<PAGE>   1
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                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                                WASHINGTON, D.C.
                                   FORM 10-K
                                  ------------
/X/      ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
                                       OR
/ /      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934

                          COMMISSION FILE NO. 0-26672

                      ALLIED CAPITAL MORTGAGE CORPORATION
               (EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)

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

                  MARYLAND                                53-1081052
        (STATE OR OTHER JURISDICTION                   (I.R.S. EMPLOYER
              OF INCORPORATION)                       IDENTIFICATION NO.)
                                                      
      C/O ALLIED CAPITAL ADVISERS, INC.               
      1666 K STREET, N.W., NINTH FLOOR                       20006
              WASHINGTON, D.C.                            (ZIP CODE)
   (ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)

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

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

          SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
                                          
                                                        NAME OF EACH EXCHANGE
        TITLE OF EACH CLASS                              ON WHICH REGISTERED
        -------------------                              -------------------
               NONE                                             NONE

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

                        COMMON STOCK, $0.0001 PAR VALUE
                                (TITLE OF CLASS)

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

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

There is currently no market for the registrant's common stock.  As of March
18, 1996 there were 70 shares of the registrant's common stock outstanding.

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<PAGE>   2
                                     PART I


ITEM 1.   BUSINESS.

         Allied Capital Mortgage Corporation (the "Company") was incorporated
in Maryland on August 10, 1995 and currently has no operations.  Once its
operations begin, the Company will be engaged primarily in the business of
investing in small businesses through the purchase of non-performing loans or
other interests.  The Company is a closed-end, non-diversified management
investment company that has elected to be regulated as a business development
company ("BDC") under the Investment Company Act of 1940, as amended (the 
"1940 Act").  The Company may not change the nature of its business so as
to cease to be a BDC unless authorized by the vote of a majority, as defined in
the 1940 Act, of its outstanding voting securities.  Once the Company 
commences its operations, it proposes to enter into an investment advisory 
agreement with Allied Capital Advisers, Inc. ("Advisers"), if such agreement 
is approved by the majority of the Company's independent directors.

         The Company is part of a group of funds (the "Allied Entities")
managed by Advisers that specialize in making loans to, and investments in,
small businesses, as well as buying performing and sub-performing loans from
the Federal Deposit Insurance Corporation ("FDIC"), banks and other financial
institutions.  Over the past four years, Advisers has been exposed to numerous
opportunities to purchase non-performing loans and, while several of the Allied
Entities have purchased some loans, the Allied Entities have been restricted on
the types of investments they could make due to various regulations under which
they operate.  As a result, it is intended that the Company will upon
commencement of its operations purchase non-performing loans from the FDIC,
banks and other institutions, many of which are expected to involve first
mortgages on real estate, as well as first liens on the operating assets of
small businesses.  The Company will be the sole entity managed by Advisers
involved primarily in the business of purchasing non-performing loans.

         Once a loan is purchased, the Company will contact the small business
concern that borrowed the funds with the objective of placing part of the
non-performing loan on a performing basis, and reducing the remaining part of
the loan to an equity ownership in the business or an equity ownership in the
real estate asset underlying the loan.  It is expected that, once the Company
has completed the restructuring of the non-performing loan, the situation will
be similar to that of other small businesses to which one of the Allied
Entities has made a loan.

TYPES OF LOANS AND MORTGAGES

         The Company will purchase and make a variety of loans and investments
in transactions that can generally be categorized as follows:  (1) purchasing
non-performing loans and investments; (2) providing loans and investments to
small businesses to allow them to purchase their non-performing loans from a
prior lender; and (3) other financings.  A description of each of these types
of financings is set forth below.

(1) Purchasing Non-performing Loans and Investments

         The Company will purchase non-performing loans from the FDIC, banks
and other institutions.  These types of loans typically have become
non-performing because the current earnings of the small business borrowers are
insufficient to generate the cash necessary to make full payments on the loan.
The situation may exist, for example, because a financial institution made a
loan to the small business expecting the business to grow significantly. In
some instances, the small business concern has had a contraction in its ability
to generate cash.  In both instances, the small business is generating
sufficient cash to service part, but not all, of the loan.

         The Company will purchase non-performing loans with the objective of
restructuring such loans into two segments.  The first segment will be a
single, performing loan secured by the assets of the business, including real
estate.  This segment will have regular interest payments being made on a
current basis, and the principal will be amortized over a reasonable time
frame.  The second, non-performing segment of the loan will most likely be
converted into an equity ownership in the business or an equity ownership in
the real estate.  This segment may later be sold to generate an optional gain.





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(2) Providing Financing to Purchase Non-Performing Loans

         From time to time, some small businesses may negotiate with their
current lender a repayment of their loan at a substantial discount.  In these
situations, the Company will work with the small business concern in order to
affect the same type of transaction that is covered above in "(1) Purchasing
Non-performing Loans and Investments."  Two differences may exist in these
types of transactions, as compared with those covered in item (1) above.
First, the Company will be financing the small business concern directly to
assist it in buying its loan at a discount.  Under those circumstances, the
Company will negotiate the terms and conditions of its new investment, plus its
potential equity option before the loan is purchased.  Second, the Company may
provide additional financing to the small business for working capital or other
business needs.  This would allow the Company to go directly to the small
business concerns that are seeking financing and to assist with their efforts
to both restructure their existing debt and raise new capital.

(3) Other Types of Financing

         There are a number of small business concerns in which the new owner
has obtained financing by having the former owner of the business take back
financing for the purchase.  In some instances, these financings are
collateralized by all the assets of the business, including the real estate.
The Company has developed a program whereby it will solicit opportunities to
help the small businesses buy back their owner-financed notes at a discount.
This type of financing, and other similar types of financings, will be a
secondary business of the Company.  It is not expected that a large portion of
the assets of the Company will involve this type of financing.

OPERATION AS A BDC

         As a BDC, the Company may not acquire any assets other than Qualifying
Assets unless, at the time the acquisition is made, Qualifying Assets represent
at least 70% of the value of the Company's total assets.  The principal
categories of Qualifying Assets relevant to the business of the Company are the
following:

(1)      Securities purchased in transactions not involving any public offering
         from the issuer of such securities, which issuer is an eligible
         portfolio company.  An eligible portfolio company is defined as any
         issuer that is organized and has its principal place of business in
         the United States and does not have any class of publicly-traded
         securities with respect to which a broker may extend margin credit.

(2)      Cash, cash items, Government securities, or high quality debt
         securities maturing in one year or less from the time of investment.

         In addition, to treat securities described in (1) above as Qualifying
Assets for the purpose of the 70% test, a BDC must make available to the issuer
of those securities significant managerial assistance.  Making available
significant managerial assistance means, among other things, any arrangement
whereby the BDC, through its directors, officers or employees, offers to
provide, and, if accepted, does provide, significant guidance and counsel
concerning the management, operations or business objectives and policies of a
portfolio company.  Managerial assistance will be made available to the
portfolio companies by the Company's officers and the investment officers of
Advisers who manage the Company's investments.  Each portfolio company will be
assigned for monitoring purposes to an investment officer and will be contacted
and counseled if it appears to be encountering business or financial
difficulties.  The Company will also provide management assistance and
counselling on a continuing basis to any portfolio company that requests it,
whether or not difficulties are perceived.  The Company's officers, all of whom
are employees of Advisers, are highly experienced in providing this type of
managerial assistance to small businesses.  The Company may not change the
nature of its business so as to cease to be, or withdraw its election as, a BDC
unless authorized by vote of a majority (as defined in the 1940 Act), of the
Company's shares.

         As a BDC, the Company is entitled to borrow money and issue senior
securities representing indebtedness as long as its indebtedness has asset
coverage to the extent of at least 200%.





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<PAGE>   4
LOAN GENERATION

         Advisers has long-standing relationships with hundreds of sellers of
mortgages, as well as relationships with third-party loan generators in various
states who may or may not have a contractual relationship with one of the
Allied Entities to provide loan origination services.  Any prospective loan
referred to the Company by any of these persons will be reviewed by the
Company's portfolio manager and its credit committee and will not be closed
unless approved by the Board of Directors of the Company.  If and when a loan
referred by a third party is closed, the third party would be compensated based
on a percentage of the total loan.

