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                                                                    EXHIBIT 10.3


                         ALLIED CAPITAL CORPORATION II
                           DIVIDEND REINVESTMENT PLAN


                                COMPANY CONTACT:
                      Department of Shareholder Relations
                         Allied Capital Corporation II
                          1666 K Street, NW, Suite 901
                              Washington, DC 20006
                                 (202) 331-1112

                              PLAN ADMINISTRATOR:
                   American Stock Transfer and Trust Company
                                 40 Wall Street
                               New York, NY 10005
                                 (800) 937-5449
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The following is the Allied Capital Corporation II Dividend Reinvestment Plan
(the "Plan").  Further questions and correspondence should be directed to
either of the addresses listed on the front of the Plan:

1.               WHAT IS THE PURPOSE OF THE PLAN?

                 The purpose of the Plan is to provide shareholders with a
                 simple and convenient method of investing cash dividends and
                 distributions in additional shares of Common Stock, $ 1.00 par
                 value, of Allied Capital Corporation II (the "Company") at the
                 current market price.  Participants in the Plan may have cash
                 dividends and distributions automatically reinvested without
                 charges for record-keeping, and may take advantage of the
                 custodial and reporting services provided by American Stock
                 Transfer and Trust Company ("AST") at no additional cost.

2.               WHAT DOES THE PLAN ADMINISTRATOR DO?

                 AST administers the Plan for participants, keeps records,
                 sends statement of accounts to participants, and performs
                 other duties relating to the Plan.

3.               HOW DOES A SHAREHOLDER ENROLL?

                 If you are a shareholder of record, that is if the shares.
                 you own are registered in your own name on the books of AST,
                 no enrollment is necessary.  In that case, you are
                 automatically a participant in the Plan and AST, as the Plan
                 Agent, will automatically reinvest for your account all
                 dividends and distributions that may be declared and paid on
                 your shares.  If all of your shares of record are enrolled in
                 the Plan, you are considered to be an unlimited participant.

4.               WHAT IF THE SHARES ARE HELD BY A BROKER, BANK OR NOMINEE?

                 If your shares are held on the books of AST in the name of a
                 broker, bank or other nominee (a "nominee"), you can
                 participate in the Plan only to the extent that the nominee
                 participates on your behalf.  Many nominees do not provide
                 that service and routinely request dividends and distributions
                 to be paid in cash on all shares registered in their names.
                 Therefore, if your shares are held for your account by a
                 nominee, you must either make appropriate arrangements for
                 your nominee to participate on your behalf, or you must become
                 a shareholder of record by having a part or all of your shares
                 transferred to your own name.

5.               WHAT IF A SHAREHOLDER WOULD RATHER RECEIVE CASH?

                 If you would rather receive cash, you may either write a
                 letter to the Company or to AST to communicate that you would
                 like to terminate your participation in the Plan, or return
                 the attached Enrollment Status Card to AST.  Any communication
                 by you expressing a preference for cash in lieu of shares must
                 be received by the Company or AST before the record date of
                 the next dividend or distribution.

6.               WHAT IF A SHAREHOLDER WISHES TO RECEIVE CASH ON ONLY SOME OF
                 HIS SHARES?

                 If you wish to receive dividends and distributions in cash on
                 some of your shares, and have the remaining dividends and
                 distributions reinvested, you must write to the Company or AST
                 and give us notice to that effect.  You may also use the
                 attached Enrollment Status Card for this purpose.  As a
                 partial participant, you will receive your dividends and
                 distributions in cash only with respect to the number of
                 shares that you have specified.  With respect to any other
                 shares registered in your name, and with respect to the shares
                 credited to your account on the books of AST, the
                 corresponding dividends and distributions will be paid in
                 additional shares.  The number of shares on which a cash
                 dividend is received may be changed at any time simply by
                 writing to the Company or to AST.

7.               MAY A SHAREHOLDER ELECT TO REENROLL ONCE HE HAS TERMINATED
                 PARTICIPATION IN THE PLAN? 

                 Yes.  If a shareholder has previously elected to receive
                 dividends and distributions in cash and thus terminated
                 participation in the Plan, and later wishes to participate in
                 the Plan, the shareholder may reenroll at any time by writing
                 to the Company.  Any letter requesting enrollment must be
                 received by the Company prior to the dividend declaration date
                 in order for it to take effect as of the next dividend or
                 distribution.

8.               HOW DOES THE DIVIDEND REINVESTMENT PLAN WORK?

                 When the Board of Directors declares a dividend or
                 distribution, all non-participants will receive it in cash.
                 Participants will have credited to their Plan Accounts the
                 number of full and fractional shares (computed to three
                 decimal places) that could be obtained, at the price
                 determined in accordance with the answers to Questions 9 and
                 10, with the cash, net of any applicable withholding taxes,
                 that would have been paid to them if they were not
                 participants.

