ALLIED CAPITAL ADVISERS INC, 10-K405, 1997-03-31

ALLIED CAPITAL ADVISERS INC
10-K405, 1997-03-31
INVESTMENT ADVICE

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<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
FORM 10-K
------

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

COMMISSION FILE NO. 0-18826

ALLIED CAPITAL ADVISERS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
------

MARYLAND 52-0812307
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION) IDENTIFICATION NO.)

1666 K STREET, NW, NINTH FLOOR
WASHINGTON, D.C. 20006
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (202) 331-1112

------

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- -------------------
NONE NONE

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

COMMON STOCK, $0.001 PAR VALUE
(TITLE OF CLASS)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
--- ---

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]

The aggregate market value of the registrant's common stock held by
non-affiliates of the registrant as of March 19, 1997 was approximately
$40,736,996 based upon the average bid and asked price for the registrant's
common stock on that date. As of March 19, 1997 there were 9,010,460 shares
of the registrant's common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant's Annual Report to Shareholders for the year ended
December 31, 1996 are incorporated by reference into Parts II and IV of this
Report. Portions of the registrant's definitive Proxy Statement for the Annual
Meeting of Stockholders to be held on May 16, 1997 are incorporated by reference
into Part III of this Report.

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

<PAGE> 2

PART I

Item 1. Business.

Allied Capital Advisers, Inc. (the "Company") was incorporated under
the laws of the District of Columbia in May 1964 and was reorganized as a
Maryland corporation in September 1990. The Company is engaged primarily in the
business of providing investment advice and related services to the investment
funds comprising the Allied Capital family of funds (the "Allied Funds"). In
1989, the Company registered as an investment adviser under the Investment
Advisers Act of 1940, as amended (the "Advisers Act"). Until late 1990, the
Company was a wholly owned subsidiary of Allied Capital Corporation ("Allied
I"); it thereafter became a public company upon the distribution of all of its
then issued and outstanding shares to the stockholders of Allied I.

The Allied Funds focus primarily on investments in small growing
entrepreneurial companies. During 1996, the Company served as an investment
adviser to Allied I, Allied Capital Corporation II ("Allied II"), Allied Capital
Lending Corporation ("Allied Lending"), Allied Venture Partnership ("Allied
Venture"), Allied Technology Partnership ("Allied Technology"), Allied Capital
Mortgage LLC ("Allied Mortgage") and Allied Capital Midwest LLC ("Allied
Midwest"), each of which specializes in financing for small, private businesses
through senior or subordinated debt and combinations of debt and equity. During
1996, the Company also served as investment manager to Allied Capital Commercial
Corporation ("Allied Commercial") and Business Mortgage Investors, Inc. ("BMI"),
each of which is a real estate investment trust that specializes in small
business loans collateralized by real estate. Allied I, Allied II, Allied
Lending, and Allied Commercial are publicly owned investment funds, and BMI,
Allied Venture, Allied Technology, Allied Mortgage and Allied Midwest are
privately held.

As the investment adviser or investment manager of the Allied Funds,
the Company provides a variety of services in the management and servicing of
those funds' portfolios of investments in small growth-oriented businesses. The
Company generally searches for and recommends investment opportunities to the
investment funds that it manages, services the portfolios under its management
and provides significant managerial assistance to portfolio companies of certain
of the funds that it manages. As the investments of its managed funds generally
are in private companies, management and servicing of the funds' portfolios is
labor intensive. Because the size of such investments generally is relatively
small, the labor intensity of the Company's work is relatively high due to the
number of investments comprising the portfolios of its managed funds. In
addition, the Company is required to monitor the compliance of certain of the
managed funds with regulations applicable to business development companies,
small business lending corporations, small business investment companies,
specialized small business investment companies and real estate investment
trusts.

The Company receives advisory and management fees as set forth in the
various advisory or management agreements it has with the Allied Funds. The fees
charged pursuant to these agreements generally approximate 2.5 percent on
invested assets and 0.5 percent on interim investments, cash and cash
equivalents on an annual basis. The Company receives payments of advisory and
management fees quarterly in arrears. At December 31, 1996, 1995 and 1994, the
Company managed assets of approximately $764 million, $670 million, and $569
million, respectively. Included in invested assets at December 31, 1996, 1995
and 1994, were approximately $53 million, $60 million, and $37 million,
respectively, in assets of a company that is co-managed by another investment
manager. The Company pays one-third of its fees received from this company to
the co-manager.

The Company from time to time will waive or adjust its advisory or
management fees, given certain regulatory or economic circumstances. The Company
believes that it is prudent to waive or adjust its fees when market conditions
dictate such an adjustment, and such actions will enhance the Company's
investment advisory and management performance overall. The Company has adjusted
its fee schedule with Allied Commercial to provide a range of fees charged on
new loans originated. The range of fees for loans originated in 1996 was from 1
percent to 3.5 percent and the range of fees for new loans originated beginning
January 1, 1997 is from 0.5 percent to 3.0 percent. The Company maintains a
quarterly cap on the fees for those assets of 2.5 percent on an annual basis.
The weighted average advisory and management fees as a percent of average total
assets under management equaled 2.2 percent, 2.3 percent, and 2.2 percent for
the years ended December 31, 1996, 1995, and 1994, respectively.

<PAGE> 3

At December 31, 1996, assets under the Company's management with
respect to, and the invested assets of, its managed funds that each generate
approximately 10% or more of the advisory fees paid to the Company were as
follows:

<TABLE>
<CAPTION>
(in millions) At December 31, 1996 At December 31, 1995
Total Invested Total Invested
Name of Fund Assets Assets Assets Assets
- ------------ --------------------------- ------------------------
<S> <C> <C> <C> <C>
Allied I $166 $109 $148 $111

Allied II 107 88 107 101

Allied Lending 68 67 55 52

Allied Commercial 370 345 298 281
</TABLE>

The Company also provides advisory services to Allied Venture, Allied
Technology, BMI, Allied Mortgage and Allied Midwest. Allied Midwest is a newly
formed fund and is in the process of closing on investment subscriptions.
Subscriptions for $50 million had been received by Allied Midwest as of March 1,
1997. With the exception of Allied Venture, Allied Technology, Allied Midwest
and Allied Mortgage, all of the funds currently managed by the Company provide
opportunities for growth through leverage. While the amount of leverage these
funds are able to obtain will depend upon various factors, including market
conditions and the cost of capital, none of the funds had exhausted its ability
to obtain debt capital as of December 31, 1996, and the potential for growth in
assets under management from debt capital remains.

Services Provided to the Managed Funds

As investment adviser or investment manager, the Company generally
identifies potential investments for the managed funds, evaluates those
potential investments for the specific fund, structures and closes all
investments for each fund and monitors all investments and the performance of
each portfolio company of each managed fund. The Company utilizes investment and
loan officers, each of whom is responsible for certain portfolio companies of a
managed fund. The Company's investment and loan officers servicing Allied I,
Allied II and Allied Lending also provide management assistance and counseling
to their portfolio companies upon the request of any portfolio company or when
it appears that a portfolio company is encountering business or financial
difficulties. At December 31, 1996, twenty-two of the Company's seventy
employees were investment and loan officers.

In addition to providing services as an investment adviser or
investment manager, the Company provides accounting functions and investment and
loan servicing functions for its managed funds. The Company's accounting staff
is responsible for all internal and external financial reporting of the managed
funds, including reports to stockholders and required reports to the U.S. Small
Business Administration ("SBA"), the Securities and Exchange Commission ("SEC")
and the Internal Revenue Service ("IRS"), and all record keeping regarding
investments in and loans to portfolio companies. The investment and loan
servicing staff processes monthly payments received from borrowers of the
managed funds, processes escrow payments, monitors payment activity and responds
to routine inquiries from borrowers. At December 31, 1996, seventeen of the
Company's employees were involved in accounting and servicing functions.

The Company also provides a compliance function for its managed funds
and their subsidiaries. At December 31, 1996, nine of the managed funds,
including subsidiary funds, were investment companies; of those nine managed
funds and subsidiary funds, four are registered under the Investment Company Act
of 1940, as amended (the "1940 Act"), five have elected to be regulated as
business development companies, two are licensed small business investment
companies, and two are licensed as specialized small business investment
companies. Two of the managed funds are real estate investment trusts. The
compliance function provided by the Company seeks to ensure compliance with the
rules and regulations imposed by the SEC, SBA and IRS on the managed funds and
their subsidiaries and reviews proposed investments or restructurings to assure
compliance with applicable regulatory requirements. The Company also monitors
its compliance with rules and regulations that govern its operation as an
investment adviser under the Advisers Act.

<PAGE> 4

Members of the Company's investor relations staff coordinate press
releases, quarterly and annual reports and proxy statements by the Company and
its managed funds and respond to inquiries from over 40,000 stockholders of the
Company and its managed funds. At December 31, 1996, two of the Company's
employees were involved in investor relations.

Investment Adviser to Allied I, Allied II, and Allied Lending

Each of Allied I, Allied II, and Allied Lending is a management
investment company that has elected to be regulated as a business development
company ("BDC") under the 1940 Act. Allied I and Allied II each has a subsidiary
licensed by the SBA as a small business investment company ("SBIC"), and a
subsidiary licensed by the SBA as a specialized small business investment
company ("SSBIC"). Each SSBIC subsidiary may provide financing for socially or
economically disadvantaged small businesses. Allied I and Allied II each seeks,
either directly or through its subsidiaries, to make privately negotiated
investments in small businesses, generally in the form of debt securities with
options or warrants, for the purpose of financing growth, management buyouts,
recapitalizations or special situations. Allied Lending is an SBA-approved small
business lending company that makes loans to small businesses that may be
guaranteed to the extent of 70% to 90% by the SBA. Allied Lending, either
directly or indirectly through its subsidiaries, systematically sells to
investors, without recourse, the guaranteed portion of its loans, which it
continues to service. As BDCs, Allied I, Allied II, and Allied Lending offer and
provide significant guidance and counseling to their portfolio companies
concerning management, operations and business objectives and policies upon the
request of any portfolio company or when it appears that a portfolio company is
encountering business or financial difficulties.

In accordance with the conditions of an exemptive order of the SEC
permitting co-investments (the "co-investment guidelines"), most of the
acquisitions and dispositions of investments by Allied I are made generally, pro
rata based on total assets, in participation with Allied II, and vice versa, on
the same terms, subject to the approval of each company's board of directors,
including a majority of their respective independent directors. Allied I and
Allied II also made investments in participation with Allied Venture and Allied
Technology during the period in which Allied Venture and Allied Technology were
making investments. The co-investment guidelines provide Allied I and Allied II
with the opportunity to dispose of any securities in which the other or Allied
Venture or Allied Technology have invested in proportion to their holdings of
such securities.

The Company has entered into a separate investment advisory agreement
with each of Allied I, Allied II, and Allied Lending that continues in effect as
long as such continuance is specifically approved at least annually by the board
of directors of the respective company, including a majority of such company's
directors who are not "interested" (within the meaning of the 1940 Act) or by
vote of a majority (as defined in the 1940 Act) of the outstanding voting
securities of the respective company. Each such agreement may be terminated at
any time, without the payment of any penalty, by the board of directors of the
respective company or by vote of a majority (as defined in the 1940 Act) of the
outstand ing voting securities of such company. In accordance with the 1940 Act,
each such agreement terminates automatically in the event of its assignment by
the Company.

Investment Manager to Allied Commercial and BMI

Allied Commercial and BMI each are intended to qualify as a real estate
investment trust ("REIT") for federal tax purposes. Allied Commercial is
publicly owned, and seeks to purchase or originate commercial loans to small
businesses secured by liens on real estate. BMI is privately owned by
institutional and other accredited investors. Allied Commercial and BMI have
participated in proportion to their respective capitalizations in most business
loans purchased or originated by them through the end of 1996.

The Company has entered into investment management agreements with
Allied Commercial and BMI that remain in effect indefinitely unless terminated
by an affirmative vote of the holders of at least two-thirds of the voting
shares of Allied Commercial or BMI then outstanding. Allied Commercial will
undertake to include in its proxy statement and shareholders will have the
opportunity to consider and vote on a voluntary liquidation of the company in
the years 2000, 2003, and 2006. Effective January 1, 1997, BMI is no longer
making any new investments and has begun liquidation.

In addition, the management agreement with BMI, which is co-managed by
the Company and Siguler Guff & Company (the "Investment Managers"), may be
terminated by a majority of independent directors as to either of the

<PAGE> 5

Investment Managers if such Investment Manager becomes insolvent, its
registration as an investment adviser is revoked or suspended or it is
disqualified to serve as a fiduciary under the Employee Retirement Income
Security Act of 1974.

Under its current investment management agreement with BMI, the Company
must remit one-third of the fee received from BMI to Siguler Guff & Company.

During 1996, Allied Commercial and BMI, through a jointly owned
corporation, Allied Capital Funding, LLC ("Funding") issued to the public bonds
collateralized by mortgage loans. The Company is the mortgage servicer to
Funding; however, because of its investment management agreements already in
place with Allied Commercial and BMI, the Company has agreed to receive no
incremental revenue for services provided to Funding.

Investment Adviser to Allied Mortgage and Allied Midwest

Allied Mortgage and Allied Midwest each is organized as a Delaware
limited liability company ("LLC") and operates as an investment fund. Neither
LLC is registered under the 1940 Act, but each may determine to register under,
and thus become subject to, the 1940 Act in the future. The business of Allied
Mortgage is to purchase non-performing loans from the Federal Deposit Insurance
Corporation, banks and other sources. It is expected that many of these loans
will involve first mortgages (or deeds of trust) on real estate, as well as
first liens on the operating assets of small businesses. Once a loan is
purchased, Allied Mortgage seeks to restore part of the non-performing loan to a
performing status, and to reduce the remaining part of the loan to an equity
ownership in the business or an equity ownership in the real estate asset
underlying the loan. Allied Midwest seeks to achieve long-term growth in the
value of its net assets, capital gains and current income primarily by providing
equity and debt capital for small, privately owned businesses which are
headquartered or have a major presence in the following Midwestern states:
Michigan, Wisconsin, Illinois, Indiana and Ohio (the "Midwest"). The Company
pursues this objective principally by utilizing equity and debt capital for the
financing of small businesses across a broad range of industries in the Midwest
which may have some difficulty in obtaining conventional financing from banks or
other financial institutions.

The Company has entered into separate investment advisory agreements
with Allied Mortgage and Allied Midwest that continue in effect as long as such
continuance is specifically approved at least annually by the board of managers
of the respective LLC, including a majority of such LLC's managers who are not
"interested" (within the meaning of the 1940 Act) or by vote of a majority (as
defined in the 1940 Act) of the outstanding membership interests of the
respective LLC. Each such agreement may be terminated at any time, without the
payment of any penalty, by the board of managers of the respective LLC or by
vote of a majority (as defined in the 1940 Act) of the outstanding voting
securities of such LLC. Each such agreement terminates automatically in the
event of its assignment by the Company.

Investment Adviser to Allied Venture and Allied Technology

Allied Venture and Allied Technology are private venture capital
partnerships in the business of making privately negotiated investments in small
businesses for the purpose of financing growth or management buyouts, generally
in the form of debt securities with options or warrants. The Company is the
general partner of Allied Management Partners, which is the general partner of
Allied Venture and Allied Technology. The limited partners of Allied Venture and
Allied Technology include large insurance companies, pension funds and other
institutions. The limited partnership agreements of Allied Venture and Allied
Technology both provide that Allied Management Partners, as general partner,
will be entitled to receive 20% of all proceeds of dispositions of investments
after return of the total capital contribution made by each respective limited
partner. One-half of the share of such proceeds received by Allied Management
Partners will accrue to the Company as the general partner of Allied Management
Partners and the other half will accrue to the limited partners of Allied
Management Partners, which at this time includes Messrs. Williams, and Williams
III, who are also directors and/or officers of the Company. At December 31,
1996, neither Allied Venture nor Allied Technology had returned the entire
capital contributions to their respective limited partners.

Allied Venture and Allied Technology have invested with Allied I or
Allied II in portfolio companies, and the co-investment guidelines applicable to
Allied I and Allied II provide Allied Venture and Allied Technology with the
opportunity to dispose of any securities in which Allied I and Allied II have
invested in proportion to their holdings of such securities.

The Company's service as investment adviser to each of Allied Venture
and Allied Technology continues in effect for the life of the respective
partnership, subject to termination by their respective limited partners under
certain

<PAGE> 6

specified circumstances. Both Allied Venture and Allied Technology are in the
process of liquidating their respective portfolios. As a result, it is likely
that the Company will cease to receive advisory fees from these entities
beginning in 1999.

Other Revenue Sources

From time to time, the Company may provide loan packaging and other
investment banking-type services to third parties, for which it may be paid fees
on a basis that is negotiated separately on each occasion with the third party
involved. The Company's investment advisory agreements with its managed funds
generally provide that fees collected by the Company in connection with any
investment transaction entered into or proposed to be entered into by these
companies will be treated as commitment fees or management fees and will be
received by the respective company in proportion to its participation in such
transaction.

In September 1994, the Company's wholly owned subsidiary, Allied
Capital Property Corporation, acquired for investment and for a potential future
business location, an office building and land on which it was situated in
Vienna, Virginia, a suburb of Washington, D.C. The building has approximately
58,000 rentable square feet and had an occupancy rate of approximately 84% at
the time of the acquisition. As of December 31, 1996, the occupancy rate was
100%. See "Item 2. Properties," below. The Company received gross revenue from
the operations of this building of $916,000 and $828,000 in 1996 and 1995,
respectively. Net of operating expenses, incremental pre-tax profits generated
by the building's operations were $410,000 and $342,000 in 1996 and 1995,
respectively.

Competition

Various aspects of the operations of the Company are comparable to the
operations of many professional money management companies, many of which (e.g.
mutual funds) have substantially greater resources than the Company and greater
access to public investors. Management of the Company believes that it is the
only publicly owned investment adviser that specializes in small business
investment management and that certain aspects of its operations are distinct
from the operations and services provided by investment advisers that manage
portfolios of publicly traded securities.

Change of Chairman and Chief Executive Officer

After 22 years with the Allied Capital companies, David Gladstone
stepped down as Chairman and Chief Executive Officer of the Company in early
1997, and the Board appointed William L. Walton to be the Company's new Chairman
and Chief Executive Officer. Mr. Gladstone also resigned as a director on March
19, 1997 and will not stand for election to the board of directors. Mr. Walton
has been affiliated with the Allied Capital companies for more than ten years,
both as a director of the Company and as a past director of Allied Capital
Corporation. Mr. Walton's extensive experience in the investment industry
combined with his performance as an entrepreneur provide an excellent mix of
talent for the Company. He previously served as Managing Director of New
York-based Butler Capital Corporation and was the personal venture capital
advisor for William S. Paley, founder and Chairman of CBS. More recently, Mr.
Walton founded two private companies dedicated to improving education for
children with a focus on reading and languages. Mr. Walton has been a commercial
banker, an investment banker with Lehman Brothers Kuhn Loeb, a private investor
and an entrepreneur, and throughout his career has been involved in the growth
and finance of small business.

ITEM 2. PROPERTIES.

The Company's principal offices are located on the ninth floor of 1666
K Street, NW, Washington, D.C., an office building in the heart of Washington's
business and financial district. The Company leases approximately 22,000 square
feet of office space at that location under a lease that currently expires in
1998. That office is equipped with a network of personal computers for word
processing, financial analysis and accounting, which the Company believes is
suitable for the Company's needs for the foreseeable future.

The Company's wholly owned subsidiary, Allied Capital Property
Corporation, owns an office building and land on which it is situated in Vienna,
Virginia, a suburb of Washington, DC. The building has approximately 58,000
rentable square feet and had an occupancy rate of 100% as of December 31, 1996.
The Company acquired that building for investment, as a hedge against rising
leasing costs and tax rates in the District of Columbia and with the expectation
that the Company will consider locating its operations to the building at some
point in the future.

<PAGE> 7

ITEM 3. LEGAL PROCEEDINGS

The Company is party to certain lawsuits in connection with its
business. While the outcome of these legal proceedings cannot at this time be
predicted with certainty, management does not expect that these actions will
have a material effect upon the Company's financial condition or results of
operations.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

EXECUTIVE OFFICERS OF THE REGISTRANT.

The following table sets forth the names, ages and positions of the
executive officers of the Company as of March 1, 1997, as well as certain other
information with respect to those persons:

Positions Currently
Held with the Principal Occupations
Name Age Company During Past Five Years
- ---- --- ------------------ ----------------------
<S> <C> <C> <C>
William L. Walton 47 Chairman and Chief Employed by the Company since
Executive Officer 1997; Chairman and Chief
Executive Officer of Allied I, Allied
II, Allied Commercial, and Allied
Lending; Manager of Allied
Midwest; Chief Executive Officer of
Success Lab, Inc. (children's
educational services) from 1993 to
1996; Chief Executive Officer of
Language Odyssey (educational
publishing and services) from 1992
to 1996; Managing Director of
Butler Capital Corporation from
1987 to 1991.

Joan M. Sweeney 37 President and Chief Operating Employed by the Company since
Officer 1993; Executive Vice President of
Allied I, Allied II, Allied
Commercial, Allied Lending, BMI,
Allied Mortgage and Allied
Midwest; Executive Vice President
of the Company from 1993 to 1994;
Senior Manager at Ernst & Young
from 1990 to 1993.

G. Cabell Williams III 42 Executive Vice President Employed by Allied I or the
Company since 1981; President and
Chief Operating Officer of Allied I;
Executive Vice President of Allied
II, Allied Commercial, Allied
Lending and BMI; Executive Vice
President of Allied Midwest. He is
the son of George C. Williams.
</TABLE>

<PAGE> 8

<TABLE>
<S> <C> <C> <C>
John M. Scheurer 44 Executive Vice President Employed by the Company since
1991; President and Chief
Operating Officer of Allied
Commercial; Executive Vice
President of Allied I, Allied II,
Allied Lending, Allied Mortgage
and Allied Midwest; President of
BMI.