LOAN PROCESSING PROCEDURES

         The following is the procedure to be followed by the Company in the
processing of a loan from the time that such loan first comes to the Company's
attention to the time of the final collection or other disposition of each
loan.

         The first step is the preparation of a file, called an underwriting or
credit file, which contains financial and other information about the borrower
and its principals.  If the loan is being referred to the Company by a third
party, the credit file may be prepared in the first instance by the third
party.  The credit file will then be reviewed by the Company's portfolio
manager and other investment officers, who may request additional information.
If the loan is considered by the portfolio manager to be one that is acceptable
under the Company's credit standards, it will then be reviewed by the credit
committee and, if deemed acceptable by the credit committee, the Company will
issue a conditional commitment letter to purchase the loan or investment.  Once
the seller has accepted the terms of this conditional commitment, the loan
request will be submitted to the Board of Directors for approval.

         If the loan has been referred to the Company by a third party,
Advisers will pay to the third party the agreed-upon fee within thirty days of
closing, and the Company will reimburse Advisers promptly for such fee.  Upon
the closing of a loan, the loan will be entered on the books of the Company at
its cost, which includes the amount disbursed to the borrower and the fee, if
any, payable to the third-party.  The Company's board of directors will, on a
quarterly basis, determine whether cost remains the appropriate basis for
valuation of the investment, or if a different basis is appropriate.

         Under the terms of most restructured loans, payments from the borrower
(including interest and principal) are due monthly.  All such payments are made
to the Company.  Upon receipt of a payment, the Company calculates the portion
thereof to be treated as interest and records that portion as interest income.
The balance of the payment is recorded as (1) a reduction in the principal
amount outstanding and (2) income from amortization of any discount.

         The Company will contact the small business and have discussions with
the objective of restructuring the non-performing loan into a portion that is
performing and the remainder that will be converted after the restructuring
into preferred or common stock of the small business concern or an ownership
position in the real estate owned by the small business. It is expected that
the small business will pay off the portion of the original note that is
restructured to be a performing note, and that the Company will sell its equity
interest in the small business or its ownership position in the real estate.

TEMPORARY INVESTMENTS

         Pending the investment in loans of all of its initial equity capital,
the Company will invest at least 70% of its otherwise uninvested cash in U.S.
government or agency-issued or guaranteed securities that are backed by the
full faith and credit of the United States, or in high quality, short term
repurchase agreements fully collateralized by such securities.  Typically, the
Company will invest in U.S. Treasury bills or in repurchase obligations of a
"primary dealer" in government securities (as designated by the Federal Reserve
Bank of New York) or of any other dealer whose credit has been established to
the satisfaction of the Board of Directors, in any case collateralized by
securities which carry the full faith and credit of the United States.  A
repurchase agreement involves the purchase by an investor, such as the Company,
of a specified security and the simultaneous agreement by the seller to
repurchase it at an agreed-upon future date and at a price which is greater
than the purchase price by an amount





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<PAGE>   5
that reflects an agreed-upon interest rate.  Such interest rate is effective
for the period of time during which the investor's money is invested in the
arrangement and is related to current market interest rates rather than the
coupon rate on the purchased security.  The Company will require the continual
maintenance by its custodian or its correspondent in its account with the
Federal Reserve/Treasury Book Entry System of collateral in an amount at least
equal to the repurchase price.  If the seller were to default on its repurchase
obligation, the Company might suffer a loss to the extent that the proceeds
from the sale of the collateral were less than the repurchase price.  A
seller's bankruptcy could delay or prevent a sale of the collateral.  The
Company's Board of Directors has established procedures, which it will review
periodically, requiring Advisers to monitor the creditworthiness of the dealers
with which the Company enters into repurchase agreement transactions.

INVESTMENT ADVISER

         Pursuant to the terms of a proposed investment advisory agreement
between the Company and Advisers (the "Agreement"), Advisers will manage the
investments of the Company, subject to the supervision and control of the
Company's Board of Directors.  Specifically, Advisers will identify, evaluate,
structure, close and monitor the investments made by the Company.  Each loan or
other investment must be approved by a credit committee composed of the most
senior investment officers of Advisers, as well as by the Company's Board of
Directors.  The Company will not make any investments that have not been
recommended by Advisers.  Advisers is a publicly owned (Nasdaq symbol "ALLA")
registered investment adviser located at 1666 K Street, N.W., 9th Floor,
Washington, D.C.  20006, telephone (202) 331-1112.  Advisers is registered with
the Securities and Exchange Commission ("SEC" or "Commission") under the
Investment Advisers Act of 1940.  Once the Agreement is effected, by its terms,
the Agreement will remain in effect for two years from its effective date and
from year to year thereafter as long as it is approved at least annually by the
Board of Directors, including a majority of the directors who are not
"interested persons" of the Company within the meaning of the 1940 Act, or by
vote of the holders of a majority of the outstanding shares of the Company, as
defined in the 1940 Act.

         Advisers is a party to investment advisory agreements with Allied
Capital Corporation ("Allied I") and Allied Capital Corporation II ("Allied
II"), both BDCs which, directly or through Small Business Investment Company
("SBIC") subsidiaries, specialize in loans with equity features to, and equity
investments in, small business concerns.  Advisers is also the investment
adviser to two privately funded limited partnerships that engage in the same
business.  All of these entities co-invest with one another.  Advisers is party
to an investment advisory agreement with Allied Capital Lending Corporation
("Allied Lending"), also a BDC, that specializes in providing secured loans to
small businesses that may be partially guaranteed by the United States Small
Business Administration.  In addition, Advisers is the manager of Allied
Capital Commercial Corporation ("Allied Commercial"), a publicly held real
estate investment trust, and co-manager of Business Mortgage Investors, Inc.
("BMI"), a privately held real estate investment trust.  Allied Commercial and
BMI participate with one another in buying, from the FDIC, banks and other
institutions, performing small business loans secured by real estate.  At
December 31, 1995, total assets under Advisers' management were approximately
$670 million.

         Under the Agreement, the Company will be required to pay all of its
operating expenses, except those specifically required to be borne by Advisers
by the Agreement.  The latter include the compensation of the Company's
officers and the cost of office space, equipment and other personnel required
for the Company's day-to-day operations.  The Company will reimburse Advisers
promptly, against Advisers' voucher, for any expenses incurred by Advisers for
the Company's account.  Without limitation, such expenses will include all
expenses of any offering and sale by the Company of its shares and all expenses
of the Company's operations; the fees and disbursements of the Company's
counsel, accountants, custodian, transfer agent and registrar; fees and
expenses incurred in producing and effecting filings with federal and state
securities administrators; costs of the Company's periodic reports to and other
communications with the Company's shareholders; costs of promoting the
Company's stock; fees and expenses of members of the Company's Board of
Directors who are not directors, officers or employees of Advisers or of any
entity affiliated with Advisers, and fees of directors who are such officers,
directors or employees; premiums for the fidelity bond maintained by the
Company; and all transaction costs incident to the acquisition and disposition
of securities by the Company, including, without limitation, legal and
accounting fees and other professional or technical fees and expenses (e.g.,
credit report, title search and delivery charges, costs of specialized
consultants such as accountants or industry-specific technical experts, and
deal-specific travel expenses) incurred in monitoring, negotiating and
working-out such investments, as well as responding to any





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litigation arising therefrom.  If the Company for its corporate purposes uses
the services of attorneys or paraprofessionals on the staff of Advisers in lieu
of outside counsel, the Company will reimburse Advisers for such services at
hourly rates calculated to cover the cost of such services, as well as for
incidental disbursements.  The Company will reimburse Advisers promptly,
against Advisers' voucher, for (a) any origination fee with respect to any loan
or investment made by the Company that was identified or referred to the
Company by any third party with which the Company then has a written agreement
or arrangement that specifies the amount or rate of such fee or (b) any
origination fee with respect to any loan or investment made by the Company that
was identified or referred to the Company by any third party with which the
Company or Advisers then does not have a written agreement or arrangement.  All
such origination fees reimbursed to Advisers will be reviewed as of the end of
each calendar quarter by the Company's Board of Directors.

