
Options 266 266
-----------------------------------------------------------------------------------------------------------
Teknekron Infoswitch Corporation Debt Securities 13,863 13,863
Warrants 900 900
-----------------------------------------------------------------------------------------------------------
Total Foam, Inc. Debt Securities 1,528 135
Common Stock (910 shares) 57 --
-----------------------------------------------------------------------------------------------------------
Tubbs Snowshoe Company, LLC Debt Securities 3,886 3,886
Warrants 54 54
Equity Interests 500 500
-----------------------------------------------------------------------------------------------------------
United Pet Group Debt Securities 4,938 4,938
Warrants 15 15
-----------------------------------------------------------------------------------------------------------
Wildwood Designs, Inc. Loan 1,167 1,167
-----------------------------------------------------------------------------------------------------------
Williams Brothers Lumber Company Warrants 24 322
-----------------------------------------------------------------------------------------------------------
</TABLE>

<TABLE>
<S> <C> <C> <C>
(1) Public company.
(2) Common stock, preferred stock, warrants, options and equity interests are generally non-income
producing and restricted.
</TABLE>

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

F-15
<PAGE> 99

<TABLE>
<S> <C> <C> <C>
(1) Public company.
(2) Common stock, preferred stock, warrants, options and equity interests are generally non-income
producing and restricted.
</TABLE>

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

F-16
<PAGE> 100

<TABLE>
<CAPTION>
DECEMBER 31, 1999
INTEREST NUMBER OF -----------------------
(IN THOUSANDS, EXCEPT NUMBER OF LOANS) RATE RANGES LOANS COST VALUE
---------------------------------------- ---------------- --------- ---------- ----------
<S> <C> <C> <C> <C>
COMMERCIAL REAL ESTATE FINANCE

Commercial Mortgage Loans Up to 6.99% 5 $ 1,422 $ 1,422
7.00%- 8.99% 15 71,619 71,595
9.00%-10.99% 41 39,415 39,623
11.00%-12.99% 30 25,016 25,175
13.00%-14.99% 12 15,207 15,230
15.00% and above 3 1,088 1,064
------------------------------------------------------------------------------------------------
Total commercial mortgage loans 106 $ 153,767 $ 154,109
------------------------------------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
STATED
INTEREST FACE
-------- ----
<S> <C> <C> <C> <C>
Purchased CMBS
Mortgage Capital Funding, Series 1998-MC3 5.5% $ 61,302 $ 29,141 $ 29,141
Morgan Stanley Capital I, Series 1999-RM1 6.4% 71,640 35,453 35,453
COMM 1999-1 5.7% 105,010 54,166 54,166
Morgan Stanley Capital I, Series 1999-FNV1 6.1% 49,486 24,505 24,505
DLJ Commercial Mortgage Trust 1999-CG2 6.1% 96,622 44,288 44,288
Commercial Mortgage Acceptance Corp., Series
1999-C1 6.8% 50,449 28,115 28,115
LB Commercial Mortgage Trust, Series 1999-C2 6.7% 42,391 20,054 20,054
Chase Commercial Mortgage Securities Corp.,
Series 1999-2 6.5% 43,046 20,121 20,121
FUNB CMT, Series 1999-C4 6.5% 49,288 21,851 21,851
--------------------------------------------------------------------------------------------------
Total purchased CMBS $569,234 $ 277,694 $ 277,694
--------------------------------------------------------------------------------------------------
Residual CMBS $ 76,374 $ 76,374
Residual Interest Spread 6,882 5,382
Real Estate Owned 7,305 6,470
--------------------------------------------------------------------------------------------------
Total commercial real estate finance $ 522,022 $ 520,029
--------------------------------------------------------------------------------------------------
Small business finance $ 61,708 $ 61,428
--------------------------------------------------------------------------------------------------
Total portfolio $1,222,901 $1,228,497
--------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------
</TABLE>

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

F-17
<PAGE> 101

ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. ORGANIZATION

Allied Capital Corporation, a Maryland corporation, is a closed-end
management investment company that has elected to be regulated as a business
development company ("BDC") under the Investment Company Act of 1940 ("1940
Act"). Allied Capital Corporation has two wholly owned subsidiaries that have
also elected to be regulated as BDCs. Allied Investment Corporation ("Allied
Investment") is licensed under the Small Business Investment Act of 1958 as a
Small Business Investment Company ("SBIC"). Allied Capital SBLC Corporation
("Allied SBLC") is licensed by the Small Business Administration ("SBA") as a
Small Business Lending Company and is a participant in the SBA Section 7(a)
Guaranteed Loan Program. In addition, the Company has a real estate investment
trust subsidiary, Allied Capital REIT, Inc. ("Allied REIT") and several single-
member limited liability companies established primarily to hold real estate
properties.

Allied Capital Corporation and its subsidiaries, collectively, are
hereinafter referred to as the "Company."

The investment objective of the Company is to achieve current income and
capital gains. In order to achieve this objective, the Company invests primarily
in private, small and middle-market companies in a variety of industries and in
diverse geographic locations in the United States.

On December 31, 1997, Allied Capital Corporation, Allied Capital
Corporation II, Allied Capital Commercial Corporation, and Allied Capital
Advisers ("Advisers") merged with and into Allied Capital Lending Corporation
("Allied Lending") (each a "Predecessor Company" and collectively the
"Predecessor Companies") in a stock-for-stock exchange (the "Merger").
Immediately following the Merger, Allied Lending changed its name to Allied
Capital Corporation.

The consolidated financial statements reflect the operations of the
Company, with the year ended December 31, 1997 restated as if the Predecessor
Companies had merged as of the beginning of the year.

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION

The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All intercompany accounts and transactions
have been eliminated in consolidation. Certain reclassifications have been made
to the 1999, 1998 and 1997 balances to conform with the 2000 financial statement
presentation. The consolidated financial statements for 1997 and prior periods
have been restated to include the accounts of the Predecessor Companies.
Transaction fees and expenses related to the Merger were expensed in the fourth
quarter of 1997.

In the opinion of management, the unaudited consolidated financial results
of the Company included herein contain all adjustments (consisting of only
normal recurring accruals) necessary to present fairly the financial position of
the Company as of and for the nine months ended September 30, 2000 and 1999 and
the results of operations, changes in net assets, and cash flows for these
periods. The results of operations for the nine months ended September 30, 2000
are not necessarily indicative of the operating results to be expected for the
full year.

F-18
<PAGE> 102
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
VALUATION OF PORTFOLIO INVESTMENTS

Portfolio assets are carried at fair value as determined by the Board of
Directors under the Company's valuation policy.

LOANS AND DEBT SECURITIES

The values of loans and debt securities are considered to be amounts that
could be realized in the normal course of business, which generally anticipates
the Company holding the loan to maturity and realizing the face value of the
loan. For loans and debt securities, value normally corresponds to cost unless
the borrower's condition or external factors lead to a determination of value at
a lower amount.

Interest income is recorded on the accrual basis to the extent that such
amounts are expected to be collected. Loan origination fees, original issue
discount and market discount are amortized into interest income using the
effective interest method. Yields on loans and debt securities are computed on
these investments at value.

EQUITY SECURITIES

Equity interests in portfolio companies for which there is no public market
are valued based on various factors including a history of positive cash flow
from operations, the market value of comparable publicly traded companies, and
other pertinent factors such as recent offers to purchase a portfolio company's
securities or other liquidation events. The determined values are generally
discounted to account for liquidity issues and minority control positions.

The Company's equity interests in public companies that carry certain
restrictions on sale are typically valued at a discount from the public market
value of the security at the balance sheet date. Restricted and unrestricted
publicly traded stocks may also be valued at a discount due to the investment
size or market liquidity concerns.

COMMERCIAL MORTGAGE-BACKED SECURITIES ("CMBS")

CMBS consists of purchased commercial mortgage-backed securities
("Purchased CMBS"), residual interest in a mortgage securitization ("Residual
CMBS") and residual interest spread.

PURCHASED CMBS

The Purchased CMBS is carried at fair value. The Company recognizes income
from the amortization of original issue discount using the effective interest
method, using the anticipated yield over the projected life of the investment.
Yields are revised when there are changes in estimates of future credit losses,
actual losses incurred, and actual and estimated prepayment speeds. Changes in
estimated yield are currently recognized as an adjustment to the estimated yield
over the remaining life of the Purchased CMBS. The Company recognizes unrealized
depreciation on its Purchased CMBS whenever it determines that the value of its
Purchased CMBS is less than the cost basis.

F-19
<PAGE> 103
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
RESIDUAL CMBS

The Company values its residual interest in securitization and recognizes
income using the same accounting policies used for the Purchased CMBS.

RESIDUAL INTEREST SPREAD

Residual interest spread is carried at fair value based on discounted
estimated future cash flows. The Company recognizes income from the residual
interest spread using the effective interest method. At each reporting date, the
effective yield is recalculated and used to recognize income until the next
reporting date.

NET REALIZED AND UNREALIZED GAINS

Realized gains or losses are measured by the difference between the net
proceeds from the sale and the cost basis of the investment without regard to
unrealized gains or losses previously recognized, and include investments
charged off during the year, net of recoveries. Unrealized gains or losses
reflect the change in portfolio investment values during the reporting period.

DEFERRED FINANCING COSTS

Financing costs are based on actual costs incurred in obtaining financing
and are deferred and amortized as part of interest expense over the term of the
related debt instrument.

DERIVATIVE FINANCIAL INSTRUMENTS

The Company may or may not use derivative financial instruments to reduce
interest rate risk. The Company has established policies and procedures for risk
assessment and the approval, reporting and monitoring of derivative financial
instrument activities. The Company does not hold or issue derivative financial
instruments for trading purposes.

CASH AND CASH EQUIVALENTS

Cash and cash equivalents include cash in banks and all highly liquid
investments with original maturities of three months or less.

DIVIDENDS TO SHAREHOLDERS

Dividends to shareholders are recorded on the record date.

FEDERAL AND STATE INCOME TAXES

The Company and its wholly owned subsidiaries intend to comply with the
requirements of the Internal Revenue Code ("Code") that are applicable to
regulated investment companies ("RIC") and real estate investment trusts
("REIT"). The Company and its wholly owned subsidiaries intend

F-20
<PAGE> 104
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
to annually distribute or retain through a deemed distribution all of their
taxable income to shareholders; therefore, the Company has made no provision for
income taxes.

With the exception of Advisers, the Predecessor Companies qualified as a
RIC or a REIT; however, Advisers was a corporation subject to federal and state
income taxes. Income tax expense reported on the consolidated statement of
operations relates to the operations of Advisers for all periods presented.

PER SHARE INFORMATION

Basic earnings per share is calculated using the weighted average number of
shares outstanding for the period presented. Diluted earnings per share reflects
the potential dilution that could occur if options to issue common stock were
exercised into common stock. Earnings per share is computed after subtracting
dividends on preferred shares.

USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from these estimates.

RECENT ACCOUNTING PRONOUNCEMENTS

In October 2000, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 140 ("SFAS 140"), "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities -- a Replacement of FASB Statement No. 125", which requires new
disclosures about securitizations and retained interests in securitized
financial assets and revises the criteria involving qualifying special purpose
entities. These new disclosure requirements are to be provided for fiscal years
ending after December 15, 2000. The revisions related to special purpose
entities are to be applied prospectively to transfers of financial assets and
extinguishments of liabilities occurring after March 31, 2001.

NOTE 3. PORTFOLIO

The Company's investment operations are conducted in three primary areas:
private finance, commercial real estate finance, and small business finance.

F-21
<PAGE> 105
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 3. PORTFOLIO, CONTINUED
PRIVATE FINANCE

At September 30, 2000, December 31, 1999 and 1998, the private finance
portfolio consisted of the following:

<TABLE>
<CAPTION>
2000 1999 1998
--------------------------- --------------------------- ---------------------------
COST VALUE YIELD COST VALUE YIELD COST VALUE YIELD
(IN THOUSANDS) -------- -------- ----- -------- -------- ----- -------- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans and debt
securities......... $833,286 $814,346 14.6% $578,570 $559,746 14.2% $354,870 $339,163 14.6%
Equity interests..... 130,362 153,175 60,601 87,294 27,618 49,391
-------- -------- -------- -------- -------- --------
Total....... $963,648 $967,521 $639,171 $647,040 $382,488 $388,554
======== ======== ======== ======== ======== ========
</TABLE>

Private finance investments are generally structured as loans and debt
securities that carry a relatively high fixed rate of interest, which may be
combined with equity features, such as conversion privileges, or warrants or
options to purchase a portion of the portfolio company's equity at a nominal
price.

Debt securities would typically have a maturity of five to ten years, with
interest-only payments in the early years and payments of both principal and
interest in the later years, although debt maturities and principal amortization
schedules vary.

Equity interests consist primarily of securities issued by privately owned
companies and may be subject to restrictions on their resale or otherwise
illiquid. Equity securities generally do not produce a current return, but are
held for investment appreciation and ultimate gain on sale.

At September 30, 2000, December 31, 1999 and 1998, approximately 98% of the
Company's private finance loan portfolio was composed of fixed interest rate
loans. At September 30, 2000, December 31, 1999 and 1998, loans and debt
securities with a value of $51,982,000, $34,560,000 and $5,459,000,
respectively, were not accruing interest.

