American Capital 10-Q Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarter ended September 30, 2005

OR

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 814-00149

AMERICAN CAPITAL STRATEGIES, LTD.

Delaware	52-1451377
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)

2 Bethesda Metro Center

14^th Floor

Bethesda, Maryland 20814

(Address of principal executive offices)

(301) 951-6122

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports to be filed by Section 13 of 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter earlier 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 whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    Yes  x.    No  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.):    Yes  ¨    No  x

The number of shares of the issuer’s common stock, $0.01 par value, outstanding as of October 31, 2005 was 108,775,167.

AMERICAN CAPITAL STRATEGIES, LTD.

TABLE OF CONTENTS

PART I.	FINANCIAL INFORMATION
Item 1.	Consolidated Financial Statements	3
	Consolidated Balance Sheets as of September 30, 2005 (unaudited) and December 31, 2004	3
	Consolidated Statements of Operations for the three and nine months ended September 30, 2005 and 2004 (unaudited)	4
	Consolidated Schedules of Investments as of September 30, 2005 (unaudited) and December 31, 2004	5
	Consolidated Statements of Changes in Net Assets for the nine months ended September 30, 2005 and 2004 (unaudited)	30
	Consolidated Statements of Cash Flows for the nine months ended September 30, 2005 and 2004 (unaudited)	31
	Consolidated Financial Highlights for the nine months ended September 30, 2005 and 2004 (unaudited)	32
	Notes to Consolidated Financial Statements (unaudited)	33
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	48
	Portfolio Composition	48
	Results of Operations	49
	Financial Condition, Liquidity and Capital Resources	58
	Portfolio Credit Quality	61
Item 3.	Quantitative and Qualitative Disclosure About Market Risk	65
Item 4.	Controls and Procedures	66
PART II.	OTHER INFORMATION	67
Item 1.	Legal Proceedings	67
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	67
Item 3.	Defaults upon Senior Securities	67
Item 4.	Submission of Matters to a Vote of Security Holders	67
Item 5.	Other Information	67
Item 6.	Exhibits	67
Signatures		71

Item 1. Consolidated Financial Statements

AMERICAN CAPITAL STRATEGIES, LTD.

CONSOLIDATED BALANCE SHEETS

(in thousands, except per share data)

	September 30, 2005			December 31, 2004
	(unaudited)
Assets
Investments at fair value (cost of $4,583,194 and $3,236,249, respectively)
Non-Control/Non-Affiliate investments (cost of $1,745,979 and $1,155,867, respectively)	$	1,728,526		$	1,157,406
Affiliate investments (cost of $446,090 and $388,310, respectively)		469,101			408,529
Control investments (cost of $2,391,125 and $1,692,072, respectively)		2,379,437			1,654,075
Interest rate derivative agreements		7,940			1,678
Total investments at fair value		4,585,004			3,221,688
Cash and cash equivalents		116,125			58,367
Restricted cash		110,503			141,895
Interest receivable		32,508			22,053
Other		127,559			47,424
Total assets	$	4,971,699		$	3,491,427
Liabilities and Shareholders’ Equity
Debt (maturing within one year of $192,328 and $130,883, respectively)	$	2,266,906		$	1,560,978
Interest rate derivative agreements		3,515			17,396
Accrued dividends payable		81,325			5,322
Other		89,831			35,305
Total liabilities		2,441,577			1,619,001
Commitments and contingencies
Shareholders’ equity:
Undesignated preferred stock, $0.01 par value, 5,000 shares authorized, 0 issued and outstanding		—			—
Common stock, $0.01 par value, 200,000 shares authorized, 108,771 and 88,705 issued and 108,386 and 88,705 outstanding, respectively		1,084			887
Capital in excess of par value		2,618,704			2,010,063
Unearned compensation		(55,981	)		(36,690	)
Notes receivable from sale of common stock		(6,667	)		(6,845	)
Distributions in excess of net realized earnings		(25,313	)		(63,032	)
Net unrealized depreciation of investments		(1,705	)		(31,957	)
Total shareholders’ equity		2,530,122			1,872,426
Total liabilities and shareholders’ equity	$	4,971,699		$	3,491,427
Net asset value per share	$	23.34		$	21.11

See accompanying notes.

3

AMERICAN CAPITAL STRATEGIES, LTD.

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

(in thousands, except per share data)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2005			2004			2005			2004
OPERATING INCOME:
Interest and dividend income
Non-Control/Non-Affiliate investments	$	48,450		$	30,410		$	126,905		$	79,245
Affiliate investments		16,295			11,460			42,446			25,655
Control investments		49,660			26,380			129,382			78,697
Total interest and dividend income		114,405			68,250			298,733			183,597
Fee and Other Income
Non-Control/Non-Affiliate investments		16,084			6,870			29,162			18,752
Affiliate investments		3,683			1,768			8,921			3,101
Control investments		14,580			5,378			44,523			18,924
Total fee and other income		34,347			14,016			82,606			40,777
Total operating income		148,752			82,266			381,339			224,374
OPERATING EXPENSES:
Interest		27,889			10,343			67,225			22,916
Salaries, benefits and stock-based compensation		20,837			8,717			55,850			25,614
General and administrative		12,216			7,174			27,309			19,264
Total operating expenses		60,942			26,234			150,384			67,794
OPERATING INCOME BEFORE INCOME TAXES		87,810			56,032			230,955			156,580
Provision for income taxes		(1,884	)		(1,314	)		(7,668	)		(1,369	)
NET OPERATING INCOME		85,926			54,718			223,287			155,211
Net realized gain (loss) on investments
Non-Control/Non-Affiliate investments		3,384			(194	)		21,638			(4,851	)
Affiliate investments		6,601			351			7,451			317
Control investments		(10,754	)		(6,633	)		10,620			(49,419	)
Interest rate derivative periodic payments		(2,706	)		(5,330	)		(8,162	)		(13,513	)
Total net realized gain (loss) on investments		(3,475	)		(11,806	)		31,547			(67,466	)
Net unrealized (depreciation) appreciation of investments
Portfolio company investments		(6,735	)		27,124			10,110			94,765
Interest rate derivative periodic payment accrual		604			291			527			(3,183	)
Interest rate derivative agreements		17,737			(9,728	)		19,615			4,774
Total net unrealized appreciation of investments		11,606			17,687			30,252			96,356
Total net gain on investments		8,131			5,881			61,799			28,890
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS	$	94,057		$	60,599		$	285,086		$	184,101
NET OPERATING INCOME PER COMMON SHARE:
Basic	$	0.84		$	0.68		$	2.34		$	2.12
Diluted	$	0.82		$	0.67		$	2.29		$	2.09
NET EARNINGS PER COMMON SHARE:
Basic	$	0.92		$	0.75		$	2.99		$	2.51
Diluted	$	0.90		$	0.74		$	2.92		$	2.48
WEIGHTED AVERAGE SHARES OF COMMON STOCK OUTSTANDING:
Basic		102,366			80,730			95,319			73,299
Diluted		104,499			81,700			97,587			74,224
DIVIDENDS DECLARED PER COMMON SHARE	$	0.78		$	0.72		$	2.26		$	2.12

See accompanying notes.

4

AMERICAN CAPITAL STRATEGIES, LTD.

CONSOLIDATED SCHEDULE OF INVESTMENTS

September 30, 2005

(unaudited)

(in thousands, except share data)

Company(4)	Industry	Investment(5)	Principal		Cost		Fair Value
NON-CONTROL/NON-AFFILIATE INVESTMENTS
A.H. Harris & Sons, Inc.	Distributors	Subordinated Debt (12.0%, Due 12/06) Common Stock Warrants (2,004 shares)(1)	$	10,000	$	9,835 534	$	9,860 1,821
						10,369		11,681
Aerus, LLC	Household Durables	Common Membership Warrants (250,000 units)(1)				246		—
Alemite Holdings, Inc.	Machinery	Common Stock Warrants (146,250 shares)(1)				124		2,443
AmSan, LLC	Distributors	Senior Debt (11.7%, Due 8/10)		25,000		24,639		24,639
Astrodyne Corporation	Electrical Equipment	Senior Debt (11.7%, Due 4/10 – 4/11) Subordinated Debt (12.0%, Due 4/12) Redeemable Preferred Stock (1 share)(1) Convertible Preferred Stock (552,705 shares)		6,500 11,000		6,359 10,841 —   10,676		6,359 10,841 —   10,676
						27,876		27,876
BarrierSafe Solutions International, Inc.	Commercial Services & Supplies	Senior Debt (12.2%, Due 9/10) Subordinated Debt (16.0%, Due 9/11 – 9/12)		15,000 51,618		14,840 51,033		14,840 51,033
						65,873		65,873
BBB Industries, LLC	Auto Components	Senior Debt (13.2%, Due 5/11) Subordinated Debt (17.5%, Due 11/11)		20,000 5,228		19,727 5,157		19,727 5,157
						24,884		24,884
BC Natural Foods LLC	Food Products	Subordinated Debt (18.3%, Due 9/10) Common Membership Warrants (15.2% membership interest)(1)		15,168		14,680 3,331		14,680 8,658
						18,011		23,338
Beacon Hospice, Inc.	Health Care Providers & Services	Senior Debt (11.2%, Due 2/08 – 2/11) Subordinated Debt (14.5%, Due 2/12)		8,450 10,169		8,276 10,026		8,276 10,026
						18,302		18,302
BLI Holdings Corporation	Personal Products	Subordinated Debt (16.5%, Due 10/10)(6)		18,113		17,343		879
Breeze Industrial Products Corporation	Auto Components	Subordinated Debt (14.5%, Due 9/12 – 8/13)		13,150		13,006		13,006
Bushnell Performance Optics	Leisure Equipment & Products	Subordinated Debt (12.5%, Due 8/12 – 8/13)		117,139		115,385		115,385
Butler Animal Health Supply, LLC	Health Care Providers & Services	Senior Debt (9.7%, Due 7/12)		3,000		3,000		3,000
Case Logic, Inc.	Textiles, Apparel & Luxury Goods	Subordinated Debt (13.7%, Due 3/10) Common Stock Warrants (197,322 shares)(1) Common Stock (11,850 shares)(1) Preferred Stock Warrants (1,564 shares)(1) Redeemable Preferred Stock (11,850 shares)(1)		24,279		21,126 5,418 —   —   441		21,193 3,812 —   —   141
						26,985		25,146
Colts 2005-1	Diversified Financial Services	Common Stock (360 shares)				12,751		14,176
Confluence Holdings Corp.	Leisure Equipment & Products	Senior Debt (10.7%, Due 5/11) Subordinated Debt (14.7%, Due 5/12) Redeemable Preferred Stock (20,119 shares)(1) Convertible Preferred Stock (950,000)(1) Common Stock (1 share)(1)		14,000 37,273		13,801 28,615 18,590 —   —		13,801 37,068 555 —   —
						61,006		51,424

5

AMERICAN CAPITAL STRATEGIES, LTD.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

September 30, 2005

(unaudited)

(in thousands, except share data)

Company(4)	Industry	Investment(5)	Principal	Cost	Fair Value
Corporate Benefit Services of America, Inc	Commercial Services & Supplies	Subordinated Debt (16.0%, Due 7/10) Common Stock Warrants (6,828 shares)(1)	15,695	15,064 695	15,064 695
				15,759	15,759
Corrpro Companies, Inc.(2)	Construction & Engineering	Subordinated Debt (12.5%, Due 3/11) Common Stock Warrants (5,799,187 shares)(1) Redeemable Preferred Stock (2,000 shares)	14,000	11,284 3,865 1,516	11,284 5,117 1,516
				16,665	17,917
Direct Marketing International LLC	Media	Subordinated Debt (14.3%, Due 7/12)	24,092	23,736	23,736
Directed Electronics, Inc.	Household Durables	Subordinated Debt (11.8%, Due 6/11 – 6/12)	74,000	73,195	73,195
Dynisco Parent, Inc.	Electronic Equipment & Instruments	Subordinated Debt (12.6%, Due 10/11) Common Stock (10,000 shares)(1) Common Stock Warrants (2,115 shares)(1)	28,020	27,488 1,000 210	27,488 1,000 210
				28,698	28,698
EAG Acquisition, LLC	Commercial Services & Supplies	Senior Debt (7.7%, Due 10/05 – 9/10) Subordinated Debt (16.0%, Due 9/11) Common Stock Warrants (7,000,000 shares)(1) Redeemable Preferred Stock (7,000,000 shares)	13,410 11,537	13,205 11,366 —   7,044	13,205 11,366 —   7,044
				31,615	31,615
Edline, LLC	Software	Senior Debt (10.7%, Due 7/10) Subordinated Debt (12.0%, Due 7/11) Membership Warrants (2,121,212 units)(1)	2,945 5,000	2,903 3,179 1,784	2,903 3,179 1,784
				7,866	7,866
Erickson Construction, LLC	Building Products	Senior Debt (10.7%, Due 9/09)	26,000	25,731	25,731
FAMS Acquisition, Inc.	Diversified Financial Services	Senior Debt (10.2%, Due 8/08 – 8/11) Subordinated Debt (14.8%, Due 8/12 – 8/13) Convertible Preferred Stock (1,477,557 shares)(1)	32,711 24,077	32,160 23,721 35,880	32,160 23,721 35,880
				91,761	91,761
Formed Fiber Technologies, Inc.	Auto Components	Subordinated Debt (15.0%, Due 8/11) Common Stock Warrants (122,397 shares)(1)	14,691	14,514 122	14,514 122
				14,636	14,636
Gibson Guitar Corp.	Leisure Equipment & Products	Senior Debt (10.7%, Due 8/10)	32,500	31,723	31,723
Hopkins Manufacturing Corporation	Auto Components	Subordinated Debt (14.8%, Due 7/12) Redeemable Preferred Stock (5,000 shares)	30,747	30,398 6,047	30,398 6,047
				36,445	36,445
HP Evenflo Acquisition Co.	Household Durables	Senior Debt (12.2%, Due 8/10) Common Stock (250,000 shares)(1)	23,000	22,755 2,500	22,755 2,500
				25,255	25,255
Infiltrator Systems, Inc.	Building Products	Subordinated Debt (14.0%, Due 9/13)	28,865	28,432	28,432
IPC Acquisition Corp.	Communications Equipment	Senior Debt (11.1%, Due 8/12)	8,000	8,000	8,000
IST Acquisitions, Inc.	Electrical Equipment	Senior Debt (11.1%, Due 5/06 – 10/11) Subordinated Debt (14.0%, Due 5/11 – 5/12) Common Stock (10,000 shares)(1) Redeemable Preferred Stock (22,000 shares) Common Stock Warrants (83,458 shares)(1)	15,075 8,993	14,927 8,722 1,000 16,347 8,346	14,927 8,722 1,000 16,347 8,346
				49,342	49,342
JAG Industries, Inc.	Metals & Mining	Subordinated Debt (0.0%, Due 10/18)(1)	1,954	1,358	61
Milton’s Fine Foods, Inc.	Food Products	Subordinated Debt (14.5%, Due 4/11)	8,583	8,461	8,461
Mobile Tool International, Inc.	Machinery	Subordinated Debt (10.6%, Due 4/06)(6)	1,068	1,068	115

6

AMERICAN CAPITAL STRATEGIES, LTD.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

September 30, 2005

(unaudited)

(in thousands, except share data)

Company(4)	Industry	Investment(5)	Principal	Cost	Fair Value
Montana Silversmiths, Inc.	Textiles, Apparel & Luxury Goods	Senior Debt (10.8%, Due 5/06 – 10/11) Subordinated Debt (14.0%, Due 10/12) Common Stock (797,448 shares)(1)	16,854 16,212	16,536 15,983 1,000	16,536 15,983 1,000
				33,519	33,519
Nailite International, Inc.	Building Products	Subordinated Debt (14.3%, Due 4/10) Common Stock Warrants (247,368 shares)(1)	9,596	8,588 1,232	8,588 1,950
				9,820	10,538
NewQuest, Inc.	Health Care Providers & Services	Subordinated Debt (15.0%, Due 3/12)	35,628	35,123	35,123
Nursery Supplies, Inc.	Containers & Packaging	Subordinated Debt (14.0%, Due 5/13)	20,143	19,850	19,850
Pelican Products, Inc.	Containers & Packaging	Senior Debt (10.4%, Due 10/11)	15,000	14,796	14,796
Phillips & Temro Industries, Inc.	Auto Components	Senior Debt (10.2%, Due 12/10 – 12/11) Subordinated Debt (15.0%, Due 12/12)	26,100 16,900	26,024 16,851	26,024 16,851
				42,875	42,875
Plastech Engineered Products, Inc.	Auto Components	Common Stock Warrants (2,145 shares)(1)		2,577	7,831
Retriever Acquisition Co.	Diversified Financial Services	Subordinated Debt (15.0%, Due 6/12)	26,486	26,185	26,185
Rocky Shoes & Boots, Inc.(2)	Textile, Apparel & Luxury Goods	Senior Debt (11.7%, Due 1/11)	30,000	29,610	29,610
Safemark Acquisitions, Inc.	Commercial Services & Supplies	Senior Debt (11.6%, Due 6/06 – 6/10) Subordinated Debt (14.4%, Due 6/11 – 6/12) Convertible Preferred Stock (3,000 shares)(1) Redeemable Preferred Stock (11,000 shares)(1) Convertible Preferred Stock Warrants (50,175 shares)(1)	5,200 12,315	5,148 12,055 305 6,825 5,028	5,148 12,055 305 6,825 1,278
				29,361	25,611
Sanda Kan (Cayman I) Holdings Company Limited(3)	Leisure Equipment & Products	Common Stock (97,104 shares)(1)		6,582	6,203
Sanlo Holdings, Inc.	Electrical Equipment	Subordinated Debt (13.9%, Due 7/11 – 7/12) Common Stock Warrants (5,187 shares)(1)	10,500	9,934 489	9,934 489
				10,423	10,423
Schoor DePalma, Inc.	Construction & Engineering	Senior Debt (10.7%, Due 8/09 – 8/11) Common Stock (50,000 shares)(1)	31,150	30,817 500	30,817 500
				31,317	31,317
Selig Sealing Products, Inc.	Containers & Packaging	Senior Debt (10.2%, Due 4/12)	14,500	14,292	14,292
SmithBucklin Corporation	Commercial Services & Supplies	Senior Debt (10.7%, Due 6/11) Subordinated Debt (14.5%, Due 6/12)	10,000 7,048	9,855 6,945	9,855 6,945
				16,800	16,800
Soff-Cut Holdings, Inc.	Machinery	Senior Debt (9.7%, Due 8/09) Subordinated Debt (15.9%, Due 8/12)	9,800 12,743	9,673 12,601	9,673 12,601
				22,274	22,274

7

AMERICAN CAPITAL STRATEGIES, LTD.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

September 30, 2005

(unaudited)

(in thousands, except share data)

Company(4)	Industry	Investment(5)	Principal	Cost	Fair Value
SSH Acquisition, Inc.	Commercial Services & Supplies	Senior Debt (8.2%, Due 9/10 – 9/12) Subordinated Debt (14.0%, Due 9/13) Convertible Preferred Stock (511,000 shares)	68,900 18,517	67,746 18,241 51,206	67,746 18,241 51,206
				137,193	137,193
Supreme Corq Holdings, LLC	Household Products	Senior Debt (7.2%, Due 6/09 – 6/10) Subordinated Debt (12.0%, Due 6/12) Common Membership Warrants (3,359 units)(1)	2,624 5,000	2,510 4,606 381	2,510 4,606 381
				7,497	7,497
Technical Concepts Holdings, LLC	Building Products	Senior Debt (9.9%, Due 2/08 – 2/10) Subordinated Debt (12.3%, Due 2/11 – 2/12) Common Membership Warrants (792,149 units)(1)	13,971 15,000	13,932 13,575 1,703	13,932 13,575 1,703
				29,210	29,210
The Hilsinger Company	Health Care Equipment & Supplies	Senior Debt (10.9%, Due 5/10) Subordinated Debt (14.5%, Due 5/12)	17,281 12,949	17,051 12,799	17,051 12,799
				29,850	29,850
The Tensar Corporation	Construction & Engineering	Subordinated Debt (15.1%, Due 6/11) Common Stock (122,949 shares)(1) Common Stock Warrants (424,616 shares)(1) Redeemable Preferred Stock (53,490 shares)	25,188	24,845 246 6,053 955	24,845 3,875 13,036 1,196
				32,099	42,952
ThreeSixty Asia, Ltd.(3)	Commercial Services & Supplies	Senior Debt (11.7%, Due 9/08) Common equity (1)	7,500	7,500 4,093	7,500 —
				11,593	7,500
T-NETIX, Inc.	Diversified Telecommunication Services	Common Stock (17,544 shares)(1)		1,000	973
TransFirst Holdings, Inc.	Commercial Services & Supplies	Senior Debt (11.5%, Due 3/11) Subordinated Debt (15.0%, Due 4/12)	13,000 16,314	12,892 16,144	12,892 16,144
				29,036	29,036
Tyden Caymen Holdings Corp	Electronic Equipment & Instruments	Senior Debt (11.2%, Due 11/11) Subordinated Debt (13.8%, Due 5/12) Common Stock (2,000,000 shares)(1)	12,000 14,500	11,793 14,289 2,000	11,793 14,289 2,000
				28,082	28,082
UAV Corporation	Leisure Equipment & Products	Junior Subordinated Debt (10.7%, Due 5/10) Senior Subordinated Debt (16.3%, Due 5/10)(6)	9,000 15,343	8,872 14,830	8,872 2,786
				23,702	11,658
Unique Fabricating Incorporated	Auto Components	Senior Debt (11.3%, Due 2/10 – 2/12) Subordinated Debt (14.9%, Due 2/13) Redeemable Preferred Stock (2,500 shares) Common Stock Warrants (6,350 shares)(1)	5,686 6,803	5,560 6,706 2,371 330	5,560 6,706 2,371 330
				14,967	14,967

8

AMERICAN CAPITAL STRATEGIES, LTD.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

September 30, 2005

(unaudited)

(in thousands, except share data)