         The Company will, during the term of the Agreement, pay to Advisers an
investment advisory fee equal to (a) 3.5% per year of the average of the
quarter-end values of the Company's consolidated total assets (less the
Company's Interim Investments, as defined below, and cash) for such year (the
"Base Fee"), and (b) 0.125% per quarter of the quarter-end values of the
Company's consolidated Interim Investments and cash.  For this purpose "Interim
Investments" are defined as short-term securities issued or guaranteed by the
U.S. government or an agency or instrumentality thereof, or in repurchase
agreements fully collateralized by such securities.

         Upon the completion of an annual audit at the end of each calendar
year, the Base Fee may be increased or decreased depending on the amount, if
any, by which the investment performance of the Company for such year is
greater or less than 13% for such year.  At the end of each of the Company's
fiscal years, the net asset value per share will be calculated by the Company's
auditors.  The investment return of the Company in a particular year will be
the sum of: (a) the change in its net asset value per share during such year;
(b) the value of its cash distributions per share during such year; and (c) the
value of capital gains taxes per share paid or payable, if any, on
undistributed realized long-term capital gains during such year.  The
investment performance of the Company for such year will be its investment
return expressed as a percentage of its net asset value per share at the
beginning of such year.  (For this purpose, the value of cash distributions per
share and capital gains taxes per share paid or payable on undistributed
realized long-term capital gains will be treated as reinvested in shares of the
investment company at the net asset value per share in effect at the close of
business on the record date for the payment of such distributions and the date
on which provision is made for such taxes, respectively, after giving effect to
such distributions and taxes.)  To the extent the investment performance of the
Company exceeds 13% for that year, one-fifth of one percentage point will be
added to the Base Fee for every one percentage point of the difference between
the investment performance of the Company and 13%.  The maximum amount added to
the Base Fee will be one percentage point, with the adjusted Base Fee not to
exceed 4.5%.  To the extent the investment performance of the Company is less
than 13% for that year, one-fifth of one percentage point will be subtracted
from the Base Fee for every one percentage point of the difference between the
investment performance of the Company and 13%.  The maximum amount subtracted
from the Base Fee will be one percentage point, with the adjusted Base Fee not
to be lower than 2.5% (the "Minimum Base Fee"). For purposes of calculating the
adjustment to the Base Fee, performance percentages will be rounded off to the
nearest whole percentage.

         The Company will, during the term of the Agreement, pay to Advisers,
quarterly, the Minimum Base Fee equal to 0.625% per quarter (2.5% on an
annualized basis) of the quarter-end value of the Company's consolidated total
assets (less the Company's Interim Investments and cash).  The Company will
also pay 0.125% per quarter (0.5% on an annualized basis) of the quarter-end
value of the Company's consolidated Interim Investments and cash.

         For the purpose of calculating the investment advisory fee, the values
of the Company's assets will be determined as of the end of each calendar
quarter by the Board of Directors.  The Company will pay the Minimum Base Fee
and the fee on Interim Investments and cash with respect to a calendar quarter
as soon as practicable after the values of the Company's assets have been
determined for such quarter.  The Company will pay the difference between the
Minimum Base Fee and the Base Fee as soon as practicable after the values of
the Company's assets have been determined for the year-end.  If the termination
of Advisers' services hereunder does not coincide with the last day of a
calendar quarter or the year-end, then the Minimum Base Fee determined in
accordance with this paragraph shall be multiplied by the ratio of the number
of days in such quarter during which Advisers rendered services to the total
number of days in such quarter, with corresponding treatment for calculating
any adjustments to the Base Fee.





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         The fees provided for in the Agreement are substantially higher than
that paid by most investment companies because of the efforts and resources
devoted by Advisers to identifying, structuring, closing and monitoring the
types of private non-performing investments in which the Company will
specialize.  Other entities managed by Advisers, however, pay fees on
comparable bases, and the Company understands that the fees are not in excess of
that frequently paid by private investment funds engaged in similar types of
investments, in addition to the substantial participation in profits that such
private funds also typically allocate to management.  Neither Advisers nor its
directors and officers will personally participate in any investments of the
Company or receive any profit-sharing interest therein except to the extent of
their ownership of shares of the Company and options thereon, if any.

OTHER POLICIES

         The Company has also adopted the following additional policies which
may be changed by action of its board of directors:

         The Company may borrow money and issue senior securities, to the
extent that the 1940 Act permits a BDC to do so, for the purpose of making
loans or for temporary or emergency purposes.  A BDC may issue and sell senior
securities if, immediately after such issuance or sale, the securities will
have asset coverage of at least 200%.

         The Company will not act as an underwriter of securities of other
issuers (except to the extent that it may be deemed an "underwriter" of
securities purchased by it that must be registered under the Securities Act of
1933, as amended (the "Securities Act"), before they may be offered or sold to
the public), or purchase or sell real estate or interests in real estate or
real estate investment trusts (except that the Company may purchase and sell
real estate or interests in real estate in connection with the orderly
liquidation of investments and may own loans secured by or made to companies
that are in the business of buying and selling real estate), or sell securities
short, purchase securities on margin or write put or call options, or engage in
the purchase or sale of commodities or commodity contracts (except where
necessary in working out distressed loan situations) or acquire any of the
voting securities of, or invest any of its assets in any securities issued by,
other investment companies.  The Company may not buy or sell publicly traded
options.

         The Company can invest in any type of small business security that, in
the Company's judgment, offers a reasonable possibility of an adequate return
on the investment.

ADDITIONAL MATTERS

         Absence of Direct Competition.  The Company believes that its business
is unique.  While other companies may purchase non-performing loans, typically
they will simply hold those loans as passive investors and at some point
liquidate them.  The Company, however, will work with borrowers to assist them
in improving the outlook for their businesses and thus increase the likelihood
that the loans will become performing.

         Environmental Law Considerations.  The various types of properties
which secure the mortgage loans held by the Company (the "mortgaged
properties"), and the businesses that operate at those properties, are subject
to federal, state, and local environmental laws, such as the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended
(commonly referred to as the "Superfund" law), and the Resource Conversation
and Recovery Act, and their state counterparts, as well as to common law causes
of action for environmental harms.  These laws and causes of actions could
diminish the value of any mortgage property in the event such property is
discovered to be contaminated or otherwise in violation of the environmental
laws.

         As a general matter, the current owner and/or operator of a property,
and any individual or entity that formerly owned or operated the property at
the time contamination was occurring, may be held responsible for cleaning up
contamination on, or originating on, the property.  Persons or entities who
take title to mortgaged property to protect a security interest generally are
exempted from this liability scheme, except that liability may attach if they
become so involved in management of the property, either before or after a
foreclosure, that they may





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<PAGE>   8
be deemed "operators" for liability purposes.  If such an event were to occur
with a mortgaged property, liability may not be limited to the value of the
affected mortgaged property and may extend to the Company as a whole.

         Further, the security interest in an affected property may be impaired
if environmental liabilities cause a mortgagor to become insolvent, if
environmental liabilities cause a diminution in the value of the mortgaged
property, or if environmental liabilities render foreclosure on a property
unavailable as a remedy because of a significant risk liability.  Moreover,
under the laws of some states, contamination may give rise to a lien, commonly
described as a "superlien," which may take priority over an existing mortgage
lien or property.

         In order to minimize any exposure that the Company may have to
environmental liabilities, the Company intends to take customary precautionary
steps, including requiring environmental site assessments and, if necessary,
site remediation.

EMPLOYEES

         The Company has no employees as all of its personnel are to be
furnished by Advisers.

ITEM 2.  PROPERTIES.

         The Company does not own or lease any properties or other tangible
assets.

ITEM 3.   LEGAL PROCEEDINGS.

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

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

         None.

EXECUTIVE OFFICERS OF THE REGISTRANT.