The geographic and industry compositions of the private finance portfolio
at September 30, 2000, December 31, 1999 and 1998 were as follows:

<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
GEOGRAPHIC REGION
Midwest..................................................... 27% 26% 27%
Mid-Atlantic................................................ 25 23 28
West........................................................ 23 11 11
Southeast................................................... 16 27 23
Northeast................................................... 7 9 4
International............................................... 2 4 7
--- --- ---
Total............................................. 100% 100% 100%
=== === ===
</TABLE>

F-22
<PAGE> 106
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 3. PORTFOLIO, CONTINUED

<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
INDUSTRY
Business Services........................................... 32% 32% 15%
Consumer Products........................................... 25 19 24
Industrial Products......................................... 12 12 9
Telecommunications.......................................... 7 5 3
Retail...................................................... 7 8 9
Broadcasting/Cable.......................................... 6 11 17
Education................................................... 4 5 8
Other....................................................... 7 8 15
--- --- ---
Total............................................. 100% 100% 100%
=== === ===
</TABLE>

COMMERCIAL REAL ESTATE FINANCE

At September 30, 2000, December 31, 1999 and 1998, the commercial real
estate finance portfolio consisted of the following:

<TABLE>
<CAPTION>
2000 1999 1998
--------------------------- --------------------------- ---------------------------
COST VALUE YIELD COST VALUE YIELD COST VALUE YIELD
(IN THOUSANDS) -------- -------- ----- -------- -------- ----- -------- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans................... $102,058 $105,853 9.7% $153,767 $154,109 9.4% $232,745 $233,186 10.4%
CMBS.................... 488,929 489,172 13.9% 360,950 359,450 13.5% 115,174 113,674 11.2%
REO..................... 6,371 5,005 7,305 6,470 8,120 8,120
-------- -------- -------- -------- -------- --------
Total............. $597,358 $600,030 $522,022 $520,029 $356,039 $354,980
======== ======== ======== ======== ======== ========
</TABLE>

LOANS

The commercial mortgage loan portfolio contains loans that were originated
by the Company or were purchased from third-party sellers.

At September 30, 2000, December 31, 1999 and 1998, approximately 71% and
29%, 81% and 19%, and 68% and 32% of the Company's commercial mortgage loan
portfolio was composed of fixed and adjustable interest rate loans,
respectively. As of September 30, 2000, December 31, 1999 and 1998, loans with a
value of $11,472,000, $8,334,000 and $5,436,000, respectively, were not accruing
interest.

F-23
<PAGE> 107
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 3. PORTFOLIO, CONTINUED

The geographic composition and the property types securing the commercial
mortgage loan portfolio at September 30, 2000, December 31, 1999 and 1998 were
as follows:

<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
GEOGRAPHIC REGION
Southeast................................................... 36% 31% 26%
Mid-Atlantic................................................ 23 32 37
West........................................................ 20 25 24
Midwest..................................................... 15 9 9
Northeast................................................... 6 3 4
--- --- ---
Total............................................. 100% 100% 100%
=== === ===
PROPERTY TYPE
Hospitality................................................. 33% 42% 47%
Office...................................................... 29 24 20
Retail...................................................... 18 11 14
Recreation.................................................. 9 8 7
Other....................................................... 11 15 12
--- --- ---
Total............................................. 100% 100% 100%
=== === ===
</TABLE>

CMBS

At September 30, 2000, December 31,1999 and 1998, the CMBS portfolio
consisted of the following:

<TABLE>
<CAPTION>
2000 1999 1998
------------------- ------------------- -------------------
COST VALUE COST VALUE COST VALUE
(IN THOUSANDS) -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Purchased CMBS.......... $407,511 $409,254 $277,694 $277,694 $ 32,221 $ 32,221
Residual CMBS........... 77,205 77,205 76,374 76,374 70,771 70,771
Residual interest
spread................ 4,213 2,713 6,882 5,382 12,182 10,682
-------- -------- -------- -------- -------- --------
Total......... $488,929 $489,172 $360,950 $359,450 $115,174 $113,674
======== ======== ======== ======== ======== ========
</TABLE>

PURCHASED CMBS. The Company has Purchased CMBS bonds with a face amount of
$813,834,000 and a cost of $407,511,000, with the difference representing
original issue discount. As of September 30, 2000, December 31, 1999 and 1998,
the estimated yield to maturity on the Purchased CMBS was approximately 14.7%,
14.6% and 15.0%, respectively. The Company's yield on its Purchased CMBS is
based upon a number of assumptions that are subject to certain business and
economic uncertainties and contingencies. Examples include the timing and
magnitude of credit losses on the mortgage loans underlying the Purchased CMBS
that are a result of the general condition of the real estate market (including
competition for tenants and their related credit quality) and changes in market
rental rates. At September 30, 2000, December 31, 1999 and 1998, the yield on
the Purchased CMBS portfolio was computed assuming a 1% loss estimate for its
entire underlying collateral mortgage pool. As these uncertainties and
contingencies are difficult to predict

F-24
<PAGE> 108
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 3. PORTFOLIO, CONTINUED
and are subject to future events which may alter these assumptions, no assurance
can be given that the anticipated yields to maturity will be achieved.

The non-investment grade and unrated tranches of the Purchased CMBS bonds
are junior in priority for payment of principal to the more senior tranches of
the related commercial securitization. Cash flow from the underlying mortgages
generally is allocated first to the senior tranches, with the most senior
tranches having a priority right to the cash flow. Then, any remaining cash flow
is allocated, generally, among the other tranches in order of their relative
seniority. To the extent there are defaults and unrecoverable losses on the
underlying mortgages resulting in reduced cash flows, the subordinate tranche
will bear this loss first.

The underlying rating classes of the Purchased CMBS is as follows:

<TABLE>
<CAPTION>
SEPTEMBER 30, 2000 DECEMBER 31, 1999 DECEMBER 31, 1998
-------------------------------- -------------------------------- ------------------------------
PERCENTAGE PERCENTAGE PERCENTAGE
COST VALUE OF TOTAL COST VALUE OF TOTAL COST VALUE OF TOTAL
(IN THOUSANDS) -------- -------- ---------- -------- -------- ---------- ------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BB+........................ $ 8,608 $ 8,968 2.2% $ -- $ -- -- % $ -- $ -- -- %
BB......................... 66,850 68,233 16.7 41,091 41,091 14.8 4,109 4,109 12.8
BB-........................ 66,594 66,594 16.3 46,692 46,692 16.8 4,269 4,269 13.2
B+......................... 59,396 59,396 14.5 41,765 41,765 15.0 -- -- --
B.......................... 89,230 89,230 21.8 64,830 64,830 23.4 13,133 13,133 40.8
B-......................... 56,156 56,156 13.7 40,995 40,995 14.8 4,711 4,711 14.6
CCC........................ 7,812 7,812 1.9 6,506 6,506 2.3 -- -- --
Unrated.................... 52,865 52,865 12.9 35,815 35,815 12.9 5,999 5,999 18.6
-------- -------- ----- -------- -------- ----- ------- ------- -----
Total.............. $407,511 $409,254 100.0% $277,694 $277,694 100.0% $32,221 $32,221 100.0%
======== ======== ===== ======== ======== ===== ======= ======= =====
</TABLE>

As of September 30, 2000, the BB+ and BB rated classes of the Purchased
CMBS were classified by the Company as held for sale, and therefore, have been
valued at the market price at which the Company would expect to sell these
securities. All other classes of Purchased CMBS were classified as held for
investment at September 30, 2000.

RESIDUAL CMBS AND RESIDUAL INTEREST SPREAD. The Residual CMBS primarily
consists of a retained interest from a post-Merger asset securitization whereby
bonds were sold in three classes rated "AAA," "AA" and "A."

The Company sold $295 million of loans, and received cash proceeds, net of
costs, of approximately $223 million. The Company retained a trust certificate
for its residual interest in the loan pool sold, and will receive interest
income from this Residual CMBS as well as the Residual Interest Spread from the
interest earned on the loans sold less the interest paid on the bonds over the
life of the bonds.

As a result of this securitization, the Company recorded a gain of $14.8
million, net of the costs of the securitization and the cost of settlement of
interest rate swaps. As of September 30, 2000, December 31, 1999 and 1998, the
mortgage loan pool had an approximate weighted average stated interest rate of
9.3%, 9.3% and 9.4%, respectively. The three bond classes sold had an aggregate
weighted average interest rate of 6.5%, 6.5% and 6.4% as of September 30, 2000,
December 31, 1999 and 1998, respectively. The value of the Residual CMBS was
determined using a discount rate equal

F-25
<PAGE> 109
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 3. PORTFOLIO, CONTINUED
to the average interest rate of the underlying mortgage loans. The value of the
residual interest spread was determined based on a constant prepayment rate of
7% and a discount rate of 14%.

The geographic composition and the property types of the underlying
mortgage loan pools securing the CMBS at September 30, 2000, December 31, 1999
and 1998 were as follows:

<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
GEOGRAPHIC REGION
West........................................................ 31% 32% 18%
Mid-Atlantic................................................ 23 23 32
Midwest..................................................... 22 21 20
Southeast................................................... 19 20 24
Northeast................................................... 5 4 6
--- --- ---
Total............................................. 100% 100% 100%
=== === ===
PROPERTY TYPE
Retail...................................................... 32% 33% 32%
Housing..................................................... 30 29 13
Office...................................................... 21 20 21
Hospitality................................................. 8 9 23
Other....................................................... 9 9 11
--- --- ---
Total............................................. 100% 100% 100%
=== === ===
</TABLE>

SMALL BUSINESS FINANCE

At September 30, 2000, December 31, 1999 and 1998, the small business
finance portfolio consisted of the following:

<TABLE>
<CAPTION>
2000 1999 1998
----------------- ----------------- -----------------
COST VALUE COST VALUE COST VALUE
------- ------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
7(a) loans.................... $45,590 $44,689 $43,246 $43,000 $57,652 $56,285
Residual interest in loans
sold........................ 8,050 8,050 4,036 4,036 -- --
Residual interest spread...... 16,729 16,729 14,046 14,046 7,250 7,250
REO........................... 1,222 1,188 380 346 50 50
------- ------- ------- ------- ------- -------
Total............... $71,591 $70,656 $61,708 $61,428 $64,952 $63,585
======= ======= ======= ======= ======= =======
</TABLE>

The Company, through its wholly owned subsidiary, Allied SBLC, participates
in the SBA's Section 7(a) Guaranteed Loan Program ("7(a) loans").

Pursuant to Section 7(a) of the Small Business Act of 1958, the SBA will
guarantee 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 or no more than 500 employees.

F-26
<PAGE> 110
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 3. PORTFOLIO, CONTINUED
The Company charges interest on the 7(a) loans at a variable rate,
typically 1.75% to 2.75% 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 date on which the
loan was made to its maturity.

As permitted by SBA regulations, the Company sells to investors, without
recourse, 100% of the guaranteed portion of its 7(a) loans while retaining the
right to service 100% of such loans. Additionally, the Company sells up to a 90%
interest in the unguaranteed portion of its 7(a) loans through a structured
finance agreement with a commercial paper conduit.

In 1999, the Company sold $36,387,000 of the unguaranteed portion of 7(a)
loans into the facility. The Company received $35,500,000 in proceeds and
retained a subordinated interest valued at $4,036,000. The Company recognized a
premium from the loan sale of $4,106,000, which includes the value of the
retained residual interest spread.

As of September 30, 2000, December 31, 1999 and 1998, 7(a) loans with a
value of $6,556,000, $5,562,000 and $5,806,000, respectively, were not accruing
interest.

As of September 30, 2000, December 31, 1999 and 1998, 7(a) loans include a
balance of $9,327,000, $7,667,000 and $3,229,000, respectively, that is
guaranteed by the SBA.

NOTE 4. DEBT

At September 30, 2000, December 31, 1999 and 1998, the Company had the
following debt:

<TABLE>
<CAPTION>
2000 1999 1998
--------------------- ------------------- -------------------
FACILITY AMOUNT FACILITY AMOUNT FACILITY AMOUNT
AMOUNT DRAWN AMOUNT DRAWN AMOUNT DRAWN
---------- -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Notes payable and debentures:
Unsecured long-term notes
payable................... $ 419,000 $419,000 $419,000 $419,000 $180,000 $180,000
SBA debentures............... 98,450 77,450 74,650 62,650 74,650 47,650
Auction rate reset note...... 75,000 75,000 -- -- -- --
OPIC loan.................... 5,700 5,700 5,700 5,700 5,700 5,700
---------- -------- -------- -------- -------- --------
Total notes payable
and debentures..... 598,150 577,150 499,350 487,350 260,350 233,350
---------- -------- -------- -------- -------- --------
Revolving credit facilities:
Revolving line of credit..... 417,500 185,000 340,000 82,000 200,000 95,000
Master loan and security
agreement................. 100,000 -- 100,000 23,500 250,000 6,000
---------- -------- -------- -------- -------- --------
Total revolving
credit
facilities......... 517,500 185,000 440,000 105,500 450,000 101,000
---------- -------- -------- -------- -------- --------
Total........................ $1,115,650 $762,150 $939,350 $592,850 $310,350 $334,350
========== ======== ======== ======== ======== ========
</TABLE>

F-27
<PAGE> 111
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 4. DEBT, CONTINUED

NOTES PAYABLE AND DEBENTURES

UNSECURED LONG-TERM NOTES PAYABLE. In June 1998, May 1999 and November
1999, the Company issued unsecured long-term notes to private institutional
investors. The notes require semi-annual interest payments until maturity and
have terms of five or seven years. The weighted average interest rate on the
notes was 7.6%, 7.6% and 7.2% at September 30, 2000, December 31, 1999 and 1998,
respectively. The notes may be prepaid in whole or in part together with an
interest premium, as stipulated in the note agreement.