9.               HOW ARE SHARES ALLOCATED UNDER THE PLAN?

                 The number of shares allocated to a participant's account will
                 be arrived at as follows.  Except under the circumstances
                 outlined below in Question 10, AST will buy shares of Allied
                 Capital Corporation II in the open market, on NASDAQ or
                 elsewhere, beginning on or before the payment date of the
                 dividend or distribution, until it has expended for such
                 purchases all of the cash that would otherwise be payable to
                 the participants.  The number of shares that will then be
                 credited to the participants' Plan Accounts will be
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                 based on the average cost of the shares so purchased,
                 including brokerage commissions.

10.              WILL NEWLY ISSUED SHARES EVER BE PAID TO PARTICIPANTS IN THE
                 PLAN?

                 There may come a time when Allied Capital II shares sell in
                 the market at a substantial premium over their net asset
                 value.  In that case, the Company's Board of Directors may
                 (but is not required to) declare a dividend or distribution to
                 be paid to Plan participants in newly issued shares of Allied
                 Capital II. In that situation, the price of newly issued shares
                 issued to a participant's account will be equal to the average
                 of the closing sales prices reported for the shares in The
                 Wall Street Journal - NASDAQ National Market System listings
                 for the five days on which trading of shares takes place
                 immediately prior to the dividend payment date (but not less
                 than 95% of the opening sales price on that date).

                 Even if the Board of Directors has declared the dividend or
                 distribution to be payable to Plan participants in newly
                 issued shares, AST will be under standing instructions not to
                 credit newly issued shares, and instead to buy shares in the
                 market, if (1) the price at which newly issued shares are to
                 be credited does  not exceed 110% of the last determined net
                 asset value of the Allied Capital II shares or (2) the
                 Company has advised AST that since such net asset value was
                 last determined we have become aware of events that indicate
                 the possibility of a change in per share net asset value as a
                 result of which the net asset value of the Allied Capital II
                 shares on the payment date might be higher than the price at
                 which AST would credit newly issued shares to the
                 participants' Plan Accounts.

                 If, as would normally be the case at least in the near future,
                 AST buys shares on the market, it is possible that by the time
                 AST has completed its purchases, the average per share
                 purchase price paid by AST may exceed the price at which the
                 newly issued shares would have been credited or the shares'
                 current net asset value. As a result, there would be credited
                 to the participants' Plan Accounts a smaller number of shares
                 than would have been credited if the dividend or distribution
                 had been paid in newly issued shares.

11.              WHAT ACCOUNTS ARE MAINTAINED FOR PARTICIPANTS AND WHAT REPORTS
                 ON THESE ACCOUNTS DO PARTICIPANTS RECEIVE?

                 The Plan Administrator will maintain a separate account for
                 each participant.  All shares issued to a participant under
                 the Plan will be credited to the participant's account.  AST
                 will mail to each participant a statement confirming the
                 issuance of shares within fifteen days after the allocation of
                 shares is made.  The statement will show the amount of the
                 dividend or distribution, the price at which shares were
                 credited, the number of full and fractional shares credited,
                 the number of shares previously credited and the cumulative
                 total of shares credited.  In addition, each participant will
                 receive copies of the Company's annual and quarterly reports
                 to shareholders, proxy statements and dividend income
                 information for tax purposes.  The proxy card received by each
                 participant will represent all shares held of record,
                 including shares held in the Plan Account.
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12.              WILL CERTIFICATES BE ISSUED FOR SHARES ISSUED UNDER THE PLAN?

                 No. Certificates for shares issued under the Plan will not be
                 furnished to you until your account is terminated or unless
                 you request certificates in writing for a specified number of
                 shares credited to your Plan Account.  All written requests
                 for certificates should be directed to AST, allowing two weeks
                 for processing.  The issuance of certificates for shares
                 credited to a Plan Account will not terminate your
                 participation in the Plan.  No certificate for a fractional
                 share will be issued.  If you terminate your participation in
                 the Plan (see Question 15), AST will sell for your account any
                 fractional share and send you a check for the proceeds.

13.              IN WHOSE NAME WILL CERTIFICATES BE REGISTERED WHEN ISSUED?

                 Accounts under the Plan are maintained in the name in which
                 share certificates of the participant were registered at the
                 time the participant entered the Plan.  Certificates for whole
                 shares issued at the request of a participant will be
                 similarly registered.

14.              WHAT HAPPENS IF THE COMPANY ISSUES A STOCK DIVIDEND OR
                 DECLARES A STOCK SPLIT?

                 Any stock dividends or split shares distributed by the Company
                 on shares held by the Plan Administrator for the participant
                 will be credited to the participant's account.