Katherine C. Marien 48 Executive Vice President Employed by the Company since
1992; President and Chief
Operating Officer of Allied
Lending; Executive Vice President
of Allied I, Allied II, Allied
Commercial, Allied Midwest and
BMI; Financial Consultant with
Wilks & Schwartz Broadcasting
from 1990 to 1992.

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

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

Information in response to this Item is incorporated by reference to
the "Shareholder Information" and "Quarterly Stock Price" sections and to the
"Selected Consolidated Financial Data" section of the Company's Annual Report to
Shareholders for the year ended December 31, 1996 (the "1996 Annual Report").

ITEM 6. SELECTED FINANCIAL DATA.

Information in response to this Item is incorporated by reference to
the table in the "Selected Consolidated Financial Data" of the 1996 Annual
Report.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.

Information in response to this Item is incorporated by reference to
the "Management's Discussion and Analysis" section of the 1996 Annual Report.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

Information in response to this Item is incorporated by reference to
the Consolidated Financial Statements, notes thereto and Report of Independent
Public Accountants thereon contained in the 1996 Annual Report.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.

None.

<PAGE> 9

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

Information in response to this Item is incorporated by reference to
the identification of directors and nominees contained in the "Election of
Directors" section and the subsection captioned "Compliance with Reporting
Requirements of Section 16(a) of the Securities Exchange Act of 1934" of the
Company's definitive proxy statement in connection with its 1997 Annual Meeting
of Stockholders, scheduled to be held on May 16, 1997 (the "1997 Proxy
Statement"). Information in response to this Item also is included under the
caption "Executive Officers of the Registrant" of this Report.

ITEM 11. EXECUTIVE COMPENSATION.

Information in response to this Item is incorporated by reference to
the subsections captioned "Compensation of Directors and Executive Officers,"
"Stock Options" and "Compensation of Directors" of the 1997 Proxy Statement.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

Information in response to this Item is incorporated by reference to
the subsection captioned "Beneficial Ownership of Common Stock" of the 1997
Proxy Statement.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

Information in response to this Item is incorporated by reference to
the section captioned "Certain Transactions" of the 1997 Proxy Statement.

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a) Documents filed as part of this Report:

1. A. The following financial statements are filed herewith:

Consolidated Balance Sheet as of December 31, 1996 and 1995.
Consolidated Statement of Income for the years ended December 31,
1996, 1995 and 1994.
Consolidated Statement of Shareholders' Equity for the years ended
December 31, 1996, 1995 and 1994.
Consolidated Statement of Cash Flows for the years ended December
31, 1996, 1995 and 1994.
Notes to Consolidated Financial Statements.

B. There is filed herewith the Report of Independent Public
Accountants with respect to the financial statements listed in A.
above.

2. No financial statement schedules are filed herewith because (i) such
schedules are not required or (ii) the information required has been
presented in the aforementioned financial statements.

3. The following exhibits are filed herewith or incorporated by
reference as set forth below:

Exhibit Number Description

3(i)* Amended and Restated Articles of Incorporation

3(ii)* By-laws

4 Instruments defining the rights of security holders. See
Exhibits 3(i) and 3(ii).

<PAGE> 10

10.1(1) Investment Advisory Agreement between the Company and
Allied Capital Corporation, dated May 4, 1995.

10.2(2) Investment Advisory Agreement between the Company and
Allied Capital Corporation II, dated May 11, 1995.

10.3(3) Investment Management Agreement between the Company and
Allied Capital Commercial Corporation, dated June 10, 1992.

10.3(a)(4) Revised fee schedule for Investment Management Agreement
between the Company and Allied Capital Commercial
Corporation, dated May 3, 1996.

10.3(b)(5) Revised fee schedule for Investment Management Agreement
between the Company and Allied Capital Commercial
Corporation, dated January 9, 1997.

10.4(6) Investment Management Agreement among the Company, Mitchell
Hutchins Institutional Investors Inc. and Business Mortgage
Investors, Inc., dated January 4, 1993. Assignment of
Management Agreement from Mitchell Hutchins Institutional
Investors Inc. to Siguler Guff & Company LLC on August 8,
1995.

10.5(6) Agreement between the Company and Mitchell Hutchins
Institutional Investors Inc., dated January 4, 1993.
Assignment of Agreement Between Investment Managers from
Mitchell Hutchins Institutional Investors, Inc. to Siguler
Guff & Company LLC on August 8, 1995.

10.7(7) Investment Advisory Agreement between the Company and
Allied Capital Lending Corporation, dated May 9, 1995.

10.8(8) Lease Agreement between 1620 K Street Associates Limited
Partnership and the Company dated February 17, 1993.

10.10* Deferred Compensation Plan

10.11* Stock Option Plan

11* Statement regarding computation of per share earnings.

13* Excerpts from the 1996 Annual Report to Shareholders.

21 Subsidiaries of the Company and jurisdiction of
incorporation:

Allied Capital Property Corporation Maryland

23* Consents of Arthur Andersen LLP, independent accountants.

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

* Filed herewith.

(1) Incorporated by reference to Exhibit A to the definitive proxy statement of
Allied Capital Corporation relating to its annual meeting of stockholders
held on May 4, 1995.

(2) Incorporated by reference to Exhibit A to the definitive proxy statement of
Allied Capital Corporation II relating to its meeting of stockholders held
on May 11, 1995.

(3) Incorporated by reference to the exhibit of the same number to the
Company's Report on Form 10-K for the year ended December 31, 1992.

(4) Incorporated by reference to Form 8-K filed on May 3, 1996.

<PAGE> 11

(5) Incorporated by reference to Form 8-K filed on February 7, 1997.

(6) Incorporated by reference to the exhibit of the same name to the Company's
Report on Form 10-K for the year ended December 31, 1992 for Agreements.
Incorporated by reference to the exhibit of the same name to the Company's
Report on Form 10-K for the year ended December 31, 1995 for Assignments.

(7) Incorporated by reference to Exhibit A to the definitive proxy statement of
Allied Capital Lending Corporation relating to its annual meeting of
stockholders held on May 9, 1995.

(8) Incorporated by reference to an exhibit of the same name filed with the
Company's Annual Report on Form 10-K for the year ended December 31, 1994.

(b) Reports on Form 8-K.

No reports on Form 8-K have been filed for the three months ended
December 31, 1996.

<PAGE> 12

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized on March 27, 1997.

/s/ WILLIAM L. WALTON
-----------------------------
William L. Walton
Chairman of the Board and
Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Title
Signature (Capacity) Date
- --------- ---------- ----
<S> <C> <C>
/s/ WILLIAM L. WALTON
- -------------------------------- Chairman and March 27, 1997
William L. Walton Chief Executive Officer
(Principal Executive Officer)

/s/ JOAN M. SWEENEY
- -------------------------------- Director, President March 27, 1997
Joan M. Sweeney and Chief Operating
Officer

/s/ SWEP DAVIS
- -------------------------------- Director March 27, 1997
Swep Davis

/s/ BROOKS H. BROWNE
- -------------------------------- Director March 27, 1997
Brooks H. Browne

/s/ ROBERT E. LONG
- -------------------------------- Director March 27, 1997
Robert E. Long and Chief Operating
Officer

/s/ GEORGE C. WILLIAMS
- -------------------------------- Director March 27, 1997
George C. Williams

/s/ JON A. DELUCA
- -------------------------------- Executive Vice President March 27, 1997
Jon A. DeLuca and Chief Financial
Officer (Principal
Financial and Accounting
Officer)
</TABLE>

<PAGE> 13

EXHIBIT INDEX

Exhibit
Number Description
- ------ -----------
3(i) Amended and Restated Articles of Incorporation

3(ii) By-laws

10.10 Deferred Compensation Plan

10.11 Stock Option Plan

11 Statement regarding computation of per share earnings.

13 Excerpts from the 1996 Annual Report to Shareholders.

23 Consents of Arthur Andersen LLP, independent accountants.

<PAGE> 1

EXHIBIT 3(i)

AMENDED AND RESTATED
ARTICLES OF INCORPORATION
of
ALLIED CAPITAL ADVISERS, INC.
(a Maryland corporation)

FIRST: The name of the corporation (hereinafter referred to as the
"Corporation") is: Allied Capital Advisers, Inc.

SECOND: The purposes for which the Corporation is organized are as
follows:

A. To render advice and consulting services to corporations,
individuals, partnerships and other business entities; to enter into contracts
with any of such entities for the purpose of carrying out such advisory and
consulting services; to register as an investment adviser with such agencies
and in such jurisdiction where such registration is deemed appropriate; and to
do all such other acts as may be related or incidental to the purposes of an
investment adviser, merchant bank or similar financial institution;

B. To purchase, acquire, hold, own, improve, develop, sell, convey,
assign, release, mortgage, encumber, use, lease, hire, manage, deal in and
otherwise dispose of real property and personal property of every kind and
nature or any interest therein, improved or otherwise, including stocks and
securities of other corporations; to loan money; to take securities for the
payment of all sums due the Corporation; to sell, assign and release such
securities;

C. To equip, furnish, improve, develop and manage any property,
real or personal; to invest, trade and deal in any personal property; to
encumber or dispose of any personal property at any time held or owned by the
Corporation;

D. To engage in, operate and acquire interests in any kind of
business, of whatever nature, which may be permitted by law;

E. To import, export, produce, buy, sell and otherwise deal in and
with, good, wares and merchandise of every kind, class and description;

F. To acquire all or any part of the good will, rights, property
and business of any individual, association, partnership, joint venture,
corporation or other legal entity; to hold, utilize, enjoy and in any manner
dispose of the whole or any part of the rights, property and business so
acquired; to assume in connection therewith any liabilities of any such
individual, association, partnership, joint venture, corporation or other legal
entity;

G. To acquire, by purchase, subscription or in any other manner,
take, receive, hold, use, employ, sell, assign, transfer, exchange, pledge,
mortgage, lease, dispose of and otherwise deal in and with any shares of stock
or other shares, voting trust certificates, bonds, debentures, notes, mortgages
or other obligations, securities or evidences of indebtedness, and any
certificates, receipts, warrants or other instruments evidencing rights or
options to receive, purchase or subscribe for the same or representing any other
rights or interests therein nor in any property or assets, issued or created by
any individual, association, partnership, joint venture, corporation,
government (or subdivision or agency thereof) or other legal entity, wherever
organized and wherever doing business; to possess and exercise in respect
thereof any and all of the rights, powers and privileges of individual holders
including, without limitation, the right to vote any shares of stock so held or
owned and, upon a distribution of the assets or a division of the profits of the
Corporation, to distribute any such shares of stock or other shares, voting
trust certificates, bonds or other obligations, securities or evidences of
indebtedness (or the proceeds thereof) among the stockholders of the
Corporation;

<PAGE> 2
H. To erect commercial buildings and other buildings, private or
public of all kinds, and to sell and rent the same; to contract, enlarge,
repair, grade, pave, dedicate, remodel or otherwise engage in any work upon
buildings of every nature, roads, avenues, highways, paths,s walks, parks,
playgrounds and sidewalks; to engage in iron, steel, wood, brick, concrete,
stone, cement, masonry, glass and earth construction; to execute contracts or
to receive assignments of contract therefor or relating thereto; to manufacture
and furnish the building materials and supplies connected therewith;

I. To apply, for obtain, purchase or otherwise acquire any
patents,s copyrights, licenses, trademarks, trade names, rights, processes,
formulae and the like; to use, exercise, develop and grant licenses in respect
of, sell and otherwise turn to account the same;

J. To purchase (or otherwise acquire), hold, sell, retire, reissue
or otherwise dispose of shares of its own stock of any class in any manner now
or hereafter authorized or permitted by law, and to pay therefor, with cash or
other property;

K. To borrow or raise money and to issue bonds, debentures, notes
or other obligations of any nature (and in any manner permitted by law) for
money so borrowed or in payment for property purchased, or for any other lawful
consideration, and to secure the payment thereof, and of the interest thereon,
by mortgage upon, pledge, conveyance or assignment in trust of, the whole or any
part of the property of the Corporation, real or personal, including contract
rights, whether at the time owned or thereafter acquired; to sell, pledge,
discount or otherwise dispose of such bonds, debentures, notes or other
obligations of the Corporation;

L. To aid, by loan, subsidy, guaranty or in any lawful manner
whatsoever, any individual, association, partnership, joint venture, corporation
or other legal entity whose stocks, bonds, notes, debentures or other
obligations, securities or evidences of indebtedness are in any manner
directly or indirectly held or guaranteed by the Corporation, or by any
corporation in which the Corporation may have an interest directly or indirectly
as stockholder, creditor, guarantor or otherwise, or whose shares or securities
are owned by the Corporation; to do any and all lawful acts and things designed
to protect, preserve, improve or enhance the value of any stocks, bonds, notes,
debentures or other obligations, securities or evidences of indebtedness of any
individual, association, partnership, joint venture, corporation or other legal
entity in which the Corporation has an interest directly or indirectly as a
stock holder, creditor, guarantor or otherwise, or whose shares or securities
are owned by the Corporation, or to lend money with or without collateral
security;

M. To guarantee the payment of dividends upon any shares of stock
of any other association or corporation; to guarantee the performance of any
contract by any individual, association, partnership, joint venture, corporation
or other legal entity; to endorse or otherwise guarantee the payment of
principal and interest, or either, of any bonds, debentures, notes securities
or other evidences of indebtedness created or issued by any such individual,
association, partnership, joint venture, corporation or other legal entity, it
not being necessary that any such guaranty or endorsement shall ben intended
to result in any benefit to the Corporation (it being understood that in no way
shall the corporation act as a surety company);

N. To carry out all or any part of the purposes set forth herein
as principal, broker, factor, agent, contractor or otherwise, either alone,
through or in conjunction with any individual, association, partnership,
corporation or other legal entity; to make, execute and perform any contracts
or agreements and to do any other acts and things for the accomplishment of any
of the purposes set forth herein or incidental to such purposes, or which at any
time may appear conducive to or expedient for the accomplishment of any such
purposes;

O. To carry out all of the purposes set forth herein in any or all
states, territories, districts, dependencies and possessions of the United
States of America and any foreign country; to maintain offices and agencies in
any or all states, territories, districts, dependencies and possessions of the
United States of America and any foreign country;

<PAGE> 3
P. To organize, incorporate, reorganize, liquidate and dissolve any
association, partnership, joint venture, corporation (subsidiary, affiliated or
other) or other legal entity for any purpose permitted by law; to invest in any
manner in any association, partnership, joint venture, corporation (subsidiary,
affiliated or other) or other legal entity;

Q. To do any act or thing and exercise any power suitable,
convenient or proper for the accomplishment of any of the purposes set forth
herein or incidental to such purposes, or which at any time may appear
conducive to or expedient for the accomplishment of any of such purposes; and

R. To have and exercise any and all powers and privileges now or
hereafter conferred by the general laws of the State of Maryland upon
corporations formed under such laws.

The foregoing enumeration of the purposes of the Corporation is made in
furtherance and not in limitation of the powers conferred upon the Corporation
by law. The mention of any particular purpose is not intended in any manner to
limit or restrict the generality of any other purpose mentioned, or to limit or
restrict any of the powers of the Corporation. The Corporation shall have,
enjoy and exercise all of the powers and rights now or hereafter conferred by
the laws of the State of Maryland upon corporations of a similar character, it
being the intention that the purposes set forth in each of the paragraphs of
this Article shall, except as otherwise expressly provided, in nowise be
limited or restricted by reference to or inference from the terms of any other
clause or paragraph of this or any other Article of these Articles of
Incorporation, or of any amendment thereto, and shall each be regarded as
independent, and construed as powers as well as purposes; provided, however,
that nothing herein contained shall be deemed to authorize or permit the
Corporation to carry on any business or exercise any power, or do any act which
a corporation formed under the general laws of the State of Maryland may not at
the time lawfully carry on or do.

THIRD: The post office address of the principal office of the Corporation
in the State of Maryland is: 5422 Albia Road, Bethesda, Maryland 20816. The
name and post office address of the resident agent of the Corporation in the
State of Maryland are: G. Cabell Williams, II1, 5422 Albia Road, Bethesda
(Montgomery County), Maryland 20816. Said resident agent is a citizen of the
State of Maryland and actually resides therein.

FOURTH:

A. The total number of shares of stock of all classes which the
Corporation has authority to issue is twenty million (20,000,000) shares of
capital stock, with a par value of One Mil ($0.001) per share, amounting in
aggregate par value to Twenty Thousand Dollars ($20,000). All of such shares
are initially classified as 'Common Stock'. The Board of Directors may classify
and reclassify any unissued shares of capital stock by setting or changing in
any one or more respects the preferences, conversion or other rights, voting
powers, restrictions, limitations as to dividends, qualifications, terms or
conditions of redemption or other rights of such shares of stock.

B. The following is a description of the preferences, conversion
and other rights, voting powers, restrictions, limitations as to dividends,
qualifications and terms and conditions of redemption of the Common Stock of
the Corporation:

(1) Each share of Common Stock shall have one vote, and,
except as otherwise provided in respect of any class of stock hereafter
classified or reclassified, the exclusive voting power for all purposes shall he
vested in the holders of the Common Stock;

(2) Subject to the provisions of law and any preferences of
any class of stock hereafter classified or reclassified, dividends, including
dividends payable in shares of another class of the Corporation's stock, may be
paid on the Common Stock of the Corporation at such time and in such amounts as
the Board of Directors may deem advisable; and

<PAGE> 4
(3) In the event of any liquidation, dissolution or winding up of
the Corporation, whether voluntary or involuntary, the holders of the Common
Stock shall be entitled, after payment or provision for payment of the debts and
other liabilities of the Corporation and the amount to which the holders of any
class of stock hereafter classified or reclassified having a preference on
distributions in the liquidation, dissolution or winding up of the Corporation
shall be entitled, together with the holders of any other class of stock
hereafter classified or reclassified not having a preference on distributions in
the liquidation, dissolution or winding up of the Corporation, to share ratably
in the remaining net assets of the Corporation.

C. Subject to the foregoing, the power of the Board of Directors to
classify and reclassify any of the shares of capital stock shall include,
without limitation, subject to the provisions of these Articles of
Incorporation, as they may subsequently be amended, authority to classify or
reclassify any unissued shares of such stock into a class or classes of
preferred stock, preference stock, special stock or other stock, and to divide
and classify shares of any class into one or more series of such class, by
determining, fixing, or altering one or more of the following:

(1) The distinctive designation of such class or series and the
number of shares to constitute such class or series; provided that, unless
otherwise prohibited by the terms of such or any other class or series, the
number of shares of any class or series may be decreased by the Board of
Directors in connection with any classification or reclassification of unissued
shares and the number of shares of such class or series may be increased by the
Board of Directors in connection with any such classification or
reclassification, and any shares of any class or series which have been
redeemed, purchased, otherwise acquired or converted into shares of Common Stock
or any other class or series shall become part of the authorized capital stock
and be subject to classification and reclassification as provided in this
sub-paragraph;

(2) Whether or not and, if so, the rates, amount and times at
which, and the conditions under which, dividends shall be payable on shares of
such class or series, whether any such dividends shall rank senior or junior to
or on a parity with the dividends payable on any other class or series of stock,
and the status of any such dividends as cumulative, cumulative to a limited
extent, or non-cumulative and as participating or non-participating;

(3) Whether or not shares of such class or series shall have
voting rights, in addition to any voting rights provided by law and, if so, the
terms of such voting rights;

(4) Whether or not shares of such class or series shall have
conversion or exchange privileges and, if so, the terms and conditions thereof,
including provision for adjustment of the conversion or exchange rate in such
events or at such times as the Board of Directors shall determine;

(5) Whether or not shares of such class or series shall be subject
to redemption and, if so, the terms and conditions of such redemption, including
the date or dates upon or after which they shall be redeemable and the amount
per share payable in caw of redemption, which amount may vary under different
conditions and at different redemption dates; and whether or not there "I be any
sinking fund or purchase account in respect thereof, and if so, the terms
thereof;

(6) The rights of the holders of shares of such class or series
upon the liquidation, dissolution or winding up of the affairs of, or upon any
distribution of assets of, the Corporation, which rights may vary depending upon
whether such liquidation, dissolution or winding up is voluntary or involuntary
and, if voluntary, may vary at different dates, and whether such rights shall
rank senior or junior to or on a parity with such rights of any other class of
series of stock;

(7) Whether or not there shall be any limitations applicable,
while shares of such class or series are outstanding, upon the payment of
dividends or making of distributions on, or the acquisition of, or the

<PAGE> 5
use of moneys for purchase or redemption of, any stock of the Corporation, or
upon any other action of the Corporation, including action under this
sub-paragraph, and, if so, the terms and conditions thereof; and

(8) Any other preferences, rights, restrictions, including
restrictions on transferability, and qualifications of shares of such class or
series, not inconsistent with law and the Articles of Incorporation, as they may
subsequently be amended.

D. For the purposes hereof and of any Articles Supplementary to these
Articles of Incorporation providing for the classification or reclassification
of any shares of capital stock or of any other charter document of the
Corporation (unless otherwise provided in any such articles or documents), any
class or series of stock of the Corporation shall be deemed to rank:

(1) prior to another class or series either as to dividends or
upon liquidation, if the holders of such class or series shall be entitled to
the receipt of dividends or of amounts distributable on liquidation, dissolution
or winding up, as the case may be, in preference or priority to holders of such
other class or series;

(2) on a parity with another class or series either as to
dividends or upon liquidation, whether or not the dividend rates, dividend
payment dates or redemption or liquidation price per share thereof be different
from those of such others, if the holders of such class or series of stock shall
be entitled to receipt of dividends or amounts distributable upon liquidation,
dissolution or winding up, as the case may be, in proportion to their respective
dividend rates or redemption or liquidation prices, without preference or
priority over the holders of such other class or series; and

(3) junior to another class or series either as to dividends or
upon liquidation, if the rights of the holders of such class or series shall be
subject or subordinate to the rights of the holders of such other class or
series in respect of the receipt of dividends or the amounts distributable upon
liquidation, dissolution or winding up, as the case may be.

