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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, 1996
                                       OR
[ ]      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934

                         COMMISSION FILE NO. 811-00907

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

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

                    MARYLAND                           53-0245085
          (STATE OR OTHER JURISDICTION              (I.R.S. EMPLOYER
                OF INCORPORATION)                  IDENTIFICATION NO.)

        C/O ALLIED CAPITAL ADVISERS, INC.          
         1666 K STREET, NW, 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, $1.00 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 [ ]

The aggregate market value of the registrant's common stock held other than by
directors and officers of the registrant and officers of its investment adviser
as of March 19, 1997 was approximately $107,020,154, based upon the average 
bid and asked price for the registrant's common stock on that date.  As of 
March 19, 1997 there were 7,326,626 shares of the registrant's common stock
outstanding.

                      DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant's Annual Report to Shareholders for the year ended
December 31, 1996 are incorporated by reference into Parts II and IV of this
Report.  Portions of the registrant's definitive Proxy Statement for the Annual
Meeting of Stockholders to be held on May 1, 1997 are incorporated by reference
into Part III of this Report.

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<PAGE>   2
                                     PART I


ITEM 1.  BUSINESS

         Allied Capital Corporation (the "Company") was incorporated under the
laws of the District of Columbia in 1958 and was reorganized as a Maryland
corporation in 1991.  It is a closed-end management investment company that
elected in 1991 to be regulated as a business development company ("BDC") under
the Investment Company Act of 1940, as amended (the "1940 Act").  The Company
has two active wholly owned subsidiaries, Allied Investment Corporation
("Allied Investment") and Allied Capital Financial Corporation ("Allied
Financial").  Allied Investment and Allied Financial are Maryland corporations
registered under the 1940 Act as closed-end management investment companies.
Allied Investment is licensed by the U.S. Small Business Administration (the
"SBA") as a small business investment company under Section 301(C) of the Small
Business Investment Act of 1958, as amended  (an "SBIC"), and Allied Financial
is licensed by the SBA as a specialized small business investment company under
Section 301(d) of the Small Business Investment Act of 1958, as amended (an
"SSBIC").  As described below, the Company also has a significant ownership
interest in Allied Capital Lending Corporation ("Allied Lending"), a closed-end
management investment company that has elected to be regulated as a BDC and is
an SBA-approved small business lending company.  Allied Capital Advisers, Inc.
("Advisers") serves as the investment adviser to the Company under an
investment advisory agreement.

         The Company seeks to provide current income and long-term growth in
the value of its net assets by providing debt, mezzanine, and equity financing
primarily for small, privately owned companies.  The Company invests primarily
in and lends primarily to small businesses, both directly and through its
wholly owned subsidiaries (unless otherwise indicated, all further references
herein to investments made by the Company include those made by its
subsidiaries).  The investments made by the Company include providing financing
for growth, for leveraged buyouts of such companies, for note purchases and
loan restructurings, and for special situations, such as acquisitions, buyouts,
recapitalizations, and bridge financing of such companies.

         The Company's investments generally take the form of loans with equity
features, such as warrants or conversion privileges, that entitle the Company
to acquire a portion of the equity in the entity in which the investment is
made.  The typical maturity of such a loan made by the Company is seven years,
with interest-only payments in the early years and payments of both principal
and interest in the later years, although loan maturities and principal
amortization schedules vary.  The Company also makes senior loans without
equity features.  Loans generally bear interest at a fixed rate that the
Company believes is competitive in the venture capital marketplace.  Current
income is derived primarily from interest earned on the loan element of the
Company's investments.  Generally, long-term growth in net asset value and
realized capital gains, if any, from portfolio companies are achieved through
the equity obtained as a result of the Company's growth financing and leveraged
buyout activity.  The Company seeks to structure its investments so that
approximately one-half of the potential return is earned in the form of monthly
or quarterly interest payments and the balance is derived from capital gains.
The Company's investments may be secured by the assets of the entity in which
the investment is made, which collateral interests may be subordinated in
certain instances to institutional lenders, such as banks.  The Company makes
available significant managerial assistance to its portfolio companies.
Pending investment of its assets, the Company's funds are generally invested in
repurchase agreements fully collateralized by U.S. government securities.