Company(4)	Industry	Investment(5)	Principal	Cost	Fair Value
Vector Products, Inc.	Electronic Equipment & Instruments	Senior Debt (11.7%, Due 9/10)	35,000	34,478	34,478
Vigo Remittance Corp.	Diversified Financial Services	Common Stock Warrants (50,000 shares)(1)		1,213	5,184
Visador Holding Corporation	Building Products	Subordinated Debt (15.0%, Due 2/10) Common Stock Warrants (4,284 shares)(1)	10,539	10,155 462	10,155 1,252
				10,617	11,407
WIL Research Holding Company, Inc.	Biotechnology	Subordinated Debt (13.8%, Due 9/11)	15,444	15,269	15,269
		Redeemable Preferred Stock (5,000,000 shares)		5,809	5,809
		Convertible Preferred Stock (1,210,086 shares)		1,261	1,261
				22,339	22,339
Zenta Global, Ltd.(3)	IT Services	Senior Debt (16.7%, Due 5/11) Common Units (250,025 units)(1) Preferred Units (1,025 units)(1)	27,500	27,103 25 1,025	27,103 25 1,025
				28,153	28,153
Subtotal Non-Control / Non-Affiliate Investments				1,745,979	1,728,526
CONTROL INVESTMENTS
3SI Acquisition Holdings, Inc.	Electronic Equipment & Instruments	Subordinated Debt (14.8%, Due 10/10 –11/11)	39,463	39,044	39,044
		Common Stock (855 shares)(1)		27,246	55,248
				66,290	94,292
ACAS Wachovia Investments, L.P.	Diversified Financial Services	Partnership Interest, 90% of L.P.		25,945	25,945
Aeriform Corporation	Chemicals	Senior Debt (8.7%, Due 6/08) Senior Subordinated Debt (14.0%,     Due 5/09)	21,707 475	21,707 428	21,707 428
		Junior Subordinated Debt (0.0%, Due 5/09)(1)	46,159	34,982	1,153
		Common Stock Warrants (2,419,483 shares)(1)		4,360	—
		Redeemable Preferred Stock (10 shares)(1)		119	—
				61,596	23,288
American Decorative Surfaces International, Inc.	Building Products	Senior Debt (8.1%, Due 5/06)(6) Subordinated Debt (7.0%, Due 5/11)(6) Common Stock (1 share)(1) Common Stock Warrants (64,868 shares)(1)	3,000 18,269	3,000 16,727 10,542 —	1,615 —   —   —
		Convertible Preferred Stock (70,000 shares)(1)		9,572	—
				39,841	1,615
ASC Industries, Inc	Auto Components	Subordinated Debt (12.4%, Due 10/10 – 10/11)	20,500	18,589	18,589
		Common Stock Warrants (74,888 shares)(1)		6,531	28,462
		Redeemable Preferred Stock (72,000 shares)		4,947	4,947
				30,067	51,998

9

AMERICAN CAPITAL STRATEGIES, LTD.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

September 30, 2005

(unaudited)

(in thousands, except share data)

Company(4)	Industry	Investment(5)	Principal	Cost	Fair Value
Auxi Health, Inc.	Health Care Providers & Services	Senior Debt (10.7%, Due 12/07) Subordinated Debt (13.9%, Due 12/05 - 3/09) Subordinated Debt (14.0%, Due 3/09)(6) Common Stock Warrants (4,268,905 shares)(1) Convertible Preferred Stock (13,301,300 shares)(1)	5,251 18,377 8,135	5,251 15,370 3,232 2,599 2,732	5,251 15,465 5,082 1,850 —
				29,184	27,648
Biddeford Real Estate Holdings, Inc.	Real Estate	Senior Debt (8.0%, Due 5/14) Common Stock (100 shares)(1)	3,646	2,999 483	2,999 476
				3,482	3,475
BPWest, Inc.	Energy Equipment & Services	Senior Debt (11.2%, Due 7/11) Subordinated Debt (15.0%, Due 7/12) Redeemable Preferred Stock (780 shares) Common Stock (780,000 shares)(1)	7,000 6,043	6,898 5,954 7,946 1	6,898 5,954 7,946 1
				20,799	20,799
Bridgeport International, LLC(3)	Machinery	Senior Debt (11.1%, Due 12/05 – 11/10) Common membership units (100 units)(1)	5,332	1,029 7,000	1,029 3,038
				8,029	4,067
Capital.com, Inc.	Diversified Financial Services	Common Stock (8,500,100 shares)(1)		1,492	400
Consolidated Utility Services, Inc.	Commercial Services & Supplies	Subordinated Debt (15.0%, Due 5/10) Common Stock (58,906 shares)(1) Redeemable Preferred Stock (3,625,000 shares)	6,656	6,566 1 3,859	6,566 1,345 3,859
				10,426	11,770
Cottman Acquisitions, Inc.	Commercial Services & Supplies	Subordinated Debt (14.3%, Due 9/11 – 9/12) Redeemable Preferred Stock (252,020 shares) Common Stock Warrants (111,965 shares)(1) Common Stock (65,000 shares)(1)	14,949	14,082 17,932 11,197 6,500	14,082 17,932 11,197 6,500
				49,711	49,711
DanChem Technologies, Inc.	Chemicals	Senior Debt (9.7%, Due 12/10) Common Stock (427,719 shares)(1) Redeemable Preferred Stock (12,453 shares)(1) Common Stock Warrants (401,622 shares)(1)	12,593	12,593 2,500 10,393 2,221	12,593 —   345 —
				27,707	12,938
Dosimetry Acquisitions (U.S.), Inc. (3)	Electrical Equipment	Senior Debt (8.5%, Due 6/06 – 6/10) Subordinated Debt (16.6%, Due 6/11) Common Stock (10,000 shares)(1) Common Stock Warrants (73,333 shares)(1) Redeemable Preferred Stock (17,476 shares)	38,009 17,774	37,752 17,580 1,769 12,775 14,595	37,752 17,580 1,769 12,775 14,595
				84,471	84,471
ECA Acquisition Holdings, Inc.	Health Care Equipment & Supplies	Senior Debt (12.0%, Due 4/10 – 4/12) Subordinated Debt (16.5%, Due 4/14) Common Stock (1,000 shares)(1)	16,700 9,664	16,445 9,524 19,025	16,445 9,524 19,025
				44,994	44,994

10

AMERICAN CAPITAL STRATEGIES, LTD.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

September 30, 2005

(unaudited)

(in thousands, except share data)

Company(4)	Industry	Investment(5)	Principal	Cost	Fair Value
eLynx Holdings, Inc.	IT Services	Senior Debt (10.6%, Due 12/07 – 12/09) Subordinated Debt (15.0%, Due 12/10 – 12/11) Common Stock (9,326 shares)(1) Redeemable Preferred Stock (17,488 shares) Common Stock Warrants (108,735 shares)(1)	9,503 8,672	9,366 8,553 933 7,758 10,873	9,366 8,553 933 7,758 10,873
				37,483	37,483
Escort Inc.	Household Durables	Senior Debt (15.7%, Due 7/09) Subordinated Debt (12.4%, Due 7/11 – 7/12) Redeemable Preferred Stock (90,000 shares) Common Stock Warrants (175,562 shares)(1)	5,750 21,648	5,733 17,944 5,399 8,783	5,733 17,944 5,399 63,783
				37,859	92,859
ETG Holdings, Inc.	Containers & Packaging	Senior Debt (11.2%, Due 5/11) Subordinated Debt (15.1%, Due 5/12 – 5/13) Convertible Preferred Stock (333,145 shares)	7,400 11,199	7,294 11,037 15,917	7,294 11,037 15,917
				34,248	34,248
Euro-Caribe Packing Company, Inc.	Food Products	Senior Debt (8.8%, Due 10/05 – 3/08) Subordinated Debt (11.0%, Due 3/08) Common Stock Warrants (31,897 shares)(1) Convertible Preferred Stock (260,048 shares)(1)	8,143 7,766	8,110 7,711 1,110 5,732	8,142 7,720 69 1,764
				22,663	17,695
European Capital Limited(3)	Diversified Financial Services	Senior Debt (4.9%, Due 12/05) Common Stock (52,074,548 shares)(1)	9,937	9,937 50,200	9,937 50,200
				60,137	60,137
European Touch LTD. II	Commercial Services & Supplies	Senior Debt (9.0%, Due 11/06) Subordinated Debt (12.4%, Due 11/06) Common Stock (2,895 shares)(1) Redeemable Preferred Stock (450 shares) Common Stock Warrants (7,105 shares)(1)	2,736 15,640	2,736 14,210 1,500 546 3,683	2,736 14,210 6,280 546 16,172
				22,675	39,944
Flexi-Mat Holding, Inc.	Textiles, Apparel & Luxury Goods	Senior Debt (17.1%, Due 11/09) Subordinated Debt (14.9%, Due 11/10 – 11/11) Common Stock (970,583 shares)(1) Redeemable Preferred Stock (145,000 shares)	4,500 12,430	4,458 12,314 9,706 10,878	4,458 12,314 22,234 10,878
				37,356	49,884
Fosbel Global Services (LUXCO) S.C.A(3)	Commercial Services & Supplies	Senior Debt (7.6%, Due 7/10 – 7/11) Subordinated Debt (14.3%, Due 7/12 – 7/13)	41,207 24,096	40,487 23,740	40,487 23,740
		Redeemable Preferred Stock (31,647,625 shares)		32,660	32,660
		Convertible Preferred Stock (2,606,275 shares)(1) Common Stock (186,161 shares)(1)		5,213 372	5,213 372
				102,472	102,472
Future Food, Inc.	Food Products	Senior Debt (11.7%, Due 7/10) Subordinated Debt (12.4%, Due 7/11 – 7/12) Common Stock (92,738 shares)(1) Common Stock Warrants (6,500 shares)(1)	9,892 14,000	9,787 12,669 18,500 1,297	9,787 12,669 16,566 1,201
				42,253	40,223

11

AMERICAN CAPITAL STRATEGIES, LTD.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

September 30, 2005

(unaudited)

(in thousands, except share data)

Company(4)	Industry	Investment(5)	Principal	Cost	Fair Value
FutureLogic, Inc.	Computers & Peripherals	Senior Debt (11.4%, Due 2/10 – 2/12) Subordinated Debt (15.0%, Due 2/13) Common Stock (221,672 shares)(1)	50,917 29,534	50,221 29,112 26,685	50,221 29,112 24,222
				106,018	103,555
Global Dosimetry Solutions, Inc.	Commercial Services & Supplies	Senior Debt (12.0%, Due 11/11) Subordinated Debt (16.0%, Due 9/09 – 9/10) Common Stock (14,140 shares)(1) Redeemable Preferred Stock (16,480 shares) Common Stock Warrants (71,557 shares)(1)	4,000 18,097	3,946 18,027 1,414 12,177 7,132	3,946 18,027 1,414 12,177 7,132
				42,696	42,696
Halex Holdings, Inc.	Construction Materials	Senior Debt (10.7%, Due 7/08 – 10/08) Subordinated Debt (17.1%, Due 8/10) Common Stock (163,083 shares)(1) Redeemable Preferred Stock (1,000 shares) Convertible Preferred Stock (145,996 shares)(1)	22,450 29,094	22,148 28,934 6,784 14,449 1,603	22,148 28,934 5,065 14,449 4,535
				73,918	75,131
Hartstrings LLC	Textiles, Apparel & Luxury Goods	Senior Debt (9.5%, Due 10/05 – 5/09) Subordinated Debt (14.3%, Due 5/10) Subordinated Debt (15.0%, Due 5/10)(6) Common Membership Warrants (41.7% membership interest)(1)	18,246 10,000 4,656	18,099 9,257 3,828 3,572	18,099 9,257 1,321 —
				34,756	28,677
Hospitality Mints, Inc.	Food Products	Senior Debt (11.7%, Due 11/10) Subordinated Debt (12.4%, Due 11/11 – 11/12) Convertible Preferred Stock (95,198 shares) Common Stock Warrants (86,817 shares)(1)	7,438 18,500	7,338 18,195 21,876 53	7,338 18,195 27,583 643
				47,462	53,759
Iowa Mold Tooling Co., Inc.	Machinery	Subordinated Debt (13.0%, Due 10/08) Common Stock (426,205 shares)(1) Redeemable Preferred Stock (23,803 shares)(1) Common Stock Warrants (530,000 shares)(1)	16,288	15,755 4,760 18,864 5,918	15,825 —   20,261 4,375
				45,297	40,461
Jones Stephens Corp.	Building Products	Subordinated Debt (16.1%, Due 10/10 – 10/11) Common Stock (8,750 shares)(1) Redeemable Preferred Stock (1,000 shares)(1) Convertible Preferred Stock (8,750 shares)(1)	22,275	22,048 3,500 7,000 3,500	22,048 11,881 7,000 11,922
				36,048	52,851
KAC Holdings, Inc.	Chemicals	Subordinated Debt (16.6%, Due 2/11 – 2/12) Common Stock (1,550,100 shares)(1) Redeemable Preferred Stock (13,950 shares)	22,542	22,308 1,550 15,915	22,308 60,966 15,915
				39,773	99,189
KIC Holdings, Inc.	Building Products	Senior Debt (12.5%, Due 9/07) Subordinated Debt (12.0%, Due 9/08)(6) Redeemable Preferred Stock (45,087 shares)(1) Common Stock (3,761 shares)(1) Common Stock Warrants (156,613 shares)(1)	7,464 11,649	7,437 11,172 31,161 5,100 3,060	7,437 6,450 —   —   —
				57,930	13,887

12

AMERICAN CAPITAL STRATEGIES, LTD.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

September 30, 2005

(unaudited)

(in thousands, except share data)

Company(4)	Industry	Investment(5)	Principal	Cost	Fair Value
Kirby Lester, LLC	Health Care Equipment & Supplies	Senior Debt (10.3%, Due 9/10 – 9/12) Subordinated Debt (16.0%, Due 9/13) Preferred Units (375 units)(1)	11,300 11,637	11,091 11,463 375	11,091 11,463 375
				22,929	22,929
Life-Like Holdings, Inc.	Leisure Equipment & Products	Senior Debt (8.6%, Due 6/07 – 6/10) Subordinated Debt (14.2%, Due 6/11 – 6/12) Common Stock (20,000 shares)(1) Redeemable Preferred Stock (8,800 shares) Common Stock Warrants (41,164 shares)(1)	30,000 22,140	29,658 21,746 2,000 5,790 4,116	29,658 21,746 966 5,790 3,341
				63,310	61,501
Logex Corporation	Road & Rail	Senior Subordinated Debt (12.0%, Due 7/08) Junior Subordinated Debt (14.0%, Due 7/08)(6) Common Stock Warrants (137,839 shares)(1) Redeemable Preferred Stock (695 shares)(1)	22,322 6,316	21,024 4,757 7,454 3,929	21,024 4,134 —   —
				37,164	25,158
LVI Holdings, LLC	Commercial Services & Supplies	Senior Debt (9.2%, Due 2/10) Subordinated Debt (18.0%, Due 2/13) Preferred Units (800 units)(1)	7,400 9,354	7,275 9,224 11,000	7,275 9,224 17,668
				27,499	34,167
MBT International, Inc.	Distributors	Senior Subordinated Debt (13.0%, Due 5/09) Junior Subordinated Debt (9.0%, Due 5/06 –5/09)(6)	1,838 6,117	1,634 4,051	1,634 4,051
				5,685	5,685
Network for Medical Communication & Research, LLC	Commercial Services & Supplies	Subordinated Debt (13.0%, Due 12/06) Common Membership Warrants (50,128 units)(1)	11,200	10,609 2,038	10,609 25,148
				12,647	35,757
New Piper Aircraft, Inc.	Aerospace & Defense	Senior Debt (9.2%, Due 6/06 – 8/23) Subordinated Debt (8.0%, Due 7/13) Common Stock (771,839 shares)(1)	61,012 576	60,143 94 95	60,162 575 921
				60,332	61,658
New Starcom Holdings, Inc.	Construction & Engineering	Subordinated Debt (12.0%, Due 12/08 – 12/09) Common Stock (100 shares)(1) Convertible Preferred Stock (32,043 shares)(1)	33,225	27,884 —   11,500	27,983 —   17,085
				39,384	45,068
NPC Holdings, Inc.	Building Products	Senior Debt (10.5%, Due 6/06 – 6/12) Subordinated Debt (15.0%, Due 6/13) Common Stock (80 shares)(1) Redeemable Preferred Stock (13,275 shares) Convertible Preferred Stock (13,690 shares) Convertible Preferred Stock Warrants (43,782 shares)(1)	4,835 8,056	4,736 7,938 8 9,184 1,384 4,378	4,736 7,938 8 9,184 1,384 4,378
				27,628	27,628
nSpired Holdings, Inc.	Food Products	Senior Debt (9.3%, Due 12/08 – 12/09) Subordinated Debt (18.0%, Due 8/07) Common Stock (169,018 shares)(1) Redeemable Preferred Stock (29,500 shares)(1)	16,731 9,540	16,552 9,396 5,000 29,500	16,552 9,469 —   1,645
				60,448	27,666

13

AMERICAN CAPITAL STRATEGIES, LTD.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

September 30, 2005

(unaudited)

(in thousands, except share data)

Company(4)	Industry		Investment(5)	Principal	Cost	Fair Value
Optima Bus Corporation	Machinery		Senior Debt (8.8%, Due 6/06 – 1/08) Subordinated Debt (10.0%, Due 5/11) (6) Common Stock (20,464 shares)(1) Convertible Preferred Stock (2,751,743 shares)(1)	5,274 6,000	5,274 4,610 1,895 24,622	5,274 3,754 —   —
			Common Stock Warrants (43,150 shares)(1)		4,041	—
		��
					40,442	9,028
PaR Systems, Inc.	Machinery		Subordinated Debt (12.9%, Due 2/10) Common Stock (341,222 shares)(1) Common Stock Warrants (29,205 shares)(1)	4,632	4,632 1,089 —	4,632 6,064 519
					5,721	11,215
Pasternack Enterprises, Inc.	Electrical Equipment		Senior Debt (9.6%, Due 12/09 – 8/11) Subordinated Debt (17.4%, Due 5/10 – 12/12) Common Stock (98,799 shares)(1)	34,922 26,468	34,344 26,150 20,562	34,344 26,150 20,562
					81,056	81,056
PHI Acquisitions, Inc.	Internet & Catalog Retail		Senior Debt (7.9%, Due 6/10 – 6/12) Subordinated Debt (13.5%, Due 6/13) Common Stock (69,120 shares)(1) Redeemable Preferred Stock (62,210 shares) Common Stock Warrants (199,095 shares)(1)	85,842 24,587	84,503 24,228 6,629 43,773 19,910	84,503 24,228 6,629 43,773 19,910
					179,043	179,043
Precitech, Inc.	Machinery		Senior Debt (10.1%, Due 12/09 – 12/10) Senior Subordinated Debt (16.0%, Due 12/11) Junior Subordinated Debt (17.0%, Due 12/12)(6)	6,222 2,062 6,826	6,208 2,062 5,048	6,208 2,062 1,067
			Redeemable Preferred Stock (35,807 shares)(1)		7,186	—
			Common Stock (22,040 shares)(1)		2,204	—
			Common Stock Warrants (22,783)(1)		2,278	—
					24,986	9,337
Sixnet, LLC	Electronic Equipment & Instruments		Senior Debt (8.7%, Due 6/10) Subordinated Debt (17.0%, Due 6/13) Membership Units (760 units)(1)	12,705 9,918	11,878 9,776 9,500	11,878 9,776 9,500
					31,154	31,154
Specialty Brands of America, Inc.	Food Products		Senior Debt (9.4%, Due 12/05 – 5/11) Subordinated Debt (15.4%, Due 9/08 – 5/13) Redeemable Preferred Stock (209,303 shares) Convertible Preferred Stock (336,000 shares) Common Stock (33,916 shares)(1) Common Stock Warrants (97,464 shares)(1)	27,131 21,870	26,823 21,629 14,269 34,531 3,392 9,746	26,823 21,629 14,269 34,531 3,392 9,746
					110,390	110,390
S-Tran Holdings, Inc.	Road & Rail		Subordinated Debt (12.5%, Due 12/09)(6)	7,490	6,290	1,202
Stravina Holdings, Inc.	Personal Products		Senior Debt (11.7%, Due 1/10 – 4/11) Subordinated Debt (17.4%, Due 4/13)(6) Common Stock (1,000 shares)(1)	41,664 33,653	41,322 26,986 1	41,322 11,962 1
					68,309	53,285

14

AMERICAN CAPITAL STRATEGIES, LTD.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

September 30, 2005

(unaudited)

(in thousands, except share data)

Company(4)	Industry	Investment(5)	Principal	Cost	Fair Value
Warner Power, LLC	Electrical Equipment	Senior Debt (10.7%, Due 12/07)	6,450	6,450	6,450
		Subordinated Debt (12.7%, Due 12/06 – 12/07)	6,500	6,074	4,858
		Subordinated Debt (13.0%, Due 12/07)(6)	3,500	2,528	—
		Common Membership Units (916 units)(1)		1,123	—
		Common Membership Warrants (916 units)(1)		1,123	700
				17,298	12,008
Weber Nickel Technologies, Ltd. (3)	Machinery	Subordinated Debt (17.7%, Due 2/06 – 9/12)	16,536	16,381	16,381
		Common Stock (44,834 shares)(1)		1,171	—
		Redeemable Preferred Stock (14,796 shares)(1)		11,847	3,781
				29,399	20,162
WWC Acquisitions, Inc	Commercial Services & Supplies	Senior Debt (10.7%, Due 12/07 – 12/11)	11,914	11,711	11,711
		Subordinated Debt (14.2%, Due 12/12 – 12/13)	22,301	21,985	21,985
		Common Stock (4,826,476 shares)(1)		21,237	38,082
				54,933	71,778
Subtotal Control Investments				2,391,125	2,379,437
AFFILIATE INVESTMENTS
Bankruptcy Management Solutions, Inc.	Commercial Services & Supplies	Senior Debt (12.3%, Due 12/09 – 12/10) Subordinated Debt (15.5%, Due 12/12) Common Stock (281,534 shares)(1) Common Stock Warrants (101,179 shares)(1)	18,000 27,734	17,723 27,346 —   —	17,723 27,346 6,116 2,198
				45,069	53,383
Compusearch Holdings Company, Inc.	Software	Senior Debt (7.3%, Due 6/10 – 6/11) Subordinated Debt (12.0%, Due 6/12) Convertible Preferred Stock (40,039 shares)	17,331 12,500	17,012 12,316 1,528	17,012 12,316 1,528
				30,856	30,856
Continental Structural Plastics, Inc.	Auto Components	Subordinated Debt (14.0%, Due 2/13) Common Stock (3,000 shares)(1) Redeemable Preferred Stock (2,700 shares)	11,132	10,971 300 2,830	10,971 300 2,830
				14,101	14,101
Edge Products, LLC	Auto Components	Senior Debt (8.7%, Due 3/10) Subordinated Debt (12.4%, Due 3/13)	11,025 13,594	10,827 13,398	10,827 13,398
		Common Membership Units (7,620 units)(1)		1,749	2,320
		Common Membership Warrants (13,780 units)(1)		62	1,767
				26,036	28,312
FMI Holdco I, LLC	Road & Rail	Subordinated Debt (13.0%, Due 4/10) Common units (626,085 units)(1) Preferred units (410,778 units)(1)	13,545	12,545 2,683 1,704	12,545 2,396 1,704
				16,932	16,645

15

AMERICAN CAPITAL STRATEGIES, LTD.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