FIFTH: The number of directors of the Corporation shall be in
accordance with the provisions of the General Corporation Law of the State of
Maryland, which number may be changed pursuant to the provisions set forth in
the Bylaws of the Corporation, but shall never be less than the number permitted
by law.

SIXTH: The following provisions are hereby adopted for the purpose
of defining, limiting and regulating the powers of the Corporation and of the
Board of Directors and stockholders:

A. The Board of Directors of the Corporation is hereby empowered to
authorize and direct the issuance from time to time or at any time or times of
the shares of stock of the Corporation of any class, now or hereafter
authorized, any options or warrants for such shares permitted by law, any rights
to subscribe to or purchase such shares and any other securities of the
Corporation, for such consideration as the Board of Directors may deem
advisable, subject to such limitations and restrictions, if any, as may be set
forth in the Bylaws of the Corporation.

B. Unless specifically provided elsewhere herein or in any Articles
Supplementary, no holder of shares of stock of the Corporation of any class, now
or hereafter authorized, shall have any preferential or preemptive right to
subscribe for, purchase or receive (i) any shares of stock of the Corporation of
any class, now or hereafter authorized, (ii) any options or warrants for any
such preferential or preemptive shares, (iii) any rights to subscribe to or
purchase any such shares, or (iv) any other securities of the Corporation which
may at any time or from time to time be issued, sold or offered for sale by the
Corporation.

C. The Board of Directors of the Corporation is hereby empowered to
adopt Bylaw provisions with respect to the indemnification of directors,
officers, employees, agents and other persons and to make such

5
<PAGE> 6
C. The Board of Directors of the Corporation is hereby empowered to
adopt Bylaw provisions with respect to the indemnification of directors,
officers, employees, agents and other persons and to make such other
indemnification as it shall deem expedient and in the best interests of the
Corporation to the extent permitted by law and Article SEVENTH hereof

D. The provisions relating to certain special voting requirements set
forth in Title 3, Subtitle 6 of the General Corporation Law of the State of
Maryland and the provisions relating to certain control shares set forth in
Title 3, Subtitle 7 of the General Corporation Law of the State of Maryland
shall not be applicable, pursuant to Sections 3-603(e)(iii) and 3-702(b)
thereof, respectively, to the shares of the Corporation which are owned by, or
which shall in the future be issued to and owned by, any employee stock
ownership plan, incentive stock ownership plan or other similar plan established
now or in the future for the benefit of the Corporation's directors, officers,
employees or affiliates, and, without limiting the foregoing, none of such
shares owned by any such plan shall, for purposes of such subtitles, be
aggregated with any shares owned individually by any beneficiaries of any such
plan.

E. The Board of Directors is expressly authorized to make, amend,
alter, repeal or rescind the Bylaws of the Corporation.

F. The Corporation reserves the right to amend these Articles of
Incorporation in any way which alters the contract rights, as expressly set
forth in these Articles of Incorporation, of any outstanding stock of the
Corporation and substantially adversely affects any of the rights of any of the
holders of any outstanding stock of the Corporation.

SEVENTH:

A. The Corporation shall indemnify (i) its directors and officers,
whether serving the Corporation or, at its request, any other entity, to the
full extent permitted by the general laws of the State of Maryland now or
hereafter in force, including the advance of expenses under the procedures and
to the full extent permitted by law and (ii) other employees and agents to such
extent as shall be authorized by the Board of Directors or the Corporation's
Bylaws and be permitted by law. The foregoing rights of indemnification shall
not be exclusive of any other rights to which those seeking indemnification may
be entitled. The Board of Directors may take such action as is necessary to
carry out these indemnification provisions and is expressly empowered to adopt,
approve and amend from time to time such Bylaws, resolutions or contracts
implementing such provisions or such further indemnification arrangements as may
be permitted by law. No amendment to or repeal of this Article SEVENTH shall
limit or eliminate the right to indemnification provided hereunder with respect
to acts or omissions occurring prior to such amendment or repeal.

B. To the fullest extent permitted by Maryland statutory or decisional
law, as amended or interpreted, no director or officer of this Corporation shall
be personally liable to the Corporation or its stockholders for money damages.
No amendment to or repeal of this Article SEVENTH shall limit or eliminate the
benefits provided to directors and officers under this provision with respect to
any act or omission which occurred prior to such amendment or repeal.

EIGHTH: The duration of the Corporation shall be perpetual.

<PAGE> 1
EXHIBIT 3(ii)

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

ALLIED CAPITAL ADVISERS, INC.
(a Maryland corporation)

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

BYLAWS

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

As adopted by the Board of Directors on August 7, 1990 and as amended
by the Board of Directors on February 27, 1991,
May 6, 1992, November 7, 1995 and February 3, 1997.
<PAGE> 2
TABLE OF CONTENTS

<TABLE>
<S> <C>
ARTICLE I

OFFICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Section 1. Office. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 2. Additional Offices. . . . . . . . . . . . . . . . . . . . . . . . . . 1

ARTICLE II

MEETINGS OF STOCKHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Section 1. Time and Place. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 2. Annual Meeting. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 3. Notice of Annual Meeting. . . . . . . . . . . . . . . . . . . . . . . 1
Section 4. Special Meetings. . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 5. Notice of Special Meeting. . . . . . . . . . . . . . . . . . . . . . . 2
Section 6. General Powers. . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Section 7. Presiding Officer. . . . . . . . . . . . . . . . . . . . . . . . . . 2
Section 8. Quorum. Adjournments. . . . . . . . . . . . . . . . . . . . . . . . . 2
Section 9. Voting. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Section 10. Action by Consent. . . . . . . . . . . . . . . . . . . . . . . . . . 3

ARTICLE III

DIRECTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

Section 1. General Powers; Number; Tenure. . . . . . . . . . . . . . . . . . . . 3
Section 2. Matters for Which Action of the Entire Board is Required. . . . . . . 4
Section 3. Vacancies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Section 4. Removal; Resignation. . . . . . . . . . . . . . . . . . . . . . . . . 4
Section 5. Place of Meetings. . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Section 6. Annual Meeting. . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Section 7. Regular Meetings. . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Section 8. Special Meetings. . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Section 9. Quorum; Adjournments . . . . . . . . . . . . . . . . . . . . . . . . . 5
Section 10. Compensation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Section 11. Action by Consent. . . . . . . . . . . . . . . . . . . . . . . . . . 5
Section 12. Meetings by Telephone or Similar Communications. . . . . . . . . . . 6

ARTICLE IV

COMMITTEES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Section 1. Executive Committee . . . . . . . . . . . . . . . . . . . . . . . . . 6
</TABLE>

i
<PAGE> 3
<TABLE>
<S> <C>
Section 2. Nominating Committee. . . . . . . . . . . . . . . . . . . . . . . . . 6
Section 3. Compensation Committee. . . . . . . . . . . . . . . . . . . . . . . . 6
Section 4. Audit Committee. . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Section 5. Other Committees. . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Section 6. Procedure; Notice; Meetings. . . . . . . . . . . . . . . . . . . . . . 7
Section 7. Quorum; Vote. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Section 8. Appointments; Vacancies; Changes; Discharges. . . . . . . . . . . . . 7
Section 9. Tenure. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Section 10. Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Section 11. Action by Consent. . . . . . . . . . . . . . . . . . . . . . . . . . 8
Section 12. Meetings by Telephone or Similar Communications. . . . . . . . . . . 8

ARTICLE V

NOTICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

Section 1. Form; Delivery. . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Section 2. Waiver. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

ARTICLE VI

OFFICERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

Section 1. Designations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Section 2. Term of Office; Removal. . . . . . . . . . . . . . . . . . . . . . . . 9
Section 3. Compensation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Section 4. The Chairman of the Board. . . . . . . . . . . . . . . . . . . . . . . 9
Section 5. The President. . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Section 6. The Vice Presidents. . . . . . . . . . . . . . . . . . . . . . . . . 10
Section 7. The Secretary. . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Section 8. The Assistant Secretary. . . . . . . . . . . . . . . . . . . . . . . 11
Section 9. The Treasurer. . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Section 10. The Assistant Treasurer. . . . . . . . . . . . . . . . . . . . . . 11

ARTICLE VII

INDEMNIFICATION OF DIRECTORS, OFFICERS,
EMPLOYEES AND AGENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Section 1. Generally. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Section 2. Limitation for Disabling Conduct. . . . . . . . . . . . . . . . . . 12

ARTICLE VIII

STOCK CERTIFICATES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Section 1. Form of Signatures; Statements. . . . . . . . . . . . . . . . . . . 14
</TABLE>

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<TABLE>
<S> <C>
Section 2. Registration of Transfer. . . . . . . . . . . . . . . . . . . . . . 14
Section 3. Registered Stockholders. . . . . . . . . . . . . . . . . . . . . . . 15
Section 4. Location of Stock Ledger. . . . . . . . . . . . . . . . . . . . . . 15
Section 5. Record Date. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Section 6. Lost, Stolen or Destroyed Certificates. . . . . . . . . . . . . . . 15

ARTICLE IX

GENERAL PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

Section 1. Dividends. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Section 2. Reserves. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Section 3. Fiscal Year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Section 4. Seal. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

ARTICLE X

AMENDMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

CERTIFICATE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
</TABLE>

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<PAGE> 5
BYLAWS

ARTICLE I

OFFICES

Section 1. Office. The principal office of the Corporation shall be
at: CSC-Lawyers Incorporating Service Company, 11 East Chase Street, Baltimore,
Maryland 21202, in the City of Baltimore, County of Baltimore, State of
Maryland. The Corporation also shall have an office at 1666 K Street, N.W.,
Washington, D.C. 20006-2803.

Section 2. Additional Offices. The Corporation may also have offices
at such other places, both within and without the State of Maryland, as the
stockholders may from time to time determine or as the business of the
Corporation may require.

ARTICLE II

MEETINGS OF STOCKHOLDERS

Section 1. Time and Place. Meetings of stockholders for any purpose
may be held at such time and place in the United States as the Board of
Directors may fix from time to time and as shall be stated in the notice of the
meeting or in a duly executed waiver of notice thereof.

Section 2. Annual Meeting. Annual meetings of stockholders shall be
held during the month of May in each year on a date and at the time set by the
Board of Directors. At the Annual Meeting, the stockholders shall elect a
Board of Directors and transact such other business as may properly be brought
before the meeting.

Section 3. Notice of Annual Meeting. Written notice of the annual
meeting, stating the place, date and time thereof, shall be given by the
Secretary of the Corporation to each stockholder entitled to vote at such
meeting or to notice thereof not less than 10 (unless a longer period is
required by law) nor more than 90 days prior to the meeting.

Section 4. Special Meetings. Special meetings of the stockholders,
for any purpose or purposes, unless otherwise prescribed by statute or by the
Articles of Incorporation, may be called by the Chairman of the Board or the
President and shall be called by the Chairman of the Board, the President or
the Secretary at the request in writing of a majority of the Board of
Directors. Unless otherwise prescribed by statute or by the Articles of
Incorporation, and except as expressly set forth below, the Secretary shall
call a Special Meeting at the request in writing of stockholders entitled to
cast not less than a majority of all the votes entitled to be cast at such
meeting. Such request by stockholders shall state the purpose or purposes of
such meeting and the matters to be acted on thereat. If the request is made by
a majority of the stockholders entitled to cast votes at

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<PAGE> 6
a meeting, the Secretary shall inform such stockholders of the reasonably
estimated cost of preparing and mailing such notice of the meeting, and, upon
payment to the Corporation of such costs by such stockholders, the Secretary
shall give notice stating the purpose or purposes of the meeting, as required
by these Bylaws, to all stockholders entitled to notice of such meeting.

Section 5. Notice of Special Meeting. Written notice of a special
meeting, stating the place, date and time thereof and the purpose or purposes
for which the meeting is called, shall be given to each stockholder entitled to
vote at such meeting or to notice thereof not less than 10 (unless a longer
period is required by law) nor more than 90 days prior to the meeting.

Section 6. General Powers. The business and affairs of the
Corporation shall be managed by its stockholders, which may exercise all powers
of the Corporation and perform all lawful acts and things on behalf of the
Corporation.

Section 7. Presiding Officer. Meetings of stockholders shall be
presided over by the Chairman of the Board or, if he or she is not present, by
the President, or, if he or she is not present, by a Vice President, or, if he
or she is not present, by such person as may have been chosen by the Board of
Directors, or if none of such persons is present, by a chairman to be chosen by
the stockholders owning a majority of the shares of capital stock of the
Corporation issued and outstanding and entitled to vote at the meeting and who
are present in person or represented by proxy. The Secretary of the
Corporation, or, if he or she is not present, an Assistant Secretary, or, if he
or she is not present, such person as may be chosen by the Board of Directors,
or if none of such persons is present, then such person as may be chosen by the
stockholders owning a majority of the shares of capital stock of the
Corporation issued and outstanding and entitled to vote at the meeting and who
are present in person or represented by proxy shall act as secretary of the
meeting.

Section 8. Quorum. Adjournments. The presence in person or by proxy
of stockholders entitled to cast a majority of the votes thereat shall be
necessary to, and shall constitute a quorum for, the transaction of business at
all meetings of the stockholders, except as otherwise provided by statute or by
the Articles of Incorporation. If, however, a quorum shall not be present or
represented at any meeting of the stockholders, the stockholders entitled to
vote thereat, present in person or represented by proxy, shall have the power
to adjourn the meeting from time to time, without notice of the adjourned
meeting if the time and place thereof are announced at the meeting at which the
adjournment is taken, until a quorum shall be present or represented. Even if
a quorum shall be present or represented at any meeting of the stockholders,
the stockholders entitled to vote thereat, present in person or represented by
proxy, shall have the power to adjourn the meeting from time to time for good
cause, without notice of the adjourned meeting if the time and place thereof
are announced at the meeting at which the adjournment is taken, until a date
which is not more than 30 days after the date of the original meeting. At any
such adjourned meeting, at which a quorum shall be present in person or
represented by proxy, any business may be transacted which might have been
transacted at the meeting as originally called. If the

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<PAGE> 7
adjournment is for more than 30 days, or, if after the adjournment a new record
date is fixed for the adjourned meeting, a notice of the adjourned meeting
shall be given to each stockholder of record entitled to vote at the meeting or
entitled to notice thereof.

Section 9. Voting.

(a) At any meeting of stockholders, every stockholder
having the right to vote shall be entitled to vote in person or by proxy.
Except as otherwise provided by law or the Articles of Incorporation, each
stockholder of record shall be entitled to one vote for each share of capital
stock registered in his, her or its name on the books of the Corporation, on
each matter submitted to a vote at a meeting of stockholders, except that no
stockholder shall be entitled to vote in respect of any shares of capital stock
if any installment payable thereon is overdue and unpaid.

(b) Except as otherwise provided by law or the Articles
of Incorporation, a majority of the votes cast at a meeting of stockholders at
which a quorum is present, shall be sufficient to take or authorize action upon
any matter which may properly come before such meeting.

Section 10. Action by Consent. Any action required or permitted to
be taken by law or the Articles of Incorporation at any meeting of stockholders
may be taken without a meeting, without prior notice and without a vote, if a
written consent, setting forth such action, is signed by all the stockholders
entitled to vote on the subject matter thereof and any other stockholders
entitled to notice of a meeting of stockholders (but not to vote thereat) have
waived in writing any rights which they may have to dissent from such action,
and such consent and waiver are filed with the records of stockholders'
meetings.

ARTICLE III

DIRECTORS

Section 1. General Powers; Number; Tenure. The business and affairs
of the Corporation shall be managed under the direction of its Board of
Directors, which may exercise all powers of the Corporation and perform all
lawful acts and things which are not by law, the Articles of Incorporation or
these Bylaws directed or required to be exercised or performed by, or are
conferred upon or reserved to, the stockholders. The number of directors shall
be that provided in the Articles of Incorporation until increased or decreased
pursuant to the following provisions, but shall never be fewer than three
unless otherwise permitted by law. A majority of the entire Board of Directors
may, at any time and from time to time, increase or decrease the number of
directors of the Corporation as set forth in the Articles of Incorporation,
subject to the foregoing limitation. The tenure of office of a director shall
not be affected by any decrease in the number

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<PAGE> 8
of directors so made by the Board. The directors shall be elected, by a
majority of all the votes cast at the annual meeting of the stockholders,
except as provided in Section 3 of this Article, and each director elected
shall hold office until the next succeeding annual meeting or until his or her
successor is elected and shall qualify. Directors need not be stockholders.

Section 2. Matters for Which Action of the Entire Board is Required.
Notwithstanding anything to the contrary in these Bylaws, the following actions
shall require the approval by the affirmative vote of a majority of the entire
Board of Directors:

(a) entering into or materially amending any contract
pursuant to which the Corporation will provide investment advisory services;

(b) appointing any director to a committee of the Board
of Directors pursuant to Article IV of these Bylaws;

(c) appointing any employee, officer, or director of the
Corporation, or any person who is to become an employee, officer, or director
of the Corporation, to serve as an officer at the level of executive vice
president or above, or as a director, trustee, or manager, of any corporation,
partnership, trust, association or other entity for which the Corporation
provides investment advisory or any other services; and

(d) altering, amending or repealing these Bylaws or
adopting new bylaws.

Section 3. Vacancies. Any vacancy occurring in the Board of
Directors for any cause other than by reason of an increase in the number of
directors may, unless otherwise provided in these Bylaws, be filled by a
majority of the remaining members of the Board of Directors, although such
majority is less than a quorum. Any vacancy occurring by reason of an increase
in the number of the directors may, unless otherwise provided in these Bylaws,
be filled by action of a majority of the directors constituting the entire
Board of Directors. A director elected by the Board of Directors to fill a
vacancy shall be elected to hold office until the next annual meeting of the
stockholders or until his or her successor is elected and shall qualify. If
there are no directors in office, any officer or stockholder may call a special
meeting of stockholders in accordance with the provisions of the Articles of
Incorporation or these Bylaws, at which meeting such vacancies shall be filled.

Section 4. Removal; Resignation.

(a) Except as otherwise provided by law or the Articles
of Incorporation, at any meeting of stockholders at which a quorum is present,
the stockholders may, by the affirmative vote of the holders of a majority of
the votes entitled to be cast thereon, remove any director or directors from
office with or without cause and may elect a successor or successors to fill
any resulting vacancy or vacancies for the unexpired terms of any removed
director or directors.

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<PAGE> 9
(b) Any director may resign at any time by giving written
notice to the Board of Directors, the Chairman of the Board, the President or
the Secretary of the Corporation. Unless otherwise specified in such written
notice, a resignation shall take effect upon delivery thereof to the Board of
Directors or the designated officer. It shall not be necessary for a
resignation to be accepted before it becomes effective.

Section 5. Place of Meetings. The Board of Directors may hold
meetings, annual, regular or special, either within or without the State of
Maryland.

Section 6. Annual Meeting. The annual meeting of each newly elected
Board of Directors shall be held immediately following the annual meeting of
stockholders, and no notice of such meeting shall be necessary to the newly
elected directors in order legally to constitute the meeting, provided a quorum
shall be present.

Section 7. Regular Meetings. Additional regular meetings of the
Board of Directors may be held without notice, at such time and place as may
from time to time be determined by the Board of Directors.

Section 8. Special Meetings. Special meetings of the Board of
Directors may be called by the Chairman of the Board or the President on at
least two days' notice to each director, if such notice is delivered personally
or sent by messenger, telegram, telecopy, facsimile transmission, or mail.
Special meetings shall be called by the Chairman of the Board, the President or
the Secretary in like manner and on like notice on the written request of two
or more of the number of directors then in office. Except as otherwise
provided by law, the Articles of Incorporation or Article X of these Bylaws,
any such notice need not state the purpose or purposes of such meeting.

Section 9. Quorum; Adjournments. At all meetings of the Board of
Directors, a majority of the number of directors then in office shall
constitute a quorum for the transaction of business, and the act of a majority
of the directors present at any meeting at which there is a quorum shall be the
act of the Board of Directors, except as may be otherwise specifically provided
by law, the Articles of Incorporation or these Bylaws. If a quorum is not
present at any meeting of the Board of Directors, the directors present may
adjourn the meeting from time to time until a quorum shall be present, provided
that an announcement is made at such meeting, and notice is provided to any
directors not present at such meeting, of the time and place of the next
meeting.

Section 10. Compensation. Directors shall be entitled to such
compensation for their services as directors and to such reimbursement for any
reasonable expenses incurred in attending directors' meetings as may from time
to time be fixed by the Board of Directors. The compensation of directors (if
any) may be on such basis as is determined by the Board of Directors. Any
director may waive compensation for any meeting. Any director receiving
compensation under these provisions shall not be barred from serving the
Corporation in any

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<PAGE> 10
other capacity and receiving compensation and reimbursement for reasonable
expenses for such other services.

Section 11. Action by Consent. Any action required or permitted to
be taken at any meeting of the Board of Directors may be taken without a
meeting if a written consent to such action is signed by all members of the
Board of Directors and such written consent is filed with the minutes of the
proceedings of the Board.

Section 12. Meetings by Telephone or Similar Communications. The
Board of Directors may participate in a meeting by means of a conference
telephone or similar communications equipment by means of which all directors
participating in the meeting can hear each other at the same time, and
participation by such means shall be conclusively deemed to constitute presence
in person at such meeting.

ARTICLE IV

COMMITTEES

Section 1. Executive Committee. The Board of Directors may appoint
an Executive Committee consisting of not fewer than three members, one of whom
shall be designated as Chairman of the Executive Committee. The Chairman of
the Board and the President shall be elected members of the Executive
Committee. The Executive Committee shall have and may exercise those rights,
powers and authority of the Board of Directors as may from time to time be
granted to it by the Board of Directors subject to any limitations imposed by
law and may authorize the seal of the Corporation to be affixed to all papers
which may require the same.

