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                                                                   EXHIBIT 10.7

                           ALLIED CAPITAL CORPORATION

                         INVESTMENT ADVISORY AGREEMENT

         THIS AGREEMENT, dated as of the last date set forth below, is made by
and between Allied Capital Corporation, a Maryland corporation (together with
its investment company subsidiaries, the "Company"), and Allied Capital
Advisers, Inc., a Maryland corporation (the "Adviser").

1.       PURPOSE OF THE COMPANY.

         The Company is organized under the laws of the State of Maryland as a
closed-end investment company registered as such under Investment Company Act
of 1940 (the "ICA") and has elected under the ICA to be regulated as a business
development company.

2.       THE INVESTMENT ADVISER.

         The Adviser is registered as an investment adviser under the
Investment Advisers Act of 1940, as amended, and has entered into this
Agreement with the Company to act as its investment adviser. The terms of this
Agreement are as follows:

3.       OBLIGATIONS OF THE ADVISER.

         The Company hereby engages the Adviser's services as the Company's
investment adviser. As such, the Adviser will:

         (a)      advise the Company as to the acquisition and disposition of
         securities in accordance with the Company's investment policies;

         (b)       make available and, if requested by entities in the
         securities of which the Company has invested or is proposing to
         invest, render managerial assistance to, and exercise management
         rights in, such entities;

         (c)      provide to the Company office space and facilities and the
         services to the extent required of the Adviser's officers and
         employees;

         (d)      maintain the Company's books of account and other records and
         files;

         (e)      report to the Company's Board of Directors, or to any
         committee or officer of the Company acting pursuant to the authority
         of the Board, at such times and in such detail as the Board deems
         appropriate in order to enable the Company to determine that its
         investment policies are being observed and implemented and that the
         Adviser's obligations hereunder are being fulfilled. Any investment
         program undertaken by the Adviser pursuant hereto and any other
         activities undertaken by the Adviser on the Company's


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         behalf shall at all times be subject to any directives of the
         Company's Board of Directors or any duly constituted committee or
         officer of the Company acting pursuant to authority of the Company's
         Board of Directors; and

         (f)      cause to be offered to the Company opportunities to acquire or
         dispose of securities in co-investment with other entities managed by
         the Adviser in accordance with the co-investment guidelines set out
         below. Except to the extent of acquisitions and dispositions that, in
         accordance with such guidelines, require the specific approval of the
         Company's Board of Directors, the Adviser is authorized to effect
         acquisitions and dispositions of securities for the Company's account
         in the Adviser's discretion. Where such approval is required, the
         Adviser is authorized to effect such acquisitions and dispositions for
         the Company's account upon and to the extent of such approval. The
         Company will put the Adviser in funds whenever the Adviser requires
         funds for an acquisition of securities in accordance with the
         foregoing, and the Company will cause to be delivered in accordance
         with the Adviser's instructions any securities disposed of in
         accordance with the foregoing. The Adviser will arrange for the
         certificates for any securities acquired to be delivered to the
         Company's custodian.

4.       CO-INVESTMENT GUIDELINES.

         Most investments made by the Company will continue to be made in
participation with Allied Capital Corporation II ("Allied II") and Allied
Venture Partnership and Allied Technology Partnership (the "affiliated
partnerships"). The Securities and Exchange Commission exemptive orders
permitting such co-investment provide that the Company must be offered the
opportunity to invest in any investment that would be suitable for both Allied
II and the Company to the extent of an amount proportionate to their respective
consolidated assets (including, in the case of the Company, the combined assets
of the affiliated partnerships so long as they are not fully invested).
Securities purchased in a joint transaction by both the Company and Allied II
or an affiliated partnership will consist of the same class of securities,
including the same registrations rights, if any, and other rights related
thereto, and will be purchased for the same unit consideration, and the
approval of such transaction, including the determination by the Company's and
Allied II's non-interested directors, will take place during the same time
period. The Company recognizes that the Adviser, in turn, is obligated, subject
to specified exceptions, to allocate to Allied Venture Partnership one-half of
any investment opportunity made available to the Company, and to consider
Allied Technology Partnership for participation in any investment that is
otherwise made available for syndication, as long as these affiliated
partnerships have funds available for investment.

         Notwithstanding the foregoing, the Company will not make any
investment in the securities of any issuer in which Allied II or either of the
affiliated partnerships, but not the Company, has previously invested, or vice
versa.

         The Adviser will give the Company the opportunity to dispose of any
securities in which both Allied II or one or both of the affiliated
partnerships and the Company have invested in

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proportion to their holdings of such securities. The Company will take
advantage of such opportunity except to the extent that a majority of the
members of its Board of Directors, including a majority of its non-interested
directors, determines otherwise. In connection with any such disposition, the
Company will be required to bear no more than its proportionate share of the
transaction costs related thereto.

         The Company will participate in any investment in which Allied II may
also participate only to the extent that such participation is approved in
advance by a majority of the members of its Board of Directors, including a
majority of its non-interested directors.

         The Adviser will give notice to the Company of any intention of Allied
II or one or both of the affiliated partnerships to exercise any conversion
privilege or other right to acquire equity securities of an issuer in the
securities of which both Allied II or one or both of the affiliated
partnerships and the Company have invested.