September 30, 2005

(unaudited)

(in thousands, except share data)

Company(4)	Industry	Investment(5)	Principal	Cost	Fair Value
Marcal Paper Mills, Inc.	Household Products	Senior Debt (16.1%, Due 12/06) Subordinated Debt (20.5%, Due 12/09) Common Stock Warrants (767,267 shares)(1) Common Stock (209,254 shares)(1)	22,379 28,771	22,371 24,696 5,001 —	22,371 24,696 8,791 2,854
				52,068	58,712
Money Mailer, LLC	Media	Common Membership Interest (6% membership interest)(1)		1,500	3,526
Nivel Holdings, LLC	Distributors	Subordinated Debt (14.6%, Due 2/11 – 2/12) Preferred Units (900 units)(1) Common Units (100,000 units)(1) Common Membership Warrants (41,360 units)(1)	8,787	8,656 900 100 41	8,656 900 336 139
				9,697	10,031
Northwest Coatings, LLC	Containers & Packaging	Senior Debt (12.2%, Due 2/08 – 3/08) Subordinated Debt (15.0%, Due 11/10) Common Units (380,828 units)(1) Redeemable Preferred Units (3,291,265 units)(1)	10,700 10,366	10,540 10,225 333 3,138	10,540 10,225 —   2,775
				24,236	23,540
PaR Nuclear Holding Company	Machinery	Common Stock (341,222 shares)(1)		1,052	5,192
Qualitor Component Holdings, LLC.	Auto Components	Subordinated Debt (15.0%, Due 12/12) Common Units (500,000 units)(1) Preferred Units (4,500,000 units)(1)	28,612	28,211 500 4,500	28,211 500 4,500
				33,211	33,211
Riddell Holdings, LLC	Leisure Equipment & Products	Common Units (3,044,491 units)(1)		3,044	5,256
Roadrunner Dawes, Inc.	Road & Rail	Subordinated Debt (14.0%, Due 9/12) Common Stock (10,000 shares)(1)	17,613	17,438 10,000	17,438 10,000
				27,438	27,438
Seroyal Holdings, L.P.(3)	Health Care Equipment & Supplies	Senior Debt (14.8%, Due 12/10) Subordinated Debt (14.5%, Due 12/11) Partnership Units (144,552 units)(1) Preferred Partnership Units (57,143 units)(1)	7,415 9,083	7,313 8,602 1,253 754	7,313 8,602 1,253 754
				17,922	17,922
TechBooks, Inc.	IT Services	Subordinated Debt (16.3%, Due 8/09) Convertible Preferred Stock (4,373,178 shares)(1)	30,157	29,718 15,000	29,718 15,000
				44,718	44,718
The Hygenic Corporation	Health Care Equipment & Supplies	Subordinated Debt (15.5%, Due 1/12) Common Stock (200,000 shares)(1) Redeemable Preferred Stock (9,000 shares)	10,874	10,757 1,000 10,200	10,757 5,735 10,200
				21,957	26,692
Trinity Hospice, Inc.	Health Care Providers & Services	Senior Debt (11.3%, Due 12/05 – 6/07) Common Stock (131,399 shares)(1) Redeemable Preferred Stock (131,399 shares)(1)	16,150	16,107 13 3,972	13,405 —   —
				20,092	13,405

16

AMERICAN CAPITAL STRATEGIES, LTD.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

September 30, 2005

(unaudited)

(in thousands, except share data)

Company(4)	Industry	Investment(5)	Principal	Cost		Fair Value
Unwired Holdings, Inc.	Household Durables	Senior Debt (11.8%, Due 6/10 – 6/11)	7,600		7,280		7,280
		Subordinated Debt (15.0%, Due 6/12 – 6/13)	15,141		14,919		14,919
		Common Stock (99 shares)(1)			1		1
		Preferred Stock (16,200 shares)			16,658		16,658
		Convertible Preferred Stock (179,901 shares)			1,812		1,812
					40,670		40,670
WFS Holding, Inc.	Software	Subordinated Debt (14.0%, Due 2/12) Convertible Preferred Stock (35,000,000 shares)	12,162		11,991 3,500		11,991 3,500
					15,491		15,491
Subtotal Affiliate Investments					446,090		469,101
INTEREST RATE DERIVATIVE AGREEMENTS
	Interest Rate Swap – Pay Fixed/ Receive Floating	22 Contracts Notional Amounts Totaling $739,646		$	—		7,389
	Interest Rate Swaption – Pay Floating/Receive Fixed	2 Contracts Notional Amounts Totaling $7,093			—		130
	Interest Rate Caps	5 Contracts Notional Amounts Totaling $26,135			—		421
Subtotal Interest Rate Derivative Agreements					—		7,940
Total Investment Assets				$	4,583,194	$	4,585,004
INTEREST RATE DERIVATIVE AGREEMENTS
	Interest Rate Swap – Pay Fixed/ Receive Floating	16 Contracts Notional Amounts Totaling $237,764		$	—	$	(3,352	)
	Interest Rate Swap – Pay Floating/ Receive Floating	5 Contracts Notional Amounts Totaling $106,869			—		(163	)
Total Investment Liabilities				$	—	$	(3,515	)

(1) Non-income producing.

(2) Public company.

(3) International investment.

(4) Certain of the securities are issued by affiliate(s) of the listed portfolio company.

(5) Interest rates represent the weighted average annual stated interest rate on loans and debt securities, which are presented by the nature of indebtedness by a single issuer. The maturity dates represent the earliest and the latest maturity dates.

(6) Debt security is on non-accrual status and therefore considered non-income producing.

See accompanying notes.

17

AMERICAN CAPITAL STRATEGIES, LTD.

CONSOLIDATED SCHEDULE OF INVESTMENTS

December 31, 2004

(in thousands, except share data)

Company(4)	Industry	Investment(5)	Principal		Cost		Fair Value
NON-CONTROL/NON-AFFILIATE INVESTMENTS
A.H. Harris & Sons, Inc.	Distributors	Subordinated Debt (12.0%, Due 12/06) Common Stock Warrants (2,004 shares)(1)	$	10,000	$	9,749 534	$	9,786 1,660
						10,283		11,446
Aerus, LLC	Household Durables	Common Membership Warrants (250,000 units)(1)				246		—
Alemite Holdings, Inc.	Machinery	Common Stock Warrants (146,250 shares)(1)				124		951
BarrierSafe Solutions International, Inc.	Commercial Services & Supplies	Senior Debt (10.8%, Due 9/10) Subordinated Debt (16.0%, Due 9/11 – 9/12)		15,000 50,456		14,820 49,840		14,820 49,840
						64,660		64,660
BBB Industries, LLC	Auto Components	Senior Debt (10.4%, Due 11/09 – 5/11) Subordinated Debt (17.5%, Due 11/11)		26,500 5,013		26,070 4,939		26,070 4,939
						31,009		31,009
BC Natural Foods LLC	Food Products	Senior Debt (10.4%, Due 9/07) Subordinated Debt (16.5%, Due 1/08 – 7/09)		4,800 30,460		4,786 28,490		4,786 28,490
		Common Membership Warrants (15.2% membership interest)(1)				3,331		8,658
						36,607		41,934
BLI Holdings Corp.	Personal Products	Subordinated Debt (16.5%, Due 10/10)(6)		17,655		17,326		3,342
Breeze Industrial Products Corporation	Auto Components	Subordinated Debt (14.4%, Due 9/12 – 8/13)		12,643		12,494		12,494
Bumble Bee Seafoods, L.P.	Food Products	Partnership Units (465 units)(1)				465		2,487
CamelBak Products, LLC	Leisure Equipment & Products	Subordinated Debt (14.8%, Due 11/10)		39,239		38,797		38,797
Case Logic, Inc.	Textiles, Apparel & Luxury Goods	Subordinated Debt (13.8%, Due 3/10) Common Stock Warrants (197,322 shares)(1)		25,157		21,575 5,418		21,666 3,812
		Common Stock (11,850 shares)(1)				—		—
		Redeemable Preferred Stock (11,850 shares)(1)				441		141
						27,434		25,619
CIVCO Holding, Inc.	Health Care Equipment & Supplies	Subordinated Debt (14.1%, Due 7/10 – 7/11) Common Stock (210,820 shares)(1)		27,494		24,413 2,127		24,413 1,491
		Common Stock Warrants (609,060 shares)(1)				2,934		4,307
						29,474		30,211
Corporate Benefit Services of America, Inc	Commercial Services & Supplies	Subordinated Debt (16.0%, Due 7/10) Common Stock Warrants (6,828 shares)(1)		15,459		14,774 695		14,774 695
						15,469		15,469
Corrpro Companies, Inc.(2)	Construction & Engineering	Subordinated Debt (12.5%, Due 3/11) Common Stock Warrants (5,799,187 shares)(1)		14,000		11,076 3,865		11,076 3,865
		Redeemable Preferred Stock (2,000 shares)				1,282		1,282
						16,223		16,223
Directed Electronics, Inc.	Household Durables	Subordinated Debt (11.1%, Due 6/11 – 6/12)		74,000		73,128		73,128

18

AMERICAN CAPITAL STRATEGIES, LTD.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

December 31, 2004

(in thousands, except share data)

Company(4)	Industry	Investment(5)	Principal	Cost	Fair Value
Dynisco Parent, Inc.	Electronic Equipment & Instruments	Subordinated Debt (12.6%, Due 10/11) Common Stock (10,000 shares)(1) Common Stock Warrants (2,115 shares)(1)	27,709	27,119 1,000 210	27,119 1,000 210
				28,329	28,329
Erickson Construction, LLC	Building Products	Senior Debt (9.3%, Due 9/09)	40,000	39,527	39,527
Euro-Pro Operating LLC	Household Durables	Senior Debt (15.0%, Due 9/08)	40,000	39,840	39,840
Formed Fiber Technologies, Inc.	Auto Components	Subordinated Debt (15.0%, Due 8/11) Common Stock Warrants (122,397 shares)(1)	14,361	14,169 122	14,169 122
				14,291	14,291
HMS Healthcare, Inc.	Health Care Providers & Services	Subordinated Debt (14.6%, Due 7/11 – 7/12) Common Stock (263,620 shares)(1)	40,980	40,386 264	40,386 2,474
		Redeemable Preferred Stock (263,620 shares)		2,839	2,839
		Common Stock Warrants (96,578 shares)(1)		97	906
				43,586	46,605
Hopkins Manufacturing Corporation	Auto Components	Subordinated Debt (14.8%, Due 7/12) Redeemable Preferred Stock (5,000 shares)	29,956	29,592 5,375	29,592 5,375
				34,967	34,967
HP Evenflo Acquisition Co.	Household Products	Senior Debt (10.7%, Due 8/10) Common Stock (250,000 shares)(1)	23,000	22,727 2,500	22,727 2,500
				25,227	25,227
Interior Specialist, Inc	Commercial Services & Supplies	Subordinated Debt (15.0%, Due 9/10)	13,200	13,047	13,047
IST Acquisitions, Inc.	Electrical Equipment	Senior Debt (9.6%, Due 5/05 – 10/11) Subordinated Debt (14.0%, Due 5/11 – 5/12) Common Stock (10,000 shares)(1) Redeemable Preferred Stock (22,000 shares) Common Stock Warrants (83,458 shares)(1)	15,200 8,858	15,031 8,572 1,000 14,924 8,346	15,031 8,572 1,000 14,924 8,346
				47,873	47,873
JAG Industries, Inc.	Metals & Mining	Subordinated Debt (0.0%, Due 10/18)(1)	1,954	1,358	61
Kelly Aerospace, Inc.	Aerospace & Defense	Subordinated Debt (13.5%, Due 2/09) Common Stock Warrants (250 shares)(1)	10,000	9,286 1,588	9,286 2,219
				10,874	11,505
Mobile Tool International, Inc.	Machinery	Subordinated Debt (9.2%, Due 4/06)(6)	1,068	1,068	115
Montana Silversmiths, Inc.	Textiles, Apparel & Luxury Goods	Senior Debt (8.8%, Due 10/06 – 10/11) Subordinated Debt (14.0%, Due 10/12)	11,234 11,043	11,027 10,880	11,027 10,880
				21,907	21,907
MP TotalCare, Inc.	Healthcare Equipment & Supplies	Senior Debt (12.8%, Due 10/10)	15,000	14,835	14,835
Nailite International, Inc.	Building Products	Subordinated Debt (14.3%, Due 4/10) Common Stock Warrants (247,368 shares)(1)	9,506	8,400 1,232	8,400 2,333
				9,632	10,733

19

AMERICAN CAPITAL STRATEGIES, LTD.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

December 31, 2004

(in thousands, except share data)

Company(4)	Industry	Investment(5)	Principal	Cost	Fair Value
Patriot Medical Technologies, Inc.	Commercial Services & Supplies	Common Stock Warrants (405,326 shares)(1) Convertible Preferred Stock (155,280 shares)(1)		612 1,319	—   300
				1,931	300
Pelican Products, Inc.	Containers & Packaging	Senior Debt (9.5%, Due 10/11)	15,000	14,778	14,778
Phillips & Temro Holdings LLC	Auto Components	Senior Debt (8.8%, Due 12/09 – 12/11) Subordinated Debt (15.0%, Due 11/09 – 12/12)	23,955 15,000	23,461 14,775	23,461 14,775
				38,236	38,236
Plastech Engineered Products, Inc.	Auto Components	Common Stock Warrants (2,145 shares)(1)		2,577	14,501
Retriever Acquisition Co.	Diversified Financial Services	Subordinated Debt (15.0%, Due 6/12)	25,893	25,578	25,578
Safemark Acquisitions, Inc.	Commercial Services & Supplies	Senior Debt (10.6%, Due 6/05 – 6/10) Subordinated Debt (14.4%, Due 6/11 – 6/12) Convertible Preferred Stock (3,000 shares) Redeemable Preferred Stock (11,000 shares)	4,804 12,130	4,731 11,855 303 6,594	4,731 11,855 303 6,594
		Convertible Preferred Stock Warrants (50,175 shares)(1)		5,028	5,028
				28,511	28,511
Sanda Kan (Cayman I) Holdings Company Limited(3)	Leisure Equipment & Products	Common Stock (97,104 shares)(1)		6,582	6,203
Sanlo Holdings, Inc.	Electrical Equipment	Subordinated Debt (13.9%, Due 7/11 – 7/12)	10,520	9,916	9,916
		Common Stock Warrants (5,187 shares)(1)		489	489
				10,405	10,405
Schoor DePalma, Inc.	Construction & Engineering	Senior Debt (9.7%, Due 8/09 – 8/11) Common Stock (50,000 shares)(1)	31,788	31,406 500	31,406 500
				31,906	31,906
Soff-Cut Holdings, Inc.	Machinery	Senior Debt (8.2%, Due 8/09) Subordinated Debt (15.9%, Due 8/12)	9,950 12,408	9,799 12,258	9,799 12,258
				22,057	22,057
Stravina Operating Company, LLC	Personal Products	Senior Subordinated Debt (17.0%, Due 5/10) Junior Subordinated Debt (18.5%, Due 8/11)(6)	20,323 8,080	20,259 7,820	20,259 7,643
		Common Stock (1,000 shares)(1)		1,000	—
				29,079	27,902
Supreme Corq Holdings, LLC	Household Products	Senior Debt (5.9%, Due 6/09 – 6/10) Subordinated Debt (12.0%, Due 6/12) Common Membership Warrants (3,359 units)(1)	2,229 5,000	2,095 4,577 381	2,095 4,577 381
				7,053	7,053
Technical Concepts Holdings, LLC	Building Products	Senior Debt (8.3%, Due 2/08 – 2/10) Subordinated Debt (12.3%, Due 2/11 – 2/12)	15,615 15,000	15,563 13,460	15,563 13,460
		Common Membership Warrants     (792,149 units)(1)		1,703	1,703
				30,726	30,726

20

AMERICAN CAPITAL STRATEGIES, LTD.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

December 31, 2004

(in thousands, except share data)

Company(4)	Industry	Investment(5)	Principal	Cost	Fair Value
The Hilsinger Company	Health Care Equipment & Supplies	Senior Debt (9.6%, Due 5/10) Subordinated Debt (14.5%, Due 5/12)	17,413 12,706	17,145 12,540	17,145 12,540
				29,685	29,685
The Lion Brewery, Inc.	Beverages	Subordinated Debt (9.8%, Due 1/09) Common Stock Warrants (540,000     shares)(1)	6,600	6,169 675	6,215 4,381
				6,844	10,596
The Tensar Corporation	Construction & Engineering	Subordinated Debt (15.0%, Due 6/11) Common Stock (122,301 shares)(1)	24,040	23,680 243	23,680 1,351
		Common Stock Warrants (403,770     shares)(1)		6,006	4,459
		Redeemable Preferred Stock (53,490     shares)		904	904
				30,833	30,394
ThreeSixty Asia, Ltd.(3)	Commercial Services & Supplies	Senior Debt (10.3%, Due 9/08) Common equity(1)	9,229	9,229 4,093	9,229 —
				13,322	9,229
T-NETIX, Inc.	Diversified Telecommunication Services	Common Stock (17,544 shares)(1)		1,000	1,000
TransFirst Holdings, Inc.	Commercial Services & Supplies	Senior Debt (9.6%, Due 3/11) Subordinated Debt (15.0%, Due 4/12)	13,000 15,951	12,881 15,772	12,881 15,772
				28,653	28,653
UAV Corporation	Leisure Equipment & Products	Subordinated Debt (16.3%, Due 5/10)	14,792	14,746	14,746
Valley Proteins, Inc.	Food Products	Subordinated Debt (11.3%, Due 6/11)	10,000	9,881	9,881
Vigo Remittance Corp.	Diversified Financial Services	Common Stock Warrants     (50,000 shares)(1)		1,213	1,396
Visador Holding Corporation	Building Products	Subordinated Debt (15.0%, Due 2/10) Common Stock Warrants (4,284 shares)(1)	10,381	9,958 462	9,958 462
				10,420	10,420
Warner Power, LLC	Electrical Equipment	Subordinated Debt (12.8%,     Due 12/06 – 12/07)	10,000	8,670	6,891
		Common Membership Warrants     (1,832 units)(1)		2,246	892
				10,916	7,783
Weston ACAS Holdings, Inc.	Commercial Services & Supplies	Subordinated Debt (17.3%, Due 6/10)	7,712	7,678	7,678
WIL Research Holding Company, Inc.	Biotechnology	Subordinated Debt (14.3%, Due 9/11) Redeemable Preferred Stock (5,000,000 shares)	15,126	14,941 5,204	14,941 5,204
		Convertible Preferred Stock (1,000,000 shares)		1,012	1,012
				21,157	21,157
Subtotal Non-Control / Non-Affiliate Investments				1,155,867	1,157,406

21

AMERICAN CAPITAL STRATEGIES, LTD.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

December 31, 2004

(in thousands, except share data)

Company(4)	Industry	Investment(5)	Principal	Cost	Fair Value
CONTROL INVESTMENTS
3SI Acquisition Holdings, Inc.	Electronic Equipment & Instruments	Senior Debt (12.3%, Due 3/10) Subordinated Debt (16.0%, Due 11/10 – 11/11)	9,000 29,656	8,901 29,311	8,901 29,311
		Common Stock (855 shares)(1)		27,246	42,046
				65,458	80,258
ACAS Wachovia Investments, L.P.	Diversified Financial Services	Partnership Interest, 90% of L.P.		26,617	26,617
ACS PTI, Inc.	Auto Components	Common Stock (1,000 shares)(1)		348	2,239
Aeriform Corporation	Chemicals	Senior Debt (7.8%, Due 6/08)	21,712	21,704	21,704
		Senior Subordinated Debt (14.0%, Due 5/09)	429	429	429
		Junior Subordinated Debt (0.0%, Due 5/09)(6)	46,154	34,959	1,130
		Common Stock Warrants (2,419,483 shares)(1)		4,360	—
		Redeemable Preferred Stock (10 shares)(1)		118	—
				61,570	23,263
American Decorative Surfaces International, Inc.	Building Products	Senior Debt (6.7%, Due 5/05) Subordinated Debt (7.0%, Due 5/11 – 5/12)(6)	1,000 17,327	1,000 16,727	1,000 7,661
		Common Stock (1 share)(1)		10,543	—
		Common Stock Warrants (94,868 shares)(1)		—	—
		Convertible Preferred Stock (100,000 shares)(1)		13,674	—
				41,944	8,661
ASC Industries, Inc	Auto Components	Subordinated Debt (12.4%, Due 10/10 – 10/11)	20,500	18,336	18,336
		Common Stock Warrants (74,888 shares)(1)		6,531	23,401
		Redeemable Preferred Stock (72,000 shares)		4,500	4,500
				29,367	46,237
Automatic Bar Controls, Inc.	Commercial Services & Supplies	Senior Debt (10.5%, Due 6/07) Subordinated Debt (17.1%, Due 6/09) Common Stock (595,364 shares)(1)	11,067 14,733	11,031 14,524 7,000	11,031 14,524 20,725
		Common Stock Warrants (15,459 shares)(1)		182	519
				32,737	46,799
Auxi Health, Inc.	Health Care Providers & Services	Senior Debt (9.3%, Due 12/07) Subordinated Debt (14.0%, Due 3/09) Subordinated Debt (14.0%, Due 3/09)(6)	5,251 6,000 19,334	5,251 5,409 12,452	5,251 5,448 3,998
		Common Stock Warrants (4,268,905 shares)(1)		2,599	—
		Convertible Preferred Stock (13,301,300 shares)(1)		2,732	—
				28,443	14,697

22

AMERICAN CAPITAL STRATEGIES, LTD.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

December 31, 2004

(in thousands, except share data)