         The Company usually invests in privately held companies or small
public companies that are thinly traded and generally lack access to capital.
These companies generally have been in business for at least one year, have a
commercially proven product or service, and seek capital to finance expansion
or ownership changes.  The Company generally requires that the companies in
which it invests demonstrate sales growth, positive cash flow, and
profitability, although turnaround situations are also considered.  The Company
invests in businesses operating in a variety of different industries, such as
broadcasting, manufacturing, environmental technologies, wholesale
distribution, and retail operations.  The Company emphasizes the quality of
management of the companies in which it invests, and seeks experienced
entrepreneurs with a management track record, relevant industry experience, and
high integrity.

         Historically, all of the investments of the Company have been made in
domestic small businesses. In 1995, the Company established a $20 million
credit facility with the Overseas Private Investment Corporation ("OPIC"),
pursuant to which it makes investments in businesses that engage, in whole or
in part, in overseas operations, usually in countries representing the world's
emerging markets.  OPIC is a self-sustaining federal agency the purpose of
which is to promote





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economic growth in developing countries by encouraging U.S. private investment
in those nations.  Under OPIC regulations, investments generally may be made
only in companies that have some affiliation with a U.S.-based business entity.

         In January 1996, the Company registered 885,448 shares of its stock to
be offered in connection with a rights offering to its existing shareholders.
Pursuant to the rights offering, the Company issued to the common stockholders
at the close of business on January 22, 1996, (the "Record Date"), one
non-transferable subscription right ("Subscription Right") for each share held
which entitled each record date stockholder to subscribe for and purchase from
the Company up to one authorized, but theretofore unissued share of the
Company's common stock for each seven Subscription Rights held (the "Primary
Subscription").  Stockholders who fully exercised their Subscription Rights
were entitled to the additional privilege of subscribing for shares from the
offering not acquired by exercise of Subscription Rights (the
"Over-Subscription Privilege").  In addition, the Company increased the number
of shares subject to subscription by 15%, or 132,817 shares, for an aggregate
total of 1,018,265 shares available under the offering.

         The subscription price per common share was $13.11, which equaled 95%
of the average of the last reported sale price of a share of common stock on
the Nasdaq National Market on February 27, 1996 (the expiration date of the
rights offering) and each of the four preceding business days.  Stockholders
participating in the offering subscribed for 411,961 shares through the Primary
Subscription and 251,749 shares through the Oversubscription Privilege for a
total of 663,710 shares.  The  Company received net proceeds of $8.3 million
from the rights offering after estimated expenses of $437,000, including a 2.5%
commission paid to eligible broker/dealers on each share sold as a result of
their soliciting efforts.  In the registration statement relating to the rights
offering, the Company retained the right to offer and sell any unsubscribed-for
shares through a subsequent offering.  Any such subsequent offering may be made
only through the use of a prospectus included in a post-effective amendment to
the registration statement.

The Company's Operation as a BDC

         As a BDC, the Company may not acquire any investment 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 investment
assets (the "70% test").  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, an affiliated person of the
         issuer, or any other person (subject to Securities and Exchange
         Commission rule-making), provided the issuer is an eligible portfolio
         company.  An eligible portfolio company is defined to include any
         issuer that (a) is organized and has its principal place of business
         in the United States, (b) is not an investment company other than an
         SBIC wholly owned by the BDC (the Company's investments in and
         advances to Allied Investment and Allied Financial are Qualifying
         Assets, but its investment in Allied Lending, which is neither wholly
         owned nor an SBIC, is not) and (C) either (I) does not have any class
         of publicly traded securities with respect to which a broker may
         extend margin credit or (ii) is controlled by the BDC.

(2)      Securities received in exchange for or distributed with respect to
         securities described in (1) above, or pursuant to the exercise of
         options, warrants or rights relating to such securities.

(3)      Cash, cash items, government securities, or high quality debt
         securities (within the meaning of the 1940 Act) maturing in one year
         or less from the time of investment.

