<PAGE>   1
                                   Form 10-Q

                       SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549

           Quarterly report pursuant to section 13 or 15(d) of the
                       Securities Exchange Act of 1934


For the quarterly period                                Commission file number:
ended SEPTEMBER 30, 1996                                         814-97        
      ------------------                                 ----------------------
                                                    

                          ALLIED CAPITAL CORPORATION             
         -----------------------------------------------------------
             (exact name of Registrant as specified in its charter)


       MARYLAND                                                53-0245085      
-----------------------                                  ----------------------
(State or jurisdiction of                                    (IRS Employer
incorporation or organization)                             Identification  No.)
                                                        

                       C/O ALLIED CAPITAL ADVISERS, INC.
                              1666 K STREET, N.W.
                                   9TH FLOOR
                            WASHINGTON, DC   20006              
               -----------------------------------------------
                    (Address of principal executive offices)


       Registrant's telephone number, including area code: (202) 331-1112
                                                           --------------


Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 12 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter periods as 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  
                                           --- -----  --  -----

On November 8, 1996 there were 7,026,013 shares outstanding of the Registrant's
common stock, $1 par value.
<PAGE>   2
                  ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
                                FORM 10-Q INDEX


<TABLE>
<S>                                                                                                       <C>
PART I. FINANCIAL INFORMATION                                                                           
                                                                                                        
  Item 1.  Financial Statements                                                                         
                                                                                                        
             Consolidated Balance Sheet as of September 30, 1996                                        
             and December 31, 1995  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    1
                                                                                                        
             Consolidated Statement of Operations - For the Three and Nine Months Ended                 
             September 30, 1996 and 1995  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    2
                                                                                                        
             Consolidated Statement of Changes in Net Assets - For the Nine Months                      
             Ended September 30, 1996 and 1995  . . . . . . . . . . . . . . . . . . . . . . . . . . . .    3
                                                                                                        
             Consolidated Statement of Cash Flows - For the Nine Months Ended                           
             September 30, 1996 and 1995  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    4
                                                                                                        
             Notes to Consolidated Financial Statements   . . . . . . . . . . . . . . . . . . . . . . .    5
                                                                                                        
  Item 2.  Management's Discussion and Analysis of Financial Condition                                  
             and Results of Operations  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    7
                                                                                                        
                                                                                                        
PART II.   OTHER INFORMATION                                                                            
                                                                                                        
  Item 1.  Legal Proceedings  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   10
                                                                                                        
  Item 2.  Changes in Securities  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   10
                                                                                                        
  Item 3.  Defaults Upon Senior Securities  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   10
                                                                                                        
  Item 4.  Submission of Matters to a Vote of Security Holders  . . . . . . . . . . . . . . . . . . . .   10
                                                                                                        
  Item 5.  Other Information  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   10
                                                                                                        
  Item 6.  Exhibits and Reports on Form 8-K   . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   10
                                                                                                        
  Signatures  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   11
</TABLE>
<PAGE>   3
                         PART I - Financial Information
Item 1.  Financial Statements

                  ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEET
                    (in thousands, except number of shares)

<TABLE>
<CAPTION>
                                                                        September 30, 1996         December 31, 1995
                                                                        ------------------         -----------------
                                                                           (unaudited)
 <S>                                                                           <C>                       <C>
 ASSETS
 Investments at Value:

   Loans and debt securities (cost: 1996 - $101,437; 1995 -                    $ 93,408                  $ 90,377
     $98,119). . . . . . . . . . . . . . . . . . . . . . . . . .  

