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




                           ALLIED CAPITAL CORPORATION
                            (a Maryland corporation)




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


                                     BYLAWS


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

    As adopted by the Board of Directors on December 21, 1990 and as amended
           by the Board of Directors on May 7, 1992, October 19, 1994,
               November 8, 1995, May 1, 1997 and August 13, 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.  Presiding Officer............................................2
                 -----------------
     Section 7.  Quorum.  Adjournments........................................2
                 ---------------------
     Section 8.  Voting.......................................................3
                 ------
     Section 9.  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
                 -------------------
     Section 2.  Nominating Committee.........................................6
                 --------------------
     Section 3.  Compensation Committee.......................................6
                 ----------------------
     Section 4.  Audit Committee..............................................6
                 ---------------
     Section 5.  Advisory Committee...........................................7
                 ------------------
     Section 6.  Other Committees.............................................7
                 ----------------
     Section 7.  Procedure; Notice; Meetings..................................8
                 ---------------------------
     Section 8.  Quorum; Vote.................................................8
                 ------------
     Section 9.  Appointments; Vacancies; Changes; Discharges.................8
                 --------------------------------------------
     Section 10.  Tenure......................................................8
                  ------
     Section 11.  Compensation................................................8
                  ------------
     Section 12.  Action by Consent...........................................8
                  -----------------
     Section 13.  Meetings by Telephone or Similar Communications.............9
                  -----------------------------------------------
ARTICLE V   NOTICES ..........................................................9
</TABLE>

                                        i
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<TABLE>
<S>                                                                         <C>
     Section 1.  Form; Delivery...............................................9
                 --------------
     Section 2.  Waiver.......................................................9
                 ------
ARTICLE VI  OFFICERS .........................................................9

     Section 1.  Designations.................................................9
                 ------------
     Section 2.  Term of Office; Removal.....................................10
                 -----------------------
     Section 3.  Compensation................................................10
                 ------------
     Section 4.  The Chairman of the Board...................................10
                 -------------------------
     Section 5.  The President...............................................10
                 -------------
     Section 6.  The Managing Directors......................................11
                 ----------------------
     Section 7.  Principals..................................................11
                 ----------
     Section 8.  Vice Presidents.............................................11
                 ---------------
     Section 9.  The Secretary...............................................12
                 -------------
     Section 10.  The Assistant Secretary....................................12
                  -----------------------
     Section 11. Associates..................................................12
                 ----------
     Section 12.  The Treasurer..............................................12
                  -------------
     Section 13.  The Assistant Treasurer....................................12
                  -----------------------
ARTICLE VII INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES AND AGENTS.....13

     Section 1.  Generally...................................................13
                 ---------
     Section 2.  Limitation for Disabling Conduct............................13
                 --------------------------------
     Section 3.  Advisory Committee Members..................................15
                 --------------------------
ARTICLE VIII STOCK CERTIFICATES..............................................15

     Section 1.  Form of Signatures; Statements..............................15
                 ------------------------------
     Section 2.  Registration of Transfer....................................16
                 ------------------------
     Section 3.  Registered Stockholders.....................................16
                 -----------------------
     Section 4.  Location of Stock Ledger....................................16
                 ------------------------
     Section 5.  Record Date.................................................17
                 -----------
     Section 6.  Lost, Stolen or Destroyed Certificates......................17
                 --------------------------------------
ARTICLE IX  GENERAL PROVISIONS...............................................17

     Section 1.  Dividends...................................................17
                 ---------
     Section 2.  Reserves....................................................17
                 --------
     Section 3.  Fiscal Year.................................................18
                 -----------
     Section 4.  Seal........................................................18
                 ----
ARTICLE X   AMENDMENTS ......................................................18

CERTIFICATE .................................................................19
-----------
</TABLE>

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<PAGE>   4


                                     BYLAWS

                                    ARTICLE I

                                     OFFICES

            Section 1. Office. The principal office of the Corporation shall be
at the offices of The Prentice-Hall Corporation System, Maryland, which is
located at 11 East Chase Street, Baltimore, Maryland 21202. 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
Board of Directors 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

                                       1


<PAGE>   5

entitled to cast votes at 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. 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 7. 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 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.

                                       2
<PAGE>   6
            Section 8.  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 9. 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 greater than ten or
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 or these Bylaws, subject to the foregoing limitation. The tenure
of office of a director shall not be affected by any decrease in the number 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 

                                       3

<PAGE>   7
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) appointing any director to a committee of the Board 
of Directors pursuant to Article IV of these Bylaws;

                        (b) 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 principal or above; and

                        (c) 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.

                        (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.

                                       4

<PAGE>   8
            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 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 (except for those instances where the Investment 

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<PAGE>   9

Company Act of 1940 (the "1940 Act") requires actions be taken by the
Corporation's Board of Directors in person, including without limitation the
selection of independent auditors and the approval of an Investment Agreement.).

            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 (except for those instances where the 1940 Act
requires actions be taken by the Corporation's Board of Directors in person,
including without limitation the selection of independent auditors and the
approval of an Investment Agreement.).

                                   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 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 have the exclusive right to
recommend candidates for election as directors to the Board of Directors.

            Section 3. Compensation Committee. The Board of Directors may
appoint from its membership a Compensation Committee consisting of 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 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.

            Section 4. Audit Committee. The Board of Directors may appoint from
its membership an Audit Committee consisting of not fewer than three members,
one of whom shall be 

                                       6

<PAGE>   10

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.  Advisory Committee.

