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                                                                EXHIBIT 10(b)(1)


                      ALLIED CAPITAL MORTGAGE CORPORATION
                          INCENTIVE STOCK OPTION PLAN


1.  PURPOSE OF THE PLAN

     The purpose of this Incentive Stock Option Plan (this "Plan") is to
advance the interests of Allied Capital Mortgage Corporation (the "Company") by
providing to directors of the Company and to officers of the Company who have
substantial responsibility for the direction and management of the Company
additional incentives to exert their best efforts on behalf of the Company, to
increase their proprietary interest in the success of the Company, to reward
outstanding performance and to provide a means to attract and retain persons of
outstanding ability to the service of the Company.  It is recognized that the
Company cannot attract or retain these officers and directors without this
compensation.  Options granted under this Plan may qualify as "incentive stock
options," as defined in Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code").

2.  ADMINISTRATION

     This Plan shall be administered by a committee (the "Committee") comprised
of at least two (2) members of the Company's Board of Directors who each shall
(a) be a "disinterested person," as defined in Rule 16b-3 promulgated under the
Securities Exchange Act of 1934, as amended, (b) have no financial interest in
grants of stock options to officers of the Company under this Plan and (c) not
be an "interested person," as defined in Section 2(a)(19) of the Investment
Company Act of 1940, as amended (the "Act"), of the Company.  The Committee
shall interpret this Plan and, to the extent and in the manner contemplated
herein, shall exercise the discretion reserved to it hereunder.  The Committee
may prescribe, amend and rescind rules and regulations relating to this Plan
and to make all other determinations necessary for its administration.  The
decision of the Committee on any interpretation of this Plan or administration
hereof, if in compliance with the provisions of the Act and regulations
promulgated thereunder, shall be final and binding with respect to the Company,
any optionee or any person claiming to have rights as, or on behalf of, any
optionee.

3.  SHARES SUBJECT TO THE PLAN

     The shares subject to option and the other provisions of this Plan shall
be shares of the Company's common stock, par value $.0001 per share ("shares").
Subject to the provisions hereof concerning adjustment, the total number of
shares which may be purchased upon the exercise or surrender of stock options
granted under this Plan shall not exceed four hundred thousand (400,000)
shares, which includes all shares with respect to which options have been
granted or surrendered for payment in cash or other consideration pursuant to
this Plan or predecessor forms of this Plan.  In the event any option shall
cease to be exercisable in whole or in part for any reason, the shares which
were covered by such option, but as to which the option had not been exercised,
shall again be available under this Plan.  Shares may be made available from
authorized, unissued or reacquired stock or partly from each.






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4.  PARTICIPANTS

     (a) Officers.  The Committee shall determine and designate from time to
time those key officers of the Company who shall be eligible to participate in
this Plan.  The Committee shall also determine the number of shares to be
offered from time to time to each optionee.  In making these determinations,
the Committee shall take into account the past service of each such officer to
the Company, the present and potential contributions of such officer to the
success of the Company and such other factors as the Committee shall deem
relevant in connection with accomplishing the purposes of this Plan; provided
that the Committee shall determine that each grant of options to an optionee,
the number of shares offered thereby and the terms of such option are in the
best interests of the Company and its shareholders.  The date on which the
Committee approves the grant of an option to an officer of the Company shall be
the date of issuance of such option; provided, however, that if (1) any such
action by the Committee does not constitute approval thereof by both (A) a
majority of the Company's directors, who each has no financial interest in such
action and in this Plan and (B) a majority of the Company directors who each is
not an "interested person" [as defined in Section 2(a)(19) of the Act] of the
Company and (2) such approval is then required by Section 61(a)(3)(B)(i)(I) of
the Act, then the grant of any option by such action shall not be effective,
and there shall be no issuance of such option, until there has been approval of
such action by (A) a majority of the Company's directors who each has no
financial interest in such action and in this Plan and (B) a majority of the
Company's directors who each is not an "interested person" of the Company, on
the basis that such action is in the best interests of the Company and its
shareholders, and the last date on which such required approval is obtained
shall be the date of issuance of such option.  The agreement documenting the
award of any option granted pursuant to this paragraph 4(a) shall contain such
terms and conditions as the Committee shall deem advisable, including but not
limited to being exercisable only in such installments as the Committee may
determine.