         In addition, to treat securities described in (1) and (2) 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, (I) 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 or (ii) in the case of an SBIC, making loans to
a portfolio company.  The Company makes available managerial assistance to its
portfolio companies through the Company's directors and officers, who are
employees of Advisers, the Company's investment adviser.  Each portfolio
company is assigned for monitoring purposes to an investment officer and its
principals are contacted and counseled if the portfolio company appears to be
encountering business or financial difficulties.  The Company also provides





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managerial assistance on a continuing basis to any portfolio company that
requests it, whether or not difficulties are perceived.  The Company's officers
and directors are experienced in providing 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 of the outstanding voting securities," as defined in the 1940 Act, of
the Company.  Since the Company made its BDC election, it has not in practice
made any substantial change in its structure or, on a consolidated basis, in
the nature of its business, except for the disposition of its ownership
interest in Allied Lending, as described below, which is not a change that
results in the Company ceasing to be a BDC.  As a BDC, the Company is entitled
to borrow money and issue senior securities representing indebtedness as long
as senior securities representing indebtedness have asset coverage of at least
200%.  This limitation is not applicable to classes of senior securities
representing indebtedness of the Company's SBIC and SSBIC subsidiaries.

Co-Investment with Allied Capital Corporation II, Allied Venture Partnership,
and Allied Technology Partnership

         In accordance with the conditions of several exemptive orders of the
Securities and Exchange Commission (the "Commission") permitting co-investments
(the "Co-investment Guidelines"), most of the Company's acquisitions and
dispositions of investments are made in participation with Allied Capital
Corporation II ("Allied II").  In the past, the Company also acquired certain
investments in participation with Allied Venture Partnership ("Allied Venture")
and Allied Technology Partnership ("Allied Technology"), both private venture
capital partnerships managed by Advisers, neither of which is now making new
investments.  Allied II is a closed-end management investment company that has
elected to be regulated as a BDC and for which Advisers serves as its
investment adviser.  At December 31, 1996, Allied II had total consolidated
assets of $106,908,000, compared to the Company's total consolidated assets of
$165,751,000 at that date.

         The Co-investment Guidelines generally provide that the Company and
its wholly owned subsidiaries must be offered the opportunity to invest in any
investment, other than in interim investments or marketable securities, that
would be suitable for Allied II or its wholly owned subsidiaries and the
Company to the extent proportionate to their respective consolidated total
assets.  Securities purchased by the Company or its wholly owned subsidiaries
in a co-investment transaction with any of Allied II or its wholly owned
subsidiaries, Allied Venture or Allied Technology, will consist of the same
class of securities, will have the same registration rights, if any, and other
rights related thereto, and will be purchased for the same unit consideration.
Any such co-investment transaction must be approved by the Company's Board of
Directors, including a majority of its independent directors.  The Company will
not make any investment in the securities of any issuers in which Allied II,
Allied Venture or Allied Technology, but not the Company, has previously
invested.  The Co-investment Guidelines also provide that the Company will have
the opportunity to dispose of any securities in which the Company or its wholly
owned subsidiaries and any of Allied II or its wholly owned subsidiaries,
Allied Venture or Allied Technology, have invested in proportion to their
respective holdings of such securities, and that, in any such disposition, the
Company will be required to bear no more than its proportionate share of the
transaction costs.

Allied Investment

          Allied Investment, as an SBIC, provides capital to privately owned
small businesses primarily through loans, generally with equity features, and,
to a lesser extent, through the purchase of common or convertible preferred
shares.  Loans with equity features are generally evidenced by a note or
debenture that is convertible into common stock, requiring the holder to make a
choice, prior to the loan's maturity, between accepting repayment and
maintaining its equity position, or purchasing, frequently for a nominal
consideration, common stock of the issuer even after the loan is repaid.
Wherever possible, Allied Investment seeks collateral for its loans, but its
security interest is usually subordinated to the security interest of other
institutional lenders.

         As an SBIC, Allied Investment currently has the opportunity to sell to
the SBA subordinated debentures with a maturity of up to ten years up to an
aggregate principal amount determined by a formula which applies a multiple to
its private capital, but not in excess of $90 million (the "$90 million
limit").  The $90 million limit generally applies to all financial assistance
provided by the SBA to any licensee and its "associates," as that term is
defined in SBA regulations.  For this purpose, Allied Investment and Allied
Financial would be deemed to be "associates" of one another and both may be
deemed to be "associates" of Allied Investment Corporation II ("Allied
Investment II") and Allied Financial Corporation II ("Allied Financial II"),
which are the SBIC and SSBIC subsidiaries of Allied II.  As a group,





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Allied Investment and Allied Financial have received $68,300,000 in
subordinated debenture and preferred stock investments from the SBA as of
December 31, 1996; as a result, this combined ability to apply for additional
leverage from the SBA will be limited to $21,700,000 due to the $90 million
limit.  This combined ability to obtain additional leverage assumes that Allied
Investment II and Allied Financial II do not obtain any SBA leverage.  The
Company is unable to predict the SBA's ability to meet demands for leverage on
an ongoing basis, as such funding may be affected if Congress reduces
appropriations for the SBA, which may compel the SBA to allocate leverage or to
reduce the current limits on available leverage.  Therefore, there is no
guaranty that Allied Investment or Allied Financial will be able to obtain
additional SBA leverage beyond what is currently held.