     Equity securities (cost: 1996 - $19,275; 1995 - $15,039)  .                 34,369                    31,600
                                                                   
     Other investment assets (cost: 1996 - $1,441; 1995 -         
       $2,457)   . . . . . . . . . . . . . . . . . . . . . . . .                    243                     1,207
                                                                              ---------                   -------

          Total investments  . . . . . . . . . . . . . . . . . .                128,020                   123,184

 Cash and cash equivalents . . . . . . . . . . . . . . . . . . .                 30,219                    22,743

 Other assets  . . . . . . . . . . . . . . . . . . . . . . . . .                  3,305                     2,341
                                                                               --------                   -------

          Total assets . . . . . . . . . . . . . . . . . . . . .               $161,544                  $148,268
                                                                                =======                   =======


 LIABILITIES AND SHAREHOLDERS' EQUITY

 Liabilities:

   Debentures and notes payable  . . . . . . . . . . . . . . . .               $ 86,300                  $ 81,300

   Revolving line of credit  . . . . . . . . . . . . . . . . . .                      -                     1,500

   Dividends and distributions payable . . . . . . . . . . . . .                    165                     3,808

   Other liabilities . . . . . . . . . . . . . . . . . . . . . .                  2,877                     3,479
                                                                               --------                   -------

                                                                                 89,342                    90,087

 Redeemable preferred stock  . . . . . . . . . . . . . . . . . .                  1,000                     1,000

 Commitments and Contingencies

 Shareholders' Equity:

   Preferred stock of wholly owned subsidiary, $100 par
     value; 200,000 shares authorized, 60,000 shares issued and
     outstanding at 9/30/96 and 12/31/95 . . . . . . . . . . . .                  6,000                     6,000

   Common stock, $1 par value; 10,000,000 shares
     authorized; 7,026,013 and 6,198,138 shares
     issued and outstanding at 9/30/96 and 12/31/95  . . . . . .                  7,026                     6,198

   Additional paid-in capital  . . . . . . . . . . . . . . . . .                 51,103                    41,491

   Notes receivable from sale of common stock  . . . . . . . . .                   (735)                     (401)

   Net unrealized appreciation on investments  . . . . . . . . .                  5,867                     7,569

   Undistributed (distributions in excess of) accumulated                                                         
     earnings  . . . . . . . . . . . . . . . . . . . . . . . . .                  1,941                    (3,676)
                                                                                -------                  -------- 

        Total shareholders' equity   . . . . . . . . . . . . . .                 71,202                    57,181
                                                                                -------                  --------

        Total liabilities and shareholders' equity   . . . . . .               $161,544                  $148,268
                                                                                =======                   =======
</TABLE>


   THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS





                                       1
<PAGE>   4
                  ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENT OF OPERATIONS
                    (in thousands, except per share amounts)
                                  (unaudited)


<TABLE>
<CAPTION>
                                                                     For the Three Months Ended       For the Nine Months Ended
                                                                            September 30,                   September 30,
                                                                            ------------                    ------------ 

                                                                        1996            1995            1996            1995
                                                                        ----            ----            ----            ----
 <S>                                                                 <C>              <C>           <C>             <C>
 Investment income:

   Interest  . . . . . . . . . . . . . . . . . . . . . . . . . .       $3,015           $2,929        $10,240          $ 8,645

   Dividends . . . . . . . . . . . . . . . . . . . . . . . . . .          382              371          1,144            1,079

   Other income  . . . . . . . . . . . . . . . . . . . . . . . .           40              264            108              618
                                                                        -----            -----         ------           ------

     Total investment income . . . . . . . . . . . . . . . . . .        3,437            3,564         11,492           10,342
                                                                        -----            -----         ------           ------
 Expenses:

   Interest expense  . . . . . . . . . . . . . . . . . . . . . .        1,916            1,648          5,607            4,994

   Investment advisory fee . . . . . . . . . . . . . . . . . . .          754              731          2,192            2,077

   Other operating expenses  . . . . . . . . . . . . . . . . . .           19              286            586              987
                                                                        -----            -----         ------           ------

     Total expenses  . . . . . . . . . . . . . . . . . . . . . .        2,689            2,665          8,385            8,058
                                                                        -----            -----         ------           ------

 Net investment income . . . . . . . . . . . . . . . . . . . . .          748              899          3,107            2,284

 Net realized gain on investments  . . . . . . . . . . . . . . .        2,225            3,289          8,376            3,584
                                                                        -----            -----         ------           ------

 Net investment income before net unrealized
    appreciation (depreciation) on investments   . . . . . . . .        2,973            4,188         11,483            5,868