         The following table sets forth the names, ages and positions of the
executive officers of the Company as of March 1, 1996, as well as certain other
information with respect to those persons:

<TABLE>
<CAPTION>
                                               Positions Currently                       Principal Occupations
 Name                                Age      Held with the Company                     During Past Five Years
 ----                                ---      ---------------------                     ----------------------
 <S>                                  <C>     <C>                             <C>
 David Gladstone                      53      President and Chief Executive   Employed by Allied I or Advisers since
                                              Officer                         1974; President or executive officer of
                                                                              the Company since its inception; Chairman
                                                                              and Chief Executive Officer of Allied I,
                                                                              Allied II, Allied Commercial, Allied
                                                                              Lending, and Advisers; Director,
                                                                              President and Chief Executive Officer of
                                                                              BMI.

 George C. Williams                   69      Chairman                        Employed by Allied I or Advisers since
                                                                              1959; Vice Chairman of Allied I, Allied
                                                                              II, Allied Lending, Allied Commercial and
                                                                              Advisers; Chairman of BMI.  He is the
                                                                              father of G. Cabell Williams III.
</TABLE>





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<TABLE>
 <S>                                  <C>     <C>                             <C>
 John M. Scheurer                     43      Executive Vice President        President and Chief Operating Officer of
                                                                              Allied Commercial since 1992; Executive
                                                                              Vice President of Allied I, Allied II,
                                                                              Allied Lending, Advisers and BMI since
                                                                              the later of 1991 or each company's
                                                                              public offering or inception; engaged in
                                                                              real estate brokerage, leasing and
                                                                              consulting from 1984 to 1991.

 Joan M. Sweeney                      36      Executive Vice President        Employed by Advisers since 1993;
                                                                              President and Chief Operating Officer of
                                                                              Advisers; Executive Vice President of
                                                                              Allied I, Allied II, Allied Commercial,
                                                                              Allied Lending, and BMI; Senior Manager
                                                                              at Ernst & Young from 1990 to 1993.

 Jon A. DeLuca                        33      Executive Vice President,       Employed by Advisers since 1994;  Executive
                                              Treasurer and Chief             Vice President, Treasurer and Chief Financial
                                              Financial Officer               Officer of Allied I, Allied II, Allied
                                                                              Commercial, Allied Lending, BMI and
                                                                              Advisers since 1994; Manager of
                                                                              Entrepreneurial Services at Coopers &
                                                                              Lybrand from 1986 to 1994.

 Thomas R. Salley                     38      General Counsel and Secretary   Employed by Advisers since 1988; General
                                                                              Counsel and Secretary of Allied I, Allied
                                                                              II, Allied Commercial, Allied Lending,
                                                                              BMI and Advisers.
</TABLE>


                                    PART II

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

         There is currently no market for the Company's securities.

ITEM 6.   SELECTED FINANCIAL DATA.


<TABLE>
<CAPTION>
                                                             As of and For the Period
                                                             Ended December 31, 1995 *
                                                             -----------------------  
          <S>                                                         <C>
          Total Assets                                                 $1,050
          Total Liabilities                                            $    0
          Net Assets                                                   $1,050
            per share                                                  $   15
          Number of Shares Outstanding                                     70
</TABLE>

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

*        The Company received its initial equity capitalization of $1,050 on
August 10, 1995.  As of December 31, 1995, the Company had not yet commenced
operations.





                                       8
<PAGE>   10
ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
         RESULTS OF OPERATIONS

LIQUIDITY, CAPITAL RESOURCES AND RESULTS OF OPERATIONS

Allied Capital Mortgage Corporation (the Company) was incorporated in the state
of Maryland on August 10, 1995 and was organized as a closed-end,
non-diversified, management investment company that has elected to be regulated
as a business development company under Section 54 of the Investment Company
Act of 1940.

The Company filed with the Securities and Exchange Commission a Form 10
registration statement registering 4,000,000 shares of the Company's common
stock ($0.0001 par value) and 150,000 units, consisting of one share of common
stock and one debt certificate, on August 23, 1995.  Amendments were filed on
September 5, 1995 and October 20, 1995 and the registration went effective on
October 23, 1995.  The purpose of the registration statement was to cause the
Company to become a reporting company under the Securities Exchange Act of
1934, which would, in turn, allow the Company to elect to be regulated as a
business development company under the Investment Company Act of 1940 ("1940
Act"). Any offering of the Company's securities may be made only pursuant to a
registration statement effective under the Securities Act of 1933 or an
exemption from registration thereunder.  The only shares sold by the Company
were those shares sold to the Company's President and Chairman in connection
with the organization of the Company.  The proceeds from the sale of stock 
will be invested in accordance with the Company's investment objectives and
policies.  The Company has recently been organized and currently has no
operations.  Once operations begin, its business will consist of investing in
small businesses through the purchase of non-performing loans or other
interests.  The Company is part of a group of funds managed by Allied Capital
Advisers, Inc. (the "Adviser"), which specializes in making loans to, and
investments in, small businesses, as well as buying performing and
sub-performing loans from financial institutions and other third parties.

The Company will purchase non-performing loans from financial institutions and
other third parties.  It is expected that many of these loans will involve
first mortgages on real estate, as well as first liens on the operating assets
of small businesses.  Once a mortgage is purchased, the Company will contact
the small business concern that borrowed the funds secured by the mortgage.
The objective will be to place part of the non-performing mortgage on a
performing basis, and to reduce the remaining part of the loan to an equity
ownership in the business or an equity ownership in the real estate asset
underlying the mortgage.

The Company proposes to enter into an Investment Advisory Agreement (the
Agreement) with Allied Capital Advisers, Inc.  The Agreement would remain in
effect for two years from its effective date and from year to year thereafter,
subject to annual approval by the Board of directors, including its independent
directors, or by vote of the holders of a majority of the outstanding shares of
the Company.  The Agreement can be terminated at any time on sixty days notice,
without the payment of penalty, by the Board of Directors or by vote of the
holders of a majority of the Company's outstanding shares and will terminate
automatically in the event of its assignment.  Under the Agreement, the Adviser
will manage the investments of the Company, subject to the supervision and
control of the Company's Board of Directors.  Specifically, the Adviser will
identify, evaluate, structure, close and follow the investments made by the
Company.  The Company will not make any investments that have not been
recommended by the Adviser.  Except as to those investment decisions that
require specific Board approval, the Adviser will have the authority to effect
purchases and sales of assets for the Company's account.

The Company intends to qualify to be treated as a "regulated investment
company" (RIC) under Subchapter M of the Internal Revenue Code (the "Code"). If
the Company qualifies as a RIC and distributes to shareholders annually in a
timely manner at least 90% of its "investment company taxable income," as
defined in the Code (i.e., net investment income, including accrued discount,
and net short-term capital gain), it will not be subject to federal income tax
on the portion of its investment company taxable income and net capital gain
(net long-term capital gain in excess of net short-term capital loss)
distributed to shareholders as required under the Code.  In addition, if the
Company distributes in a timely manner 98% of its net capital gain income for
each one-year period, and distributes 98% of its investment company taxable
income for each calendar year (as well as any income not distributed in prior
years), it will not be subject to the 4% nondeductible federal excise tax
imposed with respect to certain undistributed income of regulated investment
companies.  If the Company qualifies as a RIC as it intends to do, it generally 
will endeavor to distribute to shareholders all of its investment company 
taxable income and its net capital gain, if any, for each taxable year so 
that the Company will not incur income and excise taxes on its earnings.  No 
assurances can be made as to whether the company will ultimately qualify as 
a RIC, or after such qualification is achieved, the Company will continue to 
qualify as a RIC.





                                       9
<PAGE>   11
         Risks regarding acquisition of non-performing loans.  The Company's
anticipated business operations depend upon its ability to purchase or acquire
non-performing loans from the FDIC, banks and other financial institutions.
Any such acquisitions of loans may require that the Company incur significant
levels of leverage.  There can be no assurance that the Company will be able to
obtain the necessary to desired levels of leverage or that such leverage will
be available on acceptable terms.  There also can be no assurance that the
Company will be successful in acquiring loans or an interest in any pool of
non-performing mortgage loans from the FDIC or through other means, or that any
interest or loans so acquired will be of any particular volume or principal
amount or that any such loans can be acquired at any particular prices or
discounts to face amount.