SBA DEBENTURES. At September 30, 2000, December 31, 1999 and 1998, the
Company had debentures payable to the SBA with terms of ten years and at
interest rates ranging from 6.9% to 9.6%. The debentures require semi-annual
interest-only payments with all principal due upon maturity. The SBA debentures
are subject to prepayment penalties if paid prior to maturity.

AUCTION RATE RESET NOTE. On August 31, 2000, the Company completed a
private placement of a $75 million Auction Rate Reset Senior Note Series A. The
note matures on December 2, 2002 and bears interest at the London Interbank
Offer Rate ("LIBOR") plus 175 basis points which adjusts quarterly. Interest is
due quarterly and the Company, at its option, may pay or defer such interest
payments.

As a means to repay the note, the Company has entered into an agreement to
issue $75 million of debt, equity or other securities in one or more public or
private transactions, or prepay the Auction Note, on or before August 31, 2002.
If the note is prepaid, the Company will pay a fee equal to 0.5% of the
aggregate amount of the note outstanding.

Scheduled future maturities of notes payable and debentures at September
30, 2000 are as follows:

<TABLE>
<CAPTION>
YEAR AMOUNT MATURING
---- ---------------
(IN THOUSANDS)
<S> <C>
2000........................................................ $ 11,100
2001........................................................ 9,350
2002........................................................ 75,000
2003........................................................ 140,000
2004........................................................ 221,000
Thereafter.................................................. 120,700
--------
Total............................................. $577,150
========
</TABLE>

REVOLVING CREDIT FACILITIES

REVOLVING LINE OF CREDIT. The Company has an unsecured revolving line of
credit for $417,500,000. The facility may be expanded up to $500,000,000. The
facility bears interest at LIBOR plus 1.25% and adjusts at the beginning of each
new interest period, usually every thirty days. The interest rates were 7.9%,
7.7% and 6.9% at September 30, 2000 and December 31, 1999 and 1998,
respectively, and the facility requires a commitment fee equal to 0.25% of the
committed amount. The line expires in May 2002. The line of credit requires
monthly interest payments and all principal is due upon its expiration.

F-28
<PAGE> 112
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 4. DEBT, CONTINUED

MASTER LOAN AND SECURITY AGREEMENT. The Company had a facility to borrow
up to $100,000,000, using certain commercial mortgage loans as collateral. The
Company pledged commercial mortgage loans as collateral for the facility such
that the amount borrowed is approximately equal to 80% of the value of the
collateral pledged. The agreement generally requires interest-only payments with
all principal due at maturity. The agreement charged interest at the one-month
LIBOR plus 1.0%, adjusted daily, or 7.6%, 6.8% and 6.6% at September 30, 2000
and December 31, 1999 and 1998, respectively. The agreement matured on October
27, 2000 and was not renewed.

The average debt outstanding on the revolving credit facilities was
$179,312,000, $123,860,000 and $73,836,000 for the nine months ended September
30, 2000 and for the years ended December 31, 1999 and 1998, respectively. The
maximum amount borrowed under these facilities and the weighted average interest
rate for the nine months ended September 30, 2000 and for the years ended
December 31, 1999 and 1998, were $257,000,000, $199,392,000 and $135,000,000,
and 7.6%, 6.5% and 6.7%, respectively.

NOTE 5. INCOME TAXES

For the years ended December 31, 1999, 1998 and 1997, the Company's
effective tax rate was 0.0%, 1.0% and 2.3%, respectively.

For the year ended December 31, 1998, the Company incurred income tax
expense of $787,000, which resulted from the realization of a taxable net
built-in gain associated with property owned by Advisers prior to the Merger.

For the year ended December 31, 1997, the Company's income was subject to
federal and state taxes related to the income generated by the pre-Merger
operations of Advisers.

NOTE 6. PREFERRED STOCK

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

F-29
<PAGE> 113
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 7. SHAREHOLDERS' EQUITY

Sale of common stock for the nine months ended September 30, 2000 and the
years ended December 31, 1999 and 1998 was as follows:

<TABLE>
<CAPTION>
2000 1999 1998
(IN THOUSANDS) -------- -------- -------
<S> <C> <C> <C>
Number of common shares................................ 14,812 8,659 4,367
Gross proceeds......................................... $263,460 $172,539 $73,736
Less costs including underwriting fees................. (12,549) (8,270) (4,061)
-------- -------- -------
Net proceeds......................................... $250,911 $164,269 $69,675
======== ======== =======
</TABLE>

The Company has a dividend reinvestment plan, whereby the Company may buy
shares of its common stock in the open market or issue new shares in order to
satisfy dividend reinvestment requests. If the Company issues new shares, the
issue price is equal to the average of the closing sale prices reported for the
Company's common stock for the five consecutive days immediately prior to the
dividend payment date.

Dividend reinvestment plan activity for the nine months ended September 30,
2000 and for the years ended December 31, 1999, 1998 and 1997 was as follows:

<TABLE>
<CAPTION>
2000 1999 1998 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) ------ ------ ------ ------
<S> <C> <C> <C> <C>
Shares issued................................... 199 233 241 551
Average price per share......................... $18.18 $19.43 $20.35 $15.67
</TABLE>

NOTE 8. EARNINGS PER COMMON SHARE

Earnings per common share for the nine months ended September 30, 2000 and
1999 and for the years ended December 31, 1999, 1998 and 1997 were as follows:

<TABLE>
<CAPTION>
FOR THE NINE
MONTHS ENDED
SEPTEMBER 30, FOR THE YEARS ENDED DECEMBER 31,
------------------ ---------------------------------
2000 1999 1999 1998 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) -------- ------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net increase in net assets resulting from
operations.................................. $100,820 $67,645 $98,570 $78,078 $61,304
Less preferred stock dividends................ (165) (165) (230) (230) (220)
-------- ------- ------- ------- -------
Income available to common shareholders....... $100,655 $67,480 $98,340 $77,848 $61,084
======== ======= ======= ======= =======
Weighted average basic shares outstanding..... 70,604 59,077 59,877 51,941 49,218
Options outstanding to officers............... 173 162 167 33 33
-------- ------- ------- ------- -------
Weighted average diluted shares outstanding... 70,777 59,239 60,044 51,974 49,251
======== ======= ======= ======= =======
BASIC EARNINGS PER COMMON SHARE............... $ 1.43 $ 1.14 $ 1.64 $ 1.50 $ 1.24
======== ======= ======= ======= =======
DILUTED EARNINGS PER COMMON SHARE............. $ 1.42 $ 1.14 $ 1.64 $ 1.50 $ 1.24
======== ======= ======= ======= =======
</TABLE>

F-30
<PAGE> 114
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 9. EMPLOYEE STOCK OWNERSHIP PLAN, 401(k) PLAN AND DEFERRED COMPENSATION
PLAN

The Company had an employee stock ownership plan ("ESOP"). Pursuant to the
ESOP, the Company was obligated to contribute 5% of each eligible participant's
total cash compensation for the year to a plan account on the participant's
behalf, which vested over a two-year period. ESOP contributions were used to
purchase shares of the Company's common stock.

As of December 31, 1999 and 1998, the ESOP held 303,210 shares and 282,500
shares, respectively, of the Company's common stock, all of which had been
allocated to participants' accounts. The plan is funded annually and the total
ESOP contribution expense for the years ended December 31, 1999, 1998, and 1997
was $641,000, $489,000 and $351,000, respectively, net of forfeitures of $4,100,
$4,000, and $0, respectively. In 1999, the Company established a 401(k) plan
(see below) and elected to terminate the ESOP Plan on December 31, 1999. During
2000, the ESOP assets were transferred into the 401(k) plan.

The Company has a 401(k) retirement investment plan, which is open to all
of its employees. The employees may elect voluntary wage deferrals ranging from
0% to 15% of taxable compensation for the year up to the allowable IRS
limitations. In 2000, the Company will begin making contributions to the 401(k)
plan under the same terms that ESOP contributions were made.

The Company also has a deferred compensation plan (the "DC Plan"). Eligible
participants in the DC Plan may elect to defer some of their compensation and
have such compensation credited to a participant account. All amounts credited
to a participant's account shall be credited solely for purposes of accounting
and computation and remain assets of the Company and subject to the claims of
the Company's general creditors. Amounts credited to participants under the DC
Plan are at all times 100% vested and non-forfeitable except for amounts
credited to participants' accounts related to the Formula Award (see Note 11). A
participant's account shall become distributable upon his or her separation from
service, retirement, disability, death or at a future determined date. All DC
Plan accounts will be distributed in the event of a change of control of the
Company or in the event of the Company's insolvency. Amounts deferred by
participants under the DC Plan are funded to a trust, the trustee of which
administers the DC Plan on behalf of the Company.

NOTE 10. STOCK OPTION PLAN

In conjunction with the Merger, all stock option plans that existed for
Allied Lending and the Predecessor Companies before the Merger ("Old Plans")
were cancelled on December 31, 1997, and at a special meeting of shareholders on
November 26, 1997, the Company's shareholders approved a new stock option plan
("Option Plan") for the Company to be effected post-Merger.

THE OPTION PLAN

The purpose of the Option Plan is to provide officers and non-officer
directors of the Company with additional incentives.

On May 9, 2000 the Company's stockholders amended the Option Plan to
increase the number of shares that may be granted from 6,250,000 to 12,350,000,
which represents approximately 18% of the shares outstanding at May 9, 2000.

F-31
<PAGE> 115
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 10. STOCK OPTION PLAN, CONTINUED
Options are exercisable at a price equal to the fair market value of the
shares on the day the option is granted. Each option states the period or
periods of time within which the option may be exercised by the optionee, which
may not exceed ten years from the date the option is granted.

All rights to exercise options terminate 60 days after an optionee ceases
to be (i) a non-officer director, (ii) both an officer and a director, if such
optionee serves in both capacities, or (iii) an officer (if such officer is not
also a director) of the Company for any cause other than death or total and
permanent disability. In the event of a change of control of the Company, all
outstanding options will become fully vested and exercisable as of the change of
control.

Information with respect to options granted, exercised and forfeited under
the Option Plan for the nine months ended September 30, 2000 and for the years
ended December 31, 1999 and 1998 is as follows:

<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
OPTION PRICE
SHARES PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) ------ ------------
<S> <C> <C>
Options outstanding at January 1, 1998...................... -- $ --
Granted..................................................... 5,190 20.16
Exercised................................................... (10) 21.38
Forfeited................................................... (66) 21.38
----- ------
Options outstanding at December 31, 1998.................... 5,114 $20.14
Granted..................................................... 1,288 19.75
Exercised................................................... (318) 19.07
Forfeited................................................... (195) 20.00
----- ------
Options outstanding at December 31, 1999.................... 5,889 $20.12
Granted..................................................... 3,832 16.82
Exercised................................................... (97) 16.63
Forfeited................................................... (816) 19.68
----- ------
Options outstanding at September 30, 2000................... 8,808 $18.76
===== ======
</TABLE>

OLD PLAN ACTIVITY

During 1997, the Predecessor Companies granted 1,474,000 options under the
Old Plans at exercise prices ranging from $9.53 to $22.58 per share. Total
shares issued pursuant to the exercise of stock options totaled 2,395,000 during
1997.

NOTES RECEIVABLE FROM THE SALE OF COMMON STOCK

The Company provides loans to officers for the exercise of options. The
loans have varying terms not exceeding ten years, bear interest at the
applicable federal interest rate in effect at the date of issue and have been
recorded as a reduction to shareholders' equity. As of September 30, 2000 and
December 31, 1999, 1998 and 1997, the Company had outstanding loans to officers
of $25,926,000, $29,461,000, $23,735,000, and $29,611,000, respectively.
Officers with outstanding loans repaid principal of $4,617,000, $195,000,
$5,591,000, and $6,534,000 for the nine months ended September 30, 2000, and for
the years ended December 31, 1999, 1998 and 1997, respectively. The

F-32
<PAGE> 116
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 10. STOCK OPTION PLAN, CONTINUED

Company recognized interest income from these loans of $1,313,000, $1,539,000,
$1,600,000, and $1,031,000, respectively, during these same periods.