 Net unrealized appreciation (depreciation) on investments . . .        2,732           (1,099)        (1,702)           6,551
                                                                        -----           ------         ------           ------

 Net increase in net assets resulting from
    operations . . . . . . . . . . . . . . . . . . . . . . . . .       $5,705           $3,089        $ 9,781          $12,419
                                                                        =====            =====         ======           ======

 
 Earnings per common share . . . . . . . . . . . . . . . . . . .       $ 0.80           $ 0.49        $  1.41          $  1.97
                                                                        =====            =====         ======           ======


 Weighted average number of common shares and
    common share equivalents outstanding . . . . . . . . . . . .        7,056            6,193          6,839            6,207
                                                                        =====            =====         ======           ======
</TABLE>




   THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS





                                       2
<PAGE>   5
                  ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
                CONSOLIDATED STATEMENT OF CHANGES IN NET ASSETS
                    (in thousands, except per share amounts)
                                  (unaudited)


<TABLE>
<CAPTION>
                                                                                 For the Nine Months Ended
                                                                                       September 30,
                                                                                       ------------ 

                                                                                     1996             1995
                                                                                     ----             ----
 <S>                                                                              <C>              <C>
 Increase in net assets resulting from operations:

   Net investment income . . . . . . . . . . . . . . . . . . . . . . . . .        $ 3,107          $ 2,284

   Net realized gain on investments  . . . . . . . . . . . . . . . . . . .          8,376            3,584

   Net unrealized appreciation (depreciation) on investments . . . . . . .         (1,702)           6,551
                                                                                   -------          ------

       Net increase in net assets resulting from operations  . . . . . . .          9,781           12,419
                                                                                   ------           ------

 Distributions to shareholders:

   Common stock dividend . . . . . . . . . . . . . . . . . . . . . . . . .         (5,701)          (3,823)

   Preferred stock dividend  . . . . . . . . . . . . . . . . . . . . . . .           (165)            (165)
                                                                                   ------           ------ 

       Net decrease in net assets resulting from distributions to                                          
         shareholders  . . . . . . . . . . . . . . . . . . . . . . . . . .         (5,866)          (3,988)
                                                                                   ------           ------ 
 Capital share transactions:

   Net (increase) decrease in notes receivable from sale of common stock .           (334)             415

   Issuance of common shares upon the exercise of stock options  . . . . .          1,087                -

   Issuance of common shares in lieu of cash distributions . . . . . . . .          1,089              405

   Issuance of common shares in rights offering  . . . . . . . . . . . . .          8,264                -
                                                                                   ------           ------

       Net increase in net assets resulting from capital share                                            
         transactions  . . . . . . . . . . . . . . . . . . . . . . . . . .         10,106              820
                                                                                   ------           ------

 Net increase in net assets  . . . . . . . . . . . . . . . . . . . . . . .         14,021            9,251

 Net assets at beginning of the period . . . . . . . . . . . . . . . . . .         57,181           49,987
                                                                                   ------           ------

 Net assets at end of period . . . . . . . . . . . . . . . . . . . . . . .         71,202           59,238

 Preferred stock of wholly owned subsidiary  . . . . . . . . . . . . . . .         (6,000)          (6,000)
                                                                                   ------           ------ 

 Net asset value available to common shareholders  . . . . . . . . . . . .        $65,202          $53,238
                                                                                   ======           ======

 Net asset value per common share  . . . . . . . . . . . . . . . . . . . .        $  9.28          $  8.61
                                                                                   ======           ======

 Common shares outstanding at end of period  . . . . . . . . . . . . . . .          7,026            6,186
                                                                                   ======           ======
</TABLE>




   THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS





                                       3
<PAGE>   6
                  ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENT OF CASH FLOWS
                                 (in thousands)
                                  (unaudited)

<TABLE>
<CAPTION>
                                                                                         For the Nine Months Ended
                                                                                               September 30,
                                                                                               ------------ 

                                                                                              1996             1995
                                                                                              ----             ----
          <S>                                                                              <C>              <C>
          Cash Flows From Operating Activities:

            Net increase in net assets resulting from operations  . . . . . . . . .        $ 9,781          $12,419

            Adjustments to reconcile net increase in net assets resulting from
               operations to net cash provided by operating activities:

               Net unrealized (appreciation) depreciation on investments  . . . . .          1,702           (6,551)

               Net realized gain on investments . . . . . . . . . . . . . . . . . .         (8,376)          (3,584)

               Amortization of loan discounts and fees  . . . . . . . . . . . . . .         (1,128)            (521)

            Changes in assets and liabilities:

               Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . .           (964)             736

               Other liabilities  . . . . . . . . . . . . . . . . . . . . . . . . .           (602)            (384)
                                                                                          --------          ------- 

                  Net cash provided by operating activities . . . . . . . . . . . .            413            2,115
                                                                                          --------           ------

          Cash Flows From Investing Activities:

               Investments in small business concerns . . . . . . . . . . . . . . .        (27,742)         (17,811)

               Collections from loans and debt securities and other investment                                     
                 assets   . . . . . . . . . . . . . . . . . . . . . . . . . . . . .         20,132           14,272

               Net proceeds from sale of equity securities  . . . . . . . . . . . .         10,577            4,366

               Net purchase of U.S. government securities . . . . . . . . . . . . .             -               338

               Collections from notes receivable from sale of common stock  . . . .             66              415
                                                                                          --------          -------

                  Net cash provided by investing activities . . . . . . . . . . . .          3,033            1,580
                                                                                            ------           ------
          Cash Flows From Financing Activities:

               Issuance of common shares  . . . . . . . . . . . . . . . . . . . . .          8,950               -

               Common distributions paid  . . . . . . . . . . . . . . . . . . . . .         (8,200)          (3,416)

               Preferred distributions paid . . . . . . . . . . . . . . . . . . . .           (220)            (220)

               Net proceeds from the issuance of SBA debentures . . . . . . . . . .             -             6,500

               Proceeds from the issuance of OPIC debentures  . . . . . . . . . . .          5,000               -

               Net payments on revolving line of credit  .  . . . . . . . . . . . .         (1,500)          (2,205)
                                                                                            ------           ------ 

                  Net cash provided by financing activities . . . . . . . . . . . .          4,030              659
                                                                                            ------          -------

          Net increase in cash and cash equivalents . . . . . . . . . . . . . . . .          7,476            4,354

          Cash and cash equivalents, beginning of period  . . . . . . . . . . . . .         22,743            6,609
                                                                                            ------           ------

          Cash and cash equivalents, end of period  . . . . . . . . . . . . . . . .        $30,219          $10,963
                                                                                            ======           ======
</TABLE>



   THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS





                                       4
<PAGE>   7
                  ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               SEPTEMBER 30, 1996
                                  (UNAUDITED)

NOTE 1.  GENERAL

         In the opinion of management, the accompanying unaudited consolidated
         financial statements of Allied Capital Corporation and its
         subsidiaries (the Company) contain all adjustments (consisting of only
         normal recurring accruals) necessary to present fairly the financial
         position of the Company as of September 30, 1996 and the results of
         operations, changes in net assets, and cash flows for the periods
         indicated.  Certain information and footnote disclosures normally
         included in the consolidated financial statements prepared in
         accordance with generally accepted accounting principles have been
         condensed or omitted.  It is suggested that these consolidated
         financial statements be read in conjunction with the financial
         statements and notes thereto included in the Company's December 31,
         1995 Annual Report.  The results of operations for the nine months
         ended September 30, 1996 are not necessarily indicative of the
         operating results to be expected for the full year.

         Certain reclassifications have been made to the 1995 financial
         statements in order to conform to the 1996 presentation.