Section 2. Nominating Committee. The Board of Directors shall
appoint a Nominating Committee consisting of an odd number of, but not fewer
than three, members, one of whom shall be designated as Chairman of the
Nominating Committee. A majority of members of the Nominating Committee shall
not be officers of the Corporation. The Nominating Committee shall have and
may exercise those rights, powers and authority of the Board of Directors as
may from time to time be granted to it by the Board of Directors; provided,
however, that in addition to any such rights, powers or authority, the
Nominating Committee shall (i) have the exclusive right to recommend candidates
for election as directors to the Board of Directors; and (ii) be responsible
for recommending the initial members of the Board of Directors, Board of
Trustees, Board of Managers, or any equivalent body of any investment fund
established by the Corporation for which the Corporation will serve as the
investment adviser or as provider of any other services.

Section 3. Compensation Committee. The Board of Directors may
appoint from its membership a Compensation Committee consisting of an odd
number of, but not fewer than three, members, one of whom shall be designated
as Chairman of the Compensation Committee. None of the members of the
Compensation Committee shall be officers of the Corporation. The

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Compensation Committee shall have and may exercise those rights, powers and
authority of the Board of Directors as may from time to time be granted to it
by the Board of Directors; provided, however, that the Compensation Committee
shall not have the authority to determine the salary for any officer of the
Corporation holding a position of executive vice president or above, although
such committee shall have the exclusive right to recommend a salary and bonuses
for any such officer to the Board of Directors for its approval.

Section 4. Audit Committee. The Board of Directors may appoint from
its membership an Audit Committee consisting of an odd number of, but not fewer
than three, members, one of whom shall be designated as Chairman of the Audit
Committee. A majority of members of the Audit Committee shall not be officers
of the Corporation. The Audit Committee shall have and may exercise those
rights, powers and authority of the Board of Directors as may from time to time
be granted to it by the Board of Directors; provided, however, that in addition
to any such rights, powers or authority, the Audit Committee shall: (i) issue
instructions to and receive reports from outside accounting firms and to serve
as the liaison between the Corporation and the said firms; and (ii) review all
potential conflict-of-interest situations arising in respect of the
Corporation's affairs and involving the Corporation's affiliates or employees,
and to make a report, verbal or written, to the full Board of Directors with
recommendations for their resolutions.

Section 5. Other Committees. The Board of Directors, by resolutions
adopted by a majority of the entire Board, may appoint a committee or
committees, as it shall deem advisable and impose upon such committee or
committees such functions and duties, and grant such rights, powers and
authority, as the Board of Directors shall prescribe (except the power to
declare dividends or distributions on stock, to issue stock except to the
extent permitted by law, to recommend to stockholders any action requiring
stockholders' approval, to amend these Bylaws or to approve any merger or share
exchange which does not require stockholders' approval).

Section 6. Procedure; Notice; Meetings. Each committee shall fix its
own rules of procedure and shall meet at such times and at such place or places
as may be provided by such rules or as the members of such committee shall
provide. Committee meetings may be called by the Chairman of the Board, the
President, the Chairman of the Committee, if any, or any two or more committee
members on at least twenty-four (24) hours notice, if such notice is delivered
personally or sent by messenger, telegram, telecopy, facsimile transmission, or
mail. Each committee shall keep regular minutes of its meetings and deliver
such minutes to the Board of Directors. The Chairman of each committee, or, in
his or her absence, a member of such committee chosen by a majority of the
members of such committee present, shall preside at the meetings of such
committee, and another member thereof, or any other person, chosen by such
committee shall act as Secretary of such committee, or in the capacity of
Secretary for purposes of such meeting.

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Section 7. Quorum; Vote. With respect to each committee, a majority
of its members shall constitute a quorum for the transaction of business, and
the affirmative vote of a majority of the members thereof shall be required for
any action of such committee.

Section 8. Appointments; Vacancies; Changes; Discharges. The Board
of Directors shall have the exclusive power at any time, through the approval
by the affirmative vote of a majority of the entire Board of Directors, to
appoint directors to, fill vacancies in, change the membership of, or discharge
any committee.

Section 9. Tenure. Each member of a committee shall continue as a
member thereof until the expiration of his or her term as a director, or his or
her earlier resignation as a member of such committee or as a director, unless
sooner removed as a member of such committee by a vote of a majority of the
entire Board of Directors or as a director in accordance with these Bylaws.

Section 10. Compensation. Members of any committee shall be entitled
to such compensation for their services as members of any such committee and to
such reimbursement for any reasonable expenses incurred in attending committee
meetings as may from time to time be fixed by the Board of Directors. The
compensation (if any) of members of any committee may be on such basis as is
determined by the Board of Directors. Any member may waive compensation for
any meeting. Any committee member receiving compensation under these
provisions shall not be barred from serving the Corporation in any other
capacity and from receiving compensation and reimbursement of reasonable
expenses for such other services.

Section 11. Action by Consent. Any action required or permitted to
be taken at any meeting of any committee of the Board of Directors may be taken
without a meeting if a written consent to such action is signed by all members
of the committee and such written consent is filed with the minutes of its
proceedings.

Section 12. Meetings by Telephone or Similar Communications. The
members of any committee which is designated by the Board of Directors may
participate in a meeting of such committee by means of a conference telephone
or similar communications equipment by means of which all members participating
in the meeting can hear each other at the same time, and participation by such
means shall be conclusively deemed to constitute presence in person at such
meeting.

ARTICLE V

NOTICES

Section 1. Form; Delivery. Whenever, under the provisions of law,
the Articles of Incorporation or these Bylaws, notice is required to be given
to any director or stockholder, it shall not be construed to mean exclusively
personal notice unless otherwise specifically provided,

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<PAGE> 13
but such notice may be given in writing, by mail, addressed to such director or
stockholder, provided, in the case of a stockholder, such notice is addressed
to his, her or its post office address as such address appears on the records
of the Corporation, with postage thereon prepaid. Any such notice shall be
deemed to have been given at the time it is deposited in the United States
mail. Notice to a director also may be given personally or sent by messenger,
telegram, telecopy or facsimile transmission.

Section 2. Waiver. Whenever any notice is required to be given under
the provisions of law, the Articles of Incorporation or these Bylaws, a written
waiver thereof, signed by the person or persons entitled to said notice and
filed with the records of the meeting, whether before or after the time stated
therein, shall be conclusively deemed to be equivalent to such notice. In
addition, any stockholder who attends a meeting of stockholders in person, or
is represented at such meeting by proxy, without protesting at the commencement
of the meeting the lack of notice thereof to him or her, or any director who
attends a meeting of the Board of Directors without protesting at the
commencement of the meeting such lack of notice, shall be conclusively deemed
to have waived notice of such meeting.

ARTICLE VI

OFFICERS

Section 1. Designations. From and after the date of adoption of
these Bylaws, the officers of the Corporation shall be a Chairman of the Board,
President, Secretary and Treasurer. The officers of the Corporation also may
include one or more Vice Presidents, Assistant Secretaries or Assistant
Treasurers and such other officers and/or agents as deemed necessary or
appropriate. All officers of the Corporation shall exercise such powers and
perform such duties as shall from time to time be determined by the Board of
Directors and permitted by law or these Bylaws. Any number of offices may be
held by the same person, unless the Articles of Incorporation or these Bylaws
otherwise provide, but no person shall serve concurrently as both President and
Vice-President of the Corporation, and no person shall execute, acknowledge or
verify any instrument in more than one capacity, if such instrument is required
by law, the Articles of Incorporation or these Bylaws to be executed,
acknowledged or verified by two or more officers.

Section 2. Term of Office; Removal. The Board of Directors shall
choose a Chairman of the Board, President and one or more Executive Vice
Presidents. The Chairman and the President shall have the authority to appoint
a Secretary, Treasurer, Vice President or Vice Presidents, one or more
Assistant Secretaries and/or Assistant Treasurers, and such other officers and
agents as they shall deem necessary or appropriate. The officers of the
Corporation shall hold office until their successors are chosen and shall
qualify or until any such officer's resignation. Any officer elected or
appointed by the Board of Directors may be removed at any time by the
affirmative vote of a majority of the directors then in office when, in their
judgment, the best interests of the Corporation will be served thereby. Any
officer appointed by the Chairman of the

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<PAGE> 14
Board and the President may be removed by them at any time. Such removal by
the Board, or by the Chairman and the President, shall not prejudice to the
contractual rights, if any, of the person so removed. Any vacancy occurring in
any office of the Corporation may be filled for the unexpired portion of the
term by the Board of Directors, where such office was held by an officer
elected or appointed by the Board, or by the Chairman and the President, where
such office was held by their appointee.

Section 3. Compensation. The salaries of all officers of the
Corporation (if any) shall be fixed from time to time by the Board of Directors
and no officer shall be prevented from receiving such salary by reason of the
fact that he or she is also a director of the Corporation.

Section 4. The Chairman of the Board. The Chairman of the Board
shall be the chief executive officer of the Corporation and shall be
responsible for the overall strategic direction of the Corporation and, subject
to the direction of the Board of Directors, shall perform such executive,
supervisory and management functions and duties as may be assigned to him or
her from time to time by the Board. He or she shall, if present, preside at
all meetings of the stockholders and of the Board of Directors. In the absence
of the President, the Chairman of the Board shall have general supervision,
direction and control over the business and affairs of the Corporation. The
Chairman of the Board shall execute in the corporate name all appropriate
deeds, mortgages, bonds, contracts or other instruments requiring a seal, under
the Seal of the Corporation, except in cases where such execution shall be
expressly delegated to another by the Board of Directors. The Chairman of the
Board shall be a member of the Executive Committee and an ex-officio member of
each standing committee.

Section 5. The President. The President shall be the chief operating
officer of the Corporation and, subject to the direction of the Board of
Directors and reporting to the Chairman of the Board, shall have general charge
of the business, affairs and property of the Corporation and general
supervision over its other officers and agents. In general, he or she shall
perform all duties incident to the office of President and shall see that all
orders and resolutions of the Board of Directors are carried into effect. In
the absence of the Chairman of the Board, the President shall preside at all
meetings of the stockholders and of the Board of Directors. The President
shall be a member of the Executive Committee and an ex-officio member of each
standing committee. Unless otherwise prescribed by the Board of Directors, the
President shall have full power and authority on behalf of the Corporation to
attend, act and vote at any meeting of stockholders of other corporations in
which the Corporation may hold securities. At such meeting the President shall
possess and may exercise any and all rights and powers incident to the
ownership of such securities which the Corporation might have possessed and
exercised if it had been present. The President shall execute in the corporate
name all appropriate deeds, mortgages, bonds, contracts or other instruments
requiring a seal of the Corporation, except in cases in which the signing or
execution thereof shall be expressly delegated by the Board of Directors to
some other officer or agent of the Corporation. The Board of Directors may
from time to time confer like powers and authority upon any other person or
persons.

10
<PAGE> 15
Section 6. The Vice Presidents. The Vice Presidents, if any (or in
the event there is more than one, the Vice Presidents in the order designated,
or, in the absence of any designation, in the order of their election), shall,
in the absence of the President or in the event of his or her disability,
perform the duties and exercise the powers of the President and shall generally
assist the President and perform such other duties and have such other powers
as may from time to time be prescribed by the Board of Directors.

Section 7. The Secretary. The Secretary shall attend all meetings of
the Board of Directors and meetings of the stockholders and record all votes
and the proceedings of the meetings in a book to be kept for that purpose and
shall perform like duties for the Executive Committee or other committees, if
required. He or she shall give, or cause to be given, notice of all meetings
of stockholders and special meetings of the Board of Directors, and shall
perform such other duties as may from time to time be prescribed by the Board
of Directors, Chairman of the Board or the President, under whose supervision
he or she shall act; provided, however, that in addition to any such duties,
the Secretary shall: (i) provide each director with a copy of the Bylaws of the
Corporation upon his or her election as a director; and (ii) upon any amendment
to these Bylaws, provide each director with a copy of the Bylaws, as amended,
promptly after such Bylaws have been approved by the Board of Directors. The
Secretary shall have custody of the seal of the Corporation, and he or she, or
an Assistant Secretary, shall have authority to affix the same to any
instrument requiring it, and, when so affixed, the seal may be attested by his
or her signature or by the signature of such Assistant Secretary. The Board of
Directors may give general authority to any other officer to affix the seal of
the Corporation and to attest the affixing thereof by his or her signature.

Section 8. The Assistant Secretary. The Assistant Secretary, if any
(or, in the event there be more than one, the Assistant Secretaries in the
order designated, or, in the absence of any designation, in the order of their
election), shall, in the absence of the Secretary or in the event of his or her
disability, perform the duties and exercise the powers of the Secretary and
shall perform such other duties and have such other powers as may from time to
time be prescribed by the Board of Directors.

Section 9. The Treasurer. The Treasurer shall have the custody of
the corporate funds and other valuable effects, including securities, and shall
keep full and accurate accounts of receipts and disbursements in books
belonging to the Corporation and shall deposit all moneys and other valuable
effects in the name and to the credit of the Corporation in such depositories
as may from time to time be designated by the Board of Directors. He or she
shall disburse the funds of the Corporation as may be ordered by the Board of
Directors, taking proper vouchers for such disbursements, and shall render to
the Chairman of the Board, the President and the Board of Directors, at regular
meetings of the Board of Directors, or whenever the Board of Directors may
require it, an account of all his or her transactions as Treasurer and of the
financial condition of the Corporation.

11
<PAGE> 16
Section 10. The Assistant Treasurer. The Assistant Treasurer, if any
(or in the event there shall be more than one, the Assistant Treasurers in the
order designated, or, in the absence of any designation, in the order of their
election), shall, in the absence of the Treasurer or in the event of his or her
disability, perform the duties and exercise the powers of the Treasurer and
shall perform such other duties and have such other powers as may from time to
time be prescribed by the Board of Directors.

ARTICLE VII

INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES AND AGENTS

Section 1. Generally. Reference is made to Section 2-418 (and any
other relevant provisions) of the Corporations and Associations Article of the
Annotated Code of Maryland (1993), as amended. Particular reference is made to
the class of persons (hereinafter called "Indemnitees") who may be indemnified
by a Maryland corporation pursuant to the provisions of such Section 2-418,
namely, any person (or the heirs, executors or administrators of such person)
who was or is a party or is threatened to be made a party to any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative, by reason of the fact that such person is or
was a director, officer, employee or agent of such corporation, or is or was
serving at the request of such corporation as a director, partner, officer,
trustee, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise or employee benefit plan.

(a) The Corporation shall (and is hereby obligated to)
indemnify the Indemnitees, and each of them, in each and every situation where
the Corporation is obligated to make such indemnification pursuant to the
aforesaid statutory provisions.

(b) The Corporation shall indemnify the Indemnitees, and
each of them, in each and every situation where, under the aforesaid statutory
provisions, the Corporation is not obligated, but is nevertheless permitted or
empowered, to make such indemnification, if the Board of Directors determines
that such Indemnitee acted in good faith and in a manner such Indemnitee
reasonably believed to be in or not opposed to the best interests of the
Corporation, and, in the case of any criminal action or proceeding, that such
Indemnitee had no reasonable cause to believe that such Indemnitee's conduct
was unlawful.

Section 2. Limitation for Disabling Conduct.

(a) Notwithstanding anything to the contrary in Section 1
hereof, the Corporation may not limit any liability, or indemnify any director
or officer of the Corporation against any liability, to the Corporation or its
stockholders to which such director or officer might otherwise be subject by
reason of "disabling conduct," as hereinafter defined. Accordingly, each
determination required by Section 1(b) hereof with respect to a director or
officer of the Corporation shall include a determination that the liability for
which such indemnification is

12
<PAGE> 17
sought did not arise by reason of such person's disabling conduct. Such
determination may be based on:

(i) a final decision on the merits by a court or
other body before whom the action, suit or proceeding was brought that the
person to be indemnified was not liable by reason of disabling conduct, or

(ii) in the absence of such a decision, a
reasonable determination, based on a review of the facts, that the person to be
indemnified was not liable by reason of such person's disabling conduct by: (A)
the vote of a majority of a quorum of directors who are disinterested,
non-party directors; or (B) an independent legal counsel in a written opinion.
In making such determination, such disinterested, non-party directors or
independent legal counsel, as the case may be, may deem the dismissal for
insufficiency of evidence of any disabling conduct of either a court action or
an administrative proceeding against a person to be indemnified to provide
reasonable assurance that such person was not liable by reason of disabling
conduct.

(b) For the purpose of this Section:

(i) "disabling conduct" of a director or officer
shall mean such person's willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of the office or any
other conduct prohibited under Section 17(h) of the Investment Company Act of
1940, as amended (the "1940 Act"), or any other applicable securities laws;

(ii) "disinterested, non-party director" shall
mean a director of the Corporation who is neither an "interested person" of the
Corporation as defined in Section 2(a)(19) of the 1940 Act nor a party to the
action, suit or proceeding in connection with which indemnification is sought;

(iii) "independent legal counsel" shall mean a
member of the Bar of the State of Maryland who is not, and not at least two (2)
years prior to his or her engagement to render the opinion in question has not
been, employed or retained by the Corporation, by any investment adviser to the
principal underwriter for the Corporation, or by any person affiliated with any
of the foregoing; and

(iv) "the Corporation" shall include, in addition
to the resulting Corporation, any constituent Corporation (including any
constituent of a constituent) absorbed in a consolidation or merger which, if
its separate existence had continued, would have had power and authority to
indemnify its directors, officers, employees or agents.

(c) The Corporation may purchase insurance to cover the
payment of costs incurred in performing the Corporation's obligations under
Section 1 hereof, but it is understood that no insurance may be obtained for
the purpose of indemnifying any disabling conduct, as defined in Section 2(b)
hereof.

13
<PAGE> 18
(d) The Corporation may advance legal fees and other
expenses pursuant to the indemnification rights set forth in Section 1 hereof
so long as, in addition to the other requirements therefor, the Corporation
either:

(i) obtains security for the advance from the
Indemnitee;

(ii) obtains insurance against losses arising by
reason of lawful advances; or

(iii) it shall be determined, pursuant to the means
set forth in Section 2 (a)(ii) hereof, that there is reason to believe that the
Indemnitee ultimately will be found entitled to indemnification.

ARTICLE VIII

STOCK CERTIFICATES

Section 1. Form of Signatures; Statements.

(a) Every stockholder in the Corporation shall be
entitled to have a certificate, signed by the Chairman of the Board or the
President or a Vice President and countersigned by the Treasurer or an
Assistant Treasurer or the Secretary or an Assistant Secretary of the
Corporation, exhibiting the number and class (and series, if any) of shares
owned by him, her or it, and bearing the seal of the Corporation. Such
signatures and seal may be facsimile transmission. In case any officer who has
signed, or whose facsimile signature was placed on, a certificate shall have
ceased to be such officer before such certificate is issued, it may
nevertheless be issued by the Corporation with the same effect as if he or she
were such officer at the date of its issue.

(b) Every certificate representing stock issued by the
Corporation, if it is authorized to issue stock of more than one class, shall
set forth upon the face or back of the certificate, a full statement or summary
of the designations and any preferences, conversion and other rights, voting
powers, restrictions, limitations as to dividends, qualifications, and terms
and conditions of redemptions of the stock of each class which the Corporation
is authorized to issue and, if the Corporation is authorized to issue any
preferred or special class of stock in series, the differences in the relative
rights and preferences between the shares of each series to the extent they
have been set and the authority of the Board of Directors to set the relative
rights and preferences of subsequent series. In lieu of such full statement or
summary, there may be set forth upon the face or back of each certificate a
statement that the Corporation will furnish to the stockholder, upon request
and without charge, a full statement of such information.

(c) Every certificate representing shares which are
restricted as to transferability by the Corporation shall either (i) set forth
on the face or back of the certificate a

14
<PAGE> 19
full statement of such restriction or (ii) state that the Corporation will
furnish to the stockholder, upon request and without charge, information about
the restriction.

Section 2. Registration of Transfer. Upon surrender to the
Corporation or any transfer agent of the Corporation of a certificate for
shares duly endorsed or accompanied by proper evidence of succession,
assignment or authority to transfer, it shall be the duty of the Corporation or
its transfer agent to issue a new certificate to the person entitled thereto,
to cancel the old certificate and to record the transaction upon its books.

Section 3. Registered Stockholders.

(a) Except as otherwise provided by law, the Corporation
shall be entitled to recognize the exclusive right of a person who is
registered on its books as the owner of shares of its capital stock to receive
dividends or other distributions, to vote as such owner, and to hold liable for
calls and assessments a person who is registered on its books as the owner of
shares of its capital stock. The Corporation shall not be bound to recognize
any equitable or legal claim to or interest in such shares on the part of any
other person except that the Board of Directors may adopt by resolution a
procedure by which a stockholder may certify in writing to the Corporation that
any shares of its capital stock registered in the name of such stockholder are
held for the account of a specified person other than such stockholder are held
for the account of a specified person other than such stockholder.

(b) If a stockholder desires that notices and/or
dividends shall be sent to a name or address other than the name or address
appearing on the stock ledger maintained by the Corporation (or by the transfer
agent or registrar, if any), such stockholder shall have the duty to notify the
Corporation (or the transfer agent or registrar, if any), in writing, of such
desire. Such written notice shall specify the alternate name or address to be
used.

Section 4. Location of Stock Ledger. A copy of the Corporation's
stock ledger containing (i) the name and address of each stockholder, and (ii)
the number and shares of stock of each class which the stockholder holds shall
be maintained at the Corporation's office located at 1666 K Street, N.W.,
Washington, DC 20006-2803.

Section 5. Record Date. In order that the Corporation may determine
the stockholders of record who are entitled to notice of or to vote at any
meeting of stockholders or any adjournment thereof, or entitled to receive
payment of any dividend or the allotment of any rights, or to make a
determination with respect to stockholders of record for any other proper
purpose, the Board of Directors may, in advance, fix a date as the record date
for any such determination or meeting. Such date shall not be more than 90 nor
less than 10 days before the date of any such meeting, nor more than 90 days
prior to the date any other determination is made with respect to stockholders.
A determination of stockholders of record entitled to notice of or to vote at a
meeting of stockholders shall apply to any adjournment of the meeting taken
pursuant to Section

15
<PAGE> 20
8 of Article III; provided, however, that the Board of Directors may fix a new
record date for the adjourned meeting.