         Allied Investment provides managerial assistance to its portfolio
companies by arranging syndicated financing, advising on major business
decisions, furnishing one of its executives to serve as a director or otherwise
participating in board meetings and assisting portfolio companies when they are
having operating difficulties.

Allied Financial

         Allied Financial, as an SSBIC, operates as a small business investment
company specializing in the financing of small businesses controlled by
socially or economically disadvantaged persons.  To determine whether the
owners of a small business are socially or economically disadvantaged, the SBA
relies on a composite of factors.  Business owners who are members of the
following groups, among others, are considered socially disadvantaged:  African
Americans, Hispanic Americans, Native Americans and Asian Pacific Americans.
In determining whether the owners of a small business are economically
disadvantaged, consideration may be given to factors such as levels of income,
location (for instance, urban ghettos, depressed rural areas and areas of high
unemployment or underemployment), education level, physical or other special
handicap, inability to compete in the marketplace because of prevailing or past
restrictive practices or Vietnam-era service in the armed forces, or any other
factors that may have contributed to disadvantaged conditions.

         An SSBIC may sell preferred stock or long-term subordinated debt to
the SBA in an amount of up to 200% of its private capital.  Beginning with the
SBA's 1996 fiscal year commencing on October 1, 1995, Congress discontinued
subsidized funding for the SBA's SSBIC program.  Prior to this change, an SSBIC
was able to sell preferred stock and debentures which were issued with a rate
reduction or subsidy.  Preferred stock sold to the SBA after November 1989 pays
dividends at an annual rate of four percent (4%) of par value and must be
redeemed within 15 years of issuance; preferred stock sold to the SBA before
November 1989 pays dividends at an annual rate of three percent (3%) of par
value and has no required redemption date.  In addition to preferred stock, the
SBA had provided leverage to SSBICs at a reduced rate through the purchase or
guarantee of debentures.  As of December 31, 1996, Allied Financial had
unsubsidized capital in the aggregate amount of $18,950,000 and subsidized
capital in the aggregate amount of $7,000,000, consisting of subordinated
debentures to the SBA in the amount of $18,950,000, 3% preferred stock of
$6,000,000 and 4% preferred stock of $1,000,000.

         Allied Financial provides managerial assistance to its portfolio
companies by arranging syndicated financing, advising on major business
decisions, furnishing one of its executives to serve as a director or otherwise
participating in board meetings and assisting portfolio companies when they are
having operating difficulties.

The Company's Interest in Allied Lending

         The Company owned 2,380,000 shares, or all of the outstanding capital
stock, of Allied Lending prior to consummation of the initial public offering
of Allied Lending's common stock in November 1993.  As a result of that initial
public offering, the Company's ownership of Allied Lending's common stock was
reduced to 1,580,000 shares, or 36.2% of the Allied Lending shares outstanding
at December 31, 1993.  The Company has agreed to divest itself of all shares of
Allied Lending by December 31, 1998 by public offerings, private placements,
distributions to the Company's stockholders or otherwise.  As part of this
divestiture, the Company declared an extra distribution in December 1994 and
distributed in early January 1995 an aggregate of 335,086 Allied Lending
shares, which reduced its ownership of Allied Lending to 1,244,914 shares, or
28% of the Allied Lending common stock then outstanding.  On December 20, 1996,
the Company commenced an underwritten offering of Allied Lending shares to the
public, reducing the Company's ownership interest in Allied Lending to 844,914
shares, or 16%, as of December 31, 1996.