NOTE 2.  DIVIDENDS AND DISTRIBUTIONS

         The Company's board of directors declared a third quarter dividend
         equivalent to $0.29 per share payable on September 30, 1996 to
         shareholders of record as of September 13, 1996.  In connection with
         this dividend, the Company paid cash of $1,796,000 and distributed new
         shares of common stock to participants in the dividend reinvestment
         plan with a value of $237,000 for a total dividend of $2,033,000.  The
         Company's board of directors have declared dividends equivalent to
         $0.82 per share for the nine months ended September 1996.  In
         connection with these dividends, the Company paid cash of $5,029,000
         and distributed new shares of common stock to participants in the
         dividend reinvestment plan with a value of $672,000 for a total
         dividend of $5,701,000.

NOTE 3.  DEBT

         The Company had no borrowings outstanding under its revolving line of
         credit agreement as of September 30, 1996.

         The Company borrowed $5,000,000 under its loan agreement with the
         Overseas Private Investment Corporation (OPIC) in order to finance its
         first OPIC qualified investment in February, 1996.  The OPIC loan
         bears interest at 6.48% and all principal is due at the maturity date,
         which is February 2006.  In addition, OPIC is entitled to receive from
         the Company a contingent fee at maturity of the loan equal to five
         percent of the return generated by the OPIC-related investments in
         excess of seven percent.

NOTE 4.  SHAREHOLDERS' EQUITY

         The Company issued to the common shareholders at the close of business
         on January 22, 1996, the record date, non-transferable subscription
         rights that entitled record date shareholders to subscribe for and
         purchase from the Company up to one authorized, but unissued share of
         the Company's common stock for each seven subscription rights held.
         The Company offered a total of 885,448 shares of common stock pursuant
         to this offer.  Shareholders who fully exercised their subscription
         rights were entitled to the additional privilege of subscribing for
         shares from the offering not acquired by exercise of subscription
         rights.





                                       5
<PAGE>   8
                  ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               SEPTEMBER 30, 1996
                                  (UNAUDITED)


         The subscription price per common share was $13.11, which equaled 95
         percent of the average of the last reported sale price of a share of
         common stock on the Nasdaq National Market on February 27, 1996 (the
         expiration date of the offer) and each of the four preceding business
         days.  Shareholders participating in the offering subscribed for
         411,961 shares through the primary subscription and 251,749 shares
         through the oversubscription privilege for a total of 663,710 shares.
         The Company received net proceeds of $8,264,000 from the rights
         offering after expenses of $437,000, including a 2.5 percent
         commission paid to eligible broker/dealers on each share sold as a
         result of their soliciting efforts.

NOTE 5.  COMMITMENTS AND CONTINGENCIES

         Commitments.  The Company had commitments outstanding of $5,194,000 at
         September 30, 1996 to invest in various existing and prospective
         portfolio companies.

         Litigation.  The Company is party to certain lawsuits in connection
         with investments it has made to small businesses that are not deemed
         to be material.  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 consolidated
         financial position of the Company.





                                       6
<PAGE>   9
ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
         RESULTS OF OPERATIONS

         RESULTS OF OPERATIONS

         For the Third Quarter Ended September 30, 1996 and 1995.

         The net increase in net assets resulting from operations for the
         quarter ended September 30, 1996 was $5.7 million as compared to $3.1
         million for the quarter ended September 30, 1995.  Earnings per common
         share were $0.80 for the current quarter as compared to $0.49 for the
         comparable quarter of the prior year.

         For the quarter ended September 30, 1996, net investment income
         decreased 17% to $748,000 as compared to $899,000 for the comparable
         quarter of 1995.  Total investment income decreased 4% in the third
         quarter of 1996 as compared to the third quarter of 1995.  Other
         investment income for the quarter ended September 30, 1995 included
         non-recurring income consisting of $105,000 of litigation costs from
         prior periods recovered during the third quarter of 1995 and $130,000
         of income from an equity participation in one portfolio company.