     (b) Non-Officer Directors.  A one-time grant of options in accordance with
the provisions of this paragraph (b) shall be made to each director of the
Company who is not an officer of the Company or of the Company's investment
adviser (a "non-officer director") who is serving at the later of (i) the date
on which the proposal to make grants of options to non-officer directors is
approved by the shareholders of the Company or (ii) the date on which the
issuance of options pursuant to this Plan to non-officer directors is approved
by order of the Securities and Exchange Commission pursuant to Section
61(a)(3)(B)(i)(II) of the Act.  After the later of such dates, a one-time grant
of options in accordance with the provisions of this paragraph (b) shall be
made to each non-officer director [other than any non-officer director who
received a grant pursuant to the first sentence of this paragraph (b)] upon his
or her initial election as a director of the Company.  Each grant pursuant to
this paragraph (b) shall award the non-officer director an option to purchase
ten thousand (10,000) shares at a price equal to the current fair market value
of the shares at the date of issuance of such option; provided, that if any
non-officer director then holds ten percent (10%) or more of the outstanding
shares, the exercise price of such option shall not be less than one hundred
ten percent (110%) of such current fair market value.  The agreement
documenting the award of any option granted pursuant to this paragraph 4(b)
shall contain such terms and conditions as the Committee shall deem advisable;
provided, however, that any such option shall vest in three annual installments
(so that the recipient can first exercise the option with respect to not more
than three thousand three hundred thirty-three (3,333) shares on or after the
date of issuance of such option, can exercise the option with respect to not
more than an additional three





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thousand three hundred thirty-three (3,333) shares on or after the first
anniversary of the date of issuance of such option and can exercise such option
with respect to the all of the shares covered thereby on or after the second
anniversary of the date of issuance of such option).

     (c) General.  Agreements evidencing options granted to different optionees
or at different times need not contain similar provisions.

5.  OPTION PRICE

     Shares shall be optioned from time to time at a exercise price not less
than the current fair market value [as defined in paragraph 15(d) of this Plan]
of the shares at the date of issuance of such option; provided, that the
exercise price of any option granted to a holder of 10% or more of the
Company's shares shall not be less than one hundred ten percent (110%) of such
current fair market value.

6.  OPTION PERIOD

     Each option agreement shall state the period or periods of time within
which the subject option may be exercised, in whole or in part, by the optionee
which shall be such period or periods of time as may be determined by the
Committee; provided, that the option period shall not exceed ten years from the
date of issuance of the option and shall not exceed five years if the option is
granted to a holder of ten percent (10%) or more of the Company's shares.

7.  PAYMENT FOR SHARES

     Full payment for shares purchased shall be made at the time of exercising
the option in whole or in part.  Payment of the purchase price shall be made in
cash (including check, bank draft or money order) or, if authorized pursuant to
paragraph 9 hereof, by a loan from the Company in accordance with paragraph 9.

8.  TRANSFERABILITY OF OPTIONS

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

9.  LOANS BY THE COMPANY

     Upon the exercise of any option by an officer-optionee, the Company, at
the request of the officer-optionee, and subject to the approval of both (a) a
majority of the Company's directors who each has no financial interest in such
loan and (b) a majority of the Company's directors who each is not an
"interested person" [as defined in Section 2(a)(19) of the Act] of the Company
on the basis that such loan is in the best interests of the Company and its
stockholders (whether such approval is by the Committee or otherwise), may lend
to such officer-optionee, as of the date of exercise, an amount equal to the
exercise price of such option; provided, that such loan (a) shall have a term
of not more than ten years, (b) shall become due within sixty days after the
recipient of the loan ceases to be an officer of the Company, (c) shall bear
interest at a rate no less than the prevailing rate applicable to 90-day United
States Treasury bills at the time the loan is made, and





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(d) shall be fully collateralized at all times, which collateral may include
securities issued by the Company.  Loan terms and conditions may be changed by
the Committee to comply with applicable IRS and SEC regulations.