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         Until 1995, the business of Allied Lending consisted solely of making
small business loans which are partially guaranteed under the SBA's 7(a) Loan
Program ("7(a) guaranteed loans").  Allied Lending has been an active non-bank
lender in the 7(a) Loan Program.  Most of the loans made by Allied Lending
historically have been made for the purpose of allowing portfolio companies to
acquire real estate-related assets, such as factories, workshops, or retail
premises, or to refinance outstanding loans made to acquire such real estate; a
smaller proportion of such loans has been made for the purpose of allowing
portfolio companies to purchase or refinance machinery and equipment.  Allied
Lending, pursuant to stockholder approval at a Special Meeting of Stockholders
on November 9, 1995, expanded its ability to make loans to include, in addition
to 7(a) guaranteed loans, loans that are made in conjunction with 7(a)
guaranteed loans, and loans pursuant to the SBA 504 program.

Competition

         A large number of entities and individuals compete for the opportunity
to make the kinds of investments made by the Company.  Many of these entities
and individuals have greater financial resources than the combined  resources
of the Company.  As a result of this competition, the Company may from time to
time be precluded from  making otherwise attractive investments on terms
considered to be prudent in light of the risks to be assumed.

Investment Adviser

         Advisers is the investment adviser to the Company pursuant to an
investment advisory agreement.  The advisory agreement will remain in effect
from year to year as long as its continuance is approved at least annually by
the Board of Directors, including a majority of the disinterested directors, or
by the "vote of a majority of the outstanding voting securities" (as defined in
the 1940 Act), of the Company.  The advisory agreement may, however, be
terminated at any time on (60) sixty days' notice, without the payment of any
penalty, by the Board of Directors or by vote of a majority of the Company's
outstanding voting securities, as so defined, and will terminate automatically
in the event of its assignment.

         Under the Agreement, Advisers manages the investments of the Company,
subject to the supervision and control of the Board of Directors.
Specifically, Advisers identifies, evaluates, structures, closes, and monitors
the investments made by the Company.  The Company will not make any investments
that have not been recommended by Advisers as long as the advisory agreement
remains in effect.  Advisers has the authority to effect acquisitions and
dispositions of investments for the Company's account, subject to approval by
the Company's Board of Directors.

         The advisory agreement provides that the Company will pay all of its
own operating expenses, except those specifically required to be borne by
Advisers.  The expenses paid by Advisers include the compensation of its
officers and the cost of office space, equipment and other personnel required
for the Company's day-to-day operations.  The expenses that are paid by the
Company include the Company's share of transaction costs incident to the
acquisition and disposition of investments, legal and accounting fees, the fees
and expenses of the Company's independent directors and the fees of its
officer-directors, the costs of printing and mailing proxy statements and
reports to stockholders, costs associated with promoting the Company's stock,
and the fees and expenses of the Company's custodian and transfer agent.  The
Company is also required to pay expenses associated with litigation and other
extraordinary or non-recurring expenses, as well as expenses of required and
optional insurance and bonding.  All fees paid by or for the account of an
actual or prospective portfolio company in connection with an investment
transaction in which the Company participates are treated as commitment fees or
management fees and are received by the Company, pro rata to its participation
in such transaction, rather than by Advisers.  Advisers is entitled to retain
for its own account any fees paid by or for the account of any company,
including a portfolio company, for special investment banking or consulting
work performed for that company which is not related to such investment
transaction or management assistance.  Advisers will report to the Board of
Directors not less often than quarterly all fees received by Advisers from any
source whatever and whether, in its opinion, any such fee is one that Advisers
is entitled to retain under the provisions of the advisory agreement.  In the
event that any member of the Board of Directors should disagree, the matter
will be conclusively resolved by a majority of the Board of Directors,
including a majority of the independent directors.

         As compensation for its services to and the expenses paid for the
account of the Company, Advisers is entitled to be paid quarterly, in arrears,
a fee equal to 0.625% per quarter of the quarter-end value of the Company's
consolidated total assets, less the value of the shares of Allied Lending owned
by the Company, consolidated Interim Investments, cash and cash equivalents,
plus 0.125% per quarter of the quarter-end value of consolidated Interim
Investments, cash and cash





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equivalents.  The advisory agreement provides specifically that the fee to
Advisers will not apply to the Company's investment in Allied Lending, as
required by the Commission's 1993 exemptive order permitting the spinoff of
Allied Lending.  Such fees on an annual basis are approximately 2.5% of the
Company's consolidated total assets, less the Company's investment in Allied
Lending and consolidated Interim Investments, cash and cash equivalents, and
0.5% of the Company's consolidated Interim Investments, cash and cash
equivalents.