The following table summarizes information about stock options outstanding
at September 30, 2000:

<TABLE>
<CAPTION>
TOTAL WEIGHTED AVERAGE TOTAL
NUMBER REMAINING WEIGHTED NUMBER WEIGHTED
RANGE OF OUTSTANDING CONTRACTUAL LIFE AVERAGE EXERCISABLE AVERAGE
EXERCISE PRICES AT 9/30/00 (YEARS) EXERCISE PRICE AT 9/30/00 EXERCISE PRICE
--------------- ----------- ---------------- -------------- ------------ --------------
(SHARE AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
$15.19................. 100 7.98 $15.19 25 $15.19
$16.81................. 3,737 9.65 $16.81 0 $ 0
$17.50-$19.94.......... 1,713 8.61 $18.05 376 $18.11
$21.38................. 2,788 7.27 $21.38 1,449 $21.38
$22.00-$22.50.......... 470 8.91 $22.12 238 $22.13
----- ---- ------ ----- ------
$15.19-$22.50.......... 8,808 8.64 $18.76 2,088 $20.80
===== ==== ====== ===== ======
</TABLE>

The Company accounts for its stock options as required by the Accounting
Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees," and
no compensation cost has been recognized. Had compensation cost for the plan
been determined consistent with SFAS No. 123 "Accounting for Stock Based
Compensation," the Company's net increase in net assets resulting from
operations and basic and diluted earnings per common share would have been
reduced to the following pro forma amounts:

<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------
1999 1998 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) ------- ------- -------
<S> <C> <C> <C>
Net increase in net assets resulting from
operations:
As reported.............................. $98,570 $78,078 $61,304
Pro forma................................ $94,510 $72,684 $60,656
Basic earnings per common share:
As reported.............................. $1.64 $1.50 $1.24
Pro forma................................ $1.58 $1.39 $1.23
Diluted earnings per common share:
As reported.............................. $1.64 $1.50 $1.24
Pro forma................................ $1.57 $1.39 $1.23
</TABLE>

Pro forma expenses are based on the underlying value of the options granted
by the Company and the Predecessor Companies. The fair value of each option
grant is estimated on the date of grant using the Black-Scholes option pricing
model, with the following weighted average assumptions for grants: risk-free
interest rate of 5.9%, 5.7% and 5.0% for December 31, 1999, 1998 and 1997,
respectively; expected life of approximately five years for all options granted;
expected volatility of 37%, 35% and 35% for December 31, 1999, 1998 and 1997,
respectively.

F-33
<PAGE> 117
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 11. CUT-OFF AWARD AND FORMULA AWARD

The Predecessor Companies' existing stock option plans were canceled and
the Company established a cut-off dollar amount for all existing, but unvested
options as of the date of the Merger (the "Cut-off Award"). The Cut-off Award
was computed for each unvested option as of the Merger date. The Cut-off Award
was equal to the difference between the market price on August 14, 1997 (the
Merger announcement date) of the shares of stock underlying the option less the
exercise price of the option. The Cut-off Award was payable for each unvested
option upon the future vesting date of that option. The Cut-off Award was
designed to cap the appreciated value in unvested options at the Merger
announcement date, in order to set the foundation to balance option awards upon
the Merger. The Cut-off Award approximated $2.9 million in the aggregate and has
been expensed as the Cut-off Award vests. For the nine months ended September
30, 2000 and the years ended December 31, 1999 and 1998, $535,000, $532,000 and
$807,000, respectively, of the Cut-off Award vested.

The Formula Award was established to compensate employees from the point
when their unvested options would cease to appreciate in value (the Merger
announcement date), up until the time at which they would be able to receive
option awards in ACC post-merger. In the aggregate, the Formula Award equaled 6%
of the difference between an amount equal to the combined aggregated market
capitalizations of the Predecessor Companies as of the close of the market on
the day before the Merger date (December 30, 1997), less an amount equal to the
combined aggregate market capitalizations of Allied Lending and the Predecessor
Companies as of the close of the market on the Merger announcement date.
Advisers' compensation committee allocated the Formula Award to individual
officers on December 30, 1997. The amount of the Formula Award as computed at
December 30, 1997 was $18,994,000. This amount was contributed to the Company's
deferred compensation trust under the DC Plan (see Note 9) and was used to
purchase shares of the Company's stock (included in common stock held in
deferred compensation trust). The Formula Award vests equally in three
installments on December 31, 1998, 1999 and 2000; provided, however, that such
Formula Award vests immediately upon a change in control of the Company. The
Formula Award has been expensed in each year in which it vests. For the nine
months ended September 30, 2000 and for the years ended December 31, 1999 and
1998, $4,262,000, $6,221,000 and $6,241,000, respectively, was expensed as a
result of the Formula Award. For the nine months ended September 30, 2000 and
for the years ended December 31, 1999 and 1998, the liability related to the
Formula Award was $4,854,000, $6,221,000 and $6,241,000, respectively, and has
been included in common stock held in deferred compensation trust. Vested
Formula Awards are distributable to recipients at the Company's discretion,
however, sale of the Company's stock by the recipients is restricted. Unvested
Formula Awards are forfeited upon a recipient's separation from service and the
related Company stock is retired. For the nine months ended September 30, 2000
and for the years ended December 31, 1999 and 1998, $563,000, $61,000 and
$270,000, respectively, of the Formula Award was forfeited.

On January 3, 2000 and January 4, 1999, the Company distributed shares of
the Company's common stock with a value of $4,274,000 and $4,062,000,
respectively, representing the portion of the Formula Award that vested during
the respective previous year.

F-34
<PAGE> 118
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 12. DIVIDENDS AND DISTRIBUTIONS

The Company's Board of Directors declared and the Company paid a $1.36 per
common share dividend or $98,617,000 for the nine months ended September 30,
2000.

For the years ended December 31, 1999, 1998 and 1997, the Company declared
the following distributions:

<TABLE>
<CAPTION>
1999 1998 1997
------------------- ------------------- -------------------
TOTAL TOTAL PER TOTAL TOTAL PER TOTAL TOTAL PER
AMOUNT SHARE AMOUNT SHARE AMOUNT SHARE
------- --------- ------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)

First quarter...................... $23,286 $0.40 $18,025 $0.35 $14,347 $0.30
Second quarter..................... 23,746 0.40 17,966 0.35 14,795 0.30
Third quarter...................... 24,768 0.40 17,976 0.35 15,548 0.31
Fourth quarter..................... 26,141 0.40 19,444 0.35 31,022 0.61
Annual extra distribution.......... -- -- 1,676 0.03 1,118 0.02
Special undistributed earnings
distribution..................... -- -- -- -- 8,848 0.17
------- ----- ------- ----- ------- -----
Total distributions to common
shareholders..................... $97,941 $1.60 $75,087 $1.43 $85,678 $1.71
======= ===== ======= ===== ======= =====
</TABLE>

For income tax purposes, distributions for 1999, 1998 and 1997 were
composed of the following:

Ordinary income....................... $76,948 $1.26 $49,397 $0.94 $39,356 $0.79
Long-term capital gains............... 20,993 0.34 25,690 0.49 31,037 0.62
Return of capital (tax)............... -- -- -- -- 6,437 0.13
------- ----- ------- ----- ------- -----
Total distributions before special
distribution........................ 97,941 1.60 75,087 1.43 76,830 1.54
Special undistributed earnings
distribution........................ -- -- -- -- 8,848 0.17
------- ----- ------- ----- ------- -----
Total distributions to common
shareholders........................ $97,941 $1.60 $75,087 $1.43 $85,678 $1.71
======= ===== ======= ===== ======= =====
</TABLE>

F-35
<PAGE> 119
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 12. DIVIDENDS AND DISTRIBUTIONS, CONTINUED
The following table summarizes the differences between financial statement
net income and taxable income for the years ended December 31, 1999, 1998 and
1997:

<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
(IN THOUSANDS)

Financial statement net income............................ $98,570 $78,078 $61,304
Adjustments:
Net unrealized gains................................. (2,138) (1,079) (7,209)
Amortization of discount............................. 129 2,207 (1,124)
Post-Merger gain on securitization of commercial
mortgage loans..................................... -- (14,812) --
Interest income from securitized commercial mortgage
loans.............................................. 4,640 4,910 --
Gains from disposition of portfolio assets........... (4,547) 1,177 17,890
Expenses not deductible for tax:
Merger expenses................................. -- -- 5,159
Formula award................................... 2,158 6,242 --
Other........................................... 1,053 1,393 853
Other................................................ (1,492) (3,816) (9,050)
Income tax expense................................... -- 787 1,444
------- ------- -------
Taxable income............................................ $98,373 $75,087 $69,267
======= ======= =======
</TABLE>

NOTE 13. CONCENTRATIONS OF CREDIT RISK

The Company places its cash with financial institutions and, at times, cash
held in checking accounts in financial institutions may be in excess of the
Federal Deposit Insurance Corporation insured limit. At September 30, 2000 and
December 31, 1999 and 1998, cash and cash equivalents consisted of the
following:

<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, -------------------------
2000 1999 1998
------------- -------- --------
<S> <C> <C> <C>
(IN THOUSANDS)

Cash and cash equivalents......................... $34,091 $24,419 $31,833
Less escrows held................................. (7,897) (6,264) (6,758)
------- ------- -------
Total cash and cash equivalents......... $26,194 $18,155 $25,075
======= ======= =======
</TABLE>

NOTE 14. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

For the nine months ended September 30, 2000 and for the years ended
December 31, 1999, 1998, and 1997, the Company paid $32,911,000, $21,092,000,
$21,708,000 and $26,874,000, respectively, for interest and income taxes. During
2000, 1999, 1998 and 1997, the Company's non-cash financing activities totaled
$4,694,000, $10,241,000, $6,237,000 and $48,207,000, respectively, related
primarily to common stock issuance resulting from stock option exercises and
dividend reinvestment shares issued. During 2000, 1999, 1998 and 1997, the
Company's non-cash investing activities totaled $1,082,000, $19,320,000,
$1,265,000 and $12,022,000, respectively.

F-36
<PAGE> 120
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 15. SELECTED QUARTERLY DATA (UNAUDITED)

<TABLE>
<CAPTION>
1999
-------------------------------------
QTR 1 QTR 2 QTR 3 QTR 4
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) ------- ------- ------- -------
<S> <C> <C> <C> <C>
Total interest and related portfolio income......... $27,678 $33,186 $37,998 $42,278
Portfolio income before realized and unrealized
gains............................................. $13,830 $16,619 $19,273 $21,319
Net increase in net assets resulting from
operations........................................ $18,580 $22,121 $26,944 $30,925
Basic earnings per common share..................... $ 0.33 $ 0.38 $ 0.44 $ 0.49
Diluted earnings per common share................... $ 0.33 $ 0.38 $ 0.44 $ 0.49
</TABLE>

<TABLE>
<CAPTION>
1998
-------------------------------------
QTR 1 QTR 2 QTR 3 QTR 4
------- ------- ------- -------
<S> <C> <C> <C> <C>
Total interest and related portfolio income............. $36,897 $21,321 $22,546 $25,974
Portfolio income before realized and unrealized gains... $24,920 $ 9,148 $ 9,401 $11,776
Net increase in net assets resulting from operations.... $32,065 $14,476 $14,906 $16,631
Basic earnings per common share......................... $ 0.62 $ 0.28 $ 0.29 $ 0.31
Diluted earnings per common share....................... $ 0.61 $ 0.28 $ 0.29 $ 0.31
</TABLE>

NOTE 16. SUBSEQUENT EVENTS

On October 31, 2000, the Company entered into a definitive merger agreement
in order to acquire BLC Financial Services Inc. ("BLC") in a stock for stock
exchange. The transaction will create an independently managed, private
portfolio company. The Company also plans to merge its small business finance
portfolio and Allied Capital Express operations into the new portfolio company.

To effect the transaction, the Company will issue approximately 4.2 million
shares of common stock, and BLC shareholders will receive a fixed exchange ratio
of 0.180 shares of Company common stock for each share of BLC stock in a
tax-free exchange. In addition, in a separate transaction, the Company intends
to acquire a corporate shareholder of BLC for approximately $9.1 million in
cash. The Company filed a registration statement on Form N-14 with the SEC on
November 6, 2000 to register the shares to be issued in this transaction.

The Company will own approximately 95% of the portfolio company upon
completion of the transaction. Certain officers, directors and existing
shareholders of BLC will retain approximately 5% ownership. The Company's
investment is structured to provide a current return through interest, dividends
and fee income, and the investment will include debt, preferred stock and common
stock. In addition, the Company believes there is opportunity to add value to
the new portfolio company and to position its investment for future capital
gain. Necessary approvals to complete the transaction include an affirmative
vote of BLC shareholders, as well as regulatory approval by the SBA. The
transaction is expected to close by December 31, 2000.