         Total expenses remained level at $2.7 million for the quarters ended
         September 30, 1996 and 1995.   Interest expense increased 16% for the
         third quarter of 1996 as compared to the comparable quarter of the
         previous year as a result of the Company's outstanding borrowings
         increasing to $86.3 million from $74.8 million at September 30, 1995.
         The Company's investment advisory fee for the third quarter 1996 of
         $754,000 was 3% higher than the same quarter in 1995 of $731,000.
         Higher advisory fees were the result of the increase in total assets,
         which totaled $161.5 million at September 30, 1996, as compared to
         $145.6 million at September 30, 1995.  Other operating expenses
         decreased 93% for the third quarter of 1996 as compared to 1995.  This
         decline resulted from a decline in legal costs related to one lawsuit,
         which was pending against the Company and filed by a portfolio
         company, which was settled in early 1995.

         Net realized gains on investments were $2.2 million for the quarter
         ended September 30, 1996.  During the quarter, the Company
         successfully liquidated certain equity investments in its portfolio
         and received early payoffs of some loans in its portfolio.  Net
         realized gains on investments were $3.3 million for the third quarter
         of 1995.  Net gains are realized when the Company sells or otherwise
         liquidates its investments, and as a result may vary significantly
         from quarter to quarter.

         Net unrealized appreciation on investments for the three months ended
         September 30, 1996 was $2.7 million as compared to net unrealized
         depreciation of $1.1 million for the three months ended September 30,
         1995.  The Company disposed of portfolio investments during the third
         quarter that had net unrealized appreciation at June 30, 1996 of     
         $419,000.  When sold, net unrealized appreciation was reduced by     
         $419,000 and the actual net gain realized on these investments of $1.3
         million was included in net realized gain on investments.  The
         remaining net unrealized appreciation of $3.2 million for the third
         quarter of 1996 is due primarily to the increase in the market value
         of the Company's investments in Allied Capital Lending Corporation of
         $1.8 million and TPG Holdings, Inc. of $1.5 million, reduced by the
         decline in the value of the Company's investments in Enviroplan, Inc.
         of $745,000 and Williams Brothers Lumber Company of $792,000.

         For the Nine Months ended September 30, 1996 and 1995.

         Net increase in net assets resulting from operations was $9.8 million,
         or $1.41 per common share, for the nine months ended September 30,
         1996, compared to $12.4 million, or $1.97 per common share, for the
         same period in 1995.  Net investment income and net realized gains for
         the nine months ended September 30, 1996 increased 36% and 134%,
         respectively, over the comparable nine-month period of the prior year.
         These increases, however, were offset by a significant decline in the
         net unrealized appreciation in the investment portfolio of 126%.

         During the nine months ended September 30, 1996, the Company realized
         net gains on the sale of investments which had net unrealized
         appreciation totaling $3.8 million, or $0.56 per common share, that
         had been previously recognized into net income as net unrealized
         appreciation.  Thus upon the realization of these gains, the
         year-to-date 1996 net increase in net assets resulting from operations
         reflects an offsetting decrease in net unrealized appreciation for the
         same amount.  Generally, as investments in the portfolio





                                       7
<PAGE>   10
         appreciate or depreciate, the increase or decrease in value is
         recognized into net income as the change in net unrealized
         appreciation.  When gains or losses are realized upon the disposition
         of the investment, the effect on net income is approximately neutral; 
         however, net income would be impacted in the current period to the 
         extent the realized gain or loss differed from the unrealized 
         appreciation or depreciation.

         Other changes in the results of operations for the first nine months
         of 1996 as compared to the nine months ended September 30, 1995 were
         caused by the same factors discussed in the quarter-to-quarter
         comparison above.


         LIQUIDITY AND CAPITAL RESOURCES

         Total assets increased $13.3 million to $161.5 million at September
         30, 1996 from $148.3 million at December 31, 1995.  This growth in
         total assets resulted primarily from the Company's one-for-seven
         non-transferable rights offering that was completed in February 1996,
         which netted $8.3 million in proceeds.

         Total investments at September 30, 1996 increased $4.8 million from
         December 31, 1995 as new investments of $27.7 million exceeded total
         repayments and changes in investment valuations during the first nine
         months of 1996.  Cash and cash equivalents increased to $30.2 million
         as of September 30, 1996 from $22.7 million at December 31, 1995 due
         to the proceeds received from the rights offering and investment
         dispositions.