Section 6. Lost, Stolen or Destroyed Certificates. The Board of
Directors may direct that a new certificate be issued in place of any
certificate theretofore issued by the Corporation which is claimed to have been
lost, stolen or destroyed, upon the making of an affidavit of that fact by the
person claiming the certificate to be lost, stolen or destroyed. When
authorizing such issuance of a new certificate, the Board of Directors may, in
its discretion and as a condition precedent to the issuance thereof, require
the owner of such lost, stolen or destroyed certificate to advertise the same
in such manner as it shall require and/or to give the Corporation a bond in
such sum or other security in such form, as it may direct as indemnity against
any claim that may be made against the Corporation with respect to the
certificate claimed to have been lost, stolen or destroyed.

ARTICLE IX

GENERAL PROVISIONS

Section 1. Dividends. Except as otherwise provided by law or the
Articles of Incorporation, dividends upon the outstanding capital stock of the
Corporation may be declared by the Board of Directors at any annual, regular or
special meeting, and may be paid in cash, in property or in shares of the
Corporation's capital stock.

Section 2. Reserves. The Board of Directors shall have full power,
subject to the provisions of law and the Articles of Incorporation, to
determine whether any, and, if so, what part, of the funds legally available
for the payment of dividends shall be declared as dividends and paid to the
stockholders of the Corporation. The Board of Directors, in its sole
discretion, may fix a sum which may be set aside or reserved over and above the
paid-in capital of the Corporation for working capital or as a reserve for any
proper purpose, and may, from time to time, increase, diminish or vary such
fund or funds.

Section 3. Fiscal Year. The fiscal year of the Corporation shall be
as determined from time to time by the Board of Directors.

Section 4. Seal. The corporate seal shall have inscribed thereon the
name of the Corporation, the year of its incorporation and the words "Corporate
Seal" and "Maryland."

ARTICLE X

AMENDMENTS

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<PAGE> 21
The Board of Directors shall have the power to make, alter, amend and
repeal these Bylaws, and to adopt new bylaws, by an affirmative vote of a
majority of the entire Board of Directors, provided that notice of the proposal
to make, alter, amend or repeal these Bylaws, or to adopt new bylaws, was
included in the notice of the meeting of the Board of Directors at which such
action takes place.

17
<PAGE> 22
CERTIFICATE

We, JOAN M. SWEENEY and TRICIA B. DANIELS, President and Secretary,
respectively, of ALLIED CAPITAL ADVISERS, INC. (the "Corporation"), a Maryland
corporation, DO HEREBY CERTIFY that the foregoing is a true and correct copy of
the Corporation's Bylaws as amended and in effect the date hereof.

IN WITNESS WHEREOF, we have hereunto set our hands and affixed the
corporate seal of the Corporation this 3rd day of February, 1997.

/s/ JOAN M. SWEENEY
-------------------------------
Joan M. Sweeney, President

/s/ TRICIA B. DANIELS
-------------------------------
Tricia B. Daniels, Secretary

[Corporate Seal]

<PAGE> 1
EXHIBIT 10.10

THE ALLIED CAPITAL ADVISERS, INC.
DEFERRED COMPENSATION PLAN

Adopted January 1, 1997
<PAGE> 2
THE ALLIED CAPITAL ADVISERS, INC.
DEFERRED COMPENSATION PLAN

Table of Contents

<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I - GENERAL

Section 1.1 Effective Date . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Section 1.2 Intent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

ARTICLE II - DEFINITIONS AND USAGE

Section 2.1 Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Section 2.2 Usage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

ARTICLE III - ELIGIBILITY AND PARTICIPATION

Section 3.1 Eligibility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Section 3.2 Participation . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

ARTICLE IV - PLAN BENEFIT

Section 4.1 Plan Benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Section 4.2 Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Section 4.3 Participant's Deferral Election . . . . . . . . . . . . . . . . . . . 7
Section 4.4 Investment Procedure . . . . . . . . . . . . . . . . . . . . . . . . 8
Section 4.5 Valuation of Accounts . . . . . . . . . . . . . . . . . . . . . . . . 8

ARTICLE V - VESTING AND DISTRIBUTION

Section 5.1 Vesting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Section 5.2 Distributable Events . . . . . . . . . . . . . . . . . . . . . . . . 9
Section 5.3 Amount of Plan Benefits . . . . . . . . . . . . . . . . . . . . . . . 9
Section 5.4 Plan Benefit Payment Options . . . . . . . . . . . . . . . . . . . . 9
Section 5.5 Commencement of Benefit Payments . . . . . . . . . . . . . . . . . 10
Section 5.6 Form of Benefit Payments . . . . . . . . . . . . . . . . . . . . . 10
Section 5.7 Age 60 and Age 65 Benefit Payment Distribution Options . . . . . . 10
Section 5.8 Plan Benefit Payment Election Procedures . . . . . . . . . . . . . 11
Section 5.9 Form of Benefit Payments Upon Death . . . . . . . . . . . . . . . . 11
Section 5.10 Designation of Beneficiary . . . . . . . . . . . . . . . . . . . . 11
Section 5.11 Hardship Withdrawals of Elective Deferral and
Employer Contributions . . . . . . . . . . . . . . . . . . . . . . 11
</TABLE>
<PAGE> 3
THE ALLIED CAPITAL ADVISERS, INC.
DEFERRED COMPENSATION PLAN

Table of Contents (continued)

<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE VI - ADMINISTRATION

Section 6.1 General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Section 6.2 Administrative Rules . . . . . . . . . . . . . . . . . . . . . . . 12
Section 6.3 Duties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Section 6.4 Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

ARTICLE VII - CLAIMS PROCEDURE

Section 7.1 General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Section 7.2 Denials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Section 7.3 Notice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Section 7.4 Appeals Procedure . . . . . . . . . . . . . . . . . . . . . . . . . 14
Section 7.5 Review . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

ARTICLE VIII - TRUST

Section 8.1 Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Section 8.2 Contributions and Expenses . . . . . . . . . . . . . . . . . . . . 15
Section 8.3 Trustee Duties . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Section 8.4 Reversion to the Employer . . . . . . . . . . . . . . . . . . . . . 15

ARTICLE IX - MISCELLANEOUS PROVISION

Section 9.1 Amendment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Section 9.2 Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Section 9.3 No Assignment . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Section 9.4 Successors and Assigns . . . . . . . . . . . . . . . . . . . . . . 16
Section 9.5 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Section 9.6 No Guarantee of Employment . . . . . . . . . . . . . . . . . . . . 16
Section 9.7 Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Section 9.8 Notification of Addresses . . . . . . . . . . . . . . . . . . . . . 16
Section 9.9 Bonding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
</TABLE>
<PAGE> 4
THE ALLIED CAPITAL ADVISERS, INC.
DEFERRED COMPENSATION PLAN

PREAMBLE

WHEREAS, the Employer recognizes the unique qualifications of its executive
employees and the valuable services that they have provided to or for the
Employer; and

WHEREAS, the Employer now desires to adopt the Deferred Compensation Agreement
for Officers of Allied Capital Advisers, Inc., and to rename the plan the
Allied Capital Advisers, Inc. Deferred Compensation Plan.

NOW, THEREFORE, in consideration of the premises and of the provisions
hereinafter set forth, the Allied Capital Advisers, Inc. Deferred Compensation
Plan (the "Plan") shall be and hereby is established as follows:

1
<PAGE> 5
ARTICLE I
GENERAL

SECTION 1.1 Effective Date. The provisions of this Plan, as amended and
restated, shall be effective as of January 1, 1997. The rights, if any, of any
person whose status as an employee of the Employer has terminated shall be
determined pursuant to the Plan as in effect on the date such employee
terminated, unless a subsequently adopted provision of the Plan is made
specifically applicable to such person.

SECTION 1.2 Intent. The Plan is intended to be an unfunded plan for the
purpose of providing deferred compensation to a select group of management or
highly compensated employees as such group is described under Sections 201(2)
and 301(a)(3) of ERISA. The Plan is not intended to be a plan described in
Section 401(a)(1) of the Code.

2
<PAGE> 6
ARTICLE II
DEFINITIONS AND USAGE

SECTION 2.1 Definitions. Wherever used in the Plan, the following words
and phrases shall have the meaning set forth below unless the context plainly
requires a different meaning:

"Account" means the account established on behalf of each Participant
as described in Section 4.2.

"Administrator" means the person or persons described in Article VI.

"Beneficiary" means those persons designated as a Beneficiary by the
Participant in the Participant Deferral Agreement.

"Board" means the Board of Directors of Allied Capital Advisers, Inc.

"Bonus" means any amount paid to an employee, which is designated by
the Employer as a bonus.

"Bonus Deferral Election" means an election made pursuant to Section
4.3(b) of the Plan.

"Change in Control" means any change in control of the Employer as
the result of (a) the acquisition by any individual, entity or group
of persons, within the meaning of sections 13(d)(3) or 14(d) of the
Securities Exchange Act of 1934, or any other comparable successor
provisions, of beneficial ownership (within the meaning of Rule 13d-3
of the Securities Exchange Act of 1934) of 25 percent or more of
either the outstanding shares of common stock or the combined voting
power of the Employer's then outstanding voting securities entitled to
vote generally, or (b) the approval by the stockholders of the
Employer of a reorganization, merger, or consolidation, in each case,
with respect to which persons who were stockholders of the Employer
immediately prior to such reorganization, merger or consolidation do
not immediately thereafter own more than 25 percent of the combined
voting power of the reorganized, merged, or consolidated Employer's
then outstanding securities that are entitled to vote generally in the
election of directors, or (c) the sale of substantially all of the
Employer's assets, or (d) bankruptcy, which results in a change of
beneficial ownership (within the meaning of Rule 13d-3 of the
Securities Exchange Act of 1934) of 25 percent or more of either the
outstanding shares of common stock or the combined voting power of the
Employer's then outstanding voting securities entitled to vote
generally.

"Code" means the Internal Revenue Code of 1986, as amended from time
to time.

3
<PAGE> 7
"Compensation" means "Compensation" as defined under the Retirement
Plan. However, for purposes of this Plan "Compensation" shall not
include Bonuses and shall be determined without regard to the
limitations imposed by Code Section 401(a)(17).

"Compensation Deferral Election" means an election made pursuant to
Section 4.3(a) of the plan.

"Disability" means a physical or mental condition of a Participant
resulting from a bodily injury, disease, or mental disorder which
renders him or her incapable of continuing in the employment of the
Employer. Such Disability shall be determined by the Administrator, in
its discretion, based upon appropriate medical advice and examination.

"Employer" means Allied Capital Advisers, Inc., its successors and its
subsidiaries.

"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended from time to time.

"Insolvency" means the Employer (a) is unable to pay its debts as they
become due, or (b) is subject to a pending proceeding as a debtor
under the United States Bankruptcy Code.

"Normal Retirement Age" means age sixty (60).

"Participant" means an eligible employee of the Employer designated by
the Board for participation in the Plan, or a person who was such a
Participant at the time of retirement, death, disability or
resignation, or a Beneficiary who is presently entitled to benefits
under the Plan in accordance with its terms.

"Participant Deferral Agreement" means an agreement entered into
between a Participant and the Employer for the Purposes set forth in
Articles IV and V.

"Plan" means the Allied Capital Advisers, Inc. Deferred Compensation
Plan, as amended from time to time.

"Plan Benefit" means the benefit of a Participant as determined under
Article IV of the Plan.

"Plan Year" means the calendar year.

"Retirement" means the date on or after a Participant reaches Normal
Retirement Age on which such Participant retires from the Employer.

4
<PAGE> 8
"Trust" means a trust which may be established by the Employer in
accordance with Article VIII to provide the benefits described in this
Plan.

"Trustee" means the corporation or individual(s) selected by the
Employer to serve as trustee for the Trust.

SECTION 2.2 Usage. Except where otherwise indicated by the context, any
masculine terminology used herein shall also include the feminine and vice
versa, and the definition of any term herein in the singular shall also include
the plural and vice versa.

5
<PAGE> 9
ARTICLE III
ELIGIBILITY AND PARTICIPATION

SECTION 3.1 Eligibility. Any officer of the Employer shall be eligible to
participate in the Plan at such time and for such period as designated by the
Board.

SECTION 3.2 Participation. An employee who is eligible to participate in
the Plan pursuant to Section 3.1 shall become a Participant at such time and
for the period he is designated by the Board.

If, at any time, an employee is determined or reasonably believed, based on a
judicial or administrative determination or opinion of counsel, not to qualify
as "management" or a "highly compensated employee" under ERISA Sections 201(2),
301(a)(3), and 401(a)(1), the employee shall cease participation in the Plan as
of the date of that determination and the Plan Benefit to which he is entitled
will be distributed to him as soon as administratively possible in a single
lump-sum payment, notwithstanding any other provision of the Plan.

6
<PAGE> 10
ARTICLE IV
PLAN BENEFIT

SECTION 4.1 Plan Benefit. A Participant's Plan Benefit shall be equal to
the total amount credited to the Participant's Account under this Article IV.
Such Plan Benefit shall become nonforfeitable and payable to the Participant as
provided under Article V.

SECTION 4.2 Accounts. For each Participant, the Administrator shall
establish and maintain a Participant Account. All amounts which are credited
to the Account shall be credited solely for purposes of accounting and
computation, and shall remain assets of the Employer subject to the claims of
the Employer's general creditors. A Participant's Account shall be reduced by
an amount equal to any Plan Benefit previously distributed to him pursuant to
Article V. A Participant's Account shall include amounts credited under the
Plan for the Plan Year beginning January 1, 1997.

SECTION 4.3 Participant's Deferral Elections. For each Plan Year, each
eligible Participant may make the following deferral elections:

(a) Compensation Deferral Election: Prior to the beginning of the
Plan Year, or prior to the date of entry as a Participant
under the Plan, an eligible Participant may authorize the
Employer to reduce his or her Compensation by any specific
amount or percentage as specified in a Participant Deferral
Agreement in effect for each Plan Year (in lieu of receiving
cash Compensation), and to have such amount credited to the
Participant's Account under this Article IV. The Participant
Deferral Agreement shall be effective only with respect to
Compensation earned after the agreement becomes effective. No
more than one Compensation Deferral Election may be made
during each Plan Year. However, a Participant may terminate
the election at any time with respect to Compensation not yet
earned.

(b) Bonus Deferral Election: Prior to the end of the Plan Year in
which the Bonus is earned, an eligible Participant may
authorize the Employer to reduce his or her Bonus by any
specific amount or percentage as specified in a Participant
Deferral Agreement in effect for each Plan Year (in lieu of
receiving a cash Bonus), and to have such amount credited to
the Participant's Account under this Article IV.

7
<PAGE> 11
SECTION 4.4 Investment Procedure. The Employer and each employee who is
eligible to participate in the Plan may, at the discretion of the Employer,
execute an agreement which reflects the deemed investment of the portion of the
Participant's Compensation and Bonus which shall be applied to the payment of
the Participant's Plan Benefit under the Plan. The Administrator shall retain
overriding discretion over the selection of investment vehicles and the
Administrator may change, alter or modify its investment policy as it deems
appropriate, from time to time, to maximize benefits under the Plan. Any such
change, alteration or modification shall be communicated to the Participants
under procedures adopted by the Administrator.

SECTION 4.5 Valuation of Accounts. The value of a Participant's Account
shall be determined from time to time by the Trustee in the following manner.

(a) During any period of time in which a Participant's Account is
deemed invested in whole or in part pursuant to the agreement
with the Participant (in the manner described in Section 4.4),
the income and expenses, gains and losses, both realized and
unrealized, from such deemed investments shall be determined
by the Trustee. The amount so determined shall be credited to
the Account of the Participant proportionately in accordance
with procedures established by the Administrator.

(b) All benefits and deferrals on behalf of a Participant shall be
credited to the Account of the Participant in accordance with
this Article IV.

(c) Each Participant's Account shall be valued as of the last day
of each Plan Year or more frequently as determined by the
Administrator.

(d) All credits to a Participant's Account under this Section 4.5
shall be deemed to have been made on the applicable valuation
date in the order of priority set forth in this Section 4.5,
even though actually determined at a later date.

(e) Each Participant's Account shall include amounts previously
credited under the Plan prior to the effective date of this
amendment and restatement, January 1, 1997.

8
<PAGE> 12
ARTICLE V
VESTING AND DISTRIBUTION

SECTION 5.1 Vesting. Amounts credited under the Plan shall at all times
be 100% vested and non-forfeitable.

SECTION 5.2 Distributable Events. Except as otherwise provided in Section
5.7, a Participant's Plan Benefit shall become distributable upon the
occurrence of one of the following events:

1. Separation from service (other than on account of Retirement,
death, or Disability)

2. Retirement

3. Disability

4. Death

5. Insolvency

6. Change in Control (as defined in Section 2.1)

7. Future determined date (at least 2 years from the signing date
of the Participant Deferral Agreement)

8. Termination of the Plan

SECTION 5.3 Amount of Plan Benefits. A Participant's Plan Benefit shall
equal the total amount credited to the Participant's Account in accordance with
Article IV as of the date a distributable event occurs.

SECTION 5.4 Plan Benefit Payment Options. Subject to the provisions of
Section 5.9, upon the occurrence of a distributable event listed in Section
5.2, a Participant may elect one of the following Plan Benefit payment options:

(a) Lump-sum - A Participant may elect to receive his Plan Benefit
in a single lump sum distribution.

(b) Installments - Alternatively, a Participant may elect to
receive his Plan Benefit in equal annual installments over a
period of not less than three years and not greater than ten
years.

9
<PAGE> 13
SECTION 5.5 Commencement of Benefit Payments. At the election of the
Participant or Beneficiary, if applicable, the payment of Plan Benefits shall
commence no earlier than three months and no later than six months from the
expiration of the ninety-day election period provided for in Section 5.8. In
the event of a distribution on account of hardship, the payment of Plan
Benefits shall commence as soon as administratively feasible from the date the
Administrator determines that a Participant is entitled to a hardship
distribution under the Plan.

SECTION 5.6 Form of Benefit Payments. At the discretion of the
Administrator, Plan Benefits will be paid in the form of cash equal to the
value of Plan Benefit payable on such benefit payment date.

SECTION 5.7 Age 60 and Age 65 Benefit Payment Distribution Options.

(a) Upon the consent of the Employer, and subject to the
conditions prescribed in subparagraph (b) below, before the
end of the Plan Year beginning immediately prior to the Plan
Year in which an active Participant reaches age 60 or age 65,
such Participant can elect to begin receiving his or her Plan
Benefit determined, as of the end of such preceding Plan Year,
in monthly or annual installments (as such participant elects)
over a period of not less than three years and not longer than
ten years. If inactive Participant does not affirmatively
elect to begin receiving his or her Plan Benefit under this
paragraph or, if the Employer does not consent to such an
election, the Participant shall not be eligible to begin
receiving benefits until the earlier of a distributable event
described in Section 5.2, or in the case of an active
Participant who has not attained age 60, the Plan year ending
immediately prior to the Plan Year in which he reaches age 65.

(b) In order to begin receiving Plan Benefits under this Section
5.7, a Participant must be an active employee on the date such
benefits are elected and on the date payment of such benefits
subsequently commence.

(c) If a Participant experiences a distributable event described
in Section 5.2 after an election is made and consent is given
by the Board under this Section 5.7, the Participant or
Beneficiary shall have the same distribution options provided
in Section 5.4, with the value of his Plan Benefit as of such
date decreased by amounts distributed under this Section 5.7.

(d) A Participant who begins receiving Plan Benefits under this
Section 5.7 shall continue to be eligible for future credits
under the Plan to the extent such Participant is otherwise
entitled to receive credits under the terms and operation of
the Plan.

10
<PAGE> 14
(e) If a Participant elects to receive benefits under this Section
5.7 and the Employer consents to such election, the
distribution of the Participant's benefits will commence at a
time mutually agreed to between the Participant and the
Employer when the election is made and consent given under
this Section 5.7.

SECTION 5.8 Plan Benefit Payment Election Procedures. For purposes of
making the elections provided in Section 5.4, 5.5 and 5.7, each Participant and
Beneficiary, if applicable, shall be provided with an election form prepared by
the Administrator within a reasonable period of time after the Participant
experiences a distributable event or becomes eligible for the special Age 60 or
Age 65 Benefit Payment Distribution Options prescribed in Section 5.7. This
election form must be properly executed by the Participant on or before the
ninetieth day from the day such form is provided to the Participant. If an
election form is not properly executed as provided herein, the Participant will
be deemed (a) in the case of the elections provided in Section 5.4 and 5.5 to
have elected to receive his or her Plan Benefits in annual installments over a
three to ten year period commencing three months from the date the ninety-day
period provided herein expires; or (b) in the case of the elections provided in
Section 5.7 to have declined to begin receiving Plan Benefits under the special
Age 60 or Age 65 Benefit Payments Distribution Option provided in Section 5.7.

SECTION 5.9 Form of Benefit Payments Upon Death. Upon the death of a
Participant who has not yet begun to receive benefits under this Plan, the
Participant's Beneficiary or Beneficiaries may elect to receive the Plan
Benefit in accordance with Section 5.4. Upon the death of a Participant who
has already begun to receive his Plan Benefit under this Plan in the form of
installments, the Participant's Beneficiaries will receive the remaining Plan
Benefits in equal annual installments in the same manner elected by the
Participant.

SECTION 5.10 Designation of Beneficiary. A Participant may, in the
Participant Deferral Agreement, designate one or more primary and contingent
Beneficiaries to receive the Plan Benefit which may be payable hereunder
following the Participant's death, and may designate the proportions in which
such Beneficiaries are to receive such payments. A Participant may change such
designations from time to time, and the last written designation filed with the
Administrator prior to the Participant's death shall control. If a Participant
fails to specifically designate a Beneficiary or, if no designated Beneficiary
survives the Participant, payment shall be made to the Participant's estate in
a single lump-sum, notwithstanding any other provision of this Plan.