         Risks regarding restructuring of non-performing loans.  The Company's
anticipated business operations depend upon its ability to restructure
non-performing loans that it may purchase or otherwise acquire.  There can be
no assurance that the Company will be able to restructure such loans, that the
terms on which a borrower may be willing to restructure any such loan will be
acceptable to the Company or that any restructured loan will not default.
There also can be no assurance that borrowers or their other creditors will not
commence bankruptcy or insolvency proceedings or otherwise seek protection from
creditors, which may impose other obstacles to, or delay substantially, any
eventual loan restructuring that may occur.  Such delays or refusals to
restructure loans on terms acceptable to the Company may impact adversely the
financial results of the Company.  In the event that any loan cannot be
restructured, the Company may be required to hold the loan and incur any loss
upon default, or dispose of such loan at a significant loss, as there is no
established trading market in which such loans are sold.

         Risks of default, noncollection and loss.  Loans to small businesses
involve a high risk of default.  Non-performing loans involve an even higher
risk of default if not restructured upon terms that place the restructured loan
on a performing basis and reduce the risk of default.  The Company does not
expect that any of the loans that it proposes to acquire will benefit from any
government guarantees so that, in the event of default, the Company would have
to bear any loss.

         Potential conflicts.  For the purpose of acquiring and carrying the
non-performing loans from the FDIC, banks and other financial institutions, in
which the Company's portfolio will be invested, the Company or an entity or
entities through which the Company anticipates acquiring such loans are
expected to borrow significant amounts of funds from Allied Capital Commercial
Corporation ("Allied Commercial") and Business Mortgage Investors, Inc.
("BMI"), both of which are managed by the Adviser, as well as banks or other
institutional lenders.  Such borrowings will cause the Company or such entities
to be leveraged and will cause the lenders of those funds, which could include
Allied Commercial and BMI, to have fixed dollar claims on the assets of the
Company or such entities superior to the claims of the Company and, ultimately,
its shareholders.  In addition, either or both of Allied Commercial and BMI are
expected to loan amounts with which the Company proposes to acquire loans for
its investment portfolio.  In view of the foregoing, it is possible that the
interests of Allied Commercial and BMI, in their capacities as lenders to the
Company, may conflict with the interest of the Company and its shareholders.
Since the Adviser serves as the investment adviser to the Company as well
as the investment manager of Allied Commercial and BMI, it may have conflicts
of interest with respect to its management of the investments and operations of
the Company.  The Adviser is aware of this potential conflict of interest
and has informed the Company that it will take all reasonable steps to ensure
that the Company's interests will be protected.

         Interest rate fluctuations.  Since loans proposed to be purchased by
the Company may be made at fixed rates of interest, the return on, and value
of, the Company's investment in such loans could decline in the event of any
increase in prevailing interest rates.  Likewise, the return on, and value of,
the Company's investment in any restructured loans made at fixed rates of
interest could decline in the event of any increase in prevailing interest
rates.  Any substantial increase in market rates of interest may result in
greater rates of prepayments or defaults on performing portfolio loans.  As the
Company or any entity or entities through which the Company proposes to acquire
and hold such loans may incur significant levels of indebtedness, increases or
decreases in market rates on interest may adversely impact any return to the
Company.

         Competition.  There are a significant number of institutional
investors, as well as smaller pools of capital, that have been formed in order
to take advantage of the large number of non-performing loans and investments
in small businesses available from such sources as the FDIC, banks and other
financial institutions.  Other competitors,





                                       10
<PAGE>   12
which are larger than the Company and have more assets than the Company, may be
able to pay more for non-performing loans or may purchase more desirable
non-performing loans, and therefore may be a significant competitive factor in
the Company's ability to purchase non-performing loans.

         Dependence on key personnel.  The development, operation and success
of the Company and its business depends in major part on the efforts of the
Adviser and its key personnel expected to provide investment management and
loan restructuring services to the Company.  Termination of the Agreement
between the Company and Adviser or loss of its key personnel expected to
provide such services to the Company would have a material adverse effect on
the ability of the Company to conduct its business as described in this
registration statement.

         Loss of pass-through tax treatment.  The Company may cease to qualify
for pass-through tax treatment if it is unable to comply with any of the
requirements contained in Subchapter M of the Internal Revenue Code of 1986, as
amended (the "Code").  Non-availability of pass-through tax treatment would
have a materially adverse effect on the total return, if any, obtainable from
an investment in the Company's shares.  Even if the Company does qualify as a
RIC for purposes of pass-through tax treatment, it may be subject to a 4%
excise tax, and to federal and state taxes based on income, if it fails to make
certain distributions in a timely manner.  Under the 1940 Act, however, the
Company will not be permitted to make distributions to shareholders unless it
meets certain asset coverage requirements with respect to money borrowed and
senior securities issued.





                                       11
<PAGE>   13
ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

                      ALLIED CAPITAL MORTGAGE CORPORATION
                      STATEMENT OF ASSETS AND LIABILITIES
                            AS OF DECEMBER 31, 1995

<TABLE>
           <S>                                                       <C>
           ASSETS
           Cash  . . . . . . . . . . . . . . . . . . . . . . . .     $1,050
                                                                     ------
                   Total Assets  . . . . . . . . . . . . . . . .      1,050

           LIABILITIES
           Liabilities . . . . . . . . . . . . . . . . . . . . .     ------
                                                                     ------

           NET ASSETS

           Common stock, $0.0001 par value; 10,000,000 shares
           authorized; 70 shares issued and outstanding  . . . .     ------

           Additional paid-in capital  . . . . . . . . . . . . .      1,050
                                                                     ------

                   Net Assets  . . . . . . . . . . . . . . . . .     $1,050
                                                                     ======

           Net Asset Value per share . . . . . . . . . . . . . .     $15.00
                                                                     ======
</TABLE>


                  THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
                          OF THIS FINANCIAL STATEMENT





                                       12
<PAGE>   14
                      ALLIED CAPITAL MORTGAGE CORPORATION
                            STATEMENT OF OPERATIONS

<TABLE>
<CAPTION>
                                                                For the period August 10, 1995
                                                                (date of incorporation) through
                                                                       December 31, 1995
                                                                       -----------------
          <S>                                                              <C>
          Investment income:
           Interest                                                        $   0
                                                                            ----
                   Total investment income                                     0
                                                                            ----

          Expenses:
           Operating Expenses                                                  0
                                                                            ----
                   Total Expenses                                              0
                                                                            ----

          Net investment income                                                0

          Net realized gains on investments                                    0
                                                                            ----

          Net investment income before net unrealized
          appreciation (depreciation) on investments                           0

          Net unrealized appreciation (depreciation) on
          investments                                                          0
                                                                            ----

          Net increase in net assets resulting from
          operations                                                       $   0
                                                                           =====

          Earnings per share                                               $   0
                                                                           =====
          Weighted average number of shares outstanding                      70 
                                                                           =====
</TABLE>


                     THE ACCOMPANYING NOTES ARE AN INTEGRAL
                        PART OF THIS FINANCIAL STATEMENT





                                       13
<PAGE>   15
                      ALLIED CAPITAL MORTGAGE CORPORATION
                       STATEMENT OF CHANGES IN NET ASSETS

<TABLE>
<CAPTION>
                                                             For the Period August 10, 1995
                                                             (date of incorporation) through
                                                                   December 31, 1995
                                                                   -----------------
         <S>                                                              <C>
         Increase in net assets resulting from
         operations:

                  Net investment income                                    $   0

                  Net realized gains on investments                            0

                  Net change in unrealized appreciation                        0
                  (depreciation) on investments                             ----
                                               
                       Net increase in net assets                              
                         resulting from operations                             0

         Distributions to Shareholders                                         0

         Capital Share Transactions                                        1,050
                                                                           -----

         Net Increase in Net Assets                                        1,050

         Net assets at beginning of period                                     0
                                                                            ----

         Net assets at end of period                                      $1,050
                                                                          ======

         Net asset value per share                                           $15
                                                                             ===

         Shares outstanding at end of period                                  70
                                                                              ==
</TABLE>


                     THE ACCOMPANYING NOTES ARE AN INTEGRAL
                        PART OF THIS FINANCIAL STATEMENT





                                       14
<PAGE>   16
                      ALLIED CAPITAL MORTGAGE CORPORATION
                         NOTES TO FINANCIAL STATEMENTS
                            AS OF DECEMBER 31, 1995

NOTE 1.  ORGANIZATION

Allied Capital Mortgage Corporation (the Company) was incorporated in the state
of Maryland on August 10, 1995 and was organized as a closed-end,
non-diversified, management investment company that has elected to be regulated
as a business development company under Section 54 of the Investment Company
Act of 1940.