         The fee to Advisers is substantially higher than that paid by most
investment companies because of the efforts and resources devoted by Advisers
to identifying, evaluating, structuring, closing, and monitoring the types of
private investments in which the Company specializes.  The rate of compensation
paid by the Company to Advisers is substantially the same as that paid by
Allied II.  The Company also understands that the fee to Advisers provided for
by the advisory agreement is not in excess of that frequently paid by private
investment funds engaged in similar types of investments.  Such private funds
also typically allocate to management a substantial participation in profits.

Change of Chairman and Chief Executive Officer

         After 22 years with the Allied Capital companies, David Gladstone
stepped down as Chairman and Chief Executive Officer of the Company in early
1997, and the Board appointed William L. Walton to be the Company's new
Chairman and Chief Executive Officer.  Mr. Gladstone also resigned as a
director on March 19, 1997 and will not stand for election to the board of
directors.  Mr. Walton has been affiliated with the Allied Capital companies
for more than ten years, both as a director of Advisers and as a past director
of the Company.  Mr. Walton's extensive experience in the investment industry
combined with his performance as an entrepreneur provide an excellent mix of
talent for the Company.  He previously served as Managing Director of New
York-based Butler Capital Corporation and was the personal venture capital
advisor for William S. Paley, founder and Chairman of CBS.  More recently, Mr.
Walton founded two private companies dedicated to improving education for
children with a focus on reading and languages.  Mr.  Walton has been a
commercial banker, an investment banker with Lehman Brothers Kuhn Loeb, a
private investor and an entrepreneur, and throughout his career has been
involved in the growth and finance of small business.

Employees

         The Company has no employees, as all of its personnel are 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, 1997, as well as certain other
information with respect to those persons:





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<TABLE>
<CAPTION>
                                             Positions Currently
                                                Held with the                      Principal Occupations
 Name                         Age                 Company                          During Past Five Years
 ----                         ---           ----------------------                 ----------------------

 <S>                          <C>      <C>                                    <C>
 William L. Walton             47      Chairman of the Board and Chief        Employed by Advisers since
                                       Executive Officer                      1997; Chairman and Chief
                                                                              Executive Officer of Allied
                                                                              II, Allied Capital Commercial
                                                                              Corporation ("Allied
                                                                              Commercial"), Allied Lending
                                                                              and Advisers; Manager of
                                                                              Allied Capital Midwest LLC
                                                                              ("Allied Midwest"); Chief
                                                                              Executive Officer of Success
                                                                              Lab, Inc. (children's
                                                                              educational services) from
                                                                              1993 to 1996; Chief Executive
                                                                              Officer of Language Odyssey
                                                                              (educational publishing and
                                                                              services) from 1992 to 1996;
                                                                              and Managing Director of
                                                                              Butler Capital Corporation
                                                                              from 1987 to 1991.

 G. Cabell Williams III       42       President and Chief Operating          Employed by Advisers since
                                       Officer                                1981.  Executive Vice
                                                                              President of Allied II, Allied
                                                                              Commercial, Allied Lending,
                                                                              Business Mortgage Investors,
                                                                              Inc. ("BMI"), Allied Midwest
                                                                              and Advisers.  He is the son
                                                                              of George C. Williams, also a
                                                                              director of the Company.


 Jon A. DeLuca                34       Executive Vice President, Treasurer,   Employed by Advisers since
                                       and Chief Financial Officer            1994.  Executive Vice
                                                                              President, Treasurer and Chief
                                                                              Financial Officer of Allied
                                                                              II, Allied Commercial, Allied
                                                                              Lending, BMI, Allied Capital
                                                                              Mortgage, LLC ("Allied
                                                                              Mortgage"), Allied Midwest and
                                                                              Advisers. Manager of
                                                                              Entrepreneurial Services at
                                                                              Coopers & Lybrand from 1986 to
                                                                              1994.