SECTION 5.11 Hardship Withdrawals of Elective Deferral and Employer
Contributions. A distribution in an amount no greater than to a Participant's
Account balance may be made to a Participant in the event of hardship. For
this purpose, a withdrawal will be considered to be required due to a hardship
only if, under uniform rules and polices, the Administrator determines that the
purpose of the withdrawal is to meet an immediate and heavy financial need.
The decision of the Administrator as to whether a hardship withdrawal shall be
permitted is final and conclusive.

11
<PAGE> 15
ARTICLE VI
ADMINISTRATION

SECTION 6.1 General. The Administrator shall be the Board, or such other
person or persons as designated by the Board. Except as otherwise specifically
provided in the Plan, the Administrator shall be responsible for administration
of the Plan. The Administrator shall be the "named fiduciary" within the
meaning of Section 402(c)(2) of ERISA.

SECTION 6.2 Administrative Rules. The Administrator may adopt such rules
of procedure as it deems desirable for the conduct of its affairs, except to
the extent that such rules conflict with the provisions of the Plan.

SECTION 6.3 Duties. The Administrator shall have the following rights,
powers and duties:

(a) The decision of the Administrator in matters within its
jurisdiction shall be final, binding and conclusive upon the
Employer and upon any other person affected by such decision,
subject to the claims procedure hereinafter set forth.

(b) The Administrator shall have the duty and authority to
interpret and construe the provisions of the Plan, to decide
any question which may arise regarding the rights of
employees, Participants, and Beneficiaries, and the amount of
their respective interests, to adopt such rules and to
exercise such powers as the Administrator may deem necessary
for the administration of the Plan, and to exercise any other
rights, powers or privileges granted to the Administrator by
the terms of the Plan.

(c) The Administrator shall maintain full and complete records of
its decisions. Its records shall contain all relevant data
pertaining to the Participant and his rights and duties under
the Plan. The Administrator shall have the duty to maintain
Account records of all Participants. The Administrator shall
also have the duty to report pertinent information regarding
Participant Accounts to Participants at least annually.

(d) The Administrator shall cause the principal provisions of the
Plan to be communicated to the Participants, and a copy of the
Plan and other documents shall be available at the principal
office of the Employer for inspection by the Participants at
reasonable times determined by the Administrator.

(e) The Administrator shall periodically report to the Board with
respect to the status of the Plan.

12
<PAGE> 16
SECTION 6.4 Fees. No fee or compensation shall be paid to any person for
services as the Administrator.

13
<PAGE> 17
ARTICLE VII
CLAIMS PROCEDURE

SECTION 7.1 General. Any claim for Plan Benefits under the Plan shall be
filed by the Participant or Beneficiary ("claimant") on the form prescribed for
such purpose with the Administrator.

SECTION 7.2 Denials. If a claim for Plan Benefits under the Plan is
wholly or partially denied, notice of the decision shall be furnished to the
claimant by the Administrator within sixty days after receipt of the claim by
the Administrator, unless special circumstances require an extension of time of
sixty days (for a total of 120 days).

SECTION 7.3 Notice. Any claimant who is denied a claim for Plan Benefits
shall be furnished written notice setting forth:

(a) the specific reason or reasons for the denial;

(b) specific reference to the pertinent provision of the Plan upon
which the denial is based;

(d) an explanation of the claim review procedure under Section
7.5.

SECTION 7.4 Appeals Procedure. In order that a claimant may appeal a
denial of a claim, the claimant or the claimant's duly authorized
representative may:

(a) request a review by written application to the Administrator,
or its designate, no later than sixty days after receipt by
the claimant of written notification of denial of a claim;

(b) review pertinent documents; and

SECTION 7.5 Review. A decision on review of a denied claim shall be made
not later than sixty days after receipt of a request for review, unless special
circumstances require an extension of time for processing, in which case a
decision shall be rendered within a reasonable period of time, but not later
than 120 days after receipt of a request for review. The decision on review
shall be in writing and shall include the specific reason(s) for the decision
and the specific reference(s) to the pertinent provisions of the Plan on which
the decision is based.

14
<PAGE> 18
ARTICLE VIII
TRUST

SECTION 8.1 Trust. A trust to be known as the Allied Capital Advisers,
Inc. Deferred Compensation Trust (the "Trust") has been established by the
execution of a Trust agreement with one or more Trustees and is intended to be
maintained as a "grantor trust" under Code Section 677. The assets of the
Trust will be held, invested and disposed of by the Trustee, in accordance with
the terms of the Trust, for the purpose of providing Plan Benefits for the
Participants. Notwithstanding any provision of the Plan or the Trust to the
contrary, the assets of the Trust shall at all times be subject to the claims
of the Employer's general creditors in the event of insolvency or bankruptcy.

SECTION 8.2 Contributions and Expenses. The Employer, in its sole
discretion, and from time to time, may make contributions to the Trust. All
Plan Benefits under the Plan and expenses chargeable to the Plan, to the extent
not paid directly by the Employer, shall be paid from the Trust.

SECTION 8.3 Trustee Duties. The powers, duties and responsibilities of
the Trustee shall be as set forth in the Trust agreement and nothing contained
in the Plan, either expressly or by implication, shall impose any additional
powers, duties or responsibilities upon the Trustee.

SECTION 8.4 Reversion to the Employer. The Employer shall have no
beneficial interest in the Trust and no part of the Trust shall ever revert or
be repaid to the Employer, directly or indirectly, except as otherwise provided
in Section 8.1 or the Trust agreement.

15
<PAGE> 19
ARTICLE IX
MISCELLANEOUS PROVISIONS

SECTION 9.1 Amendment. The Employer reserves the right to amend the Plan
in any manner that it deems advisable, by a resolution of the Board. No
amendment shall, without the Participant's consent, affect the amount of the
Participant's Plan Benefit at the time the amendment becomes effective or the
right of the Participant to receive a Plan Benefit.

SECTION 9.2 Termination. The Employer reserves the right to terminate the
Plan at any time by resolution of its Board. No termination shall, without the
Participant's consent, affect the amount of the Participant's Plan Benefit
prior to the termination or the right of the Participant to receive a Plan
Benefit.

SECTION 9.3 No Assignment. The Participant shall not have the power to
pledge, transfer, assign, anticipate, mortgage or otherwise encumber or dispose
of in advance any interest in amounts payable hereunder or any of the payments
provided for herein, nor shall any interest in amounts payable hereunder or in
any payments be subject to seizure for payments of any debts, judgments,
alimony or separate maintenance, or be reached or transferred by operation of
law in the event of bankruptcy, insolvency or otherwise.

SECTION 9.4 Successors and Assigns. The provisions of the Plan are
binding upon and inure to the benefit of the Employer, its successors and
assigns, and the Participant, his Beneficiaries, heirs, legal representatives
and assigns.

SECTION 9.5 Governing Law. The Plan shall be subject to and construed in
accordance with the laws of the Commonwealth of Virginia to the extent not
preempted by the provisions of ERISA.

SECTION 9.6 No Guarantee of Employment. Nothing contained in the Plan
shall be construed as a contract of employment or deemed to give any
Participant the right to be retained in the employ of an Employer or any equity
or other interest in the assets, business or affairs of the Employer. No
Participant hereunder shall have a security interest in assets of the Employer
used to make contributions or pay Plan Benefits.

SECTION 9.7 Severability. If any provision of the Plan shall be held
illegal or invalid for any reason, such illegality or invalidity shall not
affect the remaining provisions of the Plan, but the Plan shall be construed
and enforced as if such illegal or invalid provision had never been included
herein.

SECTION 9.8 Notification of Addresses. Each Participant and each
Beneficiary shall file with the Administrator, from time to time, in writing,
the post office address of the Participant, the post office address of each
Beneficiary, and each change of post office address. Any communication,
statement or notice addressed to the last post office address filed with the
Administrator (or if no such address was filed with the Administrator, then to
the last post office

16
<PAGE> 20
address of the Participant or Beneficiary as shown on the Employer's records)
shall be binding on the Participant and each Beneficiary for all purposes of
the Plan and neither the Administrator nor the Employer shall be obligated to
search for or ascertain the whereabouts of any Participant or Beneficiary.

SECTION 9.9 Bonding. The Administrator and all agents and advisors
employed by it shall not be required to be bonded, except as otherwise required
by ERISA.

The undersigned, pursuant to the approval of the Board, does hereby execute the
Allied Capital Advisers, Inc. Deferred Compensation Plan on this 1st day of
January, 1997.

ALLIED CAPITAL ADVISERS, INC.

Attest: /s/ SUZANNE V. SPARROW By: /s/ JOAN M. SWEENEY
------------------------- ---------------------------------
(Signature) (Signature)

Suzanne V. Sparrow Joan M. Sweeney
------------------------- ---------------------------------
(Print Name) (Print Name)

<PAGE> 1
EXHIBIT 10.11

ALLIED CAPITAL ADVISERS, INC.
INCENTIVE STOCK OPTION PLAN

1. PURPOSE OF THE PLAN
The purpose of this Incentive Stock Option Plan ("the Plan") is to advance the
interests of Allied Capital Advisers, Inc. ("the Company") by providing
directors and officers who have substantial responsibility for the direction
and management of the Company with additional incentives to exert their best
efforts on behalf of the Company, to increase their proprietary interest in the
success of the Company, to reward outstanding performance and to provide a
means to attract and retain persons of outstanding ability to the service of
the Company. It is recognized that the Company cannot attract or retain these
officers without this compensation.

2. EFFECTIVE DATE OF THE PLAN
This Plan shall become effective upon (1) approval of the plan by the
shareholders of the Company and (2) adoption by the Board of Directors.

3. ADMINISTRATION
The Plan is administered by the Compensation Committee (the "Committee")
consisting of two or more "disinterested" members of the Company's Board of
Directors in accordance with the provisions of Rule 16b-3 promulgated under the
Securities Exchange Act of 1934, as amended (the "1934 Act"). The Committee
shall interpret the Plan, and to the extent and in the manner contemplated
herein, it shall exercise the discretion reserved to it hereunder. The
Committee may prescribe, amend and rescind rules and regulations relating to
the Plan and make all other determinations necessary for its administration.
The decision of the Committee on any matter affecting the Plan or the rights
and obligations arising under the Plan or any option granted thereunder shall
be final and binding upon all persons.

4. SHARES SUBJECT TO THE PLAN
The shares subject to option and the other provisions of this Plan are shares
of the Company's common stock, par value $.001 per share ("shares"). Subject
to the provisions hereof concerning adjustment, the total number of shares that
may be purchased upon the exercise or surrender of stock options granted under
this Plan shall not exceed 1,999,580 shares, which amount includes 1,649,580
shares on which options previously have been granted. In the event any option
shall cease to be exercisable in whole or in part for any reason, the shares
which were covered by such option, but as to which the option had not been
exercised, shall again be available under the Plan. Shares may be made
available from authorized unissued or reacquired stock or partly from each.

5. PARTICIPANTS
The Committee shall determine and designate from time to time those key
officers of the Company, and those directors who are not officers of the
Company or employees of the Company's investor adviser ("non-officer
directors"), who shall be eligible to participate in the Plan.

6. AWARDS UNDER THE PLAN
(a) Generally. The Committee may award at any time an incentive stock option
(within the meaning of section 422 of the Internal Revenue Code of 1986, as
amended (the "Code")) or a nonqualified stock option to a participant under the
plan; provided, however, that only nonqualified stock options may beawarded to
non-officer directors.

(b) Awards to Officers. The Committee shall determine the number of shares to
be offered from time to time to each optionee who is an officer of the Company.
In making these determinations, the Committee shall take into account the past
service of the optionee to the Company, that officer's present and potential
contributions to the success of the Company and such other factors as the
Committee shall deem relevant
<PAGE> 2
in connection with accomplishing the purposes of the Plan. The options shall
contain such terms and conditions as the Committee shall deem advisable,
including but not limited to being exercisable only in such installments as the
Committee may determine. Options granted to different optionees or at
different times need not contain similar provisions.

(c) Awards to Non-Officer Directors. Each non-officer director, upon his or
her election as a director of the Company, shall receive a one-time grant of an
option to purchase thirteen thousand three hundred and thirty three (13,333)
shares. A non-officer director shall receive no other award under this Plan.

(d) Option Price. The price at which a share may be purchased upon the
exercise of an option shall be equal to the current fair market value of the
shares at the time an option is granted; provided, however, that with respect
to incentive stock options granted to any holder of 10% or more of the
Company's shares, the price shall not be less than 110% of such current fair
market value. The day on which the Committee approves the granting of an
option shall be considered the date on which such option is granted.

(e) Option Period. Each stock option shall state the period or periods of time
within which the option may be exercised, in whole or in part, by the optionee,
which shall be such period or periods of time as may be determined by the
Committee. Notwithstanding the foregoing, the option period of each option
shall end, and the option shall cease to be exercisable, on the earliest of
(i) the date specified in the option grant, (ii) ten years (or, in the case of
incentive stock options awarded to a holder of 10% or more of the Company's
shares, five years) from the date the option is granted, (iii) the last day of
the three-month period beginning on the date on which the optionee ceases to be
an officer or director of the Company for any cause other than death or total
and permanent disability, or (iv) the first anniversary of the date on which
the optionee ceases to be an officer or director of the Company as a result of
the optionee's death or total and permanent disability.

(f) Payment for Shares. Full payment for shares purchased shall be made at the
time of exercising the option in whole or in part. Payment of the purchase
price shall be made in cash (including check, bank draft or money order) or, if
authorized by the Committee pursuant to paragraph 6(h) hereof, by a loan from
the Company in accordance with paragraph 6(h).

(g) Transferability of Options. Options shall not be transferable other than
by will or the laws of descent and distribution and during an optionee's
lifetime shall be exercisable only by the optionee.

(h) Loans by the Company. Upon the exercise of any option, the Company may, at
the request of the officer-optionee and subject to the approval of the Board
of Directors, lend to such officer-optionee, as of the date of exercise, an
amount equal to the exercise price of such option, provided that such loan (i)
has a term of not more than ten years, (ii) becomes due within sixty days after
the recipient of the loan ceases to be an officer of the Company, (iii) bears
interest at a rate no less than the prevailing applicable federal rate at the
time the loan is made, and (iv) is fully collateralized at all times, which
collateral may include securities issued by the Company. Loan terms and
conditions may be changed by the Committee to comply with applicable Internal
Revenue Service and Securities and Exchange Commission regulations.

(i) Effect of Change in Shares subject to the Plan. In the event there is any
change in the shares of the Company through the declaration of stock dividends,
or through recapitalization resulting in stock splits, or combinations or
exchanges of shares, or otherwise, the number of shares available for option
and the shares subject to any option and the option prices shall be
appropriately adjusted.

(j) General Restriction. Each option shall be subject to the requirement that,
if at any time the Committee shall determine, at its discretion, that the
listing, registration or qualification of the shares subject to such option
upon any securities exchange or under any state or federal law, or the consent
or approval of any government regulatory body, is necessary or desirable as a
condition of, or in connection with, the granting of such option or the issue
or purchase of the shares thereunder, such option may not be
<PAGE> 3
exercised in whole or in part unless such listing, registration, qualification,
consent or approval shall have been effected or obtained free of any conditions
not acceptable to the Company. Subject to the limitations of paragraph 6(e),
no option shall expire during any period when the rights reserved hereby are
invoked by the Committee, but shall be extended for such further period so as
to afford the optionee a reasonable opportunity to exercise his option.

7. AMENDMENT AND TERMINATION
The Committee may modify, revise or terminate this Plan at any time and from
time to time provided, however, that no modification or revision of any
material provision of the Plan may be made without shareholder approval except
for such modifications or revisions which are necessary in order to ensure that
the options issued as incentive stock options under the Plan comply with
section 422 or any successor provision of the Code, or other applicable law.
The Plan shall terminate when the total amount of shares with respect to which
options may be granted shall have been issued upon the exercise of options or
by action of the Board of Directors pursuant to this paragraph, or on May 23,
2006, whichever shall occur first.

8. MISCELLANEOUS PROVISIONS
(a) No optionee shall have rights as a shareholder with respect to shares
covered by his option until the date of exercise of his option.

(b) The granting of any option shall not impose upon the Company any obligation
to appoint or to continue to appoint as an officer any optionee, and the right
of the Company to terminate the employment of any officer or other employee
shall not be diminished or affected by reason of the fact that an option has
been granted to such optionee.

(c) Options shall be evidenced by stock option agreements in such form and
subject to the terms and conditions of this Plan as the Committee shall approve
from time to time. Such stock option agreements shall contain such other
provisions as the Committee in its discretion may deem advisable.

(d) For purposes of this Plan, the fair market value of the shares shall be the
average between the closing Bid and Asked price of the shares as quoted on the
Nasdaq National Market for the business day preceding the date on which the
option is awarded. If the Company's shares are traded on a major exchange, the
price shall be the closing price of the Company's shares as reported in The
Wall Street Journal for the business day preceding the date on which the option
is awarded.

(e) All options issued pursuant to the Plan shall be granted within ten years
from the earlier of the date the amended Plan is adopted by the Board of
Directors and the date the amended Plan is approved by the shareholders of the
Company.

(f) The aggregate fair market value (determined at the time the option is
granted) of the shares with respect to which incentive stock options are
exercisable for the first time by any optionee during any calendar year (under
all incentive stock option plans of the Company, its parent and subsidiary
corporations) shall not exceed $100,000.

(g) No option may be issued if exercise of all warrants, options and rights of
the Company outstanding immediately after issuance of such option would result
in the issuance of voting securities in excess of 20% of the Company's
outstanding voting securities.

(h) Any notices given in writing shall be deemed given if delivered in person
or by certified mail; if given to the Company at Allied Capital Advisers, Inc.,
1666 K Street, NW, 9th floor, Washington, DC 20006; and, if to an optionee, in
care of the optionee at his or her last known address.

(i) This plan and all actions taken by those acting for the Plan shall be
governed by the laws of the State of
<PAGE> 4
of Maryland.

(j) If an incentive stock option is issued and does not meet the terms of this
plan, then it shall continue as a stock option but it will be a non-qualified
stock option.

(k) A leave of absence granted to an employee does not constitute an
interruption in continuous employment for purposes of the Plan as long as the
leave of absence does not extend beyond one year.

(l) All costs and expenses incurred in the operation and administration of the
Plan shall be borne by the Company.

9. CHANGE OF CONTROL
In the event of a Change of Control (as hereinafter defined), all
then-outstanding options will become fully vested and exercisable as of the
Change of Control. For purposes of the Plan, "Change of Control" means the
sale of substantially all of the Company's assets or the acquisition, whether
directly, indirectly, beneficially (within the meaning of Rule 13d-3 of the
1934 Act), or of record, of securities of the Company representing twenty
percent (20%) or more in the aggregate voting power of the Company's
then-outstanding Common Stock by any "person" (within the meaning of Sections
13(d) and 14(d) of the 1934 Act), including any corporation or group of
associated persons acting in concert, other than (i) the Company or its
subsidiaries and/or (ii) any employee pension benefit plan (within the meaning
of Section 3(2) of the Employee Retirement Income Security Act of 1974) of the
Company or its subsidiaries, including a trust established pursuant to any such
plan.

<PAGE> 1

EXHIBIT 11

Allied Capital Advisers, Inc.
Exhibit 11 Statement of Computation of Earnings Per Common Share
Form 10-K
For the Years Ended December 31, 1996, 1995 and 1994

For the Year Ended December 31,
--------------------------------------------
1996 1995 1994
--------------------------------------------
<S> <C> <C> <C>
Primary Earnings Per Common Share:

Net Income $2,802,000 $2,435,000 $1,294,000
============================================

Weighted average of common
shares outstanding 8,990,013 8,927,648 8,846,726

Weighted average of common
shares issuable on exercise
of outstanding stock options 867,600 748,674 680,537
--------------------------------------------
Weighted average of common
shares outstanding, as adjusted 9,857,613 9,676,322 9,527,263
============================================

Net Income per share $ 0.28 $ 0.25 $ 0.14
============================================

Fully Diluted Earnings Per Common Share:

Net Income $2,802,000 $2,435,000 $1,294,000
============================================

Weighted average common
shares and common share
equivalents as computed for
primary earnings per share 9,857,613 9,676,322 9,527,263

Weighted average of additional
shares issuable on exercise
of outstanding stock options -- 124,239 --
--------------------------------------------
Weighted average of common
shares outstanding, as adjusted 9,857,613 9,800,561 9,527,263
============================================

Net Income assuming full dilution $ 0.28 $ 0.25 $ 0.14
============================================
</TABLE>

<PAGE> 1
EXHIBIT 13

Allied Capital Advisers, Inc.

SHAREHOLDER INFORMATION

CORPORATE OFFICE
Allied Capital Advisers, Inc.
1666 K Street, NW, 9th Floor
Washington, DC 20006
Telephone: (202) 331-1112
Facsimile: (202) 659-2053
News-On-Demand: (888) 329-5519
Investor Relations: (202) 331-3334
Investor Relations E-mail: [email protected]
Marketing: (202) 331-6439
Marketing E-mail: [email protected]
Internet Address: http://www.alliedcapital.com

STOCK TRANSFER AGENT AND REGISTRAR
Inquiries on transferring securities, replacing a lost or stolen
certificate, or processing a change of address should be directed to:
American Stock Transfer & Trust Company
40 Wall Street, 46th Floor
New York, NY 10005
In the United States: (800) 937-5449
Outside the United States: (212) 936-5100
E-mail: [email protected]
Internet Address: http://www.amstock.com

FORM 10-K REPORT
A copy of the Company's Annual Report on Form 10-K for the year ended December
31, 1996, as filed with the Securities and Exchange Commission, will be
furnished without charge to shareholders upon written request to the Investor
Relations Department at the Company's corporate office. This information is
also available on Allied Capital's Internet site: http://www.alliedcapital.com

1997 ANNUAL MEETING OF SHAREHOLDERS
NationsBank, N.A., 730 15th Street, NW,
Washington, District of Columbia 20006
Friday, May 16, 1997
10 a.m. (EST)
All shareholders are welcome to attend.