F-37
<PAGE> 121

ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATING BALANCE SHEET

<TABLE>
<CAPTION>
DECEMBER 31, 1999
-------------------------------------------------------------------------
ALLIED ALLIED ALLIED CONSOLIDATED
CAPITAL INVESTMENT SBLC OTHERS ELIMINATIONS TOTAL
---------- ---------- ------- ------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Portfolio at value:
Private finance............. $ 513,835 $133,205 $ -- $ -- $ -- $ 647,040
Commercial real estate
finance................... 422,514 4,530 -- 92,985 -- 520,029
Small business finance...... -- -- 61,428 -- -- 61,428
Investments in
subsidiaries.............. 162,161 -- -- -- (162,161) --
---------- -------- ------- ------- --------- ----------
Total portfolio at
value................ 1,098,510 137,735 61,428 92,985 (162,161) 1,228,497
---------- -------- ------- ------- --------- ----------
Cash and cash equivalents....... 10,198 3,361 2,256 2,340 -- 18,155
Intercompany notes and
receivables................... 77,748 682 618 4 (79,052) --
Other assets.................... 35,113 2,771 4,299 1,203 -- 43,386
---------- -------- ------- ------- --------- ----------
Total assets........... $1,221,569 $144,549 $68,601 $96,532 $(241,213) $1,290,038
========== ======== ======= ======= ========= ==========

LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Notes payable and
debentures................ $ 424,700 $ 62,650 $ -- $ -- $ -- $ 487,350
Revolving credit
facilities................ 105,500 -- -- -- -- 105,500
Accounts payable and other
liabilities............... 19,476 794 2,202 203 -- 22,675
Dividends and distributions
payable................... -- 6,131 7,791 3,861 (17,783) --
Intercompany notes and
payables.................. 4,380 9,500 38,664 8,726 (61,270) --
---------- -------- ------- ------- --------- ----------
Total liabilities...... 554,056 79,075 48,657 12,790 (79,053) 615,525
---------- -------- ------- ------- --------- ----------
Commitments and Contingencies
Preferred stock................. -- 7,000 -- -- -- 7,000
Shareholders' Equity:
Common stock................ 6 -- -- 1 (1) 6
Additional paid-in
capital................... 699,149 36,673 17,643 81,129 (135,445) 699,149
Common stock held in
deferred compensation
trust..................... (6,218) -- -- -- -- (6,218)
Notes receivable from sale
of common stock........... (29,461) -- -- -- -- (29,461)
Net unrealized appreciation
(depreciation) on
portfolio................. 4,517 2,056 (970) (2,415) 1,329 4,517
Undistributed (distributions
in excess of) earnings.... (480) 19,745 3,271 5,027 (28,043) (480)
---------- -------- ------- ------- --------- ----------
Total shareholders'
equity............... 667,513 58,474 19,944 83,742 (162,160) 667,513
---------- -------- ------- ------- --------- ----------
Total liabilities and
shareholders'
equity............... $1,221,569 $144,549 $68,601 $96,532 $(241,213) $1,290,038
========== ======== ======= ======= ========= ==========
</TABLE>

The accompanying notes are an integral part of these consolidating financial
statements.
F-38
<PAGE> 122

ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATING STATEMENT OF OPERATIONS

<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1999
-----------------------------------------------------------------------
ALLIED ALLIED ALLIED CONSOLIDATED
CAPITAL INVESTMENT SBLC OTHERS ELIMINATIONS TOTAL
-------- ---------- ------- ------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest and Related Portfolio
Income
Interest................... $ 91,863 $11,465 $ 7,931 $ 8,513 $ -- $119,772
Intercompany interest...... 6,237 -- -- -- (6,237) --
Premiums from loan
dispositions............. 4,525 40 9,719 -- -- 14,284
Income from investments in
wholly owned
subsidiaries............. 34,761 -- -- -- (34,761) --
Investment advisory fees
and other income......... 6,574 423 318 (231) -- 7,084
-------- ------- ------- ------- -------- --------
Total interest and
related portfolio
income............. 143,960 11,928 17,968 8,282 (40,998) 141,140
-------- ------- ------- ------- -------- --------
Expenses
Interest................... 30,765 4,074 6 15 -- 34,860
Intercompany interest...... -- 285 4,648 1,304 (6,237) --
Employee................... 16,136 -- -- -- -- 16,136
Administrative............. 11,000 56 878 416 -- 12,350
-------- ------- ------- ------- -------- --------
Total operating
expenses........... 57,901 4,415 5,532 1,735 (6,237) 63,346
-------- ------- ------- ------- -------- --------
Formula and cut-off
awards................... 6,753 -- -- -- -- 6,753
-------- ------- ------- ------- -------- --------
Portfolio income before net
realized and unrealized
gains......................... 79,306 7,513 12,436 6,547 (34,761) 71,041
-------- ------- ------- ------- -------- --------
Net Realized and Unrealized
Gains
Net realized gains
(losses)................. 17,126 9,667 (1,000) (402) -- 25,391
Net unrealized gains
(losses)................. 2,138 593 1,104 (915) (782) 2,138
-------- ------- ------- ------- -------- --------
Total net realized and
unrealized gains
(losses)........... 19,264 10,260 104 (1,317) (782) 27,529
-------- ------- ------- ------- -------- --------
Net increase in net assets
resulting from operations..... $ 98,570 $17,773 $12,540 $ 5,230 $(35,543) $ 98,570
======== ======= ======= ======= ======== ========
</TABLE>

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

F-39
<PAGE> 123

ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATING STATEMENT OF CASH FLOWS

<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1999
--------------------------------------------------------------------------
ALLIED ALLIED ALLIED CONSOLIDATED
CAPITAL INVESTMENT SBLC OTHERS ELIMINATIONS TOTAL
--------- ---------- -------- -------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Cash Flows from Operating
Activities
Net increase in net assets
resulting from operations.... $ 98,570 $ 17,773 $ 12,540 $ 5,230 $(35,543) $ 98,570
Adjustments
Net unrealized (gains)
losses.................... (2,138) (593) (1,104) 915 782 (2,138)
Depreciation and
amortization.............. 788 -- -- -- -- 788
Amortization of loan
discounts and fees........ (9,079) (761) (834) -- -- (10,674)
Changes in other assets and
liabilities............... (8,344) (64) (1,642) 1,338 -- (8,712)
--------- -------- -------- -------- -------- ---------
Net cash provided by
operating activities.... 79,797 16,355 8,960 7,483 (34,761) 77,834
--------- -------- -------- -------- -------- ---------
Cash Flows from Investing
Activities
Portfolio investments........ (596,725) (67,022) (88,124) -- -- (751,871)
Repayments of investment
principal................. 91,851 26,012 6,719 21,124 -- 145,706
Proceeds from loan sales..... 104,706 -- 93,662 -- -- 198,368
Net change in intercompany
investments............... 10,389 9,705 (7,980) (21,280) 9,166 --
Collections of notes
receivable from sale of
common stock.............. 195 -- -- -- -- 195
Other investing activities... 4,805 574 (8,198) 1,065 -- (1,754)
--------- -------- -------- -------- -------- ---------
Net cash (used in)
provided by investing
activities.............. (384,779) (30,731) (3,921) 909 9,166 (409,356)
--------- -------- -------- -------- -------- ---------
Cash Flows from Financing
Activities
Sale of common stock......... 164,269 -- -- -- -- 164,269
Common dividends and
distributions paid........ (95,031) -- -- -- -- (95,031)
Dividends paid to parent
company................... -- (12,111) (5,559) (7,925) 25,595 --
Preferred stock dividends
paid...................... 40 (220) -- (50) -- (230)
Net borrowings under notes
payable and debentures.... 239,000 15,000 -- -- -- 254,000
Net borrowings under
revolving lines of
credit.................... 4,500 -- -- -- -- 4,500
Other financing activities... (2,906) -- -- -- -- (2,906)
--------- -------- -------- -------- -------- ---------
Net cash provided by (used
in) financing
activities.............. 309,872 2,669 (5,559) (7,975) 25,595 324,602
--------- -------- -------- -------- -------- ---------
Net increase (decrease) in cash and
cash equivalents................. $ 4,890 $(11,707) $ (520) $ 417 $ -- $ (6,920)
--------- -------- -------- -------- -------- ---------
Cash and cash equivalents at
beginning of year................ $ 5,308 $ 15,068 $ 2,776 $ 1,923 $ -- $ 25,075
--------- -------- -------- -------- -------- ---------
Cash and cash equivalents at end of
year............................. $ 10,198 $ 3,361 $ 2,256 $ 2,340 $ -- $ 18,155
========= ======== ======== ======== ======== =========
</TABLE>

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

F-40
<PAGE> 124

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

TO THE SHAREHOLDERS AND BOARD OF DIRECTORS OF ALLIED CAPITAL CORPORATION AND
SUBSIDIARIES:

We have audited the consolidated balance sheet of Allied Capital
Corporation and subsidiaries as of December 31, 1999 and 1998, including the
consolidated statement of investments as of December 31, 1999, 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, 1999. These
consolidated financial statements and supplementary consolidating financial
information referred to below are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements and supplementary consolidating financial information
referred to below 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 are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. These procedures
included physical counts of investments. 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.

As discussed in Note 3, the consolidated financial statements include
investments valued at $1,228,497,000 as of December 31, 1999 and $807,119,000 as
of December 31, 1998, (95 percent and 94 percent, respectively, of total assets)
whose values have been estimated by the board of directors in the absence of
readily ascertainable market values. We have reviewed the procedures used by the
board of directors in arriving at its estimate of value of such investments and
have inspected the underlying documentation, and in the circumstances we believe
the procedures are reasonable and the documentation appropriate. However,
because of the inherent uncertainty of valuation, the board of directors'
estimate of values may differ significantly from the values that would have been
used had a ready market existed for the investments, and the differences could
be material.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Allied
Capital Corporation and subsidiaries as of December 31, 1999 and 1998, and the
consolidated results of their operations, changes in net assets and cash flows
for each of the three years in the period then ended in conformity with
generally accepted accounting principles.

Our audit was made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The supplementary
consolidating balance sheet and related consolidating statements of operations
and cash flows are presented for purposes of additional analysis and are not a
required part of the basic financial statements. This information has been
subjected to the auditing procedures applied in our audit of the basic
consolidated financial statements and in our opinion, is fairly stated in all
material respects in relation to the basic financial statements taken as a
whole.

/s/ Arthur Anderson

Vienna, Virginia
February 14, 2000

F-41
<PAGE> 125

ALLIED CAPITAL CORPORATION

STATEMENT OF ADDITIONAL INFORMATION

, 2001

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

This Statement of Additional Information ("SAI") is not a prospectus, and
should be read in conjunction with the prospectus dated , 2001
relating to this offering and the accompanying prospectus supplement, if any.
You can obtain a copy of the prospectus by calling Allied Capital Corporation at
1-888-818-5298 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>
General Information and History...................... B-2 1;12;40
Investment Objective and Policies.................... B-2 1;12;40
Management........................................... B-2 56
Compensation of Executive Officers and
Directors..................................... B-2 60
Compensation of Directors....................... B-3 62
Stock Option Awards............................. B-4 62
Formula Award and Cut-Off Award................. B-5 63
Committees of the Board of Directors............ B-5 N/A
Control Persons and Principal Holders of
Securities......................................... B-7 N/A
Investment Advisory Services......................... B-8 45;56
Safekeeping, Transfer and Dividend Paying Agent and
Registrar.......................................... B-8 78
Brokerage Allocation and Other Practices............. B-8 N/A
</TABLE>

-------------------------
B-1
<PAGE> 126

GENERAL INFORMATION AND HISTORY

This SAI contains information with respect to Allied Capital Corporation
(the "Company"). The Company changed its name from "Allied Capital Lending
Corporation" to "Allied Capital Corporation," effective upon the merger, which
was consummated on December 31, 1997. The Company is a registered investment
adviser. The Company was initially organized as a corporation in the District of
Columbia in 1976 and was reincorporated in the state of Maryland in 1990.

INVESTMENT OBJECTIVE AND POLICIES

The investment objective of the Company is to achieve current income and
capital gains. The Company seeks to achieve its investment objective by
providing investment capital to private companies and undervalued public
companies in a variety of different industries and diverse geographic locations
throughout the United States. We focus on investments in three primary areas:
private finance, commercial real estate finance and small business finance. Our
investment portfolio consists primarily of long-term unsecured loans with equity
features, commercial mortgage-backed securities, commercial mortgage loans, and
small senior loans including SBA 7(a) guaranteed loans. At September 30, 2000,
our investment portfolio totaled $1.6 billion. A discussion of the selected
financial data, supplementary financial information and management's discussion
and analysis of financial condition and results of operations is included in the
prospectus. In addition to its core lending business, the Company also provides
advisory services to private investment funds.

MANAGEMENT

COMPENSATION OF EXECUTIVE OFFICERS AND DIRECTORS

Under Commission rules applicable to BDCs, we are required to set forth
certain information regarding the compensation of certain executive officers and
directors. The following table sets forth compensation paid by the Company in
all capacities during the year ended December 31, 1999 to the directors and the
three highest paid executive officers of the Company, collectively, the
"Compensated Persons".