The Company filed with the Securities and Exchange Commission a Form 10
registration statement registering 4,000,000 shares of the Company's common
stock ($0.0001 par value) and 150,000 units, consisting of one share of common
stock and one debt certificate, on August 23, 1995.  Amendments were filed on
September 5, 1995 and October 20, 1995 and the registration went effective on
October 23, 1995.  The purpose of the registration statement was to cause the
Company to become a reporting company under the Securities Exchange Act of
1934, which would, in turn, allow the Company to elect to be regulated as a
business development company under the Investment Company Act of 1940 ("1940
Act").  Any offering of the Company's securities may be made only pursuant to a
registration statement effective under the Securities Act of 1933 or an
exemption from registration thereunder.  The only shares sold by the Company
were those shares sold to the Company's President and Chairman in connection
with the organization of the Company.  The proceeds from the sale of stock 
will be invested in accordance with the Company's investment objectives and 
policies.  The Company has recently been organized and currently has no 
operations.  Once operations begin, its business will consist of investing  in
small businesses through the purchase of non-performing loans or other 
interests.  The Company is part of a group of funds managed by Allied Capital 
Advisers, Inc., which specializes in making loans to, and investments in, 
small businesses, as well as buying performing and sub-performing loans from 
financial institutions and other third parties.

The Company will purchase non-performing loans from financial institutions and
other third parties.  It is expected that many of these loans will involve
first mortgages on real estate, as well as first liens on the operating assets
of small businesses.  Once a mortgage is purchased, the Company will contact
the small business concern that borrowed the funds secured by the mortgage.
The objective will be to place part of the non-performing mortgage on a
performing basis, and to reduce the remaining part of the loan to an equity
ownership in the business or an equity ownership in the real estate asset
underlying the mortgage.

The Company intends to qualify to be treated as a "regulated investment
company" (RIC) under Subchapter M of the Internal Revenue Code (the "Code"). If
the Company qualifies as a RIC and distributes to shareholders annually in a
timely manner at least 90% of its "investment company taxable income," as
defined in the Code (i.e. net investment income, including accrued discount,
and net short-term capital gain), it will not be subject to federal income tax
on the portion of its investment company taxable income and net capital gain
(net long-term capital gain in excess of net short-term capital loss)
distributed to shareholders as required under the Code.  In addition, if the
Company distributes in a timely manner 98% of its net capital gain income for
each one-year period, and distributes 98% of its investment company taxable
income for each calendar year (as well as any income not distributed in prior
years), it will not be subject to the 4% nondeductible federal excise tax
imposed with respect to certain undistributed income of regulated investment
companies.  If the Company qualifies as a RIC as it intends to do, it generally
will endeavor to distribute to shareholders all of its investment company
taxable income and its net capital gain, if any, for each taxable year so that
the Company will not incur income and excise taxes on its earnings.  No
assurances can be made as to whether the company will ultimately qualify as a
RIC, or after such qualification is achieved, the Company will continue to
qualify as a RIC.

NOTE 2.  INVESTMENT ADVISORY AGREEMENT

The Company proposes to enter into an Investment Advisory Agreement (the
Agreement) with Allied Capital Advisers, Inc., (the "Adviser").  The Agreement
would remain in effect for two years from its effective date and from year to
year thereafter, subject to annual approval by the Board of Directors,
including its independent directors, or by vote of the holders of a majority of
the outstanding shares of the Company.  The Agreement can be terminated at any
time on sixty days notice, without the payment of penalty, by the Board of
Directors or by vote of the holders of a majority of the Company's outstanding
shares and will terminate automatically in the event of its assignment.





                                       15
<PAGE>   17
Under the Agreement, the Adviser will manage the investments of the Company,
subject to the supervision and control of the Company's Board of Directors.
Specifically, the Adviser will identify, evaluate, structure, close and follow
the investments made by the Company.  The Company will not make any investments
that have not been recommended by the Adviser.  Except as to those investment
decisions that require specific Board approval, the Adviser will have the
authority to effect purchases and sales of assets for the Company's account.

The Company will be required to pay its share of the expenses (including
accounting, legal, printing, clerical, registration, filing and other expenses)
incurred by the Company in connection with its registration of common shares.
The Company will reimburse the Adviser promptly, against the Adviser's voucher,
for any expenses incurred by the Adviser for the Company's account.  Without
limitation, such expenses will include all expenses of any offering and sale by
the Company of its shares and all expenses of the Company's operations; the
fees and disbursements of the Company's counsel, accountants, custodian,
transfer agent and registrar; fees and expenses incurred in producing and
effecting filings with federal and state securities administrators; costs of
the Company's periodic reports to and other communications with the Company's
shareholders; costs of promoting the Company's stock; fees and expenses of
members of the Company's Board of Directors who are not directors, officers, or
employees; premiums for the fidelity bond maintained by the Company; and all
transaction costs incident to the acquisition and disposition of fees and
expenses (e.g., credit report, title search and delivery charges, costs of
specialized consultants such as accountants or industry-specific technical
experts, and deal-specific travel expenses) incurred in monitoring, negotiating
and working-out such investments, as well as responding to any litigation
arising therefrom.  If the Company for its corporate purposes uses the services
of attorneys or paraprofessionals on the staff of the Adviser in lieu of
outside counsel, the Company will reimburse the Adviser for such services at
hourly rates calculated to cover the cost of such services, as well as for
incidental disbursements.  The Company will reimburse the Adviser promptly,
against the Adviser's voucher, for (a) any origination fee with respect to any
loan or investment made by the Company that was identified or referred to the
Company by any third party with which the Company or the Adviser then has a
written agreement or arrangement that specifies the amount or rate of such fee
or (b) any origination fee with respect to any loan or investment made by the
Company that was identified or referred to the Company by any third party with
which the Company or the Adviser then does not have a written agreement or
arrangement.  All such origination fees reimbursed to the Adviser will be
reviewed as of the end of each calendar quarter by the Company's Board of
Directors.

The Company will, during the term of the Agreement, pay to the Adviser, an
investment advisory fee equal to (a) 3.5% per year of the average of the
quarter-end values of the Company's consolidated total assets (less the
Company's Interim Investments, as defined below, and cash) for such year (the
"Base Fee"), and (b) 0.125% per quarter of the quarter-end values of the
Company's consolidated Interim Investments and cash.

For this purpose "Interim Investments" are defined as short-term securities
issued or guaranteed by the U.S. government or an agency or instrumentality
thereof, or in repurchase agreements fully collateralized by such securities.

Upon the completion of an annual audit, at the end of each calendar year, the
Base Fee may be increased or decreased depending on the amount, if any, by
which the investment performance of the Company exceeds or is exceeded by 13%.
At the end of each of the Company's fiscal years, the net asset value per share
will be calculated by the Company's auditors.  The investment return of the
Company in a particular year will be the sum of: (a) the change in its net
asset value per share during such year; (b) the value of its cash distributions
per share during such year, and (c) the value of capital gains taxes per share
paid or payable, if any, on undistributed realized long-term capital gains
during such year.  The investment performance of the Company for such year will
be its investment return expressed as a percentage of its net asset value per
share at the beginning of such year.  (For this purpose, the value of cash
distributions per share and capital gains taxes per share paid or payable or
undistributed realized long-term capital gains will be treated as reinvested in
shares of the investment company at the net asset value per share in effect at
the close of business on the record date for the payment of such distributions
and the date on which provision is made for such taxes, respectively, after
giving effect to such distributions and taxes).  To the extent the investment
performance of the Company exceeds 13% for that year, one-fifth of one
percentage point will be added to the Base Fee for every one percentage point
of the difference between the investment performance of the Company and 13%.
The maximum amount added to the Base Fee will be one percentage point, with the
adjusted Base Fee not to exceed 4.5%.  To the extent the investment performance
of the Company is exceeded by 13% for





                                       16
<PAGE>   18

that year, one-fifth of one percentage point will be subtracted from the Base
Fee for every one percentage point of the difference between the investment
performance of the Company and 13%.  The maximum amount subtracted from the
Base Fee will be one percentage point, with the adjusted Base Fee not to be
lower than 2.5% (the "Minimum Base Fee").  For purposes of calculating the
adjustment to the Base Fee, performance percentages will be rounded off to the
nearest whole percentage.