INDEPENDENT ACCOUNTANTS
Arthur Andersen LLP
Washington, DC

STOCK MARKET LISTING
Allied Capital Advisers, Inc. common stock is quoted on the Nasdaq National
Market under the ticker symbol ALLA. Most newspapers list the Company's stock
as "AldCAdv." The Company has approximately 900 shareholders of record and
2,800 beneficial shareholders.

STOCK PRICE

<TABLE>
<CAPTION>
High Low Close
---- --- -----
<S> <C> <C> <C>
1995 Q1 4.00 3.25 4.00
Q2 5.00 3.63 4.63
Q3 5.38 4.63 5.06
Q4 5.38 5.00 5.31

1996 Q1 7.00 5.06 6.81
Q2 7.75 6.50 7.38
Q3 7.50 6.88 7.00
Q4 7.00 5.50 5.75
</TABLE>

ASSETS UNDER MANAGEMENT (millions)

AVERAGE ANNUAL TOTAL RETURN

Value of of $10,000 Investment on January 1, 1991
-------------------------------------------------
Year-End Value
-------- -----
<S> <C>
1991 $ 8,182
1992 10,000
1993 17,273
1994 13,636
1995 19,318
1996 20,909
</TABLE>

*The Company was spun-off from Allied Capital Corporation on December 31, 1990

A $10,000 investment in Allied Capital Advisers, Inc. as of 1/1/91 was worth
$20,909 at the end of 1996, a 13.1% average annual total return over this
period.
<PAGE> 2
Allied Capital Advisers, Inc.

COMPANY PROFILE

Allied Capital Advisers, Inc. is a registered investment adviser managing the
assets of public and private investment entities dedicated to the finance of
growing businesses. The Company's objective is to continue to increase its
assets under management and deliver strong returns to its shareholders and its
managed entities.

FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>

December 31,
(in thousands, except per share amounts) 1996 1995
- --------------------------------------------------------------------------
<S> <C> <C>
Total Revenue $ 17,070 $ 15,443
Net Income $ 2,802 $ 2,435
Earnings Per Share $ 0.28 $ 0.25
Total Assets $ 17,523 $ 14,776
Shareholders' Equity $ 11,051 $ 8,987
Weighted Average Number of Shares
and Share Equivalents Outstanding 9,858 9,676
Assets Under Management $764,000 $670,000
</TABLE>

Allied Capital Advisers, Inc.
1
<PAGE> 3
Allied Capital Advisers, Inc.

SELECTED CONSOLIDATED FINANCIAL DATA

<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
For the Years Ended December 31,
(in thousands, except per share amounts) 1996 1995 1994 1993 1992(1)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
OPERATIONS
Total revenue $ 17,070 $ 15,443 $ 12,152 $ 8,358 $ 5,187
Income (loss) before income taxes $ 4,747 $ 4,219 $ 1,966 $ 314 $ (951)
Per share $ 0.48 $ 0.44 $ 0.21 $ 0.03 $ (0.14)
Net income (loss) $ 2,802 $ 2,435 $ 1,294 $ 143 $ (673)
Per share $ 0.28 $ 0.25 $ 0.14 $ 0.02 $ (0.10)
Assets under management $764,000 $670,000 $569,000 $493,000 $436,000
Weighted average number of shares
and share equivalents outstanding 9,858 9,676 9,527 9,550 6,965
- ------------------------------------------------------------------------------------------------------------------------
FINANCIAL POSITION
Total assets $ 17,523 $ 14,776 $ 10,841 $ 7,888 $ 6,369
Deferred compensation $ 2,658 $ 2,377 $ 1,950 $ 1,614 $ 1,359
Total liabilities $ 6,472 $ 5,789 $ 4,981 $ 3,349 $ 2,882
Shareholders' equity(2) $ 11,051 $ 8,987 $ 5,860 $ 4,539 $ 3,487
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>

(1) The financial statements prior to 1993 have been restated to reflect the
adoption of Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes."
(2) The Company has not paid any dividends to shareholders.

Allied Capital Advisers, Inc.
9
<PAGE> 4
Allied Capital Advisers, Inc.

MANAGEMENT'S DISCUSSION AND ANALYSIS

The following discussion should be read in conjunction with the financial
statements and notes thereto included elsewhere in this report.

LIQUIDITY AND CAPITAL RESOURCES

At December 31, 1996, Allied Capital Advisers, Inc. and its subsidiary (the
Company) had $5.1 million in cash and cash equivalents. Current assets were
$10.4 million compared to current liabilities of $3.8 million.

The Company is a service company and does not have a significant budget for
capital expenditures. Capital resources available at December 31, 1996 appear
adequate to satisfy future operating needs. There are no known demands or
uncertainties that might cause the Company to have an increased or decreased
demand for liquidity.

Capital expenditures for 1996 were $399,000 as compared to $390,000 in 1995,
and have been largely due to the purchase of computer equipment. In 1994, the
Company purchased an office building in Vienna, Virginia for $3.6 million.

RESULTS OF OPERATIONS

COMPARISON OF 1996 TO 1995

David Gladstone stepped down as Chairman and Chief Executive Officer in early
1997. Mr. Gladstone also resigned as a director of the Company in 1997 and will
not stand for reelection at the Company's annual meeting of shareholders
scheduled to be held in May 1997.

The Company's board of directors appointed William L. Walton as the Company's
new Chairman and Chief Executive Officer. Mr. Walton has been affiliated with
the Allied Capital companies for more than ten years, both as a director of the
Company and as a past director of Allied Capital Corporation.

Net income increased 15% to $2.8 million or $0.28 per share in 1996 from $2.4
million or $0.25 per share in 1995. Investment advisory and management fee
revenue increased to $15.8 million in 1996 compared to $14.4 million in 1995,
representing a 10% increase. The increase in net income and investment advisory
fee revenue resulted from the Company being able to continue to increase the
assets of the various companies under its management. Total assets under
management increased to approximately $764 million at the end of 1996 from
approximately $670 million at December 31, 1995. This represents a 14% increase
in assets under management. The investment advisory and management fees charged
are pursuant to investment advisory and management agreements and the fees may
vary depending upon the particular agreement, and such fees range from 0.5% to
3.0% on invested assets and are 0.5% on cash and temporary investments.

During 1996 and 1995 investment advisory and management fees as a percent of
total average assets under management was 2.2% and 2.3%, respectively. Included
in invested assets under management at December 31, 1996 are approximately $53
million in assets of a company that is co-managed by another investment
manager. The Company pays one-third of its management fees from this company to
the co-manager.

The Company from time to time will waive or adjust its investment advisory or
management fee percentages depending upon the type of investments of a company
under management. The Company and its managed fund will agree to a waiver or
adjustment of advisory and management fees when particular regulatory or
economic circumstances warrant. The Company believes that it is prudent to
waive or adjust its fees when market conditions dictate, and such action will
enhance the Company's investment advisory and management performance overall.

Included in its assets under management at December 31, 1996 and 1995 was
approximately $11.4 million and $20.0 million, respectively, from two private
venture partnerships. These partnerships are no longer making new investments,
and as a result, assets under management will decline as they liquidate their
portfolios and make distributions to the partners.

Rental and other income from the office building in Virginia increased because
the building occupancy increased from 94% to 100% during 1996. The growth in
other income is a result of interest income earned on a higher average balance
of cash and temporary investments in 1996 when compared to 1995.

Allied Capital Advisers, Inc.
10
<PAGE> 5
Allied Capital Advisers, Inc.

MANAGEMENT'S DISCUSSION AND ANALYSIS

Total expenses increased by approximately $1.1 million or 10% during 1996.
Salaries and employee benefit expenses increased $0.7 million, or 9.3% compared
to 1995 expenses. The salaries and employee benefit expenses include an accrual
of $0.6 million relating to the resignation of the Company's former Chairman,
David Gladstone. General and administrative expenses increased by $281,000 or
13% during 1996. The increase in general and administrative expenses was
primarily due to the Company's participation in a competitive bid for two of
its managed companies to purchase approximately $500 million in loans secured
by real estate for which the Company incurred costs. These costs included a
$125,000 nonrefundable bid deposit and approximately $50,000 related to site
visits and due diligence costs, which would have been reimbursed by the managed
companies involved if the bid had been accepted.

Pre-tax income for 1996 increased by 12.5% or $528,000 over 1995 levels. This
increase in income resulted in an increase in income tax expense of $161,000.
The effective tax rate was 41% and 42% for 1996 and 1995, respectively. This
rate approximates the combination of federal and local statutory income tax
rates.

RESULTS OF OPERATIONS

COMPARISON OF 1995 TO 1994

Net income increased 88% to $2.4 million or $0.25 per share in 1995 from $1.3
million or $0.14 per share in 1994. Investment advisory and management fee
revenue increased to $14.4 million in 1995 compared to $11.7 million in 1994,
representing a 23% increase. The increase in net income and investment advisory
and management fee revenue resulted from the Company being able to continue to
increase the assets of the various companies under its management. Total assets
under management increased to approximately $670 million at the end of 1995
from approximately $569 million at December 31, 1994. During 1995 and 1994 the
advisory and management fees as a percent of total average assets under
management was 2.3% and 2.2%, respectively. Invested assets under management at
December 31, 1995, included approximately $60 million in assets of a company
that is co-managed by another investment manager. The Company pays one-third of
its management fees from this company to the co-manager.

Rental and other income increased 150% to $1.1 million in 1995. This increase
was due to earning a full year of rental income from operations of the office
building purchased by the Company in September 1994.

Total expenses increased by approximately $1 million or 10% during 1995.
Salaries and employee benefit expenses increased $1.1 million, or 16% compared
to 1994 expenses. This increase was the function of an increase in the number
of employees, restaffing certain departments with more experienced personnel
and salary and wage percentage increases.

General and administrative expenses decreased by $171,000 or 7% during 1995
because of continuing implementation of cost control measures throughout the
year.

Pre-tax income for 1995 increased by 115% or $2.3 million over 1994 levels.
This increase in income resulted in an increase of income tax expense of $1.1
million. The effective tax rate for 1995 was 42% which is higher than the 1994
effective tax rate of 34%. The 1995 effective tax rate approximated the
combination of federal and local statutory income tax rates. The 1994 effective
tax rate was lower than statutory rates due to a reduction in an allowance for
deferred tax assets.

Statements included in this report concerning the Company's future
prospects are "forward looking statements" under the Federal securities
laws. There can be no assurance that future results will be achieved
and actual results could differ materially from forecasts and
estimates.

Allied Capital Advisers, Inc.
11
<PAGE> 6
Allied Capital Advisers, Inc.

CONSOLIDATED BALANCE SHEET

<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
December 31,
(in thousands, except number of shares) 1996 1995
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 5,060 $ 4,386
Investment advisory and management fees receivable 4,282 4,067
Due from affiliates 695 609
Other current assets 412 490
----------------------------
Total current assets 10,449 9,552
Property and equipment, net 4,279 4,273
Deferred compensation trust 1,514 --
Deferred income taxes 1,087 706
Other assets 194 245
----------------------------
Total assets $17,523 $14,776
============================

LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 497 $ 436
Accrued salaries and bonuses 2,580 1,981
Accrued employee benefits 533 502
Due to affiliates 204 324
Income taxes payable -- 169
----------------------------
Total current liabilities 3,814 3,412
Deferred compensation 2,658 2,377
----------------------------
Total liabilities 6,472 5,789
----------------------------
Contingencies
Shareholders' Equity:
Common stock; $0.001 par value; 20,000,000 shares authorized; 8,867,430 and
8,990,349 shares outstanding at December 31, 1996 and 1995, respectively 9 9
Additional paid-in capital 5,674 5,674
Retained earnings 6,106 3,304
Common stock held in deferred compensation trust (738) --
----------------------------
Total shareholders' equity 11,051 8,987
----------------------------
Total liabilities and shareholders' equity $17,523 $14,776
============================
</TABLE>

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

Allied Capital Advisers, Inc.
12
<PAGE> 7
Allied Capital Advisers, Inc.

CONSOLIDATED STATEMENT OF INCOME

<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
For the Years Ended December 31,
(in thousands, except per share amounts) 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue:
Investment advisory and management fees $15,827 $14,379 $11,727
Rental and other income 1,243 1,064 425
-----------------------------------------
Total revenue 17,070 15,443 12,152
-----------------------------------------

Expenses:
Salaries and employee benefits 8,774 8,031 6,929
General and administrative 2,516 2,235 2,406
Rent 640 639 636
Depreciation and amortization 393 319 215
-----------------------------------------
Total expenses 12,323 11,224 10,186
-----------------------------------------
Income before income taxes 4,747 4,219 1,966
Income tax expense 1,945 1,784 672
-----------------------------------------
Net income $ 2,802 $ 2,435 $ 1,294
=========================================
Net income per share $ 0.28 $ 0.25 $ 0.14
=========================================
Weighted average number of shares and
share equivalents outstanding 9,858 9,676 9,527
=========================================
</TABLE>

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

Allied Capital Advisers, Inc.
13
<PAGE> 8
Allied Capital Advisers, Inc.

CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Number Common Additional Retained Note Deferred
of Shares Stock at Paid-in Earnings Receivable Compensation
(in thousands) Outstanding Par Value Capital (Deficit) from ESOP Trust Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
December 31, 1993 8,844 $ 9 $5,319 $ (425) $(364) $ -- $ 4,539
Net income -- -- -- 1,294 -- -- 1,294
Issuance of common stock 10 -- 27 -- -- -- 27
- ------------------------------------------------------------------------------------------------------------------------------------
December 31, 1994 8,854 9 5,346 869 (364) -- 5,860
Payments on note receivable from ESOP -- -- -- -- 364 -- 364
Net income -- -- -- 2,435 -- -- 2,435
Issuance of common stock 136 -- 328 -- -- -- 328
- ------------------------------------------------------------------------------------------------------------------------------------
December 31, 1995 8,990 9 5,674 3,304 -- -- 8,987
Net income -- -- -- 2,802 -- -- 2,802
Deferred compensation trust (123) -- -- - -- (738) (738)
- ------------------------------------------------------------------------------------------------------------------------------------
December 31, 1996 8,867 $ 9 $5,674 $6,106 $ -- $(738) $11,051
====================================================================================================================================
</TABLE>

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

Allied Capital Advisers, Inc.
14
<PAGE> 9
Allied Capital Advisers, Inc.

CONSOLIDATED STATEMENT OF CASH FLOWS

<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
For the Years Ended December 31,
(in thousands) 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income $ 2,802 $2,435 $ 1,294
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 393 319 215
Deferred income taxes (381) (174) (279)
Changes in assets and liabilities:
Investment advisory and management fees receivable (215) (891) (1,105)
Due to/from affiliates (206) (42) (301)
Other assets 129 (130) 258
Accounts payable and accrued expenses 61 (80) 105
Accrued salaries and bonuses 599 442 555
Accrued employee benefits 31 (346) 848
Income taxes payable (169) 169 (229)
Deferred compensation 281 427 336
---------------------------------------
Net cash provided by operating activities 3,325 2,129 1,697
---------------------------------------
Cash Flows from Investing Activities:
Acquisition of investments in deferred compensation trust (1,514) -- --
Capital expenditures (399) (390) (210)
Acquisition of real property -- -- (3,600)
---------------------------------------
Net cash used in investing activities (1,913) (390) (3,810)
---------------------------------------
Cash Flows from Financing Activities:
Acquisition of common stock in deferred compensation trust (738) -- --
Payments under note receivable from ESOP -- 364 --
Proceeds from sale of common stock -- 328 27
---------------------------------------
Net cash (used in) provided by financing activities (738) 692 27
---------------------------------------
Net increase (decrease) in cash and cash equivalents 674 2,431 (2,086)
Cash and cash equivalents, beginning of year 4,386 1,955 4,041
---------------------------------------
Cash and cash equivalents, end of year $ 5,060 $4,386 $ 1,955
=======================================
Supplemental Cash Flow Information:
Cash paid for income taxes $ 2,513 $1,719 $ 1,334
=======================================
</TABLE>

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

Allied Capital Advisers, Inc.
15
<PAGE> 10
Allied Capital Advisers, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION

ORGANIZATION. Allied Capital Advisers, Inc. (the Company) was incorporated in
the state of Maryland and is a registered investment adviser under the
Investment Advisers Act of 1940. Its principal business is acting as investment
adviser and manager to both public and private investment companies and real
estate investment trusts that specialize in investing in and lending to growing
businesses. The Company also generates rental income from an office building it
owns, through its wholly owned subsidiary, Allied Capital Property Corporation
(Allied Property).

PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include the
accounts of the Company and its wholly owned subsidiary. All intercompany
accounts and transactions have been eliminated in consolidation.

NOTE 2. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES

REVENUE RECOGNITION. Investment advisory and management fee revenue is
recognized based upon the contractual terms of the investment advisory or
management agreements in effect. The Company recognizes rental income based
upon the terms of tenant leases. Minimum rents and the rental income for leases
which contain rent abatements and contractual increases are recognized on a
straight-line basis over the initial term of the related lease.

CASH AND CASH EQUIVALENTS. The Company considers all highly liquid investments
purchased with an original maturity of three months or less to be cash
equivalents.

PROPERTY AND EQUIPMENT. Property and equipment are carried at cost.
Depreciation of property and equipment is computed using the straight-line
method over the estimated useful lives of the assets. Leasehold improvements
are amortized over the lives of the respective leases or the lives of the
improvements, whichever is shorter. The estimated useful lives of the building
and furniture and equipment is 30 and 3 to 7 years, respectively.

DEFERRED COMPENSATION TRUST. This trust is comprised of various securities,
including shares of the Company, money market funds, mutual funds and common
stock of companies under management of the Company. These investments except
for the common stock of the Company, which is treated as treasury stock, are
accounted for as trading assets and accordingly these assets are recorded at
their fair market value with any unrealized gains or losses recorded currently.

INCOME TAXES. Deferred income taxes are determined using a liability approach
which takes into consideration the future tax consequences associated with
differences between the financial reporting and tax bases of assets and
liabilities. These differences for the Company relate primarily to the
recognition of depreciation and deferred compensation expenses.

NET INCOME PER SHARE. Net income per share is calculated using the weighted
average number of shares and share equivalents outstanding during each year.
Share equivalents included in the computation represent shares issuable upon
assumed exercise of stock options, which would have a dilutive effect in years
in which there are earnings.

STOCK BASED COMPENSATION. Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation," encourages, but does not require
companies to record compensation cost for stock-based employee compensation
plans at fair value. The Company has chosen to continue to account for
stock-based compensation using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and related Interpretations. Accordingly, compensation cost for
stock options is measured as the excess, if any, of the quoted market price of
the Company's stock at the date of the grant over the amount an employee must
pay to acquire the stock.

USE OF ESTIMATES. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts in the consolidated financial
statements and the related notes. Actual results could differ from these
estimates.

Allied Capital Advisers, Inc.
16
<PAGE> 11
Allied Capital Advisers, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

RECLASSIFICATIONS. Certain reclassifications have been made to the December 31,
1995 and 1994 financial statements in order to conform with the December 31,
1996 financial statement presentation.

NOTE 3. INVESTMENT ADVISORY AND
MANAGEMENT SERVICES

The Company has investment advisory or management agreements to manage the
assets of certain companies, the most significant of which include agreements
with Allied Capital Corporation, Allied Capital Corporation II, Allied Capital
Commercial Corporation, Business Mortgage Investors, Inc. and Allied Capital
Lending Corporation. The investment advisory or management agreements are
generally annual agreements and remain in effect as long as they continue to be
approved by the board of directors of the companies under management. These
agreements may be terminated at any time on sixty days' notice, without
penalty, by the managed companies' board of directors or by a vote of the
holders of a majority of the managed companies' outstanding shares, and these
agreements will terminate automatically in the event of their assignment.

The Company does not have an ownership interest in most of the companies it
manages; however, certain officers and directors of the Company are also
officers and directors of the companies managed, and therefore they may be
considered affiliates. The Company manages the day-to-day activities of these
companies pursuant to the investment advisory or management agreements and
provides personnel, administrative services and assistance, facilities and
other support. As set forth in the agreements, the Company pays certain
operating expenses, including compensation of the companies' officers and other
related personnel costs, office space, and equipment.

The Company receives advisory and management fees as set forth in the various
advisory or management agreements it has with the managed entities. The fees
charged pursuant to these agreements generally approximate 2.5 percent on
invested assets and 0.5 percent on interim investments, cash and cash
equivalents on an annual basis. The Company receives payments of advisory and
management fees quarterly in arrears. At December 31, 1996, 1995 and 1994, the
Company managed assets of approximately $764,000,000, $670,000,000, and
$569,000,000, respectively. Included in invested assets at December 31, 1996,
1995 and 1994, were approximately $53,000,000, $60,000,000, and $37,000,000,
respectively, in assets of a company that is co-managed by another investment
manager. The Company pays one-third of its fees received from this company to
the co-manager.

The Company from time to time will waive or adjust its advisory or management
fees, given certain regulatory or economic circumstances. The Company believes
that it is prudent to waive or adjust its fees when market conditions dictate
such an adjustment, and such actions will enhance the Company's investment
advisory and management performance overall. The Company has adjusted its fee
schedule with Allied Capital Commercial Corporation to provide a range of fees
charged on new loans originated. The range of fees for loans originated in 1996
was from 1 percent to 3.5 percent and the range of fees for new loans
originated beginning January 1, 1997 is from 0.5 percent to 3.0 percent. The
Company maintains a quarterly cap on the fees for those assets of 2.5 percent
on an annual basis. The weighted average advisory and management fees as a
percent of average total assets under management equaled 2.2 percent, 2.3
percent, and 2.2 percent for the years ended December 31, 1996, 1995, and 1994,
respectively.