Company(4)	Industry	Investment(5)	Principal	Cost	Fair Value
Biddeford Real Estate Holdings, Inc.	Real Estate	Senior Debt (8.0%, Due 5/14) Common Stock (100 shares)(1)	3,470	2,824 483	2,824 476
				3,307	3,300
Bridgeport International, LLC(3)	Machinery	Senior Debt (8.3%, Due 9/07) Common Stock (2,000,000 shares)(1) Convertible Preferred Stock (5,000,000 shares)(1)	12,618	8,812 2,000 5,000	8,812 —   1,767
				15,812	10,579
Capital.com, Inc.	Diversified Financial Services	Common Stock (8,500,100 shares)(1)		1,492	400
Confluence Holdings Corp.	Leisure Equipment & Products	Senior Debt (6.2%, Due 9/07) Subordinated Debt (13.0%, Due 10/05)	18,320 7,204	9,966 6,955	18,320 5,466
		Subordinated Debt (25.0%, Due 5/10 – 12/15)(6)	7,504	5,471	—
		Redeemable Preferred Stock (7,200 shares)(1)		6,896	—
		Convertible Preferred Stock (765 shares)(1)		3,529	—
		Common Stock Warrants (7,764 shares)(1)		—	—
		Common Stock (1 share)(1)		2,700	546
				35,517	24,332
Consolidated Utility Services, Inc.	Commercial Services & Supplies	Subordinated Debt (15.0%, Due 5/10) Common Stock (39,406 shares)(1) Redeemable Preferred Stock (2,425,000 shares)	3,010	2,965 —   2,425	2,965 —   2,425
				5,390	5,390
Cottman Acquisitions, Inc.	Commercial Services & Supplies	Subordinated Debt (14.3%, Due 9/11 – 9/12)	14,724	13,810	13,810
		Redeemable Preferred Stock (252,020 shares)		16,307	16,307
		Common Stock Warrants (111,965 shares)(1)		11,197	11,197
		Common Stock (65,000 shares)(1)		6,500	6,500
				47,814	47,814
Cycle Gear, Inc.	Specialty Retail	Senior Debt (10.1%, Due 9/05) Subordinated Debt (11.0%, Due 9/06) Common Stock Warrants (104,439 shares)(1) Redeemable Preferred Stock (57,361 shares)	145 12,995	145 12,535 973 3,082	145 12,574 4,112 3,082
				16,735	19,913
DanChem Technologies, Inc.	Chemicals	Senior Debt (8.4%, Due 2/08 – 12/10) Subordinated Debt (12.0%, Due 2/09) Common Stock (427,719 shares)(1)	11,929 7,000	11,929 6,191 2,500	11,929 6,191 348
		Redeemable Preferred Stock (5,249 shares)(1)		4,155	4,155
		Common Stock Warrants (401,622 shares)(1)		2,221	1,706
				26,996	24,329
Dosimetry Acquisitions (U.S.), Inc. (3)	Electrical Equipment	Senior Debt (8.3%, Due 6/05 – 6/10) Subordinated Debt (15.1%, Due 6/11) Common Stock (10,000 shares)(1) Common Stock Warrants (73,333 shares)(1) Redeemable Preferred Stock (16,900 shares)	30,870 17,336	30,530 17,131 1,769 12,775 12,510	30,530 17,131 1,769 12,775 12,510
				74,715	74,715
eLynx Holdings, Inc.	IT Services	Senior Debt (9.3%, Due 12/07 – 12/09)	10,353	10,175	10,175
		Subordinated Debt (15.0%, Due 12/10 – 12/11)	8,509	8,382	8,382
		Common Stock (9,326 shares)(1)		933	933
		Redeemable Preferred Stock (17,488 shares)		6,676	6,676
		Common Stock Warrants (108,735 shares)(1)		10,874	10,874
				37,040	37,040

23

AMERICAN CAPITAL STRATEGIES, LTD.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

December 31, 2004

(in thousands, except share data)

Company(4)	Industry	Investment(5)	Principal	Cost	Fair Value
Escort Inc.	Household Durables	Senior Debt (14.2%, Due 7/09)	5,750	5,728	5,728
		Subordinated Debt (12.4%, Due 7/11 – 7/12)	21,648	17,688	17,688
		Redeemable Preferred Stock (90,000 shares)		4,868	4,868
		Common Stock Warrants (175,562 shares)(1)		8,783	37,697
				37,067	65,981
Euro-Caribe Packing Company, Inc.	Food Products	Senior Debt (7.3%, Due 5/05 – 3/08) Subordinated Debt (11.0%, Due 3/08)	8,622 7,766	8,582 7,686	8,622 7,697
		Common Stock Warrants (31,897 shares)(1)		1,110	69
		Convertible Preferred Stock (258,618 shares)(1)		4,302	334
				21,680	16,722
European Touch LTD. II	Commercial Services & Supplies	Senior Debt (9.0%, Due 11/06) Subordinated Debt (12.4%, Due 11/06) Common Stock (2,895 shares)(1) Redeemable Preferred Stock (450 shares) Common Stock Warrants (7,105 shares)(1)	3,436 15,342	3,418 13,181 1,500 515 3,683	3,418 13,181 4,525 515 11,862
				22,297	33,501
Flexi-Mat Holding, Inc.	Textiles, Apparel & Luxury Goods	Senior Debt (15.7%, Due 11/09) Subordinated Debt (14.9%, Due 11/10 – 11/11)	4,500 11,195	4,452 11,070	4,452 11,070
		Common Stock (970,583 shares)(1)		9,706	14,658
		Redeemable Preferred Stock (145,000 shares)		9,886	9,886
				35,114	40,066
Future Food, Inc.	Food Products	Senior Debt (10.2%, Due 7/10) Subordinated Debt (12.4%, Due 7/11 – 7/12) Common Stock (92,738 shares)(1) Common Stock Warrants (6,500 shares)(1)	9,967 14,000	9,849 12,577 18,500 1,297	9,849 12,577 18,500 1,297
				42,223	42,223
Global Dosimetry Solutions, Inc.	Commercial Services & Supplies	Senior Debt (10.6%, Due 11/11) Subordinated Debt (16.0%, Due 9/09 – 9/10) Common Stock (14,140 shares)(1) Redeemable Preferred Stock (16,160 shares) Common Stock Warrants (71,557 shares)(1)	4,000 17,757	3,941 17,680 1,414 10,711 7,132	3,941 17,680 1,414 10,711 7,132
				40,878	40,878
Halex Holdings, Inc.	Construction Materials	Senior Debt (10.6%, Due 7/08 – 10/08) Subordinated Debt (17.1%, Due 8/10) Common Stock (163,083 shares)(1) Redeemable Preferred Stock (1,000 shares) Convertible Preferred Stock (145,996 shares)	16,300 28,210	15,925 28,035 6,784 13,931 1,771	15,925 28,035 6,784 13,931 7,956
				66,446	72,631
Hartstrings LLC	Textiles, Apparel & Luxury Goods	Senior Debt (8.4%, Due 5/05) Subordinated Debt (14.5%, Due 5/10) Common Membership Warrants (41.7% membership interest)(1)	11,804 14,656	11,180 13,257 3,572	11,180 13,257 1,527
				28,009	25,964

24

AMERICAN CAPITAL STRATEGIES, LTD.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

December 31, 2004

(in thousands, except share data)

Company(4)	Industry	Investment(5)	Principal	Cost	Fair Value
Hospitality Mints, Inc.	Food Products	Senior Debt (10.2%, Due 11/10)	7,494	7,383	7,383
		Subordinated Debt (12.4%, Due 11/11 – 11/12)	18,500	18,173	18,173
		Convertible Preferred Stock (95,198 shares)		20,586	20,586
		Common Stock Warrants (86,817 shares)(1)		54	54
				46,196	46,196
Iowa Mold Tooling Co., Inc.	Machinery	Subordinated Debt (13.0%, Due 10/08) Common Stock (426,205 shares)(1)	16,288	15,604 4,760	15,694 —
		Redeemable Preferred Stock (23,803 shares)(1)		18,864	16,040
		Common Stock Warrants (530,000 shares)(1)		5,918	711
				45,146	32,445
Jones Stephens Corp.	Building Products	Subordinated Debt (16.1%, Due 10/10 – 10/11)	21,766	21,522	21,522
		Common Stock (8,750 shares)(1)		3,500	8,305
		Redeemable Preferred Stock (1,000 shares)(1)		7,000	7,000
		Convertible Preferred Stock (8,750 shares)(1)		3,500	8,305
				35,522	45,132
KAC Holdings, Inc.	Chemicals	Subordinated Debt (16.6%, Due 2/11 – 2/12) Common Stock (1,551,000 shares)(1) Redeemable Preferred Stock (13,950 shares)	21,822	21,574 1,550 14,981	21,574 53,499 14,981
				38,105	90,054
KIC Holdings, Inc. (formerly ACAS Holdings (Inca), Inc.)	Building Products	Senior Debt (12.5%, Due 9/07) Subordinated Debt (12.0%, Due 9/08)	5,531 11,649	5,494 11,649	5,494 11,649
		Redeemable Preferred Stock (30,087 shares)(1)		29,661	3,338
		Common Stock (3,761 shares)(1)		5,100	—
		Common Stock Warrants (156,613 shares)(1)		3,060	446
				54,964	20,927
Life-Like Holdings, Inc.	Leisure Equipment & Products	Senior Debt (7.1%, Due 6/07 – 6/10) Subordinated Debt (14.2%, Due 6/11 – 6/12) Common Stock (20,000 shares)(1) Redeemable Preferred Stock (8,800 shares) Common Stock Warrants (41,164 shares)(1)	34,373 21,768	33,947 21,352 2,000 5,231 4,116	33,947 21,352 2,000 5,231 4,116
				66,646	66,646
Logex Corporation	Road & Rail	Senior Subordinated Debt (12.0%, Due 7/08)	20,389	18,689	18,689
		Junior Subordinated Debt (14.0%, Due 7/08)(6)	5,683	4,755	4,132
		Common Stock Warrants (137,839 shares)(1)		7,454	—
		Redeemable Preferred Stock (695 shares)(1)		3,930	—
				34,828	22,821
MBT International, Inc.	Distributors	Subordinated Debt (11.7%, Due 7/05 – 5/09)	19,631	16,246	16,246
		Common Stock (1,887,834 shares)(1)		1,233	—
		Common Stock Warrants (21,314,448 shares)(1)		5,254	3,350
		Redeemable Preferred Stock (2,250,000 shares)(1)		1,228	—
				23,961	19,596
Network for Medical Communication & Research, LLC	Commercial Services & Supplies	Subordinated Debt (13.0%, Due 12/06) Common Membership Warrants     (50,128 units)(1)	12,800	11,876 2,038	11,876 46,419
				13,914	58,295

25

AMERICAN CAPITAL STRATEGIES, LTD.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

December 31, 2004

(in thousands, except share data)

Company(4)	Industry	Investment(5)	Principal	Cost	Fair Value
New Piper Aircraft, Inc.	Aerospace & Defense	Senior Debt (9.0%, Due 6/06 – 8/23) Subordinated Debt (8.0%, Due 7/13) Common Stock (771,839 shares)(1)	59,476 541	58,493 60 95	58,524 541 2,234
				58,648	61,299
New Starcom Holdings, Inc.	Construction & Engineering	Subordinated Debt (12.0%, Due 12/08 – 12/09)	34,491	28,411	28,543
		Common Stock (100 shares)(1)		—	—
		Convertible Preferred Stock (32,043 shares)(1)		11,500	7,910
				39,911	36,453
nSpired Holdings, Inc.	Food Products	Senior Debt (7.4%, Due 12/08 – 12/09) Subordinated Debt (18.0%, Due 8/07) Common Stock (169,018 shares)(1) Redeemable Preferred Stock (25,500 shares)(1)	19,584 9,355	19,359 9,263 5,000 25,500	19,359 9,263 —   17,784
				59,122	46,406
Optima Bus Corporation	Machinery	Senior Debt (7.3%, Due 6/06 – 1/08)	3,734	3,734	3,734
		Subordinated Debt (10.0%, Due 5/11)(6)	6,000	5,103	4,313
		Common Stock (20,464 shares)(1)		1,896	—
		Convertible Preferred Stock (2,751,743 shares)(1)		24,625	—
		Common Stock Warrants (43,150 shares)(1)		4,041	—
				39,399	8,047
PaR Systems, Inc.	Machinery	Subordinated Debt (12.9%, Due 2/10) Common Stock (341,222 shares)(1)	4,632	4,632 1,089	4,632 1,854
				5,721	6,486
Pasternack Enterprises, Inc.	Electrical Equipment	Senior Debt (9.5%, Due 12/09 – 6/11) Subordinated Debt (15.5%, Due 12/12) Common Stock (98,799 shares)(1)	40,950 22,020	40,263 21,690 20,562	40,263 21,690 20,562
				82,515	82,515
Precitech, Inc.	Machinery	Senior Debt (9.3%, Due 12/09 – 12/10) Senior Subordinated Debt (16.0%, Due 12/11)	4,572 2,000	4,553 2,000	4,553 2,000
		Junior Subordinated Debt (17.0% Due 12/12)(6)	6,003	5,073	1,092
		Redeemable Preferred Stock (35,807 shares)(1)		7,186	—
		Common Stock (22,040 shares)(1)		2,204	—
		Common Stock Warrants (22,783)(1)		2,278	—
				23,294	7,645
Roadrunner Freight Systems, Inc.	Road & Rail	Subordinated Debt (15.5%, Due 7/09 – 7/10)	5,247	4,334	4,334
		Common Stock (309,361 shares)(1)		13,550	23,035
		Common Stock Warrants
		(65,000 shares)(1)		2,840	4,602
				20,724	31,971

26

AMERICAN CAPITAL STRATEGIES, LTD.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

December 31, 2004

(in thousands, except share data)

Company(4)	Industry	Investment(5)	Principal	Cost	Fair Value
Specialty Brands of America, Inc.	Food Products	Senior Debt (8.2%, Due 12/05 – 12/09)	11,448	11,340	11,340
		Subordinated Debt (15.4%,     Due 9/08 – 12/11)	16,121	15,942	15,942
		Redeemable Preferred Stock
		(209,303 shares)		12,892	12,892
		Common Stock (33,916 shares)(1)		3,392	3,392
		Common Stock Warrants
		(97,464 shares)(1)		9,746	9,746
				53,312	53,312
S-Tran Holdings, Inc.	Road & Rail	Subordinated Debt (12.5%, Due 12/09)(6)	6,200	4,996	4,996
		Common Stock (4,735,000 shares)(1)		19,076	97
		Common Stock Warrants (465,000 shares)(1)		2,869	—
				26,941	5,093
Weber Nickel Technologies, Ltd.(3)	Machinery	Subordinated Debt (16.7%, Due 9/12) Common Stock (44,834 shares)(1)	10,920	10,760 1,171	10,760 1,171
		Redeemable Preferred Stock (14,796 shares)		12,070	12,070
				24,001	24,001
WWC Acquisitions, Inc	Commercial Services & Supplies	Senior Debt (9.4%, Due 12/07 – 12/11) Subordinated Debt (14.2%, Due 12/12 – 12/13)	11,500 22,011	11,268 21,681	11,268 21,681
		Common Stock (4,826,476 shares)(1)		21,237	21,237
				54,186	54,186
Subtotal Control Investments				1,692,072	1,654,075
AFFILIATE INVESTMENTS
Bankruptcy Management Solutions, Inc.	Commercial Services & Supplies	Senior Debt (8.1%, Due 12/09 – 12/10) Subordinated Debt (15.5%, Due 12/12) Common Stock (281,534 shares)(1) Common Stock Warrants (48 shares)(1)	48,000 27,000	47,242 26,595 —   —	47,242 26,595 4,407 1,584
				73,837	79,828
Chronic Care Solutions, Inc.	Health Care Equipment & Supplies	Subordinated Debt (14.3%, Due 11/11) Common Stock (447,285 shares)(1)	70,129	67,608 45	67,608 2,821
		Convertible Preferred Stock (447,285     shares)		10,737	13,559
		Common Stock Warrants (132,957     shares)(1)		1,674	1,708
				80,064	85,696
FMI Holdco I, LLC	Road & Rail	Senior Debt (9.8%, Due 4/05 – 4/08) Subordinated Debt (13.0%, Due 4/10) Common units (589,373 units)(1) Preferred units (273,224 units)(1)	18,259 13,545	18,183 12,435 2,683 1,567	18,183 12,435 1,306 1,300
				34,868	33,224

27

AMERICAN CAPITAL STRATEGIES, LTD.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

December 31, 2004

(in thousands, except share data)

Company(4)	Industry	Investment(5)	Principal	Cost	Fair Value
Futurelogic Group, Inc.	Computers & Peripherals	Senior Debt (10.4%, Due 12/07) Subordinated Debt (13.9%,	14,000	13,811	13,811
		Due 12/10 – 6/11)	13,646	13,604	13,604
		Common Stock (20,000 shares)(1)		20	2,565
		Common Stock Warrants (10,425 shares)(1)		—	1,337
				27,435	31,317
Marcal Paper Mills, Inc.	Household Products	Senior Debt (15.8%, Due 12/06) Subordinated Debt (20.5%, Due 12/09) Common Stock Warrants(1) Common Stock (209,254 shares)(1)	22,852 27,294	22,837 22,786 5,001 —	22,837 22,786 4,773 —
				50,624	50,396
Money Mailer, LLC	Media	Common Membership Interest (6% membership interest)(1)		1,500	2,262
Nivel Holdings, LLC	Distributors	Subordinated Debt (14.6%, Due 2/11 – 2/12) Preferred Units (900 units)(1) Common Units (100,000 units)(1) Common Membership Warrants (41,360 units)(1)	8,655	8,507 900 100 41	8,507 900 100 41
				9,548	9,548
NWCC Acquisition, LLC	Containers & Packaging	Subordinated Debt (15.0%, Due 11/10) Common Units (320,924 units)(1) Redeemable Preferred Units (2,763,846 units)(1)	10,221	9,743 291 2,764	9,743 24 2,335
				12,798	12,102
PaR Nuclear Holding Company	Machinery	Common Stock (341,222 shares)(1)		1,052	5,192
Qualitor Component Holdings, LLC.	Auto Components	Subordinated Debt (15.0%, Due 12/12) Common Units (500,000 units)(1) Preferred Units (4,500,000 units)(1)	28,024	27,604 500 4,510	27,604 500 4,510
				32,614	32,614
Riddell Holdings, LLC	Leisure Equipment & Products	Common Units (3,044,491 units)(1)		3,044	4,501
Seroyal Holdings, L.P.(3)	Health Care Equipment & Supplies	Senior Debt (13.4%, Due 12/10) Subordinated Debt (14.5%, Due 12/11) Partnership Units (144,552 units)(1) Preferred Partnership Units (57,143 units)(1)	8,939 8,947	8,805 8,431 1,253 754	8,805 8,431 1,253 754
				19,243	19,243
The Hygenic Corporation	Health Care Equipment & Supplies	Subordinated Debt (15.5%, Due 1/12) Common Stock (200,000 shares)(1) Redeemable Preferred Stock (9,000 shares)	10,590	10,468 1,000 9,660	10,468 1,000 9,660
				21,128	21,128
Trinity Hospice, Inc.	Health Care Providers & Services	Senior Debt (11.0%, Due 12/05 – 6/07) Common Stock (131,399 shares)(1) Redeemable Preferred Stock (131,399 shares)	16,150	16,088 13 4,454	16,088 936 4,454
				20,555	21,478
Subtotal Affiliate Investments				388,310	408,529

28

Company(4)	Industry	Investment(5)	Principal	Cost		Fair Value
INTEREST RATE DERIVATIVE AGREEMENTS
	Interest Rate Swap – Pay Fixed/ Receive Floating	4 Contracts Notional Amounts Totaling $217,000			—		1,011
	Interest Rate Swaption – Pay Floating/Receive Fixed	2 Contracts Notional Amounts Totaling $7,093			—		200
	Interest Rate Caps	5 Contracts Notional Amounts Totaling $28,703			—		467
Subtotal Interest Rate Derivative Agreements					—		1,678
Total Investment Assets				$	3,236,249	$	3,221,688
INTEREST RATE DERIVATIVE AGREEMENTS
	Interest Rate Swap – Pay Fixed/ Receive Floating	30 Contracts Notional Amounts Totaling $802,956		$	—	$	(17,008	)
	Interest Rate Swap – Pay Floating/ Receive Floating	7 Contracts Notional Amounts Totaling $135,103			—		(388	)
Total Investment Liabilities				$	—	$	(17,396	)

(1) Non-income producing.

(2) Public company.

(3) International investment.

(4) Certain of the securities are issued by affiliate(s) of the listed portfolio company.

(5) Interest rates represent the weighted average annual stated interest rate on loans and debt securities, which are presented by the nature of indebtedness by a single issuer. The maturity dates represent the earliest and the latest maturity dates.

(6) Debt security is on non-accrual status and therefore considered non-income producing.

See accompanying notes.

29

AMERICAN CAPITAL STRATEGIES, LTD.

CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS

(unaudited)

(in thousands, except per share data)

	Nine Months Ended September 30,
	2005			2004
Operations:
Net operating income	$	223,287		$	155,211
Net realized gain (loss) on investments		31,547			(67,466	)
Net unrealized appreciation of investments		30,252			96,356
Net increase in net assets resulting from operations		285,086			184,101
Shareholder distributions:
Common stock dividends		(217,115	)		(153,683	)
Net decrease in net assets resulting from shareholder distributions		(217,115	)		(153,683	)
Capital share transactions:
Issuance of common stock		543,980			442,229
Issuance of common stock under stock option plans		34,933			33,768
Issuance of common stock under dividend reinvestment plan		14,159			721
Issuance of non-recourse notes receivable to purchase common stock		(7,075	)		—
Purchase of common stock held in deferred compensation trust		(6,530	)		—
Decrease in notes receivable from sale of common stock		178			1,921
Stock-based compensation		10,080			5,421
Income tax deduction related to exercise of stock options		—			1,821
Net increase in net assets resulting from capital share transactions		589,725			485,881
Total increase in net assets		657,696			516,299
Net assets at beginning of period		1,872,426			1,175,915
Net assets at end of period	$	2,530,122		$	1,692,214
Net asset value per common share	$	23.34		$	20.18
Common shares outstanding at end of period		108,386			83,849

See accompanying notes.

30

AMERICAN CAPITAL STRATEGIES, LTD.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(in thousands)

	Nine Months Ended September 30, 2005			Nine Months Ended September 30, 2004
Operating activities:
Net increase in net assets resulting from operations	$	285,086		$	184,101
Adjustments to reconcile net increase in net assets resulting from operations to net cash provided by operating activities:
Net unrealized appreciation of investments		(30,252	)		(96,356	)
Net realized (gain) loss on investments		(31,547	)		67,466
Accretion of loan discounts		(9,486	)		(8,912	)
Increase in accrued payment-in-kind dividends and interest		(56,107	)		(34,016	)
Collection of loan origination fee discounts		21,995			11,046
Amortization of deferred finance costs and debt discount		7,223			5,482
Stock-based compensation		10,080			5,421
Depreciation of property and equipment		1,482			1,089
Increase in interest receivable		(9,847	)		(6,013	)
(Increase) decrease in other assets		(67,890	)		1,090
Increase (decrease) in other liabilities		46,585			(4,346	)
Net cash provided by operating activities		167,322			126,052
Investing activities:
Purchases of investments		(2,036,110	)		(1,193,382	)
Principal repayments		468,657			320,712
Proceeds from sale of senior debt investments		165,903			97,823
Collection of payment-in-kind notes and dividends		16,831			4,966
Collection of accreted loan discounts		3,371			6,762
Proceeds from sale of equity investments		113,258			16,785
Purchase of government securities		(99,938	)		(99,983	)
Sale of government securities		99,938			99,983
Interest rate derivative periodic payments		(8,162	)		(13,513	)
Capital expenditures of property and equipment		(4,005	)		(1,660	)
Repayments of employee notes receivable issued in exchange for common stock		178			1,921
Net cash used in investing activities		(1,280,079	)		(759,586	)
Financing activities:
Draws on revolving debt facilities, net		678,883			439,129
Repayments of notes payable		(194,694	)		(320,170	)
Proceeds from debt issuances		201,492			167,000
Proceeds from repurchase agreements, net		20,154			72,437
Increase in deferred financing costs		(5,066	)		(6,859	)
Decrease (increase) in debt service escrows		31,392			(11,902	)
Issuance of common stock		578,913			475,997
Issuance of non-recourse notes to purchase common stock		(7,075	)		—
Purchase of common stock held in deferred compensation trust		(6,530	)		—
Distributions paid		(126,954	)		(98,457	)
Net cash provided by financing activities		1,170,515			717,175
Net increase in cash and cash equivalents		57,758			83,641
Cash and cash equivalents at beginning of period		58,367			8,020
Cash and cash equivalents at end of period	$	116,125		$	91,661
Non-cash financing activities:
Issuance of common stock in conjunction with dividend reinvestment	$	14,159		$	721

See accompanying notes.