The Company will, during the term of the Agreement, pay to the Adviser,
quarterly, the Minimum Base Fee equal to 0.625% per quarter (2.5% on an
annualized basis) of the quarter-end value of the Company's consolidated total
assets (less the Company's Interim Investments and cash).  The Company will
also pay 0.125% per quarter (0.5% on an annualized basis) of the quarter-end
value of the Company's consolidated Interim Investments and cash.

For the purpose of calculating the investment advisory fee, the values of the
Company's assets will be determined as of the end of each calendar quarter by
the Board of Directors.  The Company will pay the Minimum Base Fee and the fee
on Interim Investments and cash with respect to a calendar quarter as soon as
practicable after the values of the Company's assets have been determined for
such quarter.  The Company will pay the difference between the Minimum Base Fee
and the Base Fee as soon as practicable after the values of the Company's
assets have been determined for the year-end.  If the termination of the
Advisers' services hereunder does not coincide with the last day of a calendar
quarter or the year-end, then the Minimum Base Fee determined in accordance
with this paragraph shall be multiplied by the ratio of the number of days in
such quarter during which Adviser rendered services to the total number of days
in such quarter, with corresponding treatment for calculating any adjustments
to the Base Fee.

NOTE 3.  NET ASSETS

The Company has 10,000,000 shares of stock authorized with a par value of
$.0001 per share.  All shares of common stock have equal rights as to earnings,
assets, dividends and voting privileges.  As of December 31, 1995, there were
70 shares of common stock issued and outstanding of which the Chairman and
President of the Company each owned 35 shares.

REPORT OF INDEPENDENT ACCOUNTANTS

TO THE BOARD OF DIRECTORS AND STOCKHOLDERS
ALLIED CAPITAL MORTGAGE CORPORATION

We have audited the accompanying statement of assets and liabilities of Allied 
Capital Mortgage Corporation as of December 31, 1995, and the related
statements of operations and changes in net assets for the period August 10,
1995 (date of incorporation) through December 31, 1995.  These financial
statements are the responsibility of the Company's management.  Our
responsibility is to express an opinion on these financial statements based on
our audit.

We conducted our audit in accordance with generally accepted auditing
standards.  Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement.  An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements.  An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation.  We believe that our audit provides a reasonable basis
for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Allied Capital Mortgage
Corporation as of December 31, 1995, and the results of its operations and
changes in its net assets for the period August 10, 1995 (date of
incorporation) through December 31, 1995 in conformity with generally accepted
accounting principles.


                                                    MATTHEWS, CARTER AND BOYCE

McLean, Virginia
March 27, 1996





                                       17
<PAGE>   19
ITEM 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
          FINANCIAL DISCLOSURE.

         None.

                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

DIRECTORS OF THE REGISTRANT

<TABLE>
<CAPTION>
                                                   Position With
    Name and Address               Age              the Company(2)              Principal Occupations During Past Five Years
-----------------------            ---             -------------                --------------------------------------------
<S>                                <C>             <C>                          <C>
David Gladstone(1)                 53              Director, President,         Chairman and Chief Executive Officer of Allied
1666 K Street, N.W.                                Chief Executive              Capital Advisers, Inc., Allied Capital
Washington, D.C. 20006                             Officer                      Corporation, Allied Capital Corporation II,
                                                                                Allied Capital Commercial Corporation and
                                                                                Allied Capital Lending Corporation; Director,
                                                                                President and Chief Executive Officer of 
                                                                                Business Mortgage Investors, Inc.; Director of
                                                                                The Riggs National Corporation; Trustee of The
                                                                                George Washington University. He has held
                                                                                positions as an executive officer of Allied
                                                                                Capital Advisers, Inc. since 1976 and with
                                                                                Allied Capital Corporation, Allied Capital 
                                                                                Corporation II, Allied Capital Commercial
                                                                                Corporation, Allied Capital Lending Corporation
                                                                                and Business Mortgage Investors, Inc. since the
                                                                                later of that year or their inception.

George C. Williams(1)              69              Director, Chairman           Vice Chairman of the Board of Allied Capital
1666 K Street, N.W.                                of the Board                 Advisers, Inc., Allied Capital Corporation,
Washington, D.C. 20006                                                          Allied Capital Corporation II, Allied Capital
                                                                                Commercial Corporation and Allied Capital
                                                                                Lending Corporation; Chairman of Business
                                                                                Mortgage Investors, Inc.; He has held
                                                                                positions as an executive officer of Allied
                                                                                Capital Advisers, Inc., Allied Capital
                                                                                Corporation, Allied Capital Corporation II,
                                                                                Allied Capital Commercial Corporation, Allied
                                                                                Capital Lending Corporation and Business
                                                                                Mortgage Investors, Inc. since the later of 1964
                                                                                of their inception.

Roger Machanic                     62              Director                     President, Montgomery Real Estate Corporation
300 Montgomery Street                                                           since 1991; Chairman, MREC (1986-1991); Trustee
#200                                                                            Emeritus, George Mason University Foundation, Inc.
Alexandria, VA  22314                                                           since 1995; Trustee and Treasurer, George Mason
                                                                                University (1991-1994); Advisory Board member,
                                                                                Virginia Commerce Bank since 1991.

Elizabeth Conahan                  44              Director                     Senior Vice President, Walker & Dunlap since
7500 Old Georgetown Road                                                        1994; Senior Vice President, NationsBank
Suite 800                                                                       (1991-1994); Principal and Division Manager;
Bethesda, MD  20814                                                             AMRESCO Institutional, Inc. (1991-1994);
                                                                                Senior Vice President, UST Corp. (1988-1991);
                                                                                Member, Urban Land Institute; Member, Urban
                                                                                Development and Mixed-Use Council; Vice
                                                                                Chairman, Inner-City Committee.

Landon V. Butler                   54              Director                     President, Landon Butler Company since 1981;
1215 19th Street, N.W.                                                          Member, Policy Board of Multi-Employer
Washington, D.C.  20036                                                         Property Trust; Vice Chairman, Poland Partners
                                                                                Management Company.

Joseph Morningstar                 42              Director                     Managing Director and Partner, Rockwood
555 5th Avenue                                                                  Realty Associates, Inc. since 1991; Vice
New York, New York  10017                                                       President, afa Asset Services, Inc. (1982-1991).
</TABLE>


---------------
     (1)     "Interested person" of the Company as defined in the 1940 Act.

     (2)     All directors have been directors since 1995.


EXECUTIVE OFFICERS OF THE REGISTRANT

         The Executive Officers of the Company are included in Part I of this
report under the caption "Executive Officers of the Registrant" and all
information under that caption is incorporated herein by reference.

COMPLIANCE WITH REPORTING REQUIREMENTS OF SECTION 16(a) OF THE SECURITIES
EXCHANGE ACT OF 1934

         Pursuant to Section 16(a) of the Securities Exchange Act of 1934, the
Company's directors and executive officers, directors of the Company's  
investment adviser, and any persons holding ten percent or more of the Company's
common stock are required to report their beneficial ownership and any changes
therein to the Commission and the Company.  Specific due dates for those reports
have been established, and the Company is required to report herein any failure
to file such reports by those due dates.  Based on the Company's review of Forms
3, 4 and 5 filed by such persons, the Company has identified that, pursuant to
Section 16(a) of the Securities Exchange Act of 1934 in its most recent fiscal
year, all of the Company's directors and executive officers (as reported in Item
10 of this Form), as well as certain directors of the Company's investment
adviser (Robert E. Long, William L. Walton, and Brooks H. Browne) were
delinquent in filing their respective Form 3s, although only two individuals
(David Gladstone and George C. Williams) own shares of the Company, as reported
in Item 12 of this Form.