10.  TERMINATION OF OPTION

     All rights to exercise options shall terminate sixty days after any
optionee ceases to be a director or an officer of the Company for any cause
other than death or total and permanent disability.

11.  RIGHTS IN THE EVENT OF TERMINATION OF SERVICE

     If an optionee's service as a director or officer is terminated for any
reason other than death or total and permanent disability prior to expiration
of his or her option and before such option is fully exercised, the optionee
shall have the right to exercise the option during the balance of the 60-day
period referred to in paragraph 10.

12.  RIGHTS IN THE EVENT OF TOTAL AND PERMANENT DISABILITY OR DEATH

     If an optionee becomes totally and permanently disabled or dies prior to
expiration of the option without having fully exercised it, he or the executors
or administrators or legatees or distributees of the estate, as the case may
be, shall, have the right, from time to time within one year after the
optionee's total and permanent disability or death and prior to the expiration
of the term of the option, to exercise the option in whole or in part, as
provided in the respective option agreement.

13.  EFFECT OF CHANGE IN STOCK SUBJECT TO THE PLAN

     Subject to any required action by the shareholders of the Company and the
provisions of applicable corporate law, the number of shares of represented by
the unexercised portion of an option, the number of shares which has been
authorized or reserved for issuance hereunder, and the number of shares covered
by any applicable vesting schedule hereunder, as well as the exercise price of
a share represented by the unexercised portion of an option, shall be
proportionately adjusted for (a) a division, combination or reclassification of
any of the shares of common stock of the Company or (b) a dividend payable in
shares of common stock of the Company.

14.  GENERAL RESTRICTION

     Each option shall be subject to the requirement that, if at any time the
Board of Directors shall determine, at its discretion, that the listing,
registration or qualification of the shares subject to such option upon any
securities exchange or under any state or federal law, or the consent or
approval of any government regulatory body, is necessary or desirable as a
condition of, or in connection with, the granting of such option or the issue
or purchase of the shares thereunder, such option may not be exercised in whole
or in part unless such listing, registration, qualification, consent or
approval shall have been effected or obtained free of any conditions not
acceptable to the Company.  Subject to the limitations of paragraph 6, no
option shall expire





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during any period when exercise of such option has been prohibited by the Board
of Directors, but shall be extended for such further period so as to afford the
optionee a reasonable opportunity to exercise his option.

15.  MISCELLANEOUS PROVISIONS

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

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

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

     (d) For purposes of this Plan, the fair market value of the shares shall
be either: (i) the closing sales price of the stock as quoted on the National
Association of Securities Dealers Automated Quotation System for the date of
issuance of such option, as provided herein, (ii) if the Company's shares are
traded on an exchange, the price shall be the closing price of the Company's
stock as reported in The Wall Street Journal for such date of issuance of an
option, or (iii) if neither such condition exists, as determined in good faith
by the Company's Board of Directors, including a majority of the non-interested
directors.

     (e) The aggregate fair market value (determined as of the date of issuance
of an option) of the shares with respect to which an option, or portion
thereof, intended to be an incentive stock option is exercisable for the first
time by any optionee during any calendar year (under all incentive stock option
plans of the Company and subsidiary corporations) shall not exceed One Hundred
Thousand Dollars ($100,000).

     (f) All options issued pursuant to this Plan shall be granted within ten
years from the earlier of the date of adoption of this Plan (or any amendment
thereto requiring shareholder approval pursuant to the Code) or the date this
Plan (or any amendment thereto requiring shareholder approval pursuant to the
Code) is approved by the shareholders of the Company.