         The Company believes that it has adequate capital to continue to
         satisfy its operating needs, debt service obligations, commitments and
         other future investment opportunities that may arise over the next the
         year.

         PORTFOLIO CHANGES

         For the nine months ended September 30, 1996, overall the Company's
         portfolio depreciated, net of appreciation, by $1.7 million due to the
         sale of certain investments which resulted in realized gains (losses),
         changes in investment values from the change in market prices for
         public equity investments, and changes in value of certain private     
         investments.

         The disposition of the following portfolio investments resulted in
         unrealized appreciation (depreciation) and the recognition of realized
         gains (losses) during the nine months ended September 30, 1996 as
         follows:

<TABLE>
<CAPTION>
                                                                     Unrealized              Realized
                                                                   Appreciation                  Gain
                                                                 (Depreciation)                (Loss)
                                                                 --------------          ------------
                 <S>                                                <C>                    <C>
                 Garden Ridge Corporation (stock)                   $(1,518,000)           $1,692,000
                 Garden Ridge Corporation (warrants)                 (1,996,000)            3,579,000
                 June Broadcasting, Inc.                             (1,948,000)            2,182,000
                 Kittiwake                                              400,000              (370,000)
                 Labor Ready, Inc.*                                    (203,000)            1,662,000
                 Palmer Corporation                                     100,000                (5,000)
                 Providential Corporation                               789,000              (789,000)
                 Other                                                  532,000               425,000

                 * Sale of certain stock only.
</TABLE>

         The Company's public equity investments which appreciated
         (depreciated) in value during the nine months ended September 30, 1996
         were:
<TABLE>
<CAPTION>
                                                                       Unrealized
                                                                     Appreciation
                                                                   (Depreciation)
                                                                   --------------
                 <S>                                                <C>
                 Allied Capital Lending Corporation                 $ 2,031,000
                 Au Bon Pain                                           (109,000)
                 DMI Furniture, Inc.                                    150,000
                 Labor Ready, Inc.                                    1,064,000
                 Nobel Education Dynamics, Inc.                         756,000
                 Quality Software Products Holdings, PLC               (305,000)
</TABLE>

         The Company's investment in Peerless Group, Inc. appreciated
         $1,519,000 in anticipation of its initial public offering on October
         3, 1996.  In addition, the following private companies had unrealized
         depreciation during the nine months ended September 30, 1996:
         Enviroplan, Inc. - $1,177,000; SunStates Refrigerated Services, Inc. -





                                       8
<PAGE>   11
         $772,000; and Williams Brothers Lumber Company -$1,599,000.  The
         remaining investment portfolio had net unrealized appreciation during
         the nine months ended September 30, 1996 of $584,000.

         Statements included in this filing 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.  Important factors that could cause actual results to
         differ materially are included but are not limited to those listed in
         the Company's quarterly reports as filed on Form 10-Q and annual
         report as filed on Form 10-K.





                                       9
<PAGE>   12
                           Part II. OTHER INFORMATION

Item 1.  LEGAL PROCEEDINGS

         The Company is not a defendant in any material pending legal
         proceeding and no such material proceedings are known to be
         contemplated.

Item 2.  CHANGES IN SECURITIES

         No material changes have occurred in the securities of the Registrant.

Item 3.  DEFAULTS UPON SENIOR SECURITIES

         Not applicable.

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

         None.

Item 5.  OTHER INFORMATION

         None.

Item 6.  EXHIBITS AND REPORTS ON FORM 8-K

         (a) List of Exhibits

         11  Statement of Computation of Earnings Per Share

         (b) Reports on Form 8-K

             No reports on Form 8-K were filed by the Company during the
             quarter ended September 30, 1996.





                                       10
<PAGE>   13
                                   SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunder duly authorized.

                                     ALLIED CAPITAL CORPORATION
                                     --------------------------
                                     (Registrant)
                                 
                                 
                                 
                                     /s/ Jon A. DeLuca                         
                                     ----------------------------
Date: November 13, 1996              Jon A. DeLuca
      -----------------              Executive Vice President and
                                     Chief Financial Officer
                                 




                                       11