31

AMERICAN CAPITAL STRATEGIES, LTD.

CONSOLIDATED FINANCIAL HIGHLIGHTS

(unaudited)

(in thousands, except per share data)

	Nine Months Ended September 30, 2005			Nine Months Ended September 30, 2004
Per Share Data:
Net asset value at beginning of the period	$	21.11		$	17.83
Net operating income(1)		2.34			2.12
Net realized gain (loss) on investments(1)		0.33			(0.92	)
Net unrealized appreciation on investments(1)		0.32			1.31
Net increase net assets resulting from operations(1)		2.99			2.51
Issuance of common stock		1.51			1.88
Effect of (dilution) antidilution(2)		(0.01	)		0.08
Distribution of net investment income		(2.26	)		(2.12	)
Net asset value at end of period	$	23.34		$	20.18
Ratio/Supplemental Data:
Per share market value at end of period	$	36.66		$	31.34
Total return(3)		17.7	%		12.9	%
Shares outstanding at end of period		108,386			83,849
Net assets at end of period	$	2,530,122		$	1,692,214
Average net assets	$	2,147,022		$	1,404,596
Average debt outstanding	$	1,799,500		$	928,200
Average debt per common share(1)	$	18.88		$	12.66
Ratio of operating expenses, net of interest expense, to average net assets		3.87	%		3.20	%
Ratio of interest expense to average net assets		3.13	%		1.63	%
Ratio of operating expenses to average net assets		7.00	%		4.83	%
Ratio of net operating income to average net assets		10.40	%		11.05	%

(1) Weighted average basic per share data.

(2) Represents the (dilutive) antidilutive impact of (i) the other components in the changes in net assets and (ii) the different share amounts used in calculating per share data as a result of calculating certain per share data based upon the weighted average basic shares outstanding during the period and certain per share data based on the shares outstanding as of a period end or transaction date.

(3) Total return is based on the change in the market value of our common stock taking into account dividends reinvested in accordance with the terms of our dividend reinvestment plan, which includes a 5% discount on shares purchased through the reinvested dividends effective for dividends paid on or after January 18, 2005.

See accompanying notes.

32

AMERICAN CAPITAL STRATEGIES, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

(in thousands, except per share data)

Note 1. Unaudited Interim Financial Statements

Interim financial statements of American Capital Strategies, Ltd. (which is referred throughout this report as “American Capital”, “we”, and “us”) are prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and pursuant to the requirements for reporting on Form 10-Q and Article 10 of Regulation S-X. Accordingly, certain disclosures accompanying annual financial statements prepared in accordance with GAAP are omitted. In the opinion of management, all adjustments, consisting solely of normal recurring accruals, necessary for the fair presentation of financial statements for the interim periods have been included. The current period’s results of operations are not necessarily indicative of results that ultimately may be achieved for the year. The interim financial statements and notes thereto should be read in conjunction with the financial statements and notes thereto included in our Form 10-K, as filed with the Securities and Exchange Commission.

Note 2. Organization

We were incorporated in 1986. On August 29, 1997, we completed an initial public offering (“IPO”) and became a non-diversified closed end investment company that has elected to be regulated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (“1940 Act”). On October 1, 1997, we began operations so as to qualify to be taxed as a regulated investment company (“RIC”) as defined in Subtitle A, Chapter 1, under Subchapter M of the Internal Revenue Code of 1986 as amended (the “Code”). Our investment objectives are to achieve current income from the collection of interest and dividends, as well as long-term growth in our shareholders’ equity through appreciation in value of our equity interests.

We are the parent and sole shareholder of American Capital Financial Services, Inc. (“ACFS”), a company incorporated in Delaware, and through ACFS provide financial advisory services to businesses, principally our portfolio companies. We are also the parent and sole shareholder of European Capital Financial Services (Guernsey) Limited (“ECFS”), a company incorporated in Guernsey, that provides financial advisory services to European portfolio companies. ECFS began its principal operations during 2005. We are headquartered in Bethesda, Maryland, and have offices in New York, San Francisco, Los Angeles, Philadelphia, Chicago, Dallas, London and Paris.

Note 3. Consolidation

Under the investment company rules and regulations, we are precluded from consolidating any entity other than another investment company. An exception to this general principle occurs if the investment company has an investment in an operating company that provides services to the investment company. Our consolidated financial statements include the accounts of our operating companies, ACFS and ECFS.

Note 4. Investments

Investments are carried at fair value, as determined in good faith by our Board of Directors. Unrestricted securities that are publicly traded are valued at the closing price on the valuation date. For debt and equity securities of companies that are not publicly traded, or for which we have various degrees of trading restrictions, we prepare an analysis consisting of traditional valuation methodologies to estimate the enterprise value of the portfolio company issuing the securities. The methodologies consist of valuation estimates based on: valuations of comparable public companies, recent sales of comparable companies, discounting the forecasted cash flows of the portfolio company, the liquidation or collateral value of the portfolio company’s assets, third party valuations

33

AMERICAN CAPITAL STRATEGIES, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

(in thousands, except per share data)

of the portfolio company, third party sale offers and the value of recent investments in the equity securities of the portfolio company. We weight some or all of the above valuation methods in order to conclude on our estimate of value. In valuing convertible debt, equity or other securities, we value our equity investment based on our pro rata share of the residual equity value available after deducting all outstanding debt from the estimated enterprise value. We value non-convertible debt securities at cost plus amortized original issue discount (“OID”) to the extent that the estimated enterprise value of the portfolio company exceeds the outstanding debt of the portfolio company. If the estimated enterprise value is less than the outstanding debt of the company, we reduce the value of our debt investment beginning with the junior most debt such that the enterprise value less the value of the outstanding debt is zero. If there is sufficient enterprise value to cover the face amount of a debt security that has been discounted due to the detachable equity warrants received with that security, that detachable equity warrant will be valued such that the sum of the discounted debt security and the detachable equity warrant equals the face value of the debt security.

Due to the uncertainty inherent in the valuation process, such estimates of fair value may differ significantly from the values that would have been used had a ready market for the securities existed, and the differences could be material. Additionally, changes in the market environment and other events that may occur over the life of the investments may cause the gains or losses ultimately realized on these investments to be different than the valuations currently assigned. As of September 30, 2005 and December 31, 2004, the percentage of investments that were not publicly traded or for which we have various degrees of trading restrictions and therefore the fair value was determined in good faith by our Board of Directors was 100%.

As required by the 1940 Act, we classify our investments by level of control. As defined in the 1940 Act, “Control Investments” are investments in those companies that we are deemed to “Control”. “Affiliate Investments” are investments in those companies that are “Affiliated Companies” of us, as defined in the 1940 Act, other than Control Investments. “Non-Control/Non-Affiliate Investments” are those that are neither Control Investments nor Affiliate Investments. Generally, under the 1940 Act, we are deemed to control a company in which we have invested if we own 25% or more of the voting securities of such company or have greater than 50% representation on its board. We are deemed to be an affiliate of a company in which we have invested if we own 5% or more and less than 25% of the voting securities of such company.

Investments consist of securities issued by publicly- and privately-held companies consisting of senior debt, subordinated debt, equity warrants, preferred and common equity securities and interest rate derivative agreements. Our debt securities are payable in installments with final maturities generally from 5 to 10 years and are generally collateralized by assets of the borrower. We also make investments in securities that do not produce current income. These investments typically consist of equity warrants, common equity, and preferred equity and are identified in the accompanying consolidated schedule of investments. At September 30, 2005, loans on non-accrual status were $136,252, calculated as the cost basis plus unamortized OID. At September 30, 2005, loans, excluding loans on non-accrual status, with a balance of $22,159 were greater than three months past due. At December 31, 2004, loans on non-accrual status were $87,324, calculated as the cost basis plus unamortized OID. At December 31, 2004, loans, excluding loans on non-accrual status, with a balance of $14,985 were greater than three months past due.

Interest income is recorded on the accrual basis to the extent that such amounts are expected to be collected. OID is accreted into interest income using the effective interest method. OID initially represents the value of detachable equity warrants obtained in conjunction with the acquisition of debt securities and loan origination fees that represent yield enhancement. Dividend income is recognized on the ex-dividend date for common equity securities and on an accrual basis for preferred equity securities to the extent that such amounts are expected to be collected. In determining the amount of dividend income to recognize, if any, from cash

34

AMERICAN CAPITAL STRATEGIES, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

(in thousands, except per share data)

distributions on common equity securities, we will assess many factors including a portfolio company’s cumulative undistributed income and operating cash flow. Cash distributions from common equity securities received in excess of such undistributed amount are recorded first as a reduction of our investment and then as a realized gain on investment. We stop accruing interest or dividends on our investments when it is determined that the interest or dividend is not collectible. We assess the collectibility of the interest and dividends based on many factors including the portfolio company’s ability to service our loan based on current and projected cash flows as well as the current valuation of the enterprise. For investments with payment-in-kind (“PIK”) interest and dividends, we base income and dividend accruals on the valuation of the PIK notes or securities received from the borrower. If the portfolio company valuation indicates a value of the PIK notes or securities that is not sufficient to cover the contractual interest or dividend, we will not accrue interest or dividend income on the notes or securities.

Summaries of the composition of our investment portfolio as of September 30, 2005 and December 31, 2004 at cost and fair value are shown in the following table:

	September 30, 2005		December 31, 2004
COST
Senior debt	30.2	%	25.9	%
Subordinated debt	41.9	%	47.7	%
Preferred equity	15.9	%	12.4	%
Equity warrants	4.2	%	5.8	%
Common equity	7.8	%	8.2	%
	September 30, 2005		December 31, 2004
FAIR VALUE
Senior debt	30.1	%	26.3	%
Subordinated debt	39.7	%	45.5	%
Preferred equity	13.2	%	9.4	%
Equity warrants	6.6	%	8.5	%
Common equity	10.4	%	10.3	%

We use the Global Industry Classification Standards for classifying the industry groupings of our portfolio companies. The following table shows the portfolio composition by industry grouping at cost and at fair value:

	September 30, 2005		December 31, 2004
COST
Commercial Services & Supplies	15.4	%	14.3	%
Food Products	6.8	%	8.3	%
Leisure Equipment & Products	6.6	%	5.1	%
Electrical Equipment	5.9	%	7.0	%
Building Products	5.8	%	6.9	%
Auto Components	5.5	%	6.1	%
Diversified Financial Services	4.8	%	1.7	%
Electronic Equipment & Instruments	4.1	%	2.9	%
Internet & Catalog Retail	3.9	%	0.0	%

35

AMERICAN CAPITAL STRATEGIES, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

(in thousands, except per share data)

	September 30, 2005		December 31, 2004
Machinery	3.9	%	5.5	%
Textiles, Apparel & Luxury Goods	3.5	%	3.5	%
Household Durables	3.3	%	4.6	%
Health Care Equipment & Supplies	3.0	%	6.0	%
Chemicals	2.8	%	3.9	%
Construction & Engineering	2.6	%	3.7	%
IT Services	2.4	%	1.1	%
Containers & Packaging	2.3	%	0.9	%
Computers & Peripherals	2.3	%	0.8	%
Health Care Providers & Services	2.3	%	2.9	%
Road & Rail	1.9	%	3.6	%
Personal Products	1.9	%	1.4	%
Household Products	1.9	%	2.6	%
Construction Materials	1.6	%	2.1	%
Aerospace & Defense	1.3	%	2.1	%
Software	1.2	%	0.0	%
Distributors	1.1	%	1.4	%
Media	0.6	%	0.0	%
Biotechnology	0.5	%	0.7	%
Energy Equipment & Services	0.5	%	0.0	%
Specialty Retail	0.0	%	0.5	%
Other	0.3	%	0.4	%
	September 30, 2005		December 31, 2004
FAIR VALUE
Commercial Services & Supplies	16.8	%	16.6	%
Leisure Equipment & Products	6.2	%	4.8	%
Auto Components	6.2	%	7.0	%
Food Products	6.2	%	8.0	%
Electrical Equipment	5.8	%	6.9	%
Diversified Financial Services	4.9	%	1.7	%
Electronic Equipment & Instruments	4.7	%	3.4	%
Household Durables	4.5	%	5.5	%
Building Products	4.4	%	5.1	%
Internet & Catalog Retail	3.9	%	0.0	%
Textiles, Apparel & Luxury Goods	3.6	%	3.5	%
Health Care Equipment & Supplies	3.1	%	6.2	%
Construction & Engineering	3.0	%	3.6	%
Chemicals	3.0	%	4.3	%
Machinery	2.7	%	3.6	%
IT Services	2.4	%	1.2	%
Containers & Packaging	2.3	%	0.8	%
Computers & Peripherals	2.3	%	1.0	%
Health Care Providers & Services	2.1	%	2.6	%
Household Products	2.0	%	2.6	%

36

AMERICAN CAPITAL STRATEGIES, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

(in thousands, except per share data)

	September 30, 2005		December 31, 2004
Construction Materials	1.6	%	2.3	%
Road & Rail	1.5	%	2.9	%
Aerospace & Defense	1.3	%	2.3	%
Software	1.2	%	0.0	%
Personal Products	1.2	%	1.0	%
Distributors	1.1	%	1.3	%
Media	0.6	%	0.1	%
Biotechnology	0.5	%	0.7	%
Energy Equipment & Services	0.5	%	0.0	%
Other	0.4	%	1.0	%

The following table shows the portfolio composition by geographic location at cost and at fair value. The geographic composition is determined by the location of the corporate headquarters of the portfolio company.

	September 30, 2005		December 31, 2004
COST
Mid-Atlantic	21.0	%	20.3	%
Southwest	21.3	%	28.2	%
Southeast	12.4	%	14.2	%
North-Central	14.3	%	12.8	%
South-Central	7.0	%	9.6	%
Northwest	0.9	%	0.9	%
Northeast	15.5	%	9.2	%
International	7.6	%	4.8	%
	September 30, 2005		December 31, 2004
FAIR VALUE
Mid-Atlantic	23.5	%	21.8	%
Southwest	20.4	%	28.4	%
Southeast	12.4	%	14.5	%
North-Central	15.0	%	13.5	%
South-Central	5.4	%	7.8	%
Northwest	0.9	%	0.9	%
Northeast	15.2	%	8.6	%
International	7.2	%	4.5	%

37

AMERICAN CAPITAL STRATEGIES, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

(in thousands, except per share data)

Note 5. Borrowings

Our debt obligations consisted of the following as of September 30, 2005 and December 31, 2004:

Debt	September 30, 2005		December 31, 2004
Revolving debt-funding facility, $1,100,000 commitment	$	1,054,231	$	623,348
Revolving debt-funding facility, $255,000 commitment		127,000		—
Revolving debt-funding facility, $125,000 commitment		121,000		—
Unsecured debt due through September 2011		167,000		167,000
Unsecured debt due August 2010		126,000		—
Unsecured debt due October 2020		75,492		—
Repurchase agreements		49,000		28,847
ACAS Business Loan Trust 2002-1 asset securitization		—		2,291
ACAS Business Loan Trust 2002-2 asset securitization		13,696		44,590
ACAS Business Loan Trust 2003-1 asset securitization		29,133		110,895
ACAS Business Loan Trust 2003-2 asset securitization		94,582		174,007
ACAS Business Loan Trust 2004-1 asset securitization		409,772		410,000
Total	$	2,266,906	$	1,560,978

The weighted average debt balance for the three months ended September 30, 2005 and 2004 was $2,073,800 and $1,087,900, respectively. The weighted average debt balance for the nine months ended September 30, 2005 and 2004 was $1,799,500 and $928,200, respectively. The weighted average interest rate on all of our borrowings, including amortization of deferred financing costs, for the three months ended September 30, 2005 and 2004 was 5.4% and 3.8%, respectively. The weighted average interest rate on all of our borrowings, including amortization of deferred financing costs, for the nine months ended September 30, 2005 and 2004 was 5.0% and 3.3%, respectively. We are currently in compliance with all of our debt covenants.

As of December 31, 2004, through ACS Funding Trust I, an affiliated statutory trust, we had a commercial paper conduit securitization facility with a maximum availability of $850,000. In January 2005, an existing lender in the facility increased its commitment by $150,000 increasing the total maximum availability to $1,000,000. In August 2005, we amended the facility to extend the termination date to August 2006 and to modify certain other terms. In September 2005, we further amended the facility by having one of the existing lenders temporarily increase its commitment by $100,000 until October 2005, increasing the total maximum availability to $1,100,000. We subsequently amended and restated the facility the same month to add a multicurrency provision, allowing funds to be borrowed in an alternative currency to the U.S. dollar and to modify certain other terms. Our ability to make draws under the facility expires in August 2006, unless extended for an additional 364-day period with the consent of the lenders. If the facility is not extended, any principal amounts then outstanding will be amortized over a 24-month period through termination in August 2008.

As of December 31, 2004, we had a $70,000 secured revolving credit facility with a syndication of lenders. In February 2005, we revised the terms of the existing credit facility pursuant to an Amended and Restated Credit Agreement. In connection with the amendment, the maximum availability of borrowing under the credit facility was increased from $70,000 to $100,000 and the facility was converted into an unsecured revolving line of credit. In June 2005, the $100,000 unsecured credit facility was terminated, and we entered into a new $230,000 unsecured revolving line of credit with a syndication of lenders, including lenders from our terminated $100,000 unsecured revolving line of credit. In July 2005, we expanded the facility to $255,000 and it may be expanded through new or additional commitments up to $300,000 in accordance with the terms and conditions of the

38

AMERICAN CAPITAL STRATEGIES, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

(in thousands, except per share data)

agreement. The facility expires in June 2007 unless extended for an additional 364-day period with the consent of the lenders. Interest on borrowings under the facility is charged at either (i) one-month LIBOR plus the applicable percentage at such time or (ii) the greater of the lender prime rate or the federal funds effective rate plus 50 basis points. The agreement contains covenants that, among other things, require us to maintain certain unsecured debt ratings and a minimum net worth.

In August 2005, we entered into a note purchase agreement to issue an aggregate of $126,000 of long-term unsecured five-year notes to institutional investors in a private placement offering. The unsecured notes have a fixed interest rate of 6.14% and mature in August 2010. The note purchase agreement contains customary default provisions .

In September 2005, we entered into a note purchase agreement to issue $75,000 of senior unsecured fifteen-year notes to accredited investors in a private placement offering. The unsecured notes have a fixed interest rate of 6.923% through the interest payment date in October 2015 and at the rate of LIBOR plus 2.65% thereafter and mature in October 2020. The note purchase agreement contains customary default provisions.

Note 6. Stock Options

In 2003, we adopted FASB Statement No. 123, “Accounting for Stock-Based Compensation” to account for stock-based compensation plans for all stock options granted in 2003 and forward as permitted under FASB Statement No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure—An Amendment to FASB Statement No. 123.” In applying FASB Statement No. 123 to all stock options granted in 2003 and forward, the estimated fair value of the stock options are expensed pro rata over the vesting period of the options and are included on the accompanying consolidated statements of operations in “salaries, benefits and stock-based compensation.” In accordance with FASB Statement No. 123, we elected to continue to apply the provisions of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” to all stock options granted prior to January 1, 2003 and provide pro forma disclosure of our consolidated net operating income and net increase in net assets resulting from operations calculated as if compensation costs were computed in accordance with FASB Statement No. 123.

On April 15, 2005, the Securities and Exchange Commission issued a final rule to amend the adoption date of FASB Statement No. 123(R), “Share-Based Payment” to be no later than the beginning of the first fiscal year beginning after June 15, 2005. We intend to adopt FASB Statement No. 123(R) on January 1, 2006 using the “modified prospective” method. We currently recognize stock compensation assuming all awards will vest and reverse recognized compensation cost for forfeited awards when the awards are actually forfeited. FASB Statement No. 123(R) will require that employers estimate forfeitures when recognizing compensation cost. Although we currently recognize stock compensation costs for options granted in 2003 and forward at fair value, we have not assessed the impact of recognizing stock compensation cost using a forfeiture assumption instead of recognizing it based upon actual forfeitures.

39

AMERICAN CAPITAL STRATEGIES, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

(in thousands, except per share data)

The following table summarizes the pro forma effect of stock options granted prior to January 1, 2003 on consolidated net operating income and net increase in net assets resulting from operations:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2005			2004			2005			2004
Net operating income
As reported	$	85,926		$	54,718		$	223,287		$	155,211
Stock-based employee compensation		(64	)		(592	)		(637	)		(2,328	)
Pro forma	$	85,862		$	54,126		$	222,650		$	152,883
Net operating income per common share
Basic as reported	$	0.84		$	0.68		$	2.34		$	2.12
Basic pro forma	$	0.84		$	0.67		$	2.34		$	2.09
Diluted as reported	$	0.82		$	0.67		$	2.29		$	2.09
Diluted pro forma	$	0.82		$	0.66		$	2.28		$	2.06
Net increase in net assets resulting from operations
As reported	$	94,057		$	60,599		$	285,086		$	184,101
Stock-based employee compensation		(64	)		(592	)		(637	)		(2,328	)
Pro forma	$	93,993		$	60,007		$	284,449		$	181,773
Net increase in net assets resulting from operations per common share
Basic as reported	$	0.92		$	0.75		$	2.99		$	2.51
Basic pro forma	$	0.92		$	0.74		$	2.98		$	2.48
Diluted as reported	$	0.90		$	0.74		$	2.92		$	2.48
Diluted pro forma	$	0.90		$	0.73		$	2.91		$	2.45

The effects of applying FASB Statement No. 123 for pro forma disclosures are not likely to be representative of the effects on reported consolidated net operating income and net increase in net assets resulting from operations for future periods.