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

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





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     (i) Any notices given in writing shall be deemed given if delivered in
person or by certified mail; if given to the Company at Allied Capital Mortgage
Corporation, 1666 K Street, N.W., 9th Floor, Washington, D.C. 20006; and, if to
an optionee, in care of the optionee at his or her last known address.

     (j) This Plan and all actions taken by those acting under this Plan shall
be governed by the substantive laws of Maryland without regard to any rules
regarding conflict-of-law or choice-of-law.

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

16.  CHANGE OF CONTROL

     In the event of a Change of Control (as hereinafter defined), all
then-outstanding options will become fully vested and exercisable as of the
Change of Control.  However, if in the opinion of counsel to the Company the
immediate exercisability of such options, when taken into consideration with
all other "parachute payments" as defined in Section 280G of the Code, would
result in an "excess parachute payment" as defined in such section, such option
shall not become immediately exercisable, except and to the extent the
Compensation Committee in its discretion shall otherwise determine.  For
purposes of the Plan, "Change of Control" means the sale of substantially all
of the Company's assets or the acquisition, whether directly, indirectly,
beneficially (within the meaning of Rule 13d-3 of the Act), or of record, of
securities of the Company representing twenty-five (25%) or more in the
aggregate voting power of the Company's then-outstanding Common Stock by any
"person" (within the meaning of Sections 13(d) and 14(d) of the Act), including
any corporation or group of associated persons acting in concert, other than
(i) the Company or its subsidiaries and/or (ii) any employee pension benefit
plan (within the meaning of Section 3(2) of the Employee Retirement Income
Security Act of 1974) of the Company or its subsidiaries, including a trust
established pursuant to any such plan; provided, that a Change of Control will
not result from: (A) a transfer of the Company's voting securities by a person
who is the beneficial owner, directly or indirectly, of twenty-five percent
(25%) or more of the voting securities of the Company (a "25 Percent Owner") to
(i) a member of such 25 Percent Owner's immediate family (within the meaning of
Rule 16a-l(e) of the Act) either during such 25 Percent Owner's lifetime or by
will or the laws of descent and distribution; (ii) any trust as to which the 25
Percent Owner or a member (or members) of his immediate family (within the
meaning of Rule 16a-l(e) of the Act) is the beneficiary; (iii) any trust as to
which the 25 Percent Owner is the settlor with sole power to revoke; (iv) any
entity over which such 25 Percent Owner has the power, directly or indirectly,
to direct or cause the direction of the management and policies of the entity,
whether through the ownership of voting securities, by contract or otherwise;
or (v) any charitable trust, foundation or corporation under Section 501(c)(3)
of the Code that is funded by the 25 Percent Owner; or (B) the acquisition
voting securities of the Company by either (i) a person who was a 25 Percent
Owner on the effective date of the Plan or (ii) a person, trust or other entity
described in the foregoing clauses (A)(i)-(v) of this subsection.





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17.  AMENDMENT AND TERMINATION

         The Board of Directors may modify, revise or terminate this Plan at
any time and from time to time; provided, however, that no modification or
revision of any material provision of this Plan may be made without shareholder
approval except for such modifications or revisions which are necessary in
order to ensure the options issued as incentive stock options under this Plan
comply with Section 422 or any successor provision of the Code, applicable
provisions of the Act or any exemptive order therefrom issued to the Company in
connection with this Plan, Rule 16b-3 promulgated under the Securities Exchange
Act of 1934, as amended, or other applicable law.  This Plan shall terminate
when all shares reserved for issuance hereunder have been issued upon the
exercise of options, by action of the Board of Directors pursuant to this
paragraph, or on that date which is ten (10) years after the date hereof (that
is March __, 2006), whichever shall first occur.

18.  EFFECTIVE DATE OF THE PLAN

         This Plan shall become effective upon (1) adoption by the Board of
Directors and (2) approval of this Plan by the shareholders of the Company.

19.  AMENDMENT HISTORY

      Date of plan adoption by the Board of Directors            ______________
      Date of plan approval by Shareholders                      ______________





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