ITEM 11.   EXECUTIVE COMPENSATION.

         Each member of the Board of Directors, including directors who are
officers of the Company, will receive a fee of $1,000 for each meeting of the
Board of Directors or committee thereof which such director attends, except that
a fee of only $500 will be paid for attendance at a committee meeting that is
held on the same date as a Board of Directors meeting.  It is expected that the
full Board of Directors will hold at least five meetings per year and that
committees will meet as required.

         Except for directors' fees to be paid to the two officers who are also
directors, none of the Company's officers have been nor is it contemplated that
any such officers will hereafter be compensated by the Company, since all of
their compensation is being and will continue to be paid by Advisers.  It
is contemplated, however, that the officers will be awarded stock options 
under the Company's stock option plan, the proposed terms of which are 
summarized below.

INCENTIVE STOCK OPTIONS

         The Company plans to adopt an incentive stock option plan pursuant to
which the Stock Option Plan Committee will be authorized to award incentive
stock options to the Company's officers, including the two officers who are also
directors, to purchase for a specified period at fair market value on the date 
of grant shares of Common Stock of the Company equal to an amount no greater 
than 10% of the Company's outstanding shares.  No options have been granted 
under this plan.


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

     (a)   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS.
  
<TABLE>
<CAPTION>
========================================================================================================================
                                (2) Name and address          (1) Amount and nature of         
   (1) Title of class           of beneficial owner              beneficial ownership            (4) Percent of class
------------------------------------------------------------------------------------------------------------------------
   <S>                         <C>                                    <C>                                  <C>
   Common Stock                David Gladstone(1)                     35 Shares(2)                         50%

   Common Stock                George C. Williams(1)                  35 Shares(2)                         50%
========================================================================================================================
</TABLE>

(1)  c/o Allied Capital Advisers, Inc., 1666 K Street, N.W. Washington, D.C.
     20006

(2)  Directly owned

     (b)   SECURITY OWNERSHIP OF MANAGEMENT.

     The directors and officers of the Company, as a group, own 100% of the
outstanding common stock.  Further details regarding security ownership of
management and provided in tabular form below.  No other officer or director
owns any shares of the Company's common stock.

<TABLE>
<CAPTION>
========================================================================================================================
                                     (2) Name                  (1) Amount and nature of         
   (1) Title of class           of beneficial owner              beneficial ownership            (4) Percent of class
------------------------------------------------------------------------------------------------------------------------
   <S>                         <C>                                    <C>                                  <C>
   Common Stock                David Gladstone(1)                     35 Shares(2)                         50%

   Common Stock                George C. Williams(3)                  35 Shares(2)                         50%
========================================================================================================================
</TABLE>

(1)  Director, President and Chief Executive Officer

(2)  Directly owned

(3)  Director, Chairman of the Board

ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.


         The Company proposes to enter into an investment advisory agreement
with Advisers (the "Agreement").  If the Agreement is approved, the Company
will, during the term of the Agreement, pay to Advisers an investment advisory
fee equal to (a) 3.5% per year of the average of the quarter-end values of the
Company's consolidated total assets (less the Company's Interim Investments, as
defined below, and cash) for such year (the "Base Fee"), and (b) 0.125% per
quarter of the quarter-end values of the Company's consolidated Interim
Investments and cash.  For this purpose "Interim Investments" are defined as
short-term securities issued or guaranteed by the U.S. government or an agency
or instrumentality thereof, or in repurchase agreements fully collateralized by
such securities.  Upon the completion of an annual audit at the end of each
calendar year, the Base Fee may be increased or decreased depending on
the amount, if any, by which the investment performance of the Company for such
year is greater or less than 13%.  Such adjustment, if any, will be based upon
a formula set forth in the Agreement.  In no event will the Base Fee, as so
adjusted, be greater than 4.5% or less than 2.5%.  By its terms, the
Agreement will remain in effect for two years from its effective date and from
year to year thereafter as long as it is approved at least annually by the Board
of Directors, including a majority of the directors who are not "interested
persons" of the Company within the meaning of the 1940 Act, or by vote of the
holders of a majority of the outstanding shares of the Company, as defined in
the 1940 Act.

         All of the Company's officers are also officers of Advisers.  Messrs.
Gladstone and Williams own shares of Advisers, and their beneficial ownership as
of March 15, 1996 represented approximately 9.7% and 3.4%, respectively, of 
Advisers' shares then outstanding or deemed to be outstanding including shares
allocated to their respective Allied Employee Stock Ownership Plan stock 
accounts through December 31, 1995.  Mr. Gladstone, the Company's President 
and Chief Executive Officer is the Chairman and Chief Executive Officer of 
Advisers; Mr. Williams, the Company's Chairman is the Vice Chairman of Advisers.


                                    PART IV

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

(a)      Documents filed as part of this Report:

     1.   A.  Financial Statements:

          Statement of Assets and Liabilities at December 31, 1995.
          Statement of Operations for the period August 10, 1995 (date of
          incorporation) through December 31, 1995.
          Statement of Changes in Net Assets for the period August 10, 1995
          (date of incorporation) through December 31, 1995.
          Notes to Financial Statements.

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

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

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


                                       18
<PAGE>   20
(3)(i)(1)      Amended and Restated Articles of Incorporation of the Company.

(3)(ii)(2)     By-laws of the Company, as amended.

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

(10)(a)*       Proposed Form of Investment Advisory Agreement between the
               Company and Allied Capital Advisers, Inc.

(10)(b)(1)*    Proposed Form of Allied Capital Mortgage Corporation Incentive
               Stock Option Plan.

(11)*          Statement re computation of per share earnings.

(27)*          Financial Data Schedule.

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

*    Filed herewith.

(1)  Incorporated by reference to such document filed as an exhibit of the same
     or similar number to the Company's registration statement on Form 10 (No.
     0-26672) filed on August 23, 1995.

(2)  Incorporated by reference to such document filed as an exhibit of the same 
     or similar number to Pre-Effective Amendment No. 2 to the Company's 
     registration statement on Form 10 (No. 0-26672) filed on October 20, 1995.

(b)  Reports on Form 8-K.

     No reports on Form 8-K have been filed for the three months ended December
     31, 1995.





                                       19
<PAGE>   21
                                   SIGNATURES


     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed
on its behalf by the undersigned, thereunto duly authorized on March 28, 1996.


                                          /s/ DAVID GLADSTONE
                                          -------------------------------------
                                          David Gladstone
                                          President and Chief Executive Officer

     Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
                                                            Title
Signature                                                   (Capacity)                                         Date
---------                                                   ----------                                         ----
<S>                                                         <C>                                                <C>
/s/ DAVID GLADSTONE                                         Director, President and                            March 28, 1996
---------------------------------------------               Chief Executive Officer                         
David Gladstone                                             (Principal Executive Officer)

/s/ GEORGE C. WILLIAMS                                      Director, Chairman of                              March 28, 1996
---------------------------------------------               the Board                                             
George C. Williams                                          

/s/ ROGER MACHANIC                                          Director                                           March 28, 1996
---------------------------------------------                                                                  
Roger Machanic

/s/ ELIZABETH CONAHAN                                       Director                                           March 28, 1996
---------------------------------------------                                                                  
Elizabeth Conahan

/s/ LANDON BUTLER                                           Director                                           March 28, 1996
---------------------------------------------                                                                  
Landon Butler

/s/ JOSEPH MORNINGSTAR                                      Director                                           March 28, 1996
---------------------------------------------                                                                  
Joseph Morningstar

/s/ JON A. DELUCA                                           Executive Vice President, Treasurer,               March 28, 1996
---------------------------------------------               and Chief Financial Officer
Jon A. DeLuca                                               (Principal Financial and
                                                            Accounting Officer)
</TABLE>
<PAGE>   22
                                 EXHIBIT INDEX


Exhibit
Number                   Description
------                   -----------

10(a)          Proposed Form of Investment Advisory Agreement between the 
               Company and Allied Capital Advisers, Inc.

10(b)(1)       Proposed Form of Allied Capital Mortgage Corporation Incentive
               Stock Option Plan.

11             Statement re computations of per share earnings.

27             Financial Data Schedule.