COMPENSATION TABLE

<TABLE>
<CAPTION>
Pension or
Retirement
Benefits
Aggregate Securities Accrued Directors
Compensation Underlying as Part of Fees Paid
from the Options/ Company by the
Name and Position Company(1) SARs(4) Expenses Company
----------------- ------------ ---------- ---------- ----------
<S> <C> <C> <C> <C>
William L. Walton, Chairman and CEO(2)......... $2,326,190 96,555 -- --
Joan M. Sweeney, Managing Director(2).......... 1,282,793 75,511 -- --
G. Cabell Williams III, Managing Director(2)... 931,890 21,324 -- --
Brooks H. Browne, Director..................... 15,000 10,000 -- $15,000
John D. Firestone, Director.................... 10,000 10,000 -- 10,000
Anthony T. Garcia, Director.................... 13,000 10,000 -- 13,000
Lawrence I. Hebert, Director................... 6,000 10,000 -- 6,000
John I. Leahy, Director........................ 19,000 10,000 -- 19,000
</TABLE>

B-2
<PAGE> 127

<TABLE>
<CAPTION>
Pension or
Retirement
Benefits
Aggregate Securities Accrued Directors
Compensation Underlying as Part of Fees Paid
from the Options/ Company by the
Name and Position Company(1) SARs(4) Expenses Company
----------------- ------------ ---------- ---------- ----------
<S> <C> <C> <C> <C>
Robert E. Long, Director....................... 23,000 10,000 -- 23,000
Warren K. Montouri, Director................... 17,000 10,000 -- 17,000
Guy T. Steuart II, Director.................... 7,000 10,000 -- 7,000
T. Murray Toomey, Director..................... 7,000 10,000 -- 7,000
Laura W. van Roijen, Director.................. 7,000 10,000 -- 7,000
George C. Williams, Jr., Director, Chairman
Emeritus(3).................................. 609,544 -- -- 17,000
</TABLE>

-------------------------
(1) There were no perquisites paid by the Company in excess of the lesser of
$50,000 or 10% of the Compensated Person's total salary and bonus for the
year.
(2) The following table provides detail as to aggregate compensation for 1999 as
to the three highest paid executive officers of the Company:

<TABLE>
<CAPTION>
VESTED DEFERRED
FORMULA CUT-OFF ESOP COMPENSATION
SALARY BONUS AWARD AWARD CONTRIBUTION CONTRIBUTION
-------- -------- ---------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Mr. Walton........... $410,014 $577,500 $1,121,769 $170,156 $8,000 $38,751
Ms. Sweeney.......... 258,651 302,500 657,291 37,679 8,000 18,672
Mr. Williams III..... 251,102 302,500 305,233 46,802 8,000 18,253
</TABLE>

The Formula Award, which was granted in connection with the merger, totaled
approximately $19 million in the aggregate at the time of grant, vests in
three equal installments on December 31, 1998, 1999, and 2000, and will be
expensed for financial reporting purposes similarly. The amount of the
Formula Award expensed in 1999 for financial reporting purposes for Mr.
Walton, Ms. Sweeney and Mr. Williams III was $1,472,451, $862,761 and
$400,664, respectively. The amount expensed was based on the value of the
Formula Award contribution to the deferred compensation plan in January
1998. On January 4, 2000, the second vested installment of the Formula Award
was generally distributed to participants in the form of shares at the
market value of the Company's common stock on that day. The value of the
distribution for Mr. Walton, Ms. Sweeney and Mr. Williams III was
$1,121,769, $657,291, and $305,233, respectively. The deferred compensation
plan trust distributed the vested shares of common stock to brokerage
accounts for the participants that restrict the sale of the vested shares of
common stock.

The Cut-Off Award, which totaled $2.9 million in the aggregate, is paid to
individuals on the respective vesting date of any options granted under the
predecessor company option plans that were canceled in connection with the
merger. See "Formula Award and Cut-Off Award."
(3) In addition to director's fees, Mr. Williams received $144,000 in consulting
fees, $4,688 in Cut-Off Award and $443,856 in vested Formula Award. The
amount of the Formula Award expensed in 1999 with respect to Mr. Williams'
award was $601,068.
(4) See "Stock Option Awards" for terms of options granted in 1999. The Company
does not maintain a restricted stock plan or a long-term incentive plan.

COMPENSATION OF DIRECTORS

During 1999, each director received $1,000 for each Board of Directors or
committee meeting attended, except with respect to the members of the Executive
Committee, who each received an annual retainer of $10,000 in lieu of fees paid
for each Executive Committee meeting attended.

Non-officer directors are eligible for stock option awards under the
Company's Stock Option Plan pursuant to an exemptive order from the Commission.
The terms of the order, which was granted in September 1999, provided for a
one-time grant of 10,000 options to each non-officer director on the date that
the order was issued, or on the date that any new

B-3
<PAGE> 128

director is elected to the Board. Thereafter, each non-officer director will
receive 5,000 options each year on the date of the annual meeting of
stockholders at the fair market value on the date of grant. See "Stock Option
Plan."

STOCK OPTION AWARDS

The following table sets forth the details relating to option grants in
1999 to Compensated Persons under the Company's Stock Option Plan, and the
potential realizable value of each grant, as prescribed to be calculated by the
Commission. See "Stock Option Plan" in the Prospectus.
OPTION GRANTS DURING 1999

<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
NUMBER OF ANNUAL RATES
SECURITIES PERCENT OF OF STOCK APPRECIATION
UNDERLYING TOTAL OPTIONS EXERCISE OVER 10-YEAR TERM(3)
OPTIONS GRANTED PRICE PER EXPIRATION -----------------------
NAME GRANTED(1) IN 1999(2) SHARE DATE 5% 10%
---- ---------- ------------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
William L. Walton............. 96,555 7.50% $17.75 12/30/09 $1,077,832 $2,731,438
Joan M. Sweeney............... 75,511 5.90% 17.75 12/30/09 842,920 2,136,125
G. Cabell Williams III........ 21,324 1.70% 17.75 12/30/09 238,037 603,233
Brooks H. Browne.............. 10,000 0.78% 22.06 09/08/09 138,753 351,627
John D. Firestone............. 10,000 0.78% 22.06 09/08/09 138,753 351,627
Anthony T. Garcia............. 10,000 0.78% 22.06 09/08/09 138,753 351,627
Lawrence I. Hebert............ 10,000 0.78% 22.06 09/08/09 138,753 351,627
John I. Leahy................. 10,000 0.78% 22.06 09/08/09 138,753 351,627
Robert E. Long................ 10,000 0.78% 22.06 09/08/09 138,753 351,627
Warren K. Montouri............ 10,000 0.78% 22.06 09/08/09 138,753 351,627
Guy T. Steuart II............. 10,000 0.78% 22.06 09/08/09 138,753 351,627
T. Murray Toomey.............. 10,000 0.78% 22.06 09/08/09 138,753 351,627
Laura W. van Roijen........... 10,000 0.78% 22.06 09/08/09 138,753 351,627
</TABLE>

---------------
(1) Options granted to officers in 1999 generally vest in six equal installments
beginning on the date of grant, with full vesting occurring on the fifth
anniversary of the grant date or change of control of the Company. Options
granted to non-officer directors vest immediately.

(2) In 1999, the Company granted options to purchase a total of 1,287,736 shares
of common stock.

(3) Potential realizable value is calculated on 1999 options granted, and 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, or stock option exercises
are dependent on the future performance of the shares of common stock,
overall market conditions, and the continued employment by the Company of
the option holder. The potential realizable value will not necessarily be
realized.

The following table sets forth the details of option exercises by
Compensated Persons during 1999 and the values of those unexercised options at
December 31, 1999.

OPTION EXERCISES AND YEAR-END OPTION VALUES

<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED IN-
UNDERLYING UNEXERCISED THE-MONEY OPTIONS
SHARES OPTIONS AS OF 12/31/99 AS OF 12/31/99(2)
ACQUIRED ON VALUE --------------------------- ---------------------------
NAME EXERCISE REALIZED(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
William L. Walton......... 15,834 $55,419 251,657 583,252 $15,996 $73,040
Joan M. Sweeney........... 0 0 137,345 312,441 15,116 51,486
G. Cabell Williams III.... 0 0 96,356 203,371 10,031 26,064
George C. Williams,
Jr. .................... 0 0 97,598 53,797 1,460 2,920
Brooks H. Browne.......... 0 0 10,000 0 0 0
John D. Firestone......... 0 0 10,000 0 0 0
Anthony T. Garcia......... 0 0 10,000 0 0 0
</TABLE>

B-4
<PAGE> 129

<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED IN-
UNDERLYING UNEXERCISED THE-MONEY OPTIONS
SHARES OPTIONS AS OF 12/31/99 AS OF 12/31/99(2)
ACQUIRED ON VALUE --------------------------- ---------------------------
NAME EXERCISE REALIZED(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Lawrence I. Hebert........ 0 0 10,000 0 0 0
John I. Leahy............. 0 0 10,000 0 0 0
Robert E. Long............ 0 0 10,000 0 0 0
Warren K. Montouri........ 0 0 10,000 0 0 0
Guy T. Steuart II......... 0 0 10,000 0 0 0
T. Murray Toomey.......... 0 0 10,000 0 0 0
Laura W. van Roijen....... 0 0 10,000 0 0 0
</TABLE>

-------------------------
(1) Value realized is calculated as the closing market price on the date of
exercise, net of option exercise price, but before any tax liabilities or
transaction costs. This is the deemed market value, which may actually be
realized only if the shares of common stock are sold at that price.
(2) Value of unexercised options is calculated as the closing market price on
December 31, 1999 ($18.31), net of the option exercise price, but before any
tax liabilities or transaction costs. "In-the-Money Options" are options
with an exercise price that is less than the market price as of December 31,
1999.

FORMULA AWARD AND CUT-OFF AWARD

Formula Award. The Formula Award was designed as an incentive compensation
program that would replace stock options of the predecessor companies that were
cancelled as a result of the Company's 1997 merger, and would balance share
ownership among key officers. Assuming all officers meet the vesting
requirement, the Company would accrue the Formula Award in equal amounts of
approximately $6.4 million, over the three-year period on the anniversary of the
merger date (December 31) in 1998, 1999 and 2000, and will vest automatically in
the event of a change of control of the Company. The Formula Award expense for
1999 totaled $6.2 million for 1999. The amount of the Formula Award to be
expensed in 2000 for financial reporting purposes for Mr. Walton, Ms. Sweeney
and Mr. Williams III will be $1,472,451, $862,761 and $400,664, respectively. If
an officer terminates employment with the Company prior to the vesting of any
part of the Formula Award, that amount is forfeited to the Company. The terms of
the Formula Award require that the award be contributed to the Company's
deferred compensation plan, and used to purchase shares of common stock of the
Company in the open market. See "Deferred Compensation Plan."

Cut-Off Award. The Cut-Off Award was designed to cap the appreciated value
in unvested options at the merger announcement date in order to set the
foundation to balance option awards upon the merger on December 31, 1997. As of
December 31, 1997, the Cut-Off Award in the aggregate was computed to be $2.9
million. The Cut-Off Award is payable for each canceled option as the canceled
options would have vested and vests automatically in the event of a change of
control. The Cut-Off Award is payable if the award recipient is employed by the
Company on the future vesting date. The Cut-Off Award expense for 1999 totaled
$0.6 million. The amount paid to the Compensated Persons in 1999 is set forth
above.

COMMITTEES OF THE BOARD OF DIRECTORS

The Company's Board of Directors has established an Executive Committee, an
Audit Committee, a Nominating Committee and a Compensation Committee.

The Executive Committee has and may exercise those rights, powers and
authority that the Board of Directors from time to time grants to it, except
where action by the full

B-5
<PAGE> 130

Board is required by statute, an order of the Securities and Exchange Commission
(the "Commission") or the Company's charter or bylaws. The Executive Committee
also reviews and approves all investments of $10 million or more. The Executive
Committee consists of Messrs. Walton, Leahy, Long, Montouri, and Williams. The
Executive Committee met 27 times during 1999.

The Audit Committee recommends the selection of independent public
accountants for the Company, reviews with such independent public accountants
the planning, scope and results of their audit of the Company's financial
statements and the fees for services performed, reviews with the independent
public accountants the adequacy of internal control systems, reviews the
Company's annual financial statements and receives the Company's audit reports
and financial statements. The Audit Committee consists of Messrs. Browne, Leahy
and Steuart. The Audit Committee met twice during 1999.

The Compensation Committee determines the compensation for the Company's
executive officers and the amount of salary and bonus to be included in the
compensation package for each of the Company's officers and employees. In
addition, the Compensation Committee approves stock option grants for the
Company's officers under the Company's Stock Option Plan. The Compensation
Committee consists of Messrs. Browne, Long, Firestone, and Garcia. The
Compensation Committee met six times during 1999.

The Nominating Committee recommends candidates for election as directors to
the Board of Directors. The Nominating Committee consists of Messrs. Walton,
Hebert, Toomey and Steuart, and Ms. van Roijen. The Nominating Committee did not
meet during 1999. The full Board of Directors nominated directors for election
in 1999.

B-6
<PAGE> 131

CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES

As of January 1, 2001, there were no persons that owned 25% or more of the
Company's outstanding voting securities, and no person would be deemed to
control the Company, as such term is defined in the 1940 Act.

The following table sets forth, as of January 1, 2001, each current
director, the Chief Executive Officer, the Company's executive officers, and the
executive officers and directors as a group. The address for each director and
executive officer is 1919 Pennsylvania Avenue, NW, Washington, DC 20006. Unless
otherwise indicated, the Company believes that each beneficial owner set forth
in the table has sole voting and investment power. The Company is not aware of
any shareholder that beneficially owns more than 5% of the Company's outstanding
shares of common stock.