In 2005, we issued $7,075 in non-recourse notes to employees of ECFS to purchase our common stock. The notes bear interest at an Applicable Federal Rate, mature in nine years, and are secured by the common stock purchased. Any dividends received on the common stock are required to be applied to interest and principal on the notes. The shares of common stock vest to the employee pro rata over a five year period. We accounted for the issuance of the non-recourse notes as if they were stock option grants and determined a fair value on the date of grant using a Black-Scholes option pricing model and that will be expensed over the vesting period. The issuance of the non-recourse notes was recorded as a reduction of capital in excess of par value on the accompanying consolidated balance sheet.

In 2005, we contributed funds of $6,530 to a deferred compensation trust for the benefit of ECFS employees. The trust used the funds to purchase shares of our common stock on the open market that will vest to the employee pro rata over a five year period. We accounted for the deferred compensation obligation as a grant of nonvested stock and will record compensation cost based on the fair value of the shares on the date of grant over the five year vesting period. The assets and liabilities of the trust have been consolidated in our accompanying consolidated balance sheet.

40

AMERICAN CAPITAL STRATEGIES, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

(in thousands, except per share data)

Note 7. Earnings Per Share

The following table sets forth the computation of basic and diluted earnings per share for the three and nine months ended September 30, 2005 and 2004:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2005		2004		2005		2004
Numerator for basic and diluted net operating income per share	$	85,926	$	54,718	$	223,287	$	155,211
Numerator for basic and diluted earnings per share	$	94,057	$	60,599	$	285,086	$	184,101
Denominator for basic weighted average shares		102,366		80,730		95,319		73,299
Employee stock options and awards		1,168		968		950		923
Shares issuable under forward sale agreements		965		—		1,318		—
Other contingently issuable shares		—		2		—		2
Denominator for diluted weighted average shares		104,499		81,700		97,587		74,224
Basic net operating income per common share	$	0.84	$	0.68	$	2.34	$	2.12
Diluted net operating income per common share	$	0.82	$	0.67	$	2.29	$	2.09
Basic earnings per common share	$	0.92	$	0.75	$	2.99	$	2.51
Diluted earnings per common share	$	0.90	$	0.74	$	2.92	$	2.48

Note 8. Segment Data

Our reportable segments are our investing operations and our financial advisory operations.

The following table presents segment data for the three months ended September 30, 2005:

	Investing			Financial Advisory			Consolidated
Interest and dividend income	$	114,396		$	9		$	114,405
Fee and other income		7,430			26,917			34,347
Total operating income		121,826			26,926			148,752
Interest expense		27,889			—			27,889
Salaries, benefits and stock-based compensation		6,673			14,164			20,837
General and administrative		3,948			8,268			12,216
Total operating expenses		38,510			22,432			60,942
Operating income before income taxes		83,316			4,494			87,810
Provision for income taxes		—			(1,884	)		(1,884	)
Net operating income		83,316			2,610			85,926
Net realized loss on investments		(3,475	)		—			(3,475	)
Net unrealized appreciation of investments		11,606			—			11,606
Net increase in net assets resulting from operations	$	91,447		$	2,610		$	94,057

41

AMERICAN CAPITAL STRATEGIES, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

(in thousands, except per share data)

The following table presents segment data for the nine months ended September 30, 2005:

	Investing		Financial Advisory			Consolidated
Interest and dividend income	$	298,719	$	14		$	298,733
Fee and other income		13,437		69,169			82,606
Total operating income		312,156		69,183			381,339
Interest expense		67,225		—			67,225
Salaries, benefits and stock-based compensation		18,087		37,763			55,850
General and administrative		11,646		15,663			27,309
Total operating expenses		96,958		53,426			150,384
Operating income before income taxes		215,198		15,757			230,955
Provision for income taxes		—		(7,668	)		(7,668	)
Net operating income		215,198		8,089			223,287
Net realized gain on investments		31,547		—			31,547
Net unrealized appreciation of investments		30,252		—			30,252
Net increase in net assets resulting from operations	$	276,997	$	8,089		$	285,086

The following table presents segment data for the three months ended September 30, 2004:

	Investing			Financial Advisory			Consolidated
Interest and dividend income	$	68,250		$	—		$	68,250
Fee and other income		3,150			10,866			14,016
Total operating income		71,400			10,866			82,266
Interest expense		10,343			—			10,343
Salaries, benefits and stock-based compensation		4,188			4,529			8,717
General and administrative		3,414			3,760			7,174
Total operating expenses		17,945			8,289			26,234
Operating income before income taxes		53,455			2,577			56,032
Provision for income taxes		—			(1,314	)		(1,314	)
Net operating income		53,455			1,263			54,718
Net realized loss on investments		(11,806	)		—			(11,806	)
Net unrealized appreciation of investments		17,687			—			17,687
Net increase in net assets resulting from operations	$	59,336		$	1,263		$	60,599

42

AMERICAN CAPITAL STRATEGIES, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

(in thousands, except per share data)

The following table presents segment data for the nine months ended September 30, 2004:

	Investing			Financial Advisory			Consolidated
Interest and dividend income	$	183,597		$	—		$	183,597
Fee and other income		6,688			34,089			40,777
Total operating income		190,285			34,089			224,374
Interest expense		22,916			—			22,916
Salaries, benefits and stock-based compensation		7,603			18,011			25,614
General and administrative		9,315			9,949			19,264
Total operating expenses		39,834			27,960			67,794
Operating income before income taxes		150,451			6,129			156,580
Provision for income taxes		—			(1,369	)		(1,369	)
Net operating income		150,451			4,760			155,211
Net realized loss on investments		(67,466	)		—			(67,466	)
Net unrealized appreciation of investments		96,356			—			96,356
Net increase in net assets resulting from operations	$	179,341		$	4,760		$	184,101

Note 9. Commitments

As of September 30, 2005, we had commitments under agreements to fund up to $237,891 to 49 portfolio companies. These commitments are primarily composed of working capital credit facilities and acquisition credit facilities. The commitments are subject to the borrowers meeting certain criteria. The terms of the borrowings subject to commitment are comparable to the terms of other debt securities in our portfolio.

As of September 30, 2005, we were also subject to a subscription agreement to fund up to €479,085 (or $576,934) of equity commitments for European Capital Limited (See Note 12).

Note 10. Shareholders’ Equity

Our common share activity for the nine months ended September 30, 2005 and 2004 was as follows:

	September 30, 2005		September 30, 2004
Common shares outstanding at beginning of period	88,705		65,949
Issuance of common stock	18,250		16,574
Issuance of common stock under stock option plans	1,364		1,302
Issuance of common stock under dividend reinvestment plan	452		24
Issuance of non recourse notes receivable to purchase common stock	(208	)	—
Purchase of common stock held in deferred compensation trust	(177	)	—
Common shares outstanding at end of period	108,386		83,849

43

AMERICAN CAPITAL STRATEGIES, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

(in thousands, except per share data)

In September 2004, we entered into forward sale agreements (the “2004 Forward Sale Agreements”) with third parties to sell shares of our common stock generally at such times as we could elect over a one-year period at the then applicable forward sale price. As of December 31, 2004, we had 6,250 shares available under the 2004 Forward Sale Agreements. In 2005, we sold all of the remaining 6,250 shares under the 2004 Forward Sale Agreements and received net proceeds of $178,312.

In March 2005, we completed a public offering in which 10,000 shares of our common stock, including an underwriters’ over-allotment of 1,300 shares, were sold at a public offering price of $31.50 per share. Of those shares, 2,000 were offered directly by us and 8,000 were sold by third parties in connection with agreements to purchase common stock from us for future delivery dates pursuant to forward sale agreements (the “March 2005 Forward Sale Agreements”). Upon completion of the offering and exercise of the underwriters’ over-allotment option, we received proceeds, net of the underwriters’ discount and closing costs, of $59,529 in exchange for 2,000 common shares.

The remaining 8,000 shares of common stock were borrowed from third party market sources by counterparties, or forward purchasers, of the March 2005 Forward Sale Agreements who then sold the shares to the public. Pursuant to the March 2005 Forward Sale Agreements, we were required to sell to the forward purchasers 8,000 shares of our common stock generally at such times as we could elect over a one-year period. The March 2005 Forward Sale Agreements provided for settlement on a settlement date or dates to be specified at our discretion within the duration of the March 2005 Forward Sale Agreements through a termination date of March 29, 2006. On a settlement date, we would issue shares of our common stock to the forward purchaser at the then applicable forward sale price. The forward sale price was initially $30.11 per share, which was the public offering price of shares of our common stock less the underwriting discount. The March 2005 Forward Sale Agreements provided that the initial forward sale price per share would be subject to daily adjustment based on a floating interest factor equal to the federal funds rate, less a spread, and would be subject to decrease by $0.75, $0.77, $0.78, $0.04 and $0.78 per share on May 11, 2005, August 10, 2005, November 10, 2005, December 27, 2005 and February 10, 2006, respectively. The forward sale price would also be subject to decrease if the cost to the forward purchasers of borrowing our common stock exceeded a specified amount. In 2005, we sold all of the 8,000 shares under the March 2005 Forward Sale Agreements and received net proceeds of $235,353.

In September 2005, we completed a public offering in which 7,500 shares of our common stock were sold at a public offering price of $37.11 per share. Of those shares, 2,000 were offered directly by us and 5,500 were sold by third parties in connection with agreements to purchase common stock from us for future delivery dates pursuant to forward sale agreements (the “September 2005 Forward Sale Agreements”). Upon completion of the offering we received proceeds, net of the underwriters’ discount and closing costs, of $70,786 in exchange for 2,000 common shares.

The remaining 5,500 shares of common stock were borrowed from third party market sources by counterparties, or forward purchasers, of the September 2005 Forward Sale Agreements who then sold the shares to the public. Pursuant to the September 2005 Forward Sale Agreements, we must sell to the forward purchasers 5,500 shares of our common stock generally at such times as we elect over a one-year period. The September 2005 Forward Sale Agreements provide for settlement on a settlement date or dates to be specified at our discretion within the duration of the September 2005 Forward Sale Agreements through termination in September 2006. On a settlement date, we will issue shares of our common stock to the forward purchaser at the then applicable forward sale price. The forward sale price was initially $35.72 per share, which was the public offering price of shares of our common stock less the underwriting discount. The September 2005 Forward Sale

44

AMERICAN CAPITAL STRATEGIES, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

(in thousands, except per share data)

Agreements provide that the initial forward sale price per share will be subject to daily adjustment based on a floating interest factor equal to the federal funds rate, less a spread, and will be subject to decrease by $0.79, $0.04, $0.79, $0.80 and $0.82 per share on December 2, 2005, December 27, 2005, March 3, 2006, June 2, 2006 and September 1, 2006, respectively. The forward sale price will also be subject to decrease if the cost to the forward purchasers of borrowing our common stock exceeds a specified amount. As of September 30, 2005, there are 5,500 shares available under the September 2005 Forward Sale Agreements at a forward sale price of $35.77 per share.

Each forward purchaser under a forward sale agreement has the right to accelerate its forward sale agreement and require us to physically settle on a date specified by such forward purchaser if certain events occur, such as (1) in its judgment, it is unable to continue to borrow a number of shares of our common stock equal to the number of shares to be delivered by us under its forward sale agreement, or the cost of borrowing the common stock has increased above a specified amount, (2) we declare any dividend or distribution on shares of our common stock payable in (i) excess of a specified amount, (ii) securities of another company, or (iii) any other type of securities (other than shares of our common stock), rights, warrants or other assets for payment at less than the prevailing market price in such forward purchaser’s judgment, (3) the net asset value per share of our outstanding common stock exceeds a specified percentage of the then applicable forward sales price, (4) our board of directors votes to approve a merger or takeover of us or similar transaction that would require our shareholders to exchange their shares for cash, securities, or other property, or (5) certain other events of default or termination events occur.

In accordance with Emerging Issues Task Force (EITF) Issue No. 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock”, the forward sale agreements are considered equity instruments, and the shares of common stock are not considered outstanding until issued. Also, in accordance with EITF Issue No. 03-06, “Participating Securities and the Two-Class Method Under FASB Statement No. 128”, the forward sale agreements are not considered participating securities for the purpose of determining basic earnings per share under FASB Statement No. 128, “Earnings per Share.” However, the dilutive impact of the shares issuable under the forward sale agreements is included in our diluted weighted average shares under the treasury stock method based on the forward sale price deemed to be most advantageous to the counterparties.

Note 11. Interest Rate Derivatives

We use derivative financial instruments to manage interest rate risk and also to fulfill our obligations under the terms of our revolving debt funding facilities and asset securitizations. We have established policies and procedures for risk assessment and the approval, reporting and monitoring of derivative financial instrument activities. We do not hold or issue derivative financial instruments for speculative purposes. All derivative financial instruments are recorded at fair value with changes in value reflected in net unrealized appreciation or depreciation of investments during the reporting period. The fair value of these instruments is based on the estimated net present value of the future cash flows using the forward interest rate yield curve in effect at the end of the period.

Our derivatives are considered economic hedges that do not qualify for hedge accounting under FASB Statement No. 133, “Accounting for Derivative Instruments and Hedging Activities.” We record the accrual of the periodic interest settlements of interest rate derivatives in net unrealized appreciation (depreciation) of investments and subsequently record the amount as a realized gain (loss) on investments on the interest settlement date.

45

AMERICAN CAPITAL STRATEGIES, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

(in thousands, except per share data)

Note 12. Investment in European Capital Limited

In September 2005, European Capital Limited (“ECAS Holding”), a company incorporated in Guernsey, closed on an offering of €750,000 of equity commitments. We provided €520,745 of the equity commitments and third party institutional investors provided €229,255 of the remaining equity commitments. ECAS Holding, through its subsidiary, European Capital S.A. SICAR (“ECAS”), will invest in and sponsor management and employee buyouts, invest in private equity buyouts and provide capital directly to private and mid-sized public companies primarily in Europe. As of September 30, 2005, we have funded €41,660 ($50,200) of our equity commitment and have also provided ECAS Holding with a senior bridge loan for $9,937. Our total investment in ECAS Holding as of September 30, 2005 of $60,137 is included as an investment at fair value in our accompanying consolidated balance sheet.

Our wholly-owned subsidiary, European Capital Financial Services (Guernsey) Limited (“ECFS”), entered into a services agreement with ECAS Holding and an investment management agreement with ECAS. Pursuant to the investment management agreement and services agreement, we will provide investment advisory and management services to ECAS and receive a management fee equal to 1.25% of the greater of ECAS’ weighted average gross assets and €750,000. In addition, ECAS and ECAS Holding will reimburse us for all costs and expenses incurred by ECFS during the term of the agreement, including all cost and expenses incurred by us for the organization and formation of ECAS, ECAS Holding and ECFS. Through the third quarter of 2005, we recorded $4,534 in cost reimbursements from ECAS included in fee and other income on the accompanying consolidated statement of operations.

Also pursuant to the investment management agreement, we received in October 2005 warrants to purchase preference shares of ECAS Holding representing 20% of ECAS Holding’s preference shares on a fully-diluted basis. The initial exercise price of the warrants is €0.10 per share, which is the same per share price that the original investors purchased their preference shares in the initial offering. The per share exercise price on the warrants will be reduced to reflect the amount of any future dividends on the preference shares and increased to reflect the per share amount of capital calls made on the holders of preference shares in the future. In the event that ECAS Holding undertakes an initial public offering and legal requirements effectively prevent ECAS Holding from being able to issue additional warrants to us, then ECAS Holding will pay us an incentive management fee in cash. The incentive management fee would be subject to a cumulative hurdle rate of 2% per quarter of ECAS’ pre-incentive fee net income as a return on quarterly average net asset value, determined on a cumulative basis through the end of quarter. The incentive management fee, if any, would be earned and payable as follows: (i) no incentive management fee in any calendar quarter in which ECAS’ pre-incentive fee net income does not exceed the cumulative hurdle rate or (ii) 100% of the amount of ECAS’ pre-incentive management fee net income, if any, that exceeds the cumulative hurdle rate but is less than 2.5% per quarter, plus 20% of the amount of ECAS’ pre-incentive fee net income, if any, that is equal to or exceeds 2.5%.

ECAS Holding intends to provide liquidity opportunities to its minority shareholders. In order to provide its minority shareholders with liquidity, the minority shareholders may have the right, in the event that a liquidity event has not been provided within three years of the initial close, to put, subject to applicable law, 50% of their preference shares to ECAS Holding at fair market value. In the event that a liquidity event has not been provided within four years of the initial close, the minority shareholders may put, subject to applicable law, 100% of their preference shares to ECAS Holding at fair market value. If ECAS Holding is unable to fulfill its obligations to redeem the shares, then (i) ECAS Holding will suspend all future dividends to us until such shares are redeemed, (ii) minority investors other than us will have the right to designate a substantial minority of the board

46

AMERICAN CAPITAL STRATEGIES, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

(in thousands, except per share data)

of directors of ECAS Holding, and (iii) in the event that ECAS Holding does not redeem such shares by the second put date then the minority investors other than us will have the right to designate a majority of the board of directors of ECAS Holding.

Note 13. Subsequent Event

In October 2005, we completed an $830,000 asset securitization. In connection with the transaction, we established ACAS Business Loan Trust 2005-1 (“Trust VII”), an affiliated statutory trust, and agreed to contribute to Trust VII up to $1,000,000 in loans. On the closing date, the aggregate outstanding principal balance of loans contributed by us was $872,000. Subject to continuing compliance with certain conditions, we will remain as servicer of the loans. Simultaneously with the initial contribution of loans, Trust VII issued $435,000 Class A-1 notes, $150,000 Class A-2A notes, $50,000 Class A-2B notes, $50,000 Class B notes, $145,000 Class C notes, $90,000 Class D notes and $80,000 Class E notes (collectively, the “2005-1 Notes”). The Class A-1 notes, Class A-2A notes, Class A-2B notes, Class B notes and Class C notes were issued to institutional investors and the Class D notes and Class E notes were retained by us. The 2005-1 Notes are secured by the loans originated or acquired by us and contributed to the Trust. Of the $150,000 Class A-2A notes, $22,025 was drawn upon at closing and the balance of $127,975 is an unfunded commitment.Trust VII may make two more draws under the Class A-2A notes against the unfunded commitment through January 25, 2006 to purchase additional loans to secure the 2005-1 Notes. Early repayments of loans held by Trust VII are first applied to the Class A-1 notes, Class A-2A notes and Class A-2B notes, next to the Class B notes and then to the Class C notes. Through January 2009, Trust VII may also reinvest any principal collections of its existing loans into purchases of additional loans to secure the 2005-1 Notes. The Class A-1 notes have an interest rate of LIBOR plus 25 basis points, the Class A-2A notes have an interest rate of LIBOR plus 20 basis points, the Class A-2B notes have an interest rate of LIBOR plus 35 basis points, the Class B notes have an interest rate of LIBOR plus 40 basis points, and the Class C notes have an interest rate of LIBOR plus 85 basis points. The LIBOR rate on the 2005-1 Notes during the initial interest period is a four-month LIBOR rate, and thereafter will be three-month LIBOR. The 2005-1 Notes contain customary default provisions and mature in July 2019 unless redeemed or repurchased prior to such date.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Dollars in thousands, except per share data)

All statements contained herein that are not historical facts including, but not limited to, statements regarding anticipated activity are forward looking in nature and involve a number of risks and uncertainties. Actual results may differ materially. Among the factors that could cause actual results to differ materially are the following: (i) changes in the economic conditions in which we operate negatively impacting our financial resources; (ii) certain of our competitors have substantially greater financial resources than us reducing the number of suitable investment opportunities offered to us or reducing the yield necessary to consummate the investment; (iii) there is uncertainty regarding the value of our privately held securities that require our good faith estimate of fair value for which a change in estimate could affect our net asset value; (iv) our investments in securities of privately held companies may be illiquid which could affect our ability to realize a gain; (v) our portfolio companies could default on their loans or provide no returns on our investments which could affect our operating results; (vi) we are dependent on external financing to grow our business; (vii) our ability to retain key management personnel; (viii) an economic downturn or recession could impair our portfolio companies and therefore harm our operating results; (ix) our borrowing arrangements impose certain restrictions; (x) changes in interest rates may affect our cost of capital and net operating income; (xi) we cannot incur additional indebtedness unless we maintain an asset coverage of at least 200%, which may affect returns to our shareholders; (xii) we may fail to continue to qualify for our pass-through treatment as a regulated investment company which could have an affect on shareholder return; (xiii) our common stock price may be volatile; and (xiv) general business and economic conditions and other risk factors described in our reports filed from time to time with the Securities and Exchange Commission. We caution readers not to place undue reliance on any such forward-looking statements, which statements are made pursuant to the Private Securities Litigation Reform Act of 1995 and, as such, speak only as of the date made.

The following analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the notes thereto.

Portfolio Composition

We are a publicly-traded buyout and mezzanine fund that provides investment capital to middle market companies. We invest in senior and subordinated debt and equity of companies in need of capital for buyouts, growth, acquisitions and recapitalizations. Our ability to fund the entire capital structure is an advantage in completing many middle market transactions. Our wholly-owned operating subsidiaries, ACFS and ECFS, provide financial advisory services to our portfolio companies. The total portfolio value of investments was $4,581,489 and $3,204,292, including interest rate derivative agreements, at September 30, 2005 and December 31, 2004, respectively. During the three months and nine months ended September 30, 2005 we made investments totaling $1,448,600 and $2,757,800, including $629,100 and $753,200 in funds committed but undrawn under credit facilities and equity subscription agreements at the date of the investment. During the three months and nine months ended September 30, 2004 we made investments totaling $492,140 and $1,261,110, including $23,000 and $65,700 in funds committed but undrawn under credit facilities at the date of the investment. The weighted average effective interest rate on debt securities was 12.8% and 12.9% at September 30, 2005 and December 31, 2004, respectively.

We invest in and sponsor management and employee buyouts, invest in private equity sponsored buyouts, and provide capital directly to private and small public companies. We provide senior debt, mezzanine debt and equity to fund growth, acquisitions and recapitalizations. We also provide capital directly to private and small public companies for growth, acquisitions or recapitalizations.

We seek to be a long-term partner with our portfolio companies. As a long-term partner, we will invest capital in a portfolio company subsequent to our initial investment if we believe that it can achieve appropriate returns for our investment. Add-on financings fund (i) strategic acquisitions by the portfolio company of either a complete business or specific lines of a business that are related to the portfolio company’s business, (ii) recapitalization at the

48

portfolio company, (iii) growth at the portfolio company such as product development or plant expansions, or (iv) working capital for portfolio companies, sometimes in distressed situations, that need capital to fund operating costs, debt service, or growth in receivables or inventory.