                        (a) The Board of Directors may appoint individuals of
its selection to an Advisory Committee to assist the Board of Directors in
the conduct of its duties and responsibilities. The Advisory Committee may meet
in conjunction with meetings of the Board of Directors and shall serve as
advisers and counselors to the Board of Directors as the members thereof shall
determine best serves the Corporation's interests.

                        (b) The Board of Directors, by resolutions adopted by a
majority of the whole Board, may appoint an Advisory Committee complying
with the terms of Section 2(a)(i) of the 1940 Act and the regulations
promulgated thereunder, to provide advice and counsel in respect to investment
and loan transactions entered or contemplated by the Corporation or its
subsidiaries. The Advisory Committee may be composed of up to five persons, who
shall not be directors, officers, employees or agents of the Corporation or any
subsidiary or investment adviser thereof. Advisory Committee members shall be
entitled to indemnification under Article VII below. The Advisory Committee and
its members will have no voting power and no authority, as agent or otherwise,
to act on behalf of the Corporation, in respect of any matter; and directors
shall be under no obligation to accept or reject any particular item of advice
or counsel provided thereby. The Advisory Committee may be invited to hold
meetings jointly with meetings of directors. Any one or more members of the
Advisory Committee may be invited to attend meetings of the directors and may be
offered access to the same information and materials otherwise provided only to
directors. The Advisory Committee may render its advice in written or verbal
form, and the same may or may not be recorded.

            Section 6. 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).

                                       7

<PAGE>   11
            Section 7. 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.

            Section 8. 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 9. 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 10. 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 11. 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 12. 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.

                                      8

<PAGE>   12
            Section 13. 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, 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 Managing Directors, Principals, Vice Presidents, Associates
and such other officers and/or agents as deemed necessary or appropriate,
provided, however, that a person may hold the position of Associate without
being designated an officer of the Corporation. All officers of the Corporation
shall exercise such

                                       9

<PAGE>   13

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, 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 Managing Directors.
The Chairman, President and any Managing Director shall have the authority to
appoint a Secretary, Treasurer, and one or more Principals, Vice Presidents
and/or Associates who are officers of the Corporation, 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 other than by the Board of Directors may be removed by the
Board of Directors or the Chairman of the Board at any time. Such removal by the
Board or by the Chairman shall not prejudice 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, the President and any Managing Director, 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. 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, 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 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 

                                       10

<PAGE>   14

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.

            Section 6. The Managing Directors. The Managing Directors, subject
to the direction of the Board of Directors and reporting to the Chairman of the
Board and President, shall assist in the general charge of the business of the
Corporation and general supervision over its officers and agents. In the absence
of the Chairman of the Board or President, at the direction of the Board of
Directors, a Managing Director may preside at all meetings of the stockholders
and of the Board of Directors. Unless otherwise prescribed by the Chairman of
the Board or President, the Managing Directors 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 Managing Director 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. At the
direction of the Chairman of the Board or the President, a Managing Director may
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.

            Section 7. Principals. The Principals, if any, shall, in the absence
of the President and all Managing Directors or in the event of the disabilities
of all such persons, perform the duties and exercise the powers of the President
or a Managing Director and shall generally assist the President and any and all
Managing Directors and perform such other duties and have such other powers as
may from time to time be prescribed by the Board of Directors.

            Section 8. Vice Presidents. The Vice Presidents, if any, shall
generally assist the President and any and all Managing Directors and/or the
Principals as directed by such officers and perform such other duties and have
such other powers as may from time to time be prescribed by the Board of
Directors.

                                       11


<PAGE>   15
            Section 9. 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 10. 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 11. Associates. The Associates who are designated officers
of the Corporation, if any, shall assist the President, any and all Managing
Directors, Principals, and Vice Presidents of the Corporation as directed by
such officers and perform such other duties and have such other powers as may
from time to time be prescribed by the Board of Directors.

            Section 12. 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.

            Section 13. 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 

                                       12

<PAGE>   16

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 entity (including the Corporation's investment adviser) or 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, manager, partner, officer, trustee,
employee or agent or any similar title 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 or pursuant to the Articles of Incorporation.

                    (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 indemnify any director or officer of the
Corporation against any liability, nor shall any director or officer of the
Corporation be exculpated from 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 with respect to the permissibility of indemnification of a
director or officer of the Corporation because such director or officer has met
the applicable standard of conduct shall include a determination


                                       13
<PAGE>   17
that the liability for which such indemnification is sought did not arise by
reason of such person's disabling conduct. The determination required by this
Subsection 2(a) 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 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 for 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 or
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.

                                       14

<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.

            Section 3. Advisory Committee Members. The Corporation shall
indemnify any person appointed to any Advisory Committee pursuant to Article IV,
Section 5 hereof (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 member of the Advisory Committee of this Corporation, if the Board of
Directors determines that such person acted in good faith and in a manner such
person reasonably believed to be in or not opposed to the best interest of the
Corporation, and in the case of any criminal action or proceeding, that such
person had no reasonable cause to believe that such person's conduct was
unlawful.

                                  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 Managing Director or a Principal 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 

                                       15

<PAGE>   19

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 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 

                                       16

<PAGE>   20
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 7 of Article II; 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.

                                       17
<PAGE>   21

            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

            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.

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<PAGE>   22


                                   CERTIFICATE

            We, WILLIAM L. WALTON and TRICIA BENZ DANIELS, Chairman and
Secretary, respectively, of ALLIED CAPITAL CORPORATION (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 13th day of August, 1997.

                                       /s/ WILLIAM L. WALTON
                                       ------------------------------
                                       William L. Walton,
                                       Chairman
                                       
                                       /s/ TRICIA BENZ DANIELS
                                       ------------------------------
                                       Tricia Benz Daniels, Secretary

[Corporate Seal]

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