15.              WHAT HAPPENS IF A PARTICIPANT WISHES TO TERMINATE
                 PARTICIPATION?

                 You may terminate participation in the Plan at any time by
                 notifying the Company or AST in writing.  Within twenty days,
                 and according to your instructions, AST will either (1) issue
                 certificates for the whole shares credited to your Plan
                 Account and a check representing the value of any fractional
                 shares or (2) sell the shares in the market.  The proceeds of
                 the sale, less any brokerage commissions that may be incurred,
                 will be remitted to the shareholder and address of record at
                 the time of liquidation.  The address of record may not be
                 changed per telephone
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                 instruction, but rather must be changed in writing to the
                 Company or to AST. Notification for termination must be
                 received prior to the record date of any impending
                 distribution in order for it to take effect for that
                 distribution.

                 If a participant sells or transfers all of the shares
                 registered in his name on the books of AST, participation in
                 the Plan will continue with respect to any shares credited to
                 the participant's Plan Account unless and until termination is
                 requested.

16.              WHAT IS THE TAX STATUS OF REINVESTED DIVIDENDS?

                 The automatic reinvestment of dividends and distributions will
                 not relieve you of any income tax burden that you might
                 otherwise owe on such dividends or distributions. A
                 participant in the Plan will be treated for Federal income tax
                 purposes as having received, on the dividend payment date, a
                 dividend or distribution in an equal amount to the cash that
                 the participant could have received instead of shares. The tax
                 basis of such shares will equal the amount of such cash.

                 A participant will not realize any taxable income upon receipt
                 of certificates for whole shares credited to the participant's
                 account either upon the Participant's request for a specified
                 number of shares, or upon termination of enrollment in the
                 Plan.

                 Each participant in the Plan will receive early in each year
                 a Form 1099 regarding the Federal income tax status of all
                 dividends and distributions paid during the previous year.

17.              ARE THERE ANY CHARGES FOR PARTICIPATING IN THE PLAN?

                 No. AST's fees for administering Allied Capital II's Dividend
                 Reinvestment Plan are included in the fees paid by the Company
                 to AST for acting as its transfer agent. The price at which
                 shares are credited to your account will, however, include
                 your share of brokerage commissions incurred in connection
                 with AST's open market purchases of such shares. There will be
                 no brokerage charges in connection with any credit of newly
                 issued shares.

18.              MAY THE PLAN BE CHANGED?

                 Experience under the Plan may indicate that changes are
                 desirable. Accordingly, the Plan may be amended or terminated
                 by Allied Capital II or AST with at least 90 days' written
                 notice to Plan participants.

            ALLIED CAPITAL CORPORATION II DIVIDEND REINVESTMENT PLAN
                             ENROLLMENT STATUS CARD

The undersigned shareholder of record of Allied Capital Corporation II elects
to:

                 [] TERMINATE enrollment in the Dividend Reinvestment Plan and
                 receive dividends and distributions in cash with respect to
                 all shares of Allied Capital Corporation II held of record or
                 credited to the undersigned's Plan account.  CHECK ONE OF THE
                 FOLLOWING: [] Liquidate all Plan account shares and remit
                 proceeds, or [] Send certificate for whole shares in Plan
                 account and liquidate fractional shares.

                 [] PARTICIPATE in the Dividend Reinvestment Plan and receive
                 dividends and distributions in additional shares with respect
                 to ALL Allied Capital Corporation II shares held of record or
                 credited to the undersigned's Plan account.

                 [] PARTIALLY PARTICIPATE in the Dividend Reinvestment Plan
                 with respect to all Allied Capital Corporation II shares held
                 of record, including the shares subsequently credited to the
                 undersigned's Plan account, except ______ shares on which 
                 dividends and distributions are to be paid in cash.

Termination and partial participation instructions will take effect on the
record date following receipt of this card by the Plan Administrator.
Enrollment instructions will take effect on the declaration date following
receipt of this card by the Plan Administrator.

<TABLE>
<S>                                                            <C>
                                                                                                         
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Tax identification number                                      Signature

                                                                                                          
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Type or print name exactly as it appears on your share         Signature
certificate(s).
</TABLE>

                       Please fold and staple for mailing.
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                                                                Post office will
                                                                    not deliver
                                                                  without stamp





                                    AMERICAN STOCK TRANSFER & TRUST
                                             40 Wall Street
                                           New York, NY 10005
                                    
                                      ATTN: Dividend Reinvestment
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Shareholder Relations
Allied Capital
1666 K Street, NW, 9th Floor
Washington, DC 20006