Our new investments, including unfunded commitments, during the three and nine months ended September 30, 2005 and 2004 were as follows:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2005		2004		2005		2004
American Capital Sponsored Buyouts	$	410,500	$	42,500	$	1,023,400	$	412,150
Financing for Private Equity Buyouts		243,300		386,820		579,000		685,700
Direct Investments		132,500		17,800		234,200		35,390
Investment in European Capital Limited		638,100		—		638,100		—
Add-On Financing for Acquisitions		5,200		10,020		136,800		49,130
Add-On Financing for Recapitalization		9,200		21,500		82,600		49,870
Add-On Financing for Direct Investments		—		—		3,100		—
Add-On Financing for Growth		—		1,000		5,000		5,600
Add-On Financing for Working Capital		9,800		12,500		55,600		23,270
Total	$	1,448,600	$	492,140	$	2,757,800	$	1,261,110

Results of Operations

Our consolidated financial performance, as reflected in our consolidated statements of operations, is composed of three primary elements. The first element is “Net operating income,” which is primarily the interest, dividends and prepayment fees earned from investing in debt and equity securities and the fees we earn from financial advisory and transaction structuring activities, less our operating expenses and provision for income taxes. The second element is “Net unrealized appreciation (depreciation) of investments,” which is comprised of (i) the net change in the estimated fair values of our portfolio investments, (ii) the reversal of unrealized appreciation (depreciation) upon a realization and (iii) the change in the estimated fair value of the future payment streams of our interest rate derivatives, at the end of the period compared with their estimated fair values at the beginning of the period or their stated costs, as appropriate. The third element is “Net realized gain (loss) on investments,” which reflects (i) the difference between the proceeds from an exit of a portfolio investment and the cost at which the investment was carried on our consolidated balance sheets and (ii) periodic settlements of interest rate derivatives.

The consolidated operating results for the three and nine months ended September 30, 2005 and 2004 follows:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2005			2004			2005			2004
Operating income	$	148,752		$	82,266		$	381,339		$	224,374
Operating expenses		60,942			26,234			150,384			67,794
Operating income before income taxes		87,810			56,032			230,955			156,580
Provision for income taxes		(1,884	)		(1,314	)		(7,668	)		(1,369	)
Net operating income		85,926			54,718			223,287			155,211
Net realized gain (loss) on investments		(3,475	)		(11,806	)		31,547			(67,466	)
Net unrealized appreciation of investments		11,606			17,687			30,252			96,356
Net increase in net assets resulting from operations	$	94,057		$	60,599		$	285,086		$	184,101

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Operating Income

Total operating income is comprised of two components: interest and dividend income and fee income. For the three months ended September 30, 2005, total operating income increased $66,486, or 81%, over the three months ended September 30, 2004. For the nine months ended September 30, 2005, total operating income increased $156,965, or 70%, over the nine months ended September 30, 2004. Interest and dividend income consisted of the following for the three and nine months ended September 30, 2005 and 2004:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2005		2004		2005		2004
Interest income on debt securities	$	102,261	$	63,201	$	271,306	$	170,791
Interest income on bank deposits and employee loans		794		252		2,033		609
Dividend income on equity securities		11,350		4,797		25,394		12,197
Total interest and dividend income	$	114,405	$	68,250	$	298,733	$	183,597

Interest income on debt securities increased by $39,060, or 62%, to $102,261 for the three months ended September 30, 2005 from $63,201 for the comparable period in 2004, primarily due to an increase in our debt investments, which was partially offset by a decline in the daily weighted average effective interest rate. Our daily weighted average debt investments at cost increased from $1,926,900 in the three month period ended September 30, 2004 to $3,137,900 in the comparable period in 2005 resulting from new loan originations net of loan repayments during the last twelve months ended September 30, 2005.

The daily weighted average effective interest rate on debt investments decreased from 13.0% in the three month period ended September 30, 2004 to 12.9 % in the comparable period in 2005 due primarily to an increase in the total senior loans as a percentage of our total loan portfolio. Our senior loans as a percentage of our total loans at cost increased from 32% as of September 30, 2004 to 42% as of September 30, 2005. Our senior loan investments generally yield lower rates than our higher yielding subordinated loan investments, but are typically variable rate based loans which do not necessitate the use of interest rate basis swap agreements thereby reducing our overall swap costs. We attempt to match-fund our liabilities and assets by financing floating rate assets with floating rate liabilities and fixed rate assets with fixed rate liabilities or equity. We enter into interest rate swap agreements to match the interest rate basis of our assets and liabilities and reduce our interest rate risks, thereby locking in the spread between our asset yield and the cost of our borrowings, and to fulfill our obligations under the terms of our revolving debt funding facilities and asset securitizations. Excluding the impact of the interest rate swap agreements, our daily weighted average effective interest rate for the three months ended September 30, 2005 decreased 10 basis points to 12.9% as compared to the prior year. However, including the impact of interest rate basis swap agreements, our daily weighted average effective interest rate for the three months ended September 30, 2005 increased 70 basis points to 12.7% as compared to the prior year.

However, our derivatives are considered economic hedges that do not qualify for hedge accounting under FASB Statement No. 133. The interest rate costs of our interest rate derivative agreements are not recorded in interest income. We record the accrual of the periodic interest settlements of interest rate derivatives in net unrealized appreciation (depreciation) of investments and subsequently record the amount as a realized gain (loss) on investments on the interest settlement date. In the three months ended September 30, 2005 and 2004, we incurred interest rate swap costs of $2,012 and $5,039, respectively, included in net realized gain (loss) on investments and net unrealized appreciation (depreciation) of investments on the consolidated statements of operations.

The impact on our daily weighted average effective interest rate of the increase in the percentage of our senior debt investments is partially offset by an increase in interest rates on our variable rate based loans as the weighted average monthly prime lending rate increased from 4.50% in three month period ended September 30, 2004 to 6.50% in the comparable period in 2005 and the average monthly LIBOR rate increased from 1.67% in

50

the three month period ended September 30, 2004 to 3.69% in the comparable period in 2005. In addition, the total average non-accruing loans increased from $93,778 in the three month period ended September 30, 2004 to $125,825 in the comparable period in 2005.

Interest income on debt securities increased by $100,515, or 59%, to $271,306 for the nine months ended September 30, 2005 from $170,791 for the comparable period in 2004, primarily due to an increase in our debt investments, which was partially offset by a decline in the daily weighted average effective interest rate on our debt investments. Our daily weighted average debt investments at cost increased from $1,693,300 in the nine month period ended September 30, 2004 to $2,781,800 in the comparable period in 2005 resulting from new loan originations net of loan repayments during the last twelve months ended September 30, 2005.

The daily weighted average effective interest rate on debt investments decreased from 13.5% in the nine month period ended September 30, 2004 to 13.0% in the comparable period in 2005 due primarily to an increase in the total senior loans as a percentage of our total loan portfolio as discussed above. In the nine months ended September 30, 2005 and 2004, we incurred interest rate swap costs of $8,431 and $16,696, respectively, that are included in net realized gain (loss) on investments and net unrealized appreciation (depreciation) of investments on the consolidated statements of operations. Excluding the impact of the interest rate basis swap agreements, our daily weighted average effective interest rate for the nine months ended September 30, 2005 decreased 50 basis points to 13.0% as compared to the prior year. However, including the impact of interest rate basis swap agreements, our daily weighted average effective interest rate for the nine months ended September 30, 2005 increased 40 basis points to 12.6% as compared to the prior year.

This is partially offset by an increase in interest rates on our variable rate based loans as the weighted average monthly prime lending rate increased from 4.19% in nine month period ended September 30, 2004 to 6.0% in the comparable period in 2005 and the average monthly LIBOR rate increased from 1.32% in the nine month period ended September 30, 2004 to 3.2% in the comparable period in 2005. In addition, the total average non-accruing loans increased from $88,130 in the nine month period ended September 30, 2004 to $111,882 in the comparable period in 2005.

Dividend income on equity securities increased by $6,553 to $11,350 for the three months ended September 30, 2005 from $4,797 for the comparable period in 2004 due primarily to an increase in preferred stock investments. We have grown our investments in equity securities to $1,384,000 at fair value as of September 30, 2005, a 74% increase over the fair value as of September 30, 2004. Although these investments do not produce a significant amount of current income, we expect to experience future net realized gains from these equity investments if they continue to appreciate in value. Our daily weighted average total debt and equity investments at cost increased from $2,621,400 in the three months ended September 30, 2004 to $4,295,300 in the comparable period in 2005. The daily weighted average yield on total debt and equity investments increased to 10.5% for the three months ended September 30, 2005 from 10.3% for the three months ended September 30, 2004. This increase is primarily due to the increase in preferred stock investments as a percentage of total equity investments in 2005 as compared to the prior year, partially offset by a decrease in the weighted average effective interest rate on debt securities as discussed above. Including the cost of interest rate basis swap agreements that are included in net realized gain (loss) on investments and net unrealized appreciation (depreciation) of investments on the consolidated statements of operations, our daily weighted average yield would have been 10.3% and 9.5% for the three months ended September 30, 2005 and 2004, respectively.

Dividend income on equity securities increased by $13,197 to $25,394 for the nine months ended September 30, 2005 from $12,197 for the comparable period in 2004 due primarily to an increase in preferred stock investments. Our daily weighted average total debt and equity investments at cost increased from $2,295,300 in the nine months ended September 30, 2004 to $3,788,000 in the comparable period in 2005. The daily weighted average yield on total debt and equity investments decreased to 10.5% for the nine months ended September 30, 2005 from 10.6% for the comparable period in 2004. This decrease is primarily due to the decrease in the weighted average effective interest rate on debt securities as discussed above. Including the cost

51

of interest rate basis swap agreements that are included in net realized gain (loss) on investments and net unrealized appreciation (depreciation) of investments on the consolidated statements of operations, our daily weighted average yield would have been 10.2% and 9.7% for the nine months ended September 30, 2005 and 2004, respectively.

Fee and other income consisted of the following for the three and nine months ended September 30, 2005 and 2004:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2005		2004		2005		2004
Transaction structuring fees	$	6,143	$	1,007	$	18,636	$	8,328
Loan financing fees		5,269		4,273		12,829		9,601
Equity financing fees		5,395		830		13,785		5,672
Financial advisory fees		3,996		2,421		10,548		6,070
Prepayment fees		5,373		2,847		8,641		5,761
Other structuring fees		385		476		2,030		476
Cost reimbursement from investment management agreements		4,534		—		4,534		—
Other		3,252		2,162		11,603		4,869
Total fee and other income	$	34,347	$	14,016	$	82,606	$	40,777

Fee and other income increased by $20,331, or 145%, to $34,347 for the three months ended September 30, 2005 from $14,016 in the comparable period in 2004. For the three months ended September 30, 2005, we recorded $6,143 in transaction structuring fees for five buyout investments totaling $410,500 of American Capital financing. For the three months ended September 30, 2004, we recorded $1,007 in transaction structuring fees for one buyout investment totaling $42,500 of American Capital financing. The transaction structuring fees were 1.5% and 2.4% of buyout investments in 2005 and 2004, respectively. Loan financing fees for the three months ended September 30, 2005 increased $996, or 23%, over the comparable period in 2004. The increase in loan financing fees was attributable to an increase in new debt investments from $431,500 in 2004 to $659,200 in 2005. The loan financing fees were 0.8% and 1.0% of loan originations in 2005 and 2004, respectively. Equity financing fees for the three months ended September 30, 2005 increased $4,565 over the comparable period in 2004. The increase in equity financing fees was attributable to an increase in new equity investments from $60,600 in 2004 to $211,400 in 2005. Financial advisory fees for the three months ended September 30, 2005 increased $1,575, or 65%, over the comparable period in 2004. The increase in financial advisory fees is attributable primarily to the increase in the number of portfolio companies under management. The prepayment fees of $5,373 for the three months ended September 30, 2005 are the result of the prepayment by five portfolio companies of loans totaling $146,400 compared to prepayment fees of $2,847 for the three months ended September 30, 2004 as the result of the prepayment by six portfolio companies of loans totaling $84,300. The cost reimbursement from investment management agreements of $4,534 in 2005 represents a reimbursement from ECAS for costs incurred by us in formation and operation of ECFS and ECAS.

Fee and other income increased by $41,829, or 103%, to $82,606 for the nine months ended September 30, 2005 from $40,777 in the comparable period in 2004. For the nine months ended September 30, 2005, we recorded $18,636 in transaction structuring fees for 14 buyout investments and two add-on financings for acquisitions totaling $1,097,200 of American Capital financing. For the nine months ended September 30, 2004, we recorded $8,328 in transaction structuring fees for seven buyout investments totaling $412,150 of American Capital financing. The transaction structuring fees were 1.7% and 2.0% of buyout investments in 2005 and 2004, respectively. Loan financing fees for the nine months ended September 30, 2005 increased $3,228, or 34%, over the comparable period in 2004. The increase in loan financing fees was attributable to an increase in new debt investments from $1,033,700 in 2004 to $1,690,700 in 2005, partially offset by an increase in the portion of fees deferred in 2005 as a discount that are representative of additional yield. The loan financing fees were 0.8% and

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0.9% of loan originations in 2005 and 2004, respectively. Equity financing fees for the nine months ended September 30, 2005 increased $8,113 over the comparable period in 2004. The increase in equity financing fees was attributable to an increase in new equity investments from $227,400 in 2004 to $489,200 in 2005. Financial advisory fees for the nine months ended September 30, 2005 increased $4,478, or 74%, over the comparable period in 2004. The increase in financial advisory fees is attributable primarily to the increase in the number of portfolio companies under management. The prepayment fees of $8,641 for the nine months ended September 30, 2005 are the result of the prepayment by fourteen portfolio companies of loans totaling $284,600 compared to prepayment fees of $5,761 for the nine months ended September 30, 2004 as the result of the prepayment by fourteen portfolio companies of loans totaling $222,500.

Operating Expenses

Operating expenses for the three months ended September 30, 2005 increased $34,708, or 132%, over the comparable period in 2004. For the nine months ended September 30, 2005, operating expenses increased $82,590, or 122%, over the comparable period in 2004.

Interest expense increased from $10,343 for the three months ended September 30, 2004 to $27,889 in the comparable period in 2005 due to an increase in our weighted average borrowings and an increase in our weighted average interest rate. Our weighted average borrowings increased from $1,087,900 in the three months ended September 30, 2004 to $2,073,800 in the comparable period in 2005. Our weighted average interest rate on outstanding borrowings, including amortization of deferred financing costs, increased from 3.8% during the three months ended September 30, 2004 to 5.4% during the comparable period in 2005. Interest expense increased from $22,916 for the nine months ended September 30, 2004 to $67,225 in the comparable period in 2005 due to an increase in our weighted average borrowings from $928,200 in the nine months ended September 30, 2004 to $1,799,500 in the comparable period in 2005. Our weighted average interest rate on outstanding borrowings, including amortization of deferred finance costs, increased from 3.3% during the nine months ended September 30, 2004 to 5.0% during the comparable period in 2005. The increase in the weighted average interest rate is primarily due to an increase in the average monthly LIBOR rate discussed above and the increase in unsecured debt, which generally has a higher interest rate than our secured debt.

Salaries, benefits and stock-based compensation expense increased 139% from $8,717 in the three months ended September 30, 2004 to $20,837 in the comparable period in 2005. Salaries, benefits and stock-based compensation increased 118% from $25,614 in the nine months ended September 30, 2004 to $55,850 in the comparable period in 2005. Salaries, benefits and stock-based compensation consisted of the following for the three and nine months ended September 30, 2005 and 2004:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2005		2004		2005		2004
Salaries	$	15,291	$	5,584	$	40,552	$	16,739
Benefits		1,810		992		5,218		3,454
Stock-based compensation		3,736		2,141		10,080		5,421
Total salaries, benefits and stock-based compensation	$	20,837	$	8,717	$	55,850	$	25,614

The total increases are due primarily to an increase in employees from 169 at September 30, 2004 to 277 at September 30, 2005, increases in incentive compensation, and annual salary rate increases. The increase in number of employees is due to our growth as we have added investment professionals and administrative staff in building our investment platform. The incentive compensation accrued as a percentage of the maximum amount of incentive compensation available increased in 2005 as compared to the prior year as a result of us meeting certain performance criteria in 2005. In 2003, we adopted FASB Statement No. 123 to account for stock-based compensation plans for all stock options granted in 2003 and forward as permitted under FASB Statement No. 148.

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Accordingly, stock-based compensation is higher in 2005 since it includes the pro-rata vested expense for stock options granted over the past eleven quarters compared to the pro-rata vested expense for stock options granted over the past seven quarters in 2004.

General and administrative expenses increased 70% from $7,174 in the three months ended September 30, 2004 to $12,216 in the comparable period in 2005. General and administrative expenses increased 42% from $19,264 in the nine months ended September 30, 2004 to $27,309 in the comparable period in 2005. The increase is due primarily to additional overhead attributable to the increase in the number of employees and size of our investment portfolio.

In 2005, we commenced operations of our operating subsidiary ECFS and recognized total operating expenses related to ECFS of $2,569 in the three months ended September 30, 2005 and $4,148 in the nine months ended September 30, 2005 consisting of salaries, benefits and stock-based compensation and general and administrative expenses.

Provision for Income Taxes

We operate to qualify to be taxed as a regulated investment company, or a RIC, as defined in Subtitle A, Chapter 1, under Subchapter M of the Internal Revenue Code of 1986, as amended. Generally, a RIC is entitled to deduct dividends it pays to its shareholders from its income to determine taxable income. We have distributed and currently intend to distribute sufficient dividends to eliminate investment company taxable income.

Our consolidated operating subsidiaries, ACFS and ECFS, are subject to corporate level income tax. For the three months ended and nine months ended September 30, 2005, we recorded a tax provision of $1,884 and $7,668, respectively, attributable to our taxable operating subsidiaries. For the three and nine months ended September 30, 2004, we recorded a tax provision of $1,314 and $1,369, respectively, attributable to our taxable operating subsidiaries.

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Net Realized Gains (Losses) on Investments

Our net realized gains (losses) for the three and nine months ended September 30, 2005 and 2004 consisted of the following:

	Three Months Ended September 30, 2005			Three Months Ended September 30, 2004			Nine Months Ended September 30, 2005			Nine Months Ended September 30, 2004
Roadrunner Freight Systems, Inc.	$	(18	)	$	1,220		$	26,321		$	1,220
CIVCO Holding, Inc.		—			—			12,611			—
Automatic Bar Controls, Inc.		218			—			11,765			—
ACAS Acquisitions (PaR Systems), Inc.		—			—			—			9,537
Chronic Care Solutions, Inc.		6,477			—			6,477			—
HMS Healthcare, Inc.		5,562			—			5,655			—
Atlantech Holding, Corp.		—			—			—			4,271
Cycle Gear, Inc.		73			—			3,779			—
The Lion Brewery, Inc.		—			—			1,896			—
Bumble Bee Seafoods, L.P.		—			—			1,882			491
Kelly Aerospace, Inc.		—			—			1,747			—
TransCore Holdings, Inc.		25			—			25			1,668
ACS PTI, Inc.		(367	)		—			1,524			—
Erie County Plastics Corporation		—			1,341			—			1,341
Vigo Remittance Corp.		—			—			—			1,250
BC Natural Foods LLC		1,213			—			1,213			—
Other, net		1,184			1,013			2,729			2,927
Total gross realized portfolio gains		14,367			3,574			77,624			22,705
Chromas Technologies Corp.		(248	)		11			(253	)		(32,002	)
S-Tran Holdings, Inc.		(140	)		—			(22,195	)		—
Academy Events Services, LLC		—			—			—			(14,173	)
Sunvest Industries, Inc.		—			(570	)		—			(14,032	)
Fulton Bellows & Components, Inc.		(61	)		(7,330	)		(61	)		(14,148	)
MBT International, Inc.		(6,110	)		—			(6,110	)		—
American Decorative Surfaces International, Inc.		(4,102	)		—			(4,102	)		—
Baran Group, Ltd.		—			(2,161	)		—			(2,161	)
Euro-Pro Operating LLC		(1,988	)		—			(1,988	)		—
Stravina Operating, LLC		(1,000	)		—			(1,000	)		—
Other, net		(1,487	)		—			(2,206	)		(142	)
Total gross realized portfolio losses		(15,136	)		(10,050	)		(37,915	)		(76,658	)
Total net realized portfolio gains (losses)		(769	)		(6,476	)		39,709			(53,953	)
Interest rate derivative periodic payments		(2,706	)		(5,330	)		(8,162	)		(13,513	)
Total net realized gains (losses)	$	(3,475	)	$	(11,806	)	$	31,547		$	(67,466	)

In the second quarter of 2005, we received full repayment of our remaining $5,299 subordinated debt investments in Roadrunner Freight Systems, Inc. and sold all of our equity investments in Roadrunner Freight consisting of our common stock and common stock warrants for $41,517 in proceeds realizing a total gain of $26,321 offset by a reversal of unrealized appreciation of $23,789. We provided $23,600 of subordinated bridge debt financing to the purchasers for which we subsequently received full repayment during the second quarter of 2005.

In the second quarter of 2005, we received full repayment of our $28,597 of subordinated debt investments in CIVCO Holding, Inc. and sold all or our remaining equity investments in CIVCO consisting of our common

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stock and common stock warrants for $14,651 in proceeds realizing a total gain of $12,611 offset by a reversal of unrealized appreciation of $6,802. The sale proceeds we recognized include proceeds we expect to receive held in escrow of $1,152.

In the second quarter of 2005, we received full repayment of our $25,539 of remaining senior and subordinated debt investments in Automatic Bar Controls, Inc. and sold all or our equity investments in Automatic Bar consisting of our common stock and common stock warrants for $18,505 in proceeds realizing a total gain of $11,765 offset by a reversal of unrealized appreciation of $14,062.

In the third quarter of 2005, we received full repayment of our $71,994 of remaining subordinated debt investments in Chronic Care Solutions, Inc. and sold all or our equity investments in Chronic Care Solutions consisting of our preferred stock, common stock and common stock warrants for $17,078 in proceeds realizing a total gain of $6,477 offset by a reversal of unrealized appreciation of $5,630. The sale proceeds we recognized include proceeds we expect to receive held in escrow of $2,742.

In 2005, we received full repayment of our $42,305 of remaining subordinated debt investments in HMS Healthcare, Inc. and sold all of our equity investments in HMS Healthcare consisting of our preferred stock, common stock and common stock warrants for $8,366 in proceeds realizing a total gain of $5,655 offset by a reversal of unrealized appreciation of $5,781. The sale proceeds we recognized include proceeds we expect to receive held in escrow of $1,047.

In the first quarter of 2005, we received full repayment of our remaining $13,142 senior and subordinated debt investments in Cycle Gear, Inc. and sold all of our equity investments in Cycle Gear consisting of our redeemable preferred stock and common stock warrants for $7,332 in proceeds realizing a total gain of $3,779 offset by a reversal of unrealized appreciation of $3,138. The sale proceeds we recognized include proceeds we expect to receive held in escrow of $931.