<TABLE>
<CAPTION>
NUMBER OF
SHARES PERCENTAGE
NAME OF OWNED OF
BENEFICIAL OWNER BENEFICIALLY CLASS(1)
---------------- ------------ ----------
<S> <C> <C>
DIRECTORS:
William L. Walton.................................. 1,134,841(2,4,9) 1.3%
Brooks H. Browne................................... 58,366(3) *
John D. Firestone.................................. 43,211(3) *
Anthony T. Garcia.................................. 73,112(3) *
Lawrence I. Hebert................................. 31,800(3) *
John I. Leahy...................................... 31,818(3) *
Robert E. Long..................................... 24,796(3) *
Warren K. Montouri................................. 241,182(3) *
Guy T. Steuart II.................................. 333,180(3,5) *
T. Murray Toomey, Esq.............................. 47,666(3,6) *
Laura W. van Roijen................................ 43,526(3) *
George C. Williams, Jr............................. 432,583(2) *
EXECUTIVE OFFICERS:
Scott S. Binder.................................... 185,224(2) *
Samuel B. Guren.................................... 102,500(2) *
Philip A. McNeill.................................. 331,999(2) *
Penni F. Roll...................................... 109,768(2) *
John M. Scheurer................................... 534,206(2) *
Joan M. Sweeney.................................... 512,566(2) *
Thomas H. Westbrook................................ 246,889(2,8) *
G. Cabell Williams III............................. 845,950(2,4) 1.0%
All directors and executive officers as a group (20
in number)....................................... 5,034,152(7) 5.8%
</TABLE>

---------------
* Less than 1%

(1) Based on a total of 85,291,696 shares of the Company's common stock issued
and outstanding on January 1, 2001 and shares of the Company's common stock
issuable upon the exercise of immediately exercisable stock options held by
each individual executive officer and non-officer director. The beneficial
ownership of each non-officer director includes exercisable options to
purchase 15,000 shares of common stock.

B-7
<PAGE> 132

(2) Share ownership for the following directors and executive officers includes:

<TABLE>
<CAPTION>
OPTIONS EXERCISABLE ALLOCATED TO
OWNED WITHIN 60 DAYS OF 401(K) PLAN
DIRECTLY JANUARY 1, 2001 ACCOUNT
-------- ------------------- ------------
<S> <C> <C> <C>
William L. Walton........................... 351,789 503,313 1,441
Scott S. Binder............................. 47,808 136,087 1,329
Samuel B. Guren............................. 2,500 100,000 0
Philip A. McNeill........................... 182,022 139,915 10,062
Penni F. Roll............................... 51,576 53,916 4,276
John M. Scheurer............................ 251,917 257,524 24,765
Joan M. Sweeney............................. 236,183 265,523 10,860
Thomas Westbrook............................ 178,742 68,147 0
George C. Williams, Jr...................... 286,187 146,396 0
G. Cabell Williams, III..................... 382,666 183,545 76,864
</TABLE>

(3) Beneficial ownership includes exercisable options to purchase 15,000 shares
of common stock.

(4) Includes 275,278 shares of common stock held by the 401(k) Plan, of which
Messrs. Walton and Williams III are co-trustees, who have the power to vote
the shares on behalf of the participants. Messrs. Walton and Williams III
disclaim beneficial ownership of such shares of common stock.

(5) Includes 276,691 shares of common stock held by a corporation for which Mr.
Steuart II serves as an executive officer.
(6) Shares of common stock are held by a trust for the benefit of Mr. Toomey and
his wife.

(7) Includes a total of 2,004,366 shares of common stock underlying stock
options exercisable within 60 days of January 1, 2001, which are assumed to
be outstanding for the purpose of calculating the group's percentage
ownership, and 279,739 shares held by the 401(k) Plan.

(8) Includes 15,865 shares of common stock held in an IRA.

(9)Includes 9,799 shares of common stock held in an IRA.

INVESTMENT ADVISORY SERVICES

The Company is internally managed and therefore has not entered into any
advisory agreement with, nor pays advisory fees to, an outside investment
adviser. The Company is a registered investment adviser under the Advisers Act
and provides advisory services to four other entities, three of which are in
liquidation. The Company's officers provide investment and portfolio management
services for the Company, as well as the investments of the other managed
entities. See "Management" in the prospectus for additional information about
the Company's executive officers. Our investment decisions in each business area
are made by investment committees, composed of the Company's most senior
investment professionals. In addition, in certain instances where risk/return
characteristics warrant and for every transaction larger than $10 million, the
Executive Committee of the Board of Directors must also approve the transaction.
See "Management" in the prospectus.

SAFEKEEPING, TRANSFER AND DIVIDEND PAYING AGENT AND REGISTRAR

The investments of the Company and its subsidiaries are held in safekeeping
by Riggs Bank N.A. ("Riggs") at 808 17th Street, N.W., Washington, D.C. 20006.
LaSalle National Bank, located at 25 Northwest Point Boulevard, Suite 800, Elk
Grove Village, Illinois 60007, serves as the trustee and custodian with respect
to assets of the Company held for securitization purposes. 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.

BROKERAGE ALLOCATION AND OTHER PRACTICES

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

B-8
<PAGE> 133

PART C

OTHER INFORMATION

ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS

1. FINANCIAL STATEMENTS.

The following financial statements of Allied Capital Corporation (the
"Company" or the "Registrant") are included in this registration statement in
"Part A: Information Required in a Prospectus":

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Consolidated Balance Sheet -- September 30, 2000
(unaudited), December 31, 1999 and 1998................... F-1
Consolidated Statement of Operations -- For the nine months
ended September 30, 2000 and 1999 (unaudited) and for the
Years Ended December 31, 1999, 1998 and 1997.............. F-2
Consolidated Statement of Changes in Net Assets -- For the
nine months ended September 30, 2000 and 1999 (unaudited)
and for the Years Ended December 31, 1999, 1998 and
1997...................................................... F-3
Consolidated Statement of Cash Flows -- For the nine months
ending September 30, 2000 and 1999 (unaudited) and for the
Years Ended December 31, 1999, 1998 and 1997.............. F-4
Consolidated Statement of Investments -- September 30, 2000
(unaudited) and December 31, 1999......................... F-5
Notes to Consolidated Financial Statements.................. F-18
Report of Independent Public Accountants.................... F-41
</TABLE>

2. EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
a.1(1) Articles of Amendment and Restatement of the Articles of
Incorporation.
a.2(2) Articles of Merger.
b.(15) Bylaws.
c. Not applicable.
d.(6) Specimen certificate of the Company's Common Stock, par
value $0.0001 per share, the rights of holders of which are
defined in Exhibits a.1, a.2 and b.
e.(3) Dividend Reinvestment Plan.
f.1(4) Form of debenture between certain subsidiaries of the
Company and the U.S. Small Business Administration.
f.2.a(11) Credit Agreement dated as of March 9, 1999 between the
Company, as borrower, each of the financial institutions
initially a signatory thereto, as Lenders, and Nationsbank,
N.A., as administrative agent, Nationsbanc Montgomery
Securities LLC, as sole lead arranger and sole book manager,
First Union National Bank, as syndication agent, BankBoston,
N.A., as documentation agent, Riggs Bank, N.A., as managing
agent, and Chevy Chase Bank, F.S.B. and Credit Lyonnais New
York Branch, as co-agents.
f.2.b(12) First Amendment to Credit Agreement dated May 7, 1999.
f.2.c(15) Second Amendment to Credit Agreement dated January 18, 2000.
f.2.d(15) Third Amendment to Credit Agreement dated March 17, 2000.
f.2.e+ Amended and Restated Credit Agreement dated May 17, 2000.
f.3(7) Note Agreement dated as of April 30, 1998.
</TABLE>

C-1
<PAGE> 134

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
f.4(5) Loan Agreement between Allied I and Overseas Private
Investment Corporation, dated April 10, 1995. Letter dated
December 11, 1997 evidencing assignment of Loan Agreement
from Allied I to the Company.
f.5(12) Note Agreement dated as of May 1, 1999.
f.6(14) Second Amended and Restated Master Loan & Security Agreement
dated October 28, 1999 between the Company and Morgan
Stanley Mortgage Capital, Inc.
f.7.a(6) Sale and Servicing Agreement dated, as of January 1, 1998,
among Allied Capital CMT, Inc., Allied Capital Commercial
Mortgage Trust 1998-1 and Allied Capital Corporation and
LaSalle National Bank and ABN AMRO Bank N.V.
f.7.b(6) Indenture dated as of January 1, 1998, between the Allied
Capital Commercial Mortgage Trust 1998-1 and LaSalle
National Bank.
f.7.c(6) Amended and Restated Trust Agreement, dated January 1, 1998
between Allied Capital CMT, LaSalle National Bank Inc. and
Wilmington Trust Company.
f.7.d(6) Guaranty dated as of January 1, 1998 by the Company.
f.8.(15) Note Agreement dated as of November 15, 1999.
f.9(19) Note Agreement dated as of October 15, 2000.
f.12+ Auction Rate Reset Note Agreement, dated as of August 31,
2000 between the Company and Intrepid Funding Master Trust,
a Delaware business trust administered by Banc of America
Securities LLC; Forward Issuance Agreement, dated as of
August 31, 2000, between the Company and Banc of America
Securities LLC; Remarketing and Contingency Purchase
Agreement, dated as of August 31, 2000 between the Company
and Banc of America Securities LLC.
f.13* Guaranty Agreement, dated as of December 31, 2000, between
the Company and Transamerica Business Credit Corporation and
Business Loan Express, Inc. and its subsidiary.
g. Not applicable.
h.1+ Form of Underwriting Agreement, if applicable.
i.1(3) Employee Stock Ownership Plan, as amended on December 31,
1997.
i.1a(7) First Amendment to the Allied Capital Corporation Employee
Stock Ownership Plan dated April 30, 1998.
i.1b(14) Termination Amendment to the Allied Capital Employee Stock
Ownership Plan effective December 31, 1999.
i.2(10) Amended and Restated Deferred Compensation Plan dated
December 30, 1998.
i.2.a* Amendment to Deferred Compensation Plan dated October 18,
2000.
i.3(9) Amended Stock Option Plan.
i.4 Description of Formula Award and Cut-Off Award Arrangements.
A discussion of the Formula and Cut-off Awards is set forth
on page 63 of the Prospectus to the Registration Statement
and pages B-6 of the SAI.
i.5(13) Allied Capital 401(k) Plan dated September 1, 1999.
i.5.a* Amendment to 401(k) Plan dated December 31, 2000.
i.6+ Employment Agreement dated June 15, 2000 between the Company
and William L. Walton.
i.7+ Employment Agreement dated June 15, 2000 between the Company
and Joan M. Sweeney.
</TABLE>

C-2
<PAGE> 135

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
i.8+ Employment Agreement dated June 15, 2000 between the Company
and G. Cabell Williams III.
j.1(6) Form of Custody Agreement with Riggs Bank N.A. with respect
to safekeeping.
j.2(6) Form of Custody Agreement with LaSalle National Bank.
k.1(17) Agreement and Plan of Merger, dated as of October 31, 2000,
by and among the Company, Allied Capital B Sub Corporation,
and BLC Financial Services, Inc.
k.2(18) Voting and Support Agreement with key shareholders of BLC
Financial Services, Inc.
k.3(18) Lockup Agreement with key shareholders of BLC Financial
Services, Inc.
k.4(18) Agreement and Plan of Merger, dated as of October 31, 2000,
by and among the Company, Allied Capital F Sub Corporation
and Futuronics Corporation.
k.5(18) Voting and Support Agreement with key shareholders of
Futuronics Corporation dated October 31, 2000.
k.6(18) Lockup Agreement with key shareholders of Futuronics
Corporation dated October 31, 2000.
l.+ Opinion of counsel and consent to its use.
m. Not applicable.
n.1* Consent of Arthur Andersen LLP, independent public
accountants.
n.2* Consent of Sutherland Asbill & Brennan LLP.
o. Not applicable.
p. Not applicable.
q. Not applicable.
r.+ Code of Ethics.
</TABLE>

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

<TABLE>
<C> <S>
* Filed herewith.
+ Filed previously with this registration statement on Form
N-2 (File No. 333-43534)
(1) Incorporated by reference to exhibit 3(i) filed with Allied
Lending's Annual Report on Form 10-K for the year ended
December 31, 1996.
(2) Incorporated by reference from Appendix B to the Company's
registration statement on Form N-14 filed on September 26,
1997 (File No. 333-36459).
(3) Incorporated by reference to the exhibit of the same name
filed with the Company's Annual Report on Form 10-K for the
year ended December 31, 1997.
(4) Incorporated by reference to the exhibit of the same name
filed with Allied I's Annual Report on Form 10-K for the
year ended December 31, 1996.
(5) Incorporated by reference to the exhibit f.7 filed with
Allied I's Pre-Effective Amendment No. 2 to the registration
statement on Form N-2 on January 24, 1996 (File No.
33-64629). Assignment to the Company is incorporated by
reference to Exhibit 10.3 of the Company's Annual Report on
Form 10-K for the year ended December 31, 1997.
(6) Incorporated by reference to the exhibit of the same name to
the Company's registration statement on Form N-2 filed on
the Company's behalf with the Commission on May 5, 1998
(File No. 333-51899).
(7) Incorporated by reference to the exhibit of same name filed
with the Company's Quarterly Report on Form 10-Q for the
period ended June 30, 1998.
(8) Incorporated by reference to the exhibit of the same name
filed with the Company's Quarterly Report on Form 10-Q for
the period ended September 30, 1998.
(9) Incorporated by reference to Exhibit A of the Company's
definitive proxy materials for the Company's 2000 Annual
Meeting of Stockholders filed with the Commission on March
29, 2000.
(10) Incorporated by reference to the exhibit of the same name
filed with the Company's Annual Report on Form 10-K for the
year ended December 31, 1998.
(11) Incorporated by reference to Exhibit f.2.a with the
Company's registration statement on Form N-2 (File No.
333-75161) filed on March 26, 1999.
(12) Incorporated by reference to the exhibit of the same name
filed with the Company's Quarterly Report on Form 10-Q for
the period ended June 30, 1999.
(13) Incorporated by reference to Exhibit 4.4 of the Allied
Capital 401(k) Plan registration statement on Form S-8,
filed on behalf of such Plan on October 8, 1999 (File No.
333-88681).
(14) Incorporated by reference to the exhibit of the same name
filed with Post-Effective Amendment No. 1 to the
registration Form N-2 (333-84973) filed on November 10,
1999.
(15) Incorporated by reference to the exhibit of the same name
filed with the Company's Annual Report on Form 10-K for the
year ended December 31, 1999.
</TABLE>

C-3
<PAGE> 136

<TABLE>
<S> <C>
(16) Incorporated by reference to the exhibit of the same name to the Company's registration statement
on Post Effective Amendment No. 1 to Form N-2 filed on the Company's behalf with the Commission
on May 9, 2000. (File No. 333-33478).
(17) Incorporated by reference to Appendix A to the Company's registration statement on Form N-14
filed on the Company's behalf with the Commission, on November 6, 2000.
(18) Incorporated by reference to the exhibit of the same name to the Company's registration statement
on Form N-14 filed on the Company's behalf with the Commission on November 6, 2000.
(19) Incorporated by reference to the exhibit of the same name to the Company's Quarterly Report on
Form 10-Q for the period ended September 30, 2000.
</TABLE>

ITEM 25. MARKETING ARRANGEMENTS

The information contained under the heading "Plan of Distribution" on page
77 of the prospectus is incorporated herein by reference, and any information
concerning any underwriters will be contained in the accompanying prospectus
supplement, if any.

ITEM 26. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

<TABLE>
<S> <C>
Commission registration fee*................................ $ 81,972
NASD filing fee*............................................ 31,550
Nasdaq National Market Additional Listing Fee*.............. 90,000
Accounting fees and expenses................................ 100,000
Legal fees and expenses..................................... 250,000
Printing and engraving...................................... 400,000
Miscellaneous fees and expenses............................. 11,478
--------
Total.................................................. $965,000
========
</TABLE>

-------------------------
* Estimated for filing purposes.

All of the expenses set forth above shall be borne by the Company.

ITEM 27. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL

Direct Subsidiaries

As of January , 2001, the following list sets forth each of the
Company's subsidiaries, the state or country under whose laws the subsidiary is
organized, and the percentage of voting securities or membership interests owned
by the Company in such subsidiary:

<TABLE>
<S> <C>
Allied Investment Corporation (Maryland).................... 100%
Allied Capital REIT, Inc. ("Allied REIT") (Maryland)........ 100%
Allied Capital Holdings LLC (Delaware)...................... 100%
Allied Capital Beteiligungsberatung GmbH (Germany).......... 100%
</TABLE>

Each of the Company's subsidiaries are consolidated with the Company for
financial reporting purposes, except as noted below.

Prior to December 28, 2000, Allied SBLC was a wholly owned subsidiary.
Thereafter, Allied SBLC, together with its wholly owned subsidiary Allied
Capital SBLC Holdings, LLC, was designated as a private independently managed
portfolio, and its financial results are no longer consolidated for financial
reporting purposes.

C-4
<PAGE> 137

Indirect Subsidiaries

The Company indirectly controls the entities set forth below through Allied
REIT. Allied REIT owns either all of the membership interests (in the case of a
limited liability company, "LLC") or all of the outstanding voting stock (in the
case of a corporation) of each entity. The following list sets forth each of
Allied REIT's subsidiaries, the state under whose laws the subsidiary is
organized, and the percentage of voting securities or membership interests owned
by Allied REIT of such subsidiary:

<TABLE>
<S> <C>
Allied Capital Property LLC (Delaware)...................... 100%
Allied Capital Equity LLC (Delaware)........................ 100%
9586 I-25 East Frontage Road, Longmont, CO 80504 LLC
(Delaware)................................................ 100%
Allied Capital CMT, Inc. (Delaware)......................... 100%
</TABLE>

Allied REIT also indirectly owns Allied Capital Commercial Mortgage Trust
1998-1, a Delaware business trust that is wholly owned by Allied Capital CMT,
Inc. ("CMT"). Each subsidiary of Allied REIT and CMT is not required to maintain
financial and other reports required under the Securities Act because each does
not have a class of securities registered under the Securities Act.

The Company indirectly controls Allied Capital SBLC Holdings LLC (Delaware)
through Allied Capital SBLC Corporation, which owns 100% of the membership
interests. The Company indirectly controls Allied Investment Holdings LLC
(Delaware) through Allied Investment Corporation, which owns 100% of the
membership interests.

Other Entities Deemed to be Controlled by the Company

The Company provides investment advisory services to the certain entities
and therefore may be deemed to control such entities and their respective
subsidiaries. The following list sets forth each such entity and its respective
subsidiaries and the state under whose laws the entity or subsidiary is
organized:

Allied Capital Germany Fund LLC (Delaware)(1, 2)

Allied Capital Syndication LLC (Delaware)(2)
Allied Capital Funding LLC (Delaware)(2)

Business Mortgage Investors, Inc., together with its wholly owned subsidiaries,
was liquidated in the normal course of business on December 31, 2000.

The Company has also established certain limited purpose entities in order to
facilitate certain portfolio transactions. In addition, the Company may be
deemed to control certain portfolio companies. See "Portfolio Companies" in the
prospectus.
-------------------------
(1) By so including these entities herein, the Registrant does not concede that
it controls such entities.
(2) Subsidiary does not consolidate for financial reporting purposes.

C-5
<PAGE> 138

ITEM 28. NUMBER OF HOLDERS OF SECURITIES

The following table sets forth the approximate number of record holders of
the Company's common stock at January 1, 2001.

<TABLE>
<CAPTION>
NUMBER OF
TITLE OF CLASS RECORD HOLDERS
-------------- --------------
<S> <C>
Common stock, $0.0001 par value.................. 4,800
</TABLE>

The Company has privately issued long-term debt securities to 17
institutional lenders, primarily insurance companies.

ITEM 29. INDEMNIFICATION

The Annotated Code of Maryland, Corporations and Associations (the
"Maryland Law"), Section 2-418 provides that a Maryland corporation may
indemnify any director of the corporation and any person who, while a director
of the corporation, is or was serving at the request of the corporation as a
director, officer, partner, trustee, employee, or agent of another foreign or
domestic corporation, partnership, joint venture, trust, other enterprise or
employee benefit plan, made a party to any proceeding by reason of service in
that capacity unless it is established that the act or omission of the director
was material to the matter giving rise to the proceeding and was committed in
bad faith or was the result of active and deliberate dishonesty; or the director
actually received an improper personal benefit in money, property or services;
or, in the case of any criminal proceeding, the director had reasonable cause to
believe that the act or omission was unlawful. Indemnification may be made
against judgments, penalties, fines, settlements, and reasonable expenses
actually incurred by the director in connection with the proceeding, but if the
proceeding was one by or in the right of the corporation, indemnification may
not be made in respect of any proceeding in which the director shall have been
adjudged to be liable to the corporation. Such indemnification may not be made
unless authorized for a specific proceeding after a determination has been made,
in the manner prescribed by the law, that indemnification is permissible in the
circumstances because the director has met the applicable standard of conduct.
On the other hand, the director must be indemnified for expenses if he or she
has been successful in the defense of the proceeding or as otherwise ordered by
a court. The law also prescribes the circumstances under which the corporation
may advance expenses to, or obtain insurance or similar cover for, directors.

The law also provides for comparable indemnification for corporate officers
and agents.

The Articles of Incorporation of the Company provide that its directors and
officers shall, and its agents in the discretion of the board of directors may,
be indemnified to the fullest extent permitted from time to time by the laws of
Maryland (with such power to indemnify officers and directors limited to the
scope provided for in Section 2-418 as currently in force), provided, however,
that such indemnification is limited by the Investment Company Act of 1940 or by
any valid rule, regulation or order of the Securities and Exchange Commission
thereunder. The Company's Bylaws, however, provide that the Company may not
indemnify any director or officer against liability to the Company or its
security holders to which he or she might otherwise be subject by reason of such
person's willful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of his or her office unless a
determination is made by final decision of a court, by vote of a majority of a
quorum of directors who are disinterested, non-party

C-6
<PAGE> 139

directors or by independent legal counsel that the liability for which
indemnification is sought did not arise out of such disabling conduct.

Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Company pursuant to the provisions described above, or otherwise, the Company
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Company of expenses incurred or
paid by a director, officer or controlling person in the successful defense of
an action, suit or proceeding) is asserted by a director, officer or controlling
person in connection with the securities being registered, the Company will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of the court of the issue.

The Company carries liability insurance for the benefit of its directors
and officers on a claims-made basis of up to $10,000,000, subject to a $250,000
retention and the other terms thereof.

The Agreement and Plan of Merger (the "Merger Agreement") by and among
Allied Capital Advisers, Allied Capital Corporation, Allied Capital Corporation
II, Allied Capital Lending Corporation and Allied Capital Commercial Corporation
provides that, from and after consummation of the Merger the Company shall
indemnify any person who at the date of the Merger Agreement, or had been at any
time prior to such date or who becomes prior to the effective time of the
merger, an officer or director of the companies noted above other than Allied
Capital Lending Corporation, or any of their respective subsidiaries, from any
and all liabilities resulting from their acts and omissions prior to the
effective time of the merger to the full extent permitted by Maryland Law and
the 1940 Act, including but not limited to acts and omissions arising out of or
pertaining to the merger, and shall maintain in effect for at least 72 months
directors' and officers' liability insurance policies with respect to matters
occurring prior to the effective time of the merger.

ITEM 30. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER

Not applicable.

ITEM 31. LOCATION OF ACCOUNTS AND RECORDS

The Company maintains at its principal office physical possession of each
account, book or other document required to be maintained by Section 31(a) of
the 1940 Act and the rules thereunder.

ITEM 32. MANAGEMENT SERVICES

Not applicable.

C-7
<PAGE> 140

ITEM 33. UNDERTAKINGS

The Registrant hereby undertakes:

(1) to suspend the offering of shares until the prospectus is amended
if subsequent to the effective date of this Registration Statement, its net
asset value declines more than ten percent from its net asset value as of
the effective date of this Registration Statement;

(2) to file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:

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

(ii) to reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or
the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental
change in the information set forth in the registration
statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high
end of the estimated maximum offering range may be reflected
in the form of prospectus filed with the Commission pursuant
to Rule 424(b) under the Securities Act of 1933 if, in the
aggregate, the changes in volume and price represent no more
than a 20% change in the maximum aggregate offering price
set forth in the "Calculation of Registration Fee" table in
the effective registration statement; and

(iii) to include any material information with respect to the plan of
distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement.

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

(4) to remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering;

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

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

Subject to the terms and conditions of Section 15(d) of the Securities
Exchange Act of 1934, the registrant hereby undertakes to file with the
Securities and Exchange Commission such supplementary and periodic information,
documents and reports as may

C-8
<PAGE> 141

be prescribed by any rule or regulation of the Commission heretofore or
hereafter duly adopted pursuant to authority conferred in that section.

Insofar as indemnification for liability arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions of its charter and bylaws permitting
indemnification, or otherwise, the registrant has been advised that in the
opinion of the Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.

C-9
<PAGE> 142

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Washington, in the
District of Columbia, on the 18th day of January, 2001.

ALLIED CAPITAL CORPORATION

By: /s/ WILLIAM L. WALTON

---------------------------------
William L. Walton
Chief Executive Officer and
President

Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on January 18, 2001.

<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>

/s/ WILLIAM L. WALTON Chairman of the Board, Chief Executive
--------------------------------------------- Officer, and President
William L. Walton

* Director
---------------------------------------------
Brooks H. Browne

* Director
---------------------------------------------
John D. Firestone

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

* Director
---------------------------------------------
Lawrence I. Hebert

* Director
---------------------------------------------
John I. Leahy

* Director
---------------------------------------------
Robert E. Long
</TABLE>
<PAGE> 143

<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
* Director
---------------------------------------------
Warren K. Montouri

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

* Director
---------------------------------------------
T. Murray Toomey, Esq.

* Director
---------------------------------------------
Laura W. van Roijen

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

* Principal and Chief Financial Officer
--------------------------------------------- (Principal Financial and Accounting
Penni F. Roll Officer)
</TABLE>

*Signed by William L. Walton pursuant to a power of attorney signed by each
individual and filed with this registration statement on August 11, 2000.

<PAGE> 144

INDEX TO EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
-------------- -----------
<S> <C>
Ex - 99.2f.13 Guaranty Agreement
Ex - 99.2i.2a Amendment to Deferred Compensation Plan
Ex - 99.2i.5a Amendment to 401(k) Plan
Ex - 99.2n.1 Consent of Arthur Andersen LLP, independent public
accountants
Ex - 99.2n.2 Consent of Sutherland Asbill & Brennan LLP
</TABLE>