 Joan M. Sweeney              37       Executive Vice President               Employed by Advisers since
                                                                              1993; President and Chief
                                                                              Operating Officer of Advisers;
                                                                              Executive Vice President of
                                                                              Allied II, Allied Commercial,
                                                                              Allied Lending, BMI, and
                                                                              Allied Mortgage and Allied
                                                                              Midwest; Senior Manager at
                                                                              Ernst & Young from 1990 to
                                                                              1993.
</TABLE>





                                       7
<PAGE>   9
                                    PART II

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

         Information in response to this Item is incorporated by reference to
the "Shareholder Information" and "Quarterly Stock Price and Distributions to
Shareholders" sections of, and to Notes 4 and 7 of the Notes to Consolidated
Financial Statements contained in, the Company's Annual Report to Shareholders
for the year ended December 31, 1996 (the "1996 Annual Report").

ITEM 6.  SELECTED FINANCIAL DATA.

         Information in response to this Item is incorporated by reference to
the table in the "Consolidated Comparison of Financial Highlights" section of
the 1996 Annual Report.

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
         RESULTS OF OPERATIONS.

         Information in response to this Item is incorporated by reference to
the "Management's Discussion and Analysis" section of the 1996 Annual Report.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

         Information in response to this Item is incorporated by reference to
the Consolidated Financial Statements, notes thereto and Report of Independent
Accountants thereon contained in the 1996 Annual Report.

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.

         Information in response to this Item is incorporated by reference to
the identification of directors and nominees contained in the "Election of
Directors" section and the subsection captioned "Compliance with Reporting
Requirements of Section 16(a) of the Securities Exchange Act of 1934" of the
Company's definitive proxy statement in connection with its 1997 Annual Meeting
of Stockholders, scheduled to be held on May 1, 1997 (the "1997 Proxy
Statement").  Information in response to this Item also is included under the
caption "Executive Officers of the Registrant" included in Part I of this
Report.

ITEM 11. EXECUTIVE COMPENSATION.

         Information in response to this Item is incorporated by reference to
the subsections captioned "Compensation of Executive Officers and Directors,"
"Incentive Stock Options" and "Compensation of Directors" of the 1997 Proxy
Statement.

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

         Information in response to this Item is incorporated by reference to
the subsection captioned "Beneficial Ownership of Common Stock" of the 1997
Proxy Statement.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

         Information in response to this Item is incorporated by reference to
the subsections captioned "Certain Transactions" of the 1997 Proxy Statement.





                                       8
<PAGE>   10
                                    PART IV

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

(a)      Documents filed as part of this Report:

     1.   A.  The following financial statements are incorporated by reference
          from the 1996 Annual Report:

          Consolidated Balance Sheet at December 31, 1996 and 1995.
          Consolidated Statement of Operations for the years ended December 31,
           1996, 1995 and 1994.  
          Consolidated Statement of Changes in Net Assets for the years ended 
           December 31, 1996, 1995 and 1994.  
          Consolidated Statement of Cash Flows for the years ended 
           December 31, 1996, 1995 and 1994.  
          Consolidated Statement of Loans and Investments at December 31, 1996.
          Notes to Consolidated Financial Statements.

          B.  Report of Independent Accountants with respect to the financial
          statements listed in A. above is incorporated by reference from the
          1996 Annual Report.

     2.   No financial statement schedules 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:


<TABLE>
<CAPTION>
EXHIBIT NUMBER   DESCRIPTION
--------------   -----------
<S>              <C>
3(i)*            Articles of Incorporation

3(ii)(1)         By-Laws

4.1              Instruments defining the rights of security holders.  See
                 Exhibits 3(i) and 3(ii).

4.2*             Form of debenture between certain subsidiaries of the
                 Company and the U.S. Small Business Administration.

10.1(2)          Note Agreement between the Company and certain subsidiaries
                 and Massachusetts Mutual Life Insurance Company, as
                 amended, dated April 30, 1992.

10.2(1)          Loan Agreement between the Company and Overseas Private
                 Investment Corporation, dated April 10, 1995.

10.3*            Unsecured Line of Credit Agreement between the Company and
                 certain subsidiaries and Riggs Bank N.A., dated December
                 20, 1996.

10.4*            Unconditional Guaranty by the Company to and for the
                 benefit of Riggs Bank N.A., dated December 20, 1996.

10.5*            Promissory notes between the Company and certain
                 subsidiaries and Riggs Bank N.A., dated December 20, 1996.

10.7*            Investment Advisory Agreement between the Company and
                 Allied Capital Advisers, Inc., dated May 4, 1995.

10.8*            Dividend Reinvestment Plan

10.9*            Stock Option Plan

11*              Statement regarding computation of per share earnings.
</TABLE>





                                       9
<PAGE>   11

<TABLE>
<S>              <C>
13*              Excerpts from the 1996 Annual Report to Shareholders.

21               Subsidiaries of the Company and jurisdiction of
                 incorporation.

                     Allied Investment Corporation            Maryland
                     Allied Capital Financial Corporation     Maryland
                     Allied Development Corporation           District of Columbia

23*              Consents of Matthews, Carter and Boyce, independent
                 accountants.

27*              Financial Data Schedule

28*              Financial statements as of and for the year ended December
                 31, 1996 of Allied Investment Corporation and Allied
                 Capital Financial Corporation, in the form filed with the
                 U.S. Small Business Administration.
</TABLE>

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


*    Filed herewith.

(1)  Incorporated by reference to such Exhibit on Pre-Effective Amendment No. 2
     filed with registration statement on Form N-2 on January 24, 1996 (File
     No. 33-64629).

(2)  Incorporated by reference to Exhibit (4)(D)(i) filed with the Company's
     Annual Report on Form 10-K for the year ended December 31, 1992.
     Amendments thereto are incorporated by reference to Exhibits (4)(D)(ii),
     (4)(D)(iii) and (4)(D)(iv) to the Company's Form 8-K filed on December 9,
     1993.

(b)  Reports on Form 8-K.

     No reports on Form 8-K have been filed for the three months ended December
     31, 1996.





                                       10
<PAGE>   12
                                   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 27, 1997.


                             /s/ WILLIAM L. WALTON
                             ---------------------
                             William L. Walton
                             Chairman of the Board 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/ WILLIAM L. WALTON              Chairman and                            March 27, 1997
--------------------------         Chief Executive Officer      
William L. Walton                  (Principal Executive Officer)


/s/ GEORGE C. WILLIAMS             Director                                March 27, 1997
--------------------------
George C. Williams


/s/ G. CABELL WILLIAMS III         Director and President                  March 27, 1997
--------------------------         and Chief Operating Officer
G. Cabell Williams III             


/s/ T. MURRAY TOOMEY               Director                                March 27, 1997
--------------------------
T. Murray Toomey


/s/ JOSEPH A. CLORETY              Director                                March 27, 1997
--------------------------
Joseph A. Clorety III


/s/ GUY T. STEUART II              Director                                March 27, 1997
--------------------------
Guy T. Steuart II


/s/ WARREN K. MONTOURI             Director                                March 27, 1997
--------------------------
Warren K. Montouri


/s/ MICHAEL I. GALLIE              Director                                March 27, 1997
--------------------------
Michael I. Gallie


/s/ JON A. DELUCA                  Executive Vice President, Treasurer,    March 27, 1997
--------------------------         and Chief Financial Officer
Jon A. DeLuca                      (Principal Financial       
                                   and Accounting Officer)    
</TABLE>





                                       11
<PAGE>   13
                                 EXHIBIT INDEX

<TABLE>
<CAPTION>
Exhibit
Number              Description
-------             -----------

<S>                 <C>
3(i)                Articles of Incorporation

4.2                 Form of debenture between the Company's subsidiaries and
                    the U.S. Small Business Administration.

10.3                Unsecured Line of Credit Agreement between the Company and
                    certain subsidiaries and Riggs Bank N.A., dated
                    December 20, 1996.

10.4                Unconditional Guaranty by the Company to and for the
                    benefit of Riggs Bank N.A., dated December 20, 1996.

10.5                Promissory notes between the Company and certain
                    subsidiaries and Riggs Bank N.A., dated December 20, 1996.

10.7                Investment Advisory Agreement between the Company and
                    Allied Capital Advisers, Inc., dated May 4, 1995.

10.8                Dividend Reinvestment Plan.

10.9                Stock Option Plan

11                  Statement regarding computation of per share earnings.

13                  Excerpts from the 1996 Annual Report to Shareholders.

23                  Consents of Matthews, Carter and Boyce, independent
                    accountants.

27                  Financial Data Schedule

28                  Financial statements as of and for the year ended December
                    31, 1996 of Allied Investment Corporation and Allied
                    Capital Financial Corporation, in the form filed with the
                    U.S. Small Business Administration.
</TABLE>





                                       12