In the second quarter of 2004, we received full repayment of our $22,500 subordinated debt investment in ACAS Acquisitions (PaR Systems), Inc. and received a $10,804 liquidating dividend on our common equity interest as a result of PaR’s sale of an 81% interest in its nuclear equipment and services business, recognizing a total gain of $9,537. We retained an 11% diluted ownership interest in ACAS acquisitions (PaR Systems), Inc., which was renamed PaR Nuclear Holding Co., Inc. The non-nuclear business segment of ACAS Acquisitions (PaR Systems), Inc. was contributed to a newly created company, PaR Systems, Inc., shares of which were distributed to the existing shareholders. We provided $4,632 in subordinated debt financing to, and retained a 51% ownership in, PaR Systems, Inc.

In 2004, we realized a gain of $4,271 from the realization of unamortized OID from the prepayment of debt by Atlantech Holding, Corp.

In the second quarter of 2005, S-Tran Holdings, Inc. filed for Chapter 11 bankruptcy. We do not expect to receive any proceeds from the liquidation of S-Tran for our common stock investment in S-Tran. Our common stock investment was deemed worthless and was written off resulting in a realized loss of $22,195 offset by a reversal of unrealized depreciation of $21,849.

In the third quarter of 2005, the operating assets of MBT International, Inc. were sold pursuant to an asset purchase agreement. We received cash proceeds from the sale of the operating assets as partial payment on our subordinated debt investments and expect to receive additional partial payments on our subordinated debt investments from sale proceeds held in escrow and from the sale of MBT’s real property. Subsequent to the asset sale, we deemed our equity investments worthless and wrote off the securities. We realized a total loss of $6,110 offset by a reversal of unrealized depreciation of $4,015.

In the third quarter of 2005, we sold a portion of our preferred stock investment in American Decorative Surfaces International, Inc. for nominal proceeds resulting in a realized loss of $4,102 offset by a reversal of unrealized depreciation of $4,102.

In the first quarter of 2004, Chromas Technologies Corp. entered into an asset purchase agreement whereby substantially all of the assets were sold to and certain of the liabilities were assumed by a purchaser. The net cash

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proceeds were used to repay a portion of our outstanding loans. As part of the asset purchase agreement, Chromas was entitled to receive an additional deferred payment one year from the closing date. All of Chromas’ remaining assets including its right to receive the deferred payment were conveyed to us. Our remaining subordinated debt and equity investments in Chromas were deemed worthless, and we recognized a realized loss of $32,002 offset by the reversal of unrealized depreciation of $29,767.

In the first quarter of 2004, Academy Event Services, LLC filed for Chapter 11 bankruptcy and the court conducted an auction for the sale of all of its assets during the quarter. We did not receive any proceeds from the auction sale held through the bankruptcy proceedings. Our subordinated debt and equity investments were deemed worthless, and we recognized a realized loss of $14,173 offset by the reversal of unrealized depreciation of $7,813.

Sunvest Industries, Inc. was a holding company with two wholly-owned operating subsidiaries – Dyna-Fab LLC and Advanced Fabrication Technology LLC (AFT). In the fourth quarter of 2003, Dyna-Fab entered into an asset purchase agreement whereby substantially all of the assets of Dyna-Fab were sold. In the first quarter of 2004, AFT entered into an asset purchase agreement whereby substantially all of the assets of AFT were sold. During 2004, we foreclosed on Sunvest’s and its subsidiaries’ remaining assets including any rights to future payments under the asset purchase agreements. The remaining senior and subordinated debt and equity investments in Sunvest were deemed worthless, and we recognized a realized loss of $14,032 offset by the reversal of unrealized depreciation of $14,052 in 2004.

In the second quarter of 2004, we sold our senior subordinated debt investment in Fulton Bellows & Components, Inc. for nominal proceeds and recognized a realized loss of $6,818 offset by the reversal of unrealized depreciation of $7,001. In the third quarter of 2004, Fulton’s assets were sold under Section 363 of the Bankruptcy Code, and we received proceeds of $5,917 for partial repayment of our remaining senior debt investments. We recognized a realized loss of $7,330 from the write off of our remaining senior debt investments and common stock warrants partially offset by a reversal of unrealized depreciation of $7,194.

Unrealized Appreciation and Depreciation of Investments

The net unrealized depreciation and appreciation of investments is based on portfolio asset valuations determined by management and approved by our board of directors. The following table itemizes the change in net unrealized appreciation (depreciation) of investments for the three and nine months ended September 30, 2005 and 2004:

	Number of Companies	Three Months Ended September 30, 2005			Number of Companies	Three Months Ended September 30, 2004
Gross unrealized appreciation of portfolio company investments	20	$	46,377		17	$	65,117
Gross unrealized depreciation of portfolio company investments	13		(52,449	)	12		(46,608	)
Reversal of prior period unrealized (appreciation) depreciation upon a realization	6		(663	)	4		8,615
Net unrealized appreciation (depreciation) of portfolio company investments	39		(6,735	)	33		27,124
Interest rate derivative periodic payment accrual	—		604		—		291
Interest rate derivative agreements	—		17,737		—		(9,728	)
Net unrealized appreciation (depreciation) of investments	39	$	11,606		33	$	17,687

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	Number of Companies	Nine Months Ended September 30, 2005			Number of Companies	Nine Months Ended September 30, 2004
Gross unrealized appreciation of portfolio company investments	37	$	203,018		30	$	150,143
Gross unrealized depreciation of portfolio company investments	23		(157,578	)	23		(116,165	)
Reversal of prior period unrealized (appreciation) depreciation upon a realization	15		(35,330	)	8		60,787
Net unrealized appreciation of portfolio company investments	75		10,110		61		94,765
Interest rate derivative periodic payment accrual	—		527		—		(3,183	)
Interest rate derivative agreements	—		19,615		—		4,774
Net unrealized appreciation of investments	75	$	30,252		61	$	96,356

The fair value of the interest rate derivative agreements represents the estimated net present value of the future cash flows using a forward interest rate yield curve in effect at the end of the period. A negative fair value would represent an amount we would have to pay the other party and a positive fair value would represent an amount we would receive from the other party to terminate the agreement. They appreciate or depreciate based on relative market interest rates and their remaining term to maturity. The change in fair value is recorded as unrealized appreciation (depreciation) of interest rate derivative agreements.

As part of our quarterly process of valuing our investment portfolio, we have engaged Houlihan Lokey Howard & Zukin Financial Advisors, Inc. to review independently the determination of fair value of American Capital’s portfolio company investments. Houlihan Lokey is the premier valuation firm in the U.S., engaged in approximately 1,000 valuation assignments per year for clients worldwide. In the last twelve months ended September 30, 2005, Houlihan Lokey reviewed 100% of our portfolio investments that have been a portfolio company for at least one year. In addition, Houlihan Lokey representatives attend American Capital’s quarterly valuation meetings and provide periodic reports and recommendations to our audit and compliance committee with respect to our valuation models and policies and procedures.

For the third quarter of 2005, Houlihan Lokey reviewed our valuations of 28 portfolio companies having $712,800 in aggregate fair value as reflected in our financial statements as of September 30, 2005. Using methods and techniques that are customary for the industry and that Houlihan Lokey considers appropriate under the circumstances, Houlihan Lokey determined that the aggregate fair value assigned to the portfolio company investments by American Capital was within their reasonable range of aggregate value for such companies. Over the last four quarters, Houlihan Lokey has reviewed 98 portfolio companies totaling approximately $2,801,000 in fair value as of their respective valuation dates and came to the same determination.

Financial Condition, Liquidity, and Capital Resources

At September 30, 2005, we had $116,125 in cash and cash equivalents and $110,503 in restricted cash. Our restricted cash consists primarily of escrows of interest and principal payments collected on assets that are securitized. In accordance with the terms of the related securitized debt agreements, those funds are generally distributed each month to pay interest and principal on the securitized debt. As of September 30, 2005, we had availability of $177,769 under our revolving debt funding facilities and $196,735 under our equity forward sale agreements at the forward sale price of $35.77 as of September 30, 2005. During the nine months ended September 30, 2005, we principally funded investments using draws on the revolving debt funding facilities, proceeds from unsecured debt issuances, proceeds from repurchase agreements, proceeds from repayments and sales of loans and equity offerings, including our equity forward agreements.

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As a regulated investment company, we are required to distribute annually 90% or more of our investment company taxable income and 98% of our net realized short-term capital gains to shareholders. We provide shareholders with the option of reinvesting their distributions in American Capital. On August 3, 2004, we amended our dividend reinvestment plan to provide a 5% discount on shares purchased through the reinvested dividends, effective for dividends paid in December 2004 and thereafter, subject to terms of the plan. While we will continue to provide shareholders with the option of reinvesting their distributions in American Capital, we have historically had to and anticipate continuing to issue debt or equity securities in addition to the above borrowings to expand our investments in middle market companies. The terms of the future debt and equity issuances cannot be determined and there can be no assurances that the debt or equity markets will be available to us on terms we deem favorable.

We believe that we are currently in compliance with the requirements to qualify as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended, and to qualify as a business development company under the Investment Company Act of 1940, as amended. As a business development company, our asset coverage, as defined in the Investment Company Act of 1940, must be at least 200% after each issuance of senior securities. As of September 30, 2005 and December 31, 2004, our asset coverage was 212% and 220%, respectively.

Equity Capital Raising Activities

In September 2004, we entered into forward sale agreements (the “2004 Forward Sale Agreements”) with third parties to sell shares of our common stock generally at such times as we could elect over a one-year period at the then applicable forward sale price. As of December 31, 2004, we had 6,250 shares available under the 2004 Forward Sale Agreements. In 2005, we sold all of the remaining 6,250 shares under the 2004 Forward Sale Agreements and received net proceeds of $178,312.

In March 2005, we completed a public offering in which 10,000 shares of our common stock, including an underwriters’ over-allotment of 1,300 shares, were sold at a public offering price of $31.50 per share. Of those shares, 2,000 were offered directly by us and 8,000 were sold by third parties in connection with agreements to purchase common stock from us for future delivery dates pursuant to forward sale agreements (the “March 2005 Forward Sale Agreements”). Upon completion of the offering and exercise of the underwriters’ over-allotment option, we received proceeds, net of the underwriters’ discount and closing costs, of $59,529 in exchange for 2,000 common shares.

The remaining 8,000 shares of common stock were borrowed from third party market sources by counterparties, or forward purchasers, of the March 2005 Forward Sale Agreements who then sold the shares to the public. Pursuant to the March 2005 Forward Sale Agreements, we were required to sell to the forward purchasers 8,000 shares of our common stock generally at such times as we could elect over a one-year period. The March 2005 Forward Sale Agreements provided for settlement on a settlement date or dates to be specified at our discretion within the duration of the March 2005 Forward Sale Agreements through a termination date of March 29, 2006. On a settlement date, we would issue shares of our common stock to the forward purchaser at the then applicable forward sale price. The forward sale price was initially $30.11 per share, which was the public offering price of shares of our common stock less the underwriting discount. The March 2005 Forward Sale Agreements provided that the initial forward sale price per share would be subject to daily adjustment based on a floating interest factor equal to the federal funds rate, less a spread, and would be subject to decrease by $0.75, $0.77, $0.78, $0.04 and $0.78 per share on May 11, 2005, August 10, 2005, November 10, 2005, December 27, 2005 and February 10, 2006, respectively. The forward sale price would also be subject to decrease if the cost to the forward purchasers of borrowing our common stock exceeded a specified amount. In 2005, we sold all of the 8,000 shares under the March 2005 Forward Sale Agreements and received net proceeds of $235,353.

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In September 2005, we completed a public offering in which 7,500 shares of our common stock were sold at a public offering price of $37.11 per share. Of those shares, 2,000 were offered directly by us and 5,500 were sold by third parties in connection with agreements to purchase common stock from us for future delivery dates pursuant to forward sale agreements (the “September 2005 Forward Sale Agreements”). Upon completion of the offering we received proceeds, net of the underwriters’ discount and closing costs, of $70,786 in exchange for 2,000 common shares.

The remaining 5,500 shares of common stock were borrowed from third party market sources by counterparties, or forward purchasers, of the September 2005 Forward Sale Agreements who then sold the shares to the public. Pursuant to the September 2005 Forward Sale Agreements, we must sell to the forward purchasers 5,500 shares of our common stock generally at such times as we elect over a one-year period. The September 2005 Forward Sale Agreements provide for settlement on a settlement date or dates to be specified at our discretion within the duration of the September 2005 Forward Sale Agreements through termination in September 2006. On a settlement date, we will issue shares of our common stock to the forward purchaser at the then applicable forward sale price. The forward sale price was initially $35.72 per share, which was the public offering price of shares of our common stock less the underwriting discount. The September 2005 Forward Sale Agreements provide that the initial forward sale price per share will be subject to daily adjustment based on a floating interest factor equal to the federal funds rate, less a spread, and will be subject to decrease by $0.79, $0.04, $0.79, $0.80 and $0.82 per share on December 2, 2005, December 27, 2005, March 3, 2006, June 2, 2006 and September 1, 2006, respectively. The forward sale price will also be subject to decrease if the cost to the forward purchasers of borrowing our common stock exceeds a specified amount. As of September 30, 2005, there are 5,500 shares available under the September 2005 Forward Sale Agreements at a forward sale price of $35.77 per share.

Each forward purchaser under a forward sale agreement has the right to accelerate its forward sale agreement and require us to physically settle on a date specified by such forward purchaser if certain events occur, such as (1) in its judgment, it is unable to continue to borrow a number of shares of our common stock equal to the number of shares to be delivered by us under its forward sale agreement, or the cost of borrowing the common stock has increased above a specified amount, (2) we declare any dividend or distribution on shares of our common stock payable in (i) excess of a specified amount, (ii) securities of another company, or (iii) any other type of securities (other than shares of our common stock), rights, warrants or other assets for payment at less than the prevailing market price in such forward purchaser’s judgment, (3) the net asset value per share of our outstanding common stock exceeds a specified percentage of the then applicable forward sales price, (4) our board of directors votes to approve a merger or takeover of us or similar transaction that would require our shareholders to exchange their shares for cash, securities, or other property, or (5) certain other events of default or termination events occur.

In accordance with Emerging Issues Task Force (EITF) Issue No. 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock”, the forward sale agreements are considered equity instruments, and the shares of common stock are not considered outstanding until issued. Also, in accordance with EITF Issue No. 03-06, “Participating Securities and the Two-Class Method Under FASB Statement No. 128”, the forward sale agreements are not considered participating securities for the purpose of determining basic earnings per share under FASB Statement No. 128, “Earnings per Share.” However, the dilutive impact of the shares issuable under the forward sale agreements is included in our diluted weighted average shares under the treasury stock method based on the forward sale price deemed to be most advantageous to the counterparties.

Debt Capital Raising Activities

As of December 31, 2004, through ACS Funding Trust I, an affiliated statutory trust, we had a commercial paper conduit securitization facility with a maximum availability of $850,000. In January 2005, an existing

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lender in the facility increased its commitment by $150,000 increasing the total maximum availability to $1,000,000. In August 2005, we amended the facility to extend the termination date to August 2006 and to modify certain other terms. In September 2005, we further amended the facility by having one of the existing lenders temporarily increase its commitment by $100,000 until October 2005, increasing the total maximum availability to $1,100,000. We subsequently amended and restated the facility in the same month to add a multicurrency provision, allowing funds to be borrowed in an alternate currency to the U.S. dollar and to modify certain other terms. Our ability to make draws under the facility expires in August 2006, unless extended for an additional 364-day period with the consent of the lenders. If the facility is not extended, any principal amounts then outstanding will be amortized over a 24-month period through termination in August 2008.

As of December 31, 2004, we had a $70,000 secured revolving credit facility with a syndication of lenders. In February 2005, we revised the terms of the existing credit facility pursuant to an Amended and Restated Credit Agreement. In connection with the amendment, the maximum availability of borrowing under the credit facility was increased from $70,000 to $100,000 and the facility was converted into an unsecured revolving line of credit. In June 2005, the $100,000 unsecured credit facility was terminated, and we entered into a new $230,000 unsecured revolving line of credit with a syndication of lenders, including lenders from our terminated $100,000 unsecured revolving line of credit. In July 2005, we expanded the facility to $255,000 and it may be expanded through new or additional commitments up to $300,000 in accordance with the terms and conditions of the agreement. The facility expires in June 2007 unless extended for an additional 364-day period with the consent of the lenders. Interest on borrowings under the facility is charged at either (i) a one-month LIBOR plus the applicable percentage at such time or (ii) the greater of the lender prime rate or the federal funds effective rate plus 50 basis points. The agreement contains covenants that, among other things, require us to maintain certain unsecured debt ratings and a minimum net worth.

In August 2005, we entered into a note purchase agreement to issue an aggregate of $126,000 of long-term unsecured five-year notes to institutional investors in a private placement offering. The unsecured notes have a fixed interest rate of 6.14% and mature in August 2010. The note purchase agreement contains customary default provisions.

In September 2005, we entered into a note purchase agreement to issue $75,000 of senior unsecured fifteen-year notes to accredited investors in a private placement offering. The unsecured notes have a fixed interest rate of 6.923% through the interest payment date in October 2015 and at the rate of LIBOR plus 2.65% thereafter and mature in October 2020. The note purchase agreement contains customary default provisions. We had entered into a treasury rate lock agreement in connection with this note purchase agreement that reduced our effective interest rate to 6.85%.

Portfolio Credit Quality

Loan Grading and Performance

We grade all loans on a scale of 1 to 4. This system is intended to reflect the performance of the borrower’s business, the collateral coverage of the loans and other factors considered relevant.

Under this system, loans with a grade of 4 involve the least amount of risk in our portfolio. The borrower is performing above expectations, and the trends and risk factors are generally favorable. For loans graded 3, the borrower is performing as expected and the risk factors are neutral to favorable. All new loans are initially graded 3. Loans graded 2 involve a borrower performing below expectations and indicates that the loan’s risk has increased materially since origination. For loans graded 2, we increase procedures to monitor the borrower, and the fair value of the enterprise generally will be lower than when the loan was originated. A loan grade of 1 indicates that the borrower is performing materially below expectations and that the loan risk has substantially increased since origination. Loans graded 1 are not anticipated to be repaid in full, and we will reduce the fair value of the loan to the amount we anticipate will be recovered.

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To monitor and manage the investment portfolio risk, management tracks the weighted average investment and loan grade. The weighted average investment grade was 3.1 as of both September 30, 2005 and December 31, 2004. The weighted average loan grade was 3.0 as of both September 30, 2005 and December 31, 2004, respectively. The weighted average investment grade is weighted based on the total fair value of both the loan and equity investments of a portfolio company. The weighted average loan grade is weighted based on the total fair value of only the loan investments of the portfolio company. At September 30, 2005 and December 31, 2004, our investment portfolio was graded as follows:

	September 30, 2005								December 31, 2004
Grade	Investments at Fair Value		Percentage of Total Portfolio		Loans at Fair Value		Percentage of Total Loan Portfolio		Investments at Fair Value		Percentage of Total Portfolio		Loans at Fair Value		Percentage of Total Loan Portfolio
4	$	1,060,051	23.6	%	$	597,369	18.7	%	$	666,534	21.1	%	$	326,531	14.1	%
3		3,001,325	66.7	%		2,193,362	68.7	%		2,088,051	66.2	%		1,624,966	70.3	%
2		314,203	6.9	%		277,877	8.7	%		326,454	10.4	%		288,008	12.5	%
1		124,356	2.8	%		124,396	3.9	%		70,922	2.3	%		70,825	3.1	%
	$	4,499,935	100.0	%	$	3,193,004	100	%	$	3,151,961	100.0	%	$	2,310,330	100	%

The amounts above do not include our portfolio companies for which we have only invested in the equity securities of the company.

For the nine months ended September 30, 2005, twenty portfolio companies were upgraded from a loan grade 3 to a loan grade 4, three portfolio companies were upgraded from a loan grade 2 to a loan grade 3, and one portfolio company was upgraded from a loan grade 1 to a loan grade 2. For the nine months ended September 30, 2005, one portfolio company was downgraded from a loan grade 4 to a loan grade 1, one portfolio company was downgraded from a loan grade 4 to a loan grade 2, one portfolio company was downgraded from a loan grade 4 to a loan grade 3, four portfolio companies were downgraded from a loan grade 3 to a loan grade 2, and two portfolio companies were downgraded from a loan grade 2 to a loan grade 1.

We stop accruing interest on investments when it is determined that interest is no longer collectible. Our valuation analysis serves as a critical piece of data in this determination. A significant change in the portfolio company valuation determined by us could have an effect on the amount of our loans on non-accrual status. At September 30, 2005, loans with fourteen portfolio companies with a face amount of $136,252 and a fair value of $44,465 were on non-accrual status. Loans with five of the fourteen portfolio companies are grade 2 loans, and loans with nine of the fourteen portfolio companies are grade 1 loans. These loans include a total of $99,730 with PIK interest features. At December 31, 2004, loans with ten portfolio companies with a face amount of $87,324 and a fair value of $37,292 were on non-accrual status. Loans with three of the ten portfolio companies are grade 2 loans, and loans with seven of the ten portfolio companies are grade 1 loans. These loans include a total of $74,522 with PIK interest features.

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At September 30, 2005 and December 31, 2004, loans on accrual status, past due loans and loans on non-accrual status were as follows:

	Number of Portfolio Companies	September 30, 2005			Number of Portfolio Companies	December 31, 2004
Current	114	$	3,206,640		90	$	2,304,954
One Month Past Due			22,571				61,200
Two Months Past Due			—				—
Three Months Past Due			—				—
Greater than Three Months Past Due			22,159				14,985
Loans on Non-accrual Status			136,252				87,324
Subtotal	15		180,982		13		163,509
Total	129	$	3,387,622		103	$	2,468,463
Past Due and Non-accruing Loans as a Percent of Total Loans			5.3	%			6.6	%

The loan balances above reflect the cost basis the loan plus the unamortized original issue discount. We believe that debt service collection is probable for our loans that are past due.

In the second quarter of 2005, we recapitalized one portfolio company by exchanging our senior subordinated debt with a cost basis and fair value of $6,239 into redeemable preferred stock. Prior to the recapitalization, the senior subordinated note was an accruing loan.

In the second quarter of 2005, we recapitalized another portfolio company. As part of the recapitalization, we exchanged junior subordinated debt with a cost basis of $5,464 and a fair value of $109 into redeemable preferred stock. Prior to the recapitalization, the junior subordinated notes were on non-accrual status.

Credit Statistics

We monitor several key credit statistics that provide information about credit quality and portfolio performance. These key statistics include:

• Debt to EBITDA Ratio—the sum of all debt with equal or senior security rights to our debt investments divided by the total adjusted