5.       EXPENSES TO BE PAID BY THE ADVISER.

         The Adviser will pay for its own account all expenses incurred by the
Adviser in rendering the services to be rendered by the Adviser hereunder.
Without limiting the generality of the foregoing, the Adviser will pay the
salaries and other employee benefits of the persons in its organization whom
the Adviser may engage to render such services, including without limitation
persons who may from time to time act as the Company's officers.
Notwithstanding the foregoing, the Board of Directors of the Company may, in
its sole discretion, award to such officers options to acquire shares of the
Company's common stock, which shall not be deemed part of their salaries or
other employee benefits for the purpose of this paragraph.

6.       EXPENSES TO BE PAID BY THE COMPANY.

         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 shall include all expenses of any offering
and sale by the Company of its shares and, except as otherwise specifically
provided above, 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
the Adviser or of any entity affiliated with the Adviser, and fees of directors
who are such officers, directors or employees; premiums for the fidelity bond
maintained by the Company pursuant to ICA Section 17; and all transaction costs
incident to the acquisition and disposition of securities by the Company in
proportion to the Company's participation therein, 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 industryspecific technical
experts, and deal-specific travel expenses) incurred in monitoring, negotiating

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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.

7.       RECEIPT OF FEES.

         All fees that may be paid by or for the account of an entity in which
the Company has invested or is proposing to invest in connection with an
investment transaction in which the Company participates or provides follow-on
managerial assistance will be treated as commitment fees or management fees and
will be received by the Company, pro rata to the Company's participation in
such transaction. Nevertheless, the Adviser will be entitled to retain for its
own account any fees paid to the Adviser by or for the account of any entity,
including an entity in which the Company may have invested, for special
investment banking or consulting work performed for the entity which is not
related to such transaction or follow-on managerial assistance. The Adviser
will report to the Company's Board of Directors not less often than quarterly
all fees received by the Adviser from any source and whether, in its opinion,
any such fee is one that the Adviser is entitled to retain under the provisions
of this paragraph. In the event that any member of the Company's Board of
Directors should disagree, the matter shall be conclusively resolved by a
majority of the Company's Board of Directors, including a majority of its
members who are not interested persons of the Company.

8.       COMPENSATION TO THE ADVISER.

         As the Adviser's sole and exclusive compensation for its services to
be rendered pursuant to the terms set out above, the Company will, during the
term of this Agreement, pay to the Adviser, quarterly, a fee equal to 0.625%
per quarter of the quarter-end value of the Company's consolidated total assets
(less the company's Interim Investments and cash and the Company's investment
in Allied Capital Lending Corporation) and 0.125% per quarter of the
quarter-end value 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.

         For the purpose of calculating the 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 quarterly fee as soon as practicable
after the values for the applicable quarter have been determined. If the
termination of the Adviser's services hereunder does not coincide with the last
day of a calendar quarter, then any 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.


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9.       INDEMNIFICATION OF THE ADVISER.

         The Company confirms that in performing services hereunder the Adviser
will be an agent of the Company for the purpose of the indemnification
provisions of the Company's By-Laws, subject, however, to the same limitations
as though the Adviser were a director or officer of the Company. The Adviser
shall not be liable to the Company, its shareholders or its creditors except
for violations of law or for conduct which would preclude the Adviser from
being indemnified under such provisions.

10.      APPROVAL OF THE AGREEMENT.

         The Company represents that the Company's Board of Directors,
including a majority of its members who are not interested persons of the
Company, approved this Agreement at a meeting held on March 9, 1995 at which a
quorum was personally present, and a majority, as defined in the ICA, of the
Company's shareholders approved it at a meeting held on the date hereof. This
Agreement shall continue in effect until the annual meeting of the shareholders
of the Company to be held in 1996 and thereafter from year to year as long as
such continuance is specifically approved at least annually by the Company's
Board of Directors, including a majority of its members who are not interested
persons of the Company, or by vote of the holders of a majority, as defined in
the ICA, of the Company's outstanding voting securities.

11.      TERMINATION OF THE AGREEMENT.

         The foregoing notwithstanding, this Agreement may be terminated by the
Company at any time, without payment of any penalty, on 60 days' written notice
to the Adviser if the decision to terminate has been made by the Company's
Board of Directors or by vote of the holders of a majority, as defined in the
ICA, of the Company's outstanding voting securities. This Agreement will
terminate automatically in the event of its assignment, as defined in the ICA.
The Adviser may also terminate this Agreement on 60 days' written notice to the
Company; provided, however, that the Adviser may not terminate this Agreement
unless another investment adviser has been approved by the vote of a majority,
as defined in the ICA, of the Company's outstanding securities and by the
Company's Board of Directors, including a majority of its members who are not
parties to such agreement or interested persons of any such party.

12.      JURISDICTION.

         This Agreement shall be governed by the laws of the State of Maryland.

         IN WITNESS WHEREOF, the parties have executed this Agreement on and as
of May 4th, 1995.


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ALLIED CAPITAL ADVISERS, INC.            ALLIED CAPITAL CORPORATION

By: /s/ Joan M. Sweeney                 By:  /s/ G. Cabell Williams, III
    -----------------------------            ----------------------------------
    Joan M. Sweeney, President               G. Cabell Williams, III, President



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