Allied Capital Commercial Corporation and Business Mortgage Investors, Inc. are
real estate investment trusts whose terms as corporations are perpetual;
however, Allied Capital Commercial Corporation will undertake to include in its
proxy statement, and stockholders will have the opportunity to consider and
vote on a voluntary liquidation of Allied Capital Commercial Corporation in the
years 2000, 2003 and 2006. Shareholders of Business Mortgage Investors, Inc.
will have a similar opportunity to consider liquidation in the year 2000. Of
its total assets under management at December 31, 1996, the combined assets of
Allied Capital Commercial Corporation and Business Mortgage Investors, Inc.
equaled 54 percent.

The Company entered into a servicing agreement with Allied Capital Funding,
L.L.C. (Funding) in 1995 to service certain mortgage loans. Funding is owned by
Allied Capital Commercial Corporation and Business Mortgage Investors, Inc.
Pursuant to the servicing agreement, the borrowers' payments due under the
mortgages, including principal,

Allied Capital Advisers, Inc.
17
<PAGE> 12
Allied Capital Advisers, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

interest and escrow amounts, are forwarded to the Company and are held in trust
accounts in the Company's name until remitted in accordance with the servicing
agreement to the appropriate parties. The cash in the trust accounts as of
December 31, 1996 and 1995 equaled $7,885,000 and $1,844,000, respectively, and
is not reflected on the accompanying consolidated balance sheet. The Company
receives no incremental revenue from this servicing arrangement as the Company
receives investment management fees from Allied Capital Commercial Corporation
and Business Mortgage Investors, Inc.

The Company also manages two private investment partnerships that are no longer
making investments and are in the process of liquidation. The combined assets
of these partnerships at December 31, 1996 and 1995 represented 1.5 percent and
3 percent, respectively, of total assets under management.

NOTE 4. REAL ESTATE OPERATIONS

Allied Property acquired real property consisting of land and an office
building located in Vienna, Virginia from an unrelated party in a cash
transaction which was consummated on September 13, 1994 and was effective
September 1, 1994. The $3,600,000 purchase price of the property was paid from
cash and cash equivalents. The consolidated statement of income includes the
revenue and expenses generated from the building operations for the four month
period ended December 31, 1994 and for the years ended December 31, 1995 and
1996. The office building has approximately 58,000 rentable square feet and all
rentable space was leased as of December 31, 1996. The tenants' leases are
effective through various dates over the next several years and certain leases
contain renewal options.

Rental income for the years ended December 31, 1996 and 1995 was $916,000 and
$828,000, respectively. Rental income for the four months ended December 31,
1994 was $270,000. Total expenses for the years ended December 31, 1996 and
1995 were $506,000 and $486,000, respectively. Total expenses for the four
months ended December 31, 1994 were $122,000. These expenses have been included
in general and administrative expenses on the accompanying consolidated
statement of income.

NOTE 5. PROPERTY AND EQUIPMENT

Property and equipment as of December 31, 1996 and 1995 consisted of the
following:

<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
(in thousands) 1996 1995
- ----------------------------------------------------------------------
<S> <C> <C>
Land $ 1,097 $ 1,097
Building and tenant improvements 2,585 2,513
Furniture and equipment 1,797 1,623
Leasehold improvements 406 318
-----------------------
5,885 5,551
Accumulated depreciation
and amortization (1,606) (1,278)
-----------------------
Property and equipment, net $ 4,279 $ 4,273
=======================
- ----------------------------------------------------------------------
</TABLE>

Maintenance and repairs are charged to expense as incurred. Major renewals and
betterments which substantially extend the useful life of the property are
capitalized. Upon sale or other disposition of assets, the cost and related
accumulated depreciation and amortization are removed from the accounts and the
resulting gain or loss, if any, is reflected in income.

NOTE 6. DEFERRED COMPENSATION TRUST

The Company established a "Rabbi" trust (Trust) for its deferred compensation
plan in December 1996, and transferred $2,252,000 in cash to the Trust. The
Trust has made investments in various securities, including 122,919 shares of
the Company's common stock, which is accounted for as treasury stock in the
amount of $738,000. The remaining investment portfolio consists of investments
in money market funds, mutual funds and common stocks of which are under
management of the Company, totaling $734,000, $288,000, and $492,000,
respectively. Any increases or decreases in assets of the Trust are fully
offset by changes in the liability for deferred compensation.

All assets in the Trust are subject to the Company's general creditors in the
event of bankruptcy or insolvency.

Allied Capital Advisers, Inc.
18
<PAGE> 13
Allied Capital Advisers, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 7. DEBT

The Company has a secured revolving line of credit agreement with a bank,
whereby the Company can borrow up to $1,000,000 limited to 70 percent of the
accrued advisory and management fees receivable. Borrowings under this
agreement are subject to the bank's prime rate plus 25 basis points. This
agreement expires May 31, 1997. The Company did not have any borrowings
outstanding under this agreement as of December 31, 1996 and 1995.

NOTE 8. INCOME TAXES

The following is a summary of the components of income tax expense:

<TABLE>
<CAPTION>
- ---------------------------------------------------------------
For the Years Ended December 31,
(in thousands) 1996 1995 1994
- ---------------------------------------------------------------
<S> <C> <C> <C>
Federal
Current $1,760 $1,477 $ 726
Deferred (281) (146) (224)
Local
Current 565 481 246
Deferred (99) (28) (76)
------------------------------
Income tax expense $1,945 $1,784 $ 672
==============================
- ----------------------------------------------------------------
</TABLE>

The differences between income tax expense computed using the statutory Federal
income tax rate and that shown in the consolidated statement of income are
summarized below:

<TABLE>
<CAPTION>
- -------------------------------------------------------------------------
For the Years Ended December 31,
1996 1995 1994
- -------------------------------------------------------------------------
<S> <C> <C> <C>
Computed tax expense at statutory rate 34.0% 34.0% 34.0%
Local taxes, net of Federal tax benefit 6.6 6.5 7.1
Deferred tax asset valuation adjustment -- (0.6) (4.8)
Other 0.4 2.4 (2.1)
----------------------------
Income tax expense 41.0% 42.3% 34.2%
============================
- -------------------------------------------------------------------------
</TABLE>

The components of the net deferred tax asset as of December 31, 1996 and 1995
are as follows:

<TABLE>
<CAPTION>
- ---------------------------------------------------------------
(in thousands) 1996 1995
- ---------------------------------------------------------------
<S> <C> <C>
Deferred compensation $ 899 $759
Compensation accrual 209 --
Other 69 37
Valuation allowance (90) (90)
-------------------
Net total deferred tax asset $1,087 $706
===================
- ---------------------------------------------------------------
</TABLE>

The largest component of the deferred tax asset is generated from accrued
deferred compensation expense which is not deductible for tax purposes until
paid. The Company believes that it is more likely than not that the results of
future operations will generate sufficient taxable income to realize
substantially all of the tax benefit of this deduction when the deferred
compensation is paid; however, the Company evaluates the adequacy of the
valuation allowance against the deferred tax asset on an ongoing basis.

NOTE 9. EMPLOYEE BENEFIT PLANS

EMPLOYEE STOCK OWNERSHIP PLAN. The Company has a qualified employee stock
ownership plan (ESOP) available to all employees who meet the eligibility
requirements. The plan contains a money purchase pension plan feature, which
requires a defined contribution of 10 percent of the eligible employee's wages,
and a stock bonus plan feature which allows the Company to make a discretionary
contribution of up to an additional 15 percent of the eligible employee's
wages. As of December 31, 1996 the ESOP held 1,396,948 shares 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, 1996, 1995, and 1994 was $1,018,000, $864,000, and $848,000,
respectively, net of forfeitures of $36,000, $180,000, and $124,000 in 1996,
1995 and 1994, respectively.

Allied Capital Advisers, Inc.
19
<PAGE> 14
Allied Capital Advisers, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In connection with the Company's 1991 and 1992 rights offerings, the ESOP
purchased a total of 1,960,763 shares of common stock for approximately
$3,186,000 and the Company received $2,036,000 in cash and a note receivable
from the ESOP in the amount of $1,150,000. During 1995, the ESOP paid the
remaining outstanding balance due under the note to the Company.

Effective January 1, 1997, the Company revised its compensation structure. The
board of directors of the Company modified the mandatory contribution related
to the money purchase pension plan of the ESOP from a 10 percent contribution
to a 5 percent contribution for eligible employees. The board of directors has
also decided not to continue the 15 percent contribution. The restructure is
not anticipated to have any significant impact on total compensation expense as
reductions to ESOP contributions are expected to be offset by increases in
current cash wages.

DEFERRED COMPENSATION PLAN. The Company has a deferred compensation plan.
Participants in the plan and the determination of their benefits are at the
discretion of the board of directors of the Company as of December 31, 1996.
Total deferred compensation expense including interest allocated to the
participants' accounts on the unfunded deferred compensation liabilities for
the years ended December 31, 1996, 1995, and 1994 was $503,000, $460,000, and
$336,000, respectively. Interest is payable on any unfunded deferred
compensation liability. The interest rate for the years ended December 31, 1995
and 1994 and for the eight months ended August 31, 1996 was the prime interest
rate. The interest rate for the four months ended December 31, 1996 was 5
percent.

NOTE 10. NOTES RECEIVABLE

The Company had outstanding loans totaling $40,000 as of December 31, 1996 and
1995, respectively, to officers of the Company. These loans mature in 2001 and
bear interest at 6.7 percent annually. These notes are included in other assets
on the accompanying consolidated balance sheet.

NOTE 11. STOCK OPTIONS

The shareholders approved an incentive stock option plan which provides for the
granting of options on up to 1,999,580 shares of the Company's common stock.
The vesting provisions for individual option grants are determined at issuance
by the board of directors. Options may be granted to officers and directors at
a price not less than the market value on the date of grant and are exercisable
over a period of up to 10 years. Holders of 10 percent or more of the Company's
stock must exercise their options within a period of up to five years.

A summary of the activity in the plan for the years ended December 31, is as
follows:

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
(shares in thousands) 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------------------
WEIGHTED-AVG. Weighted-Avg. Weighted-Avg.
Options SHARES EXERCISE PRICE Shares Exercise Price Shares Exercise Price
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 1,457 $2.23 1,593 $2.24 1,497 $2.12
Granted 350 7.00 1 3.63 106 4.06
Exercised -- -- (135) 2.41 (10) 2.75
--------------------------------------------------------------------------------------
Outstanding at end of year 1,807 3.15 1,457 2.23 1,593 2.24
===================================================================
Options exercisable at year-end 1,308 2.73 1,115 2.29 1,175 2.28
===================================================================
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>

Allied Capital Advisers, Inc.
20
<PAGE> 15
Allied Capital Advisers, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table summarizes information about fixed options outstanding at
December 31, 1996:

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
(shares in thousands) Options Outstanding Options Exercisable
Number Weighted Average Weighted Number Weighted
Range of Outstanding Remaining Average Exercisable Average
Exercise Prices As of 12/31/96 Contractual Life Exercise Price As of 12/31/96 Exercise Price
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$1.88-$1.88 1,030 5.7 years $1.88 763 $1.88
$2.75-$3.75 361 5.6 $2.86 361 $2.86
$4.25-$4.25 66 7.3 $4.25 66 $4.25
$7.00-$7.00 350 9.5 $7.00 118 $7.00
----- -----
$1.88-$7.00 1,807 6.5 $3.15 1,308 $2.73
===== =====
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>

The Company accounts for this plan 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, the Company's net income and net
income per share would have been reduced to the following pro forma amounts:

<TABLE>
<CAPTION>
- -----------------------------------------------------------
Year Ended
December 31 1996 1995
- -----------------------------------------------------------
<S> <C> <C>
Net income:
As reported $2,802 $2,435
Pro forma $2,262 $2,435
Net income per share:
As reported $ 0.28 $0.25
Pro forma $ 0.23 $0.25
- -----------------------------------------------------------
</TABLE>

Because the method of accounting required by SFAS No. 123 has not been applied
to options granted prior to January 1, 1995, the resulting pro forma
compensation cost may not be representative of that to be expected in future
years. 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 used for grants; risk-free interest rate of 6 percent for
both 1996 and 1995; expected dividend yield of zero percent for 1996 and 1995;
expected life of 5 years for all options granted in 1996 and 1995; expected
volatility of 42 percent for 1996 and 1995.

NOTE 12. OPERATING LEASES

The Company leases office space under a noncancelable operating lease that
expires August 31, 1998. The minimum payments under this lease for the years
ended December 31, 1997 and 1998 will be $657,000 and $449,000, respectively.

In connection with the Company's building operations, future minimum rental
receipts under noncancelable operating leases for the years ended December 31,
are as follows:

<TABLE>
<CAPTION>
- ---------------------------------------------
Year Amount
- ---------------------------------------------
<S> <C>
1997 $918,000
1998 332,000
1999 90,000
2000 62,000
2001 20,000
Thereafter --
- ---------------------------------------------
</TABLE>

Allied Capital Advisers, Inc.
21
<PAGE> 16
Allied Capital Advisers, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 13. CONCENTRATIONS OF CREDIT RISK

The investment portfolio of the managed companies consist primarily of
securities issued by small, privately held companies located throughout the
United States. These types of investments, by their nature, carry a high degree
of business and financial risk. The managed companies seek to achieve current
income by providing debt, mezzanine and equity financing primarily for small,
privately owned companies to compensate for these risks. The value of the
investment portfolios of the managed companies directly impacts the level of
advisory fees the Company recognizes.

The Company's cash is held in financial institutions and, at times, cash
amounts may be in excess of the federally insured limit. As of December 31,
1996 and 1995, the Company had purchased U.S. government securities from Signet
Bank, N.A. under agreements to resell within seven business days of the
purchase date. Cash and cash equivalents consisted of the following:

<TABLE>
<CAPTION>
- --------------------------------------------------------
(in thousands) 1996 1995
- --------------------------------------------------------
<S> <C> <C>
Cash $ 545 $ 266
Repurchase agreements 4,515 4,120
------------------
Total $5,060 $4,386
==================
- --------------------------------------------------------
</TABLE>

NOTE 14. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

Statement of Financial Accounting Standards No. 107, "Fair Value of Financial
Instruments," requires disclosures about the fair value for all financial
instruments. All of the Company's financial instruments are held or issued for
purposes other than trading. The following methods and assumptions were used
to estimate the fair value of each class of financial instrument for which it
is practical to estimate that value:

CASH AND CASH EQUIVALENTS AND OTHER SHORT-TERM INVESTMENTS. The carrying amount
approximates fair value because of the short maturity of these instruments as
of December 31, 1996.

DEFERRED COMPENSATION TRUST. Investments held in the deferred compensation
trust are carried at their fair market value. Fair market value is determined
based upon the quoted market price as of the end of the reporting period.
Investments in the trust as of December 31, 1996 consisted of the following:

<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
Investment Cost Value
- ---------------------------------------------------------------------------
<S> <C> <C>
Company Stock $ 738,000 $ 738,000
Allied Capital Corporation 123,000 123,000
Allied Capital Corporation II 123,000 123,000
Allied Capital Lending Corporation 123,000 123,000
Allied Capital Commercial Corporation 123,000 123,000
RIMCO Small Capital Stock Fund 188,000 188,000
RIMCO Stock Fund 100,000 100,000
RIMCO Money Market Fund 734,000 734,000
-------------------------------
$2,252,000 $2,252,000
===============================
</TABLE>

NOTE 15. CONTINGENCIES

The Company is party to certain lawsuits in connection with its business. While
the outcome of these legal proceedings cannot at this time be predicted with
certainty, management does not expect that these actions will have a material
effect upon the financial condition of the Company.

Allied Capital Advisers, Inc.
22
<PAGE> 17
Allied Capital Advisers, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 16. QUARTERLY FINANCIAL HIGHLIGHTS (UNAUDITED)

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
1996
(in thousands, except per share amounts) QTR 1 QTR 2 QTR 3 QTR 4
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total revenue $4,173 $4,194 $4,382 $4,321
Income before taxes $1,244 $1,354 $1,372 $ 777
Net income $ 732 $ 788 $ 807 $ 475
Net income per share $ 0.07 $ 0.08 $ 0.08 $ 0.05
- --------------------------------------------------------------------------------------
<CAPTION>
- --------------------------------------------------------------------------------------
1995
Qtr 1 Qtr 2 Qtr 3 Qtr 4
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total revenue $3,580 $3,874 $3,889 $4,100
Income before taxes $ 890 $1,042 $1,147 $1,140
Net income $ 523 $ 611 $ 659 $ 642
Net income per share $ 0.06 $ 0.06 $ 0.07 $ 0.07
- --------------------------------------------------------------------------------------
</TABLE>

Allied Capital Advisers, Inc.
23
<PAGE> 18
Allied Capital Advisers, Inc.

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors and Shareholders
of Allied Capital Advisers, Inc. and Subsidiary:

We have audited the accompanying consolidated balance sheets of Allied Capital
Advisers, Inc. and subsidiary as of December 31, 1996 and 1995, and the related
consolidated statements of income, shareholders' equity, and cash flows for
each of the three years in the period ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements 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. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Allied Capital Advisers, Inc.
and subsidiary as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996 in conformity with generally accepted accounting principles.

/s/ ARTHUR ANDERSEN LLP

Washington, DC
February 16, 1997

Allied Capital Advisers, Inc.
24
<PAGE> 19
Allied Capital Advisers, Inc.

DIRECTORS AND OFFICERS*

<TABLE>
<S> <C> <C>
DIRECTORS

William L. Walton(1,4) G. Cabell Williams III Kristine M. Lansing
Chairman of the Board & Executive Vice President Vice President & Assistant Secretary
Chief Executive Officer
Thomas H. Westbrook Robert M. Monk
David Gladstone Executive Vice President Vice President
Vice Chairman
Arthur S. Cooper Pete Papas
Joan M. Sweeney(1) Senior Vice President Vice President
President & Chief Operating Officer
Robert J. Corry Penni F. Roll
Brooks H. Browne(3) Senior Vice President Vice President & Assistant Controller
President, Environmental Enterprises
Assistance Fund Tricia B. Daniels Ruth J. Semple
Senior Vice President & Secretary Vice President
Swep T. Davis(2)
President, Tyone Partners LLP Richard E. Fearon, Jr. Julie E. Svoboda
Senior Vice President Vice President & Assistant Controller
Robert E. Long(2,3,4)
President & Chief Executive Officer, Michael J. Grisius Gay S. Truscott
Business News Network, Inc. Senior Vice President Vice President

George C. Williams(1,2,4) John J. Hall, Jr. Donald L. Benfer
Financial Consultant Senior Vice President Assistant Vice President

(1) Executive Committee Philip A. McNeill Jeff E. Erhardt
(2) Audit Committee Senior Vice President Assistant Vice President
(3) Compensation Committee
(4) Nominating Committee Mary E. Olson Peter C. Fisher
Senior Vice President Assistant Vice President
*As of March 1, 1997
Carr T. Preston Mohamoud M. Garad
OFFICERS Senior Vice President Assistant Vice President

William L. Walton Suzanne V. Sparrow Alexandra M. Johns
Chairman of the Board & Senior Vice President, Investor Relations & Assistant Vice President
Chief Executive Officer Assistant Secretary
Donna B. Natale
Joan M. Sweeney Kelly A. Anderson Assistant Vice President &
President & Chief Operating Officer Vice President, Corporate Controller & Assistant Secretary
Assistant Treasurer
Jon A. DeLuca Peter M. Ramsey
Executive Vice President, Treasurer & John W. Benton Assistant Vice President
Chief Financial Officer Vice President
Michael R. Sifers
Katherine C. Marien Michael G. Carey Assistant Vice President
Executive Vice President Vice President
James P. Shevlin
John M. Scheurer Christina L. DelDonna Assistant Vice President
Executive Vice President Vice President, Controller &
Assistant Treasurer Thomas R. Salley III
George Stelljes III Assistant Secretary
Executive Vice President
</TABLE>

QUARTERLY STOCK PRICE

The following table sets forth the high and low bid prices of the Company's
common stock by calendar quarter during 1996 and 1995. The quotations
represent interdealer quotations and do not include markups, markdowns or
commissions and may not necessarily represent actual transactions.

<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
1996 1995
HIGH LOW High Low
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
First Quarter $7.00 $5.06 $4.00 $3.25
Second Quarter $7.75 $6.50 $5.00 $3.63
Third Quarter $7.50 $6.88 $5.38 $4.63
Fourth Quarter $7.00 $5.50 $5.38 $5.00
- ----------------------------------------------------------------------------
</TABLE>

<PAGE> 1
EXHIBIT 23

ARTHUR ANDERSEN LLP

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

As independent public accountants, we hereby consent to the incorporation by
reference in this Form 10-K of our report dated February 16, 1997 included in
Allied Capital Advisers, Inc.'s Annual Report to security holders. It should be
noted that we have not audited any financial statements of the company
subsequent to December 31, 1996 or performed any audit procedures subsequent to
the date of our report.

/s/ ARTHUR ANDERSEN LLP

Washington, D.C.
March 27, 1997
<PAGE> 2
ARTHUR ANDERSEN LLP

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

As independent public accountants we hereby consent to the incorporation by
reference in the registration statement on Form S-8 File No. 33-17885, of our
report dated February 16, 1997 incorporated by reference in Allied Capital
Advisers, Inc.'s Form 10-K for the year ended December 31, 1996 and to all
references to our Firm included in such registration statement.

/s/ ARTHUR ANDERSEN LLP

Washington, D.C.
March 27, 1997

<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheet, statement of operations and cash flows and is
qualified in its entirety by reference to such Form 10-K for the year ended
December 31, 1996.
</LEGEND>
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 5,060
<SECURITIES> 0
<RECEIVABLES> 4,282
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 10,449
<PP&E> 5,885
<DEPRECIATION> 1,606
<TOTAL-ASSETS> 17,523
<CURRENT-LIABILITIES> 3,814
<BONDS> 0
0
0
<COMMON> 9
<OTHER-SE> 11,042
<TOTAL-LIABILITY-AND-EQUITY> 17,523
<SALES> 0
<TOTAL-REVENUES> 17,070
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 12,323
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 4,747
<INCOME-TAX> 1,945
<INCOME-CONTINUING> 2,802
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,802
<EPS-PRIMARY> 0.28
<EPS-DILUTED> 0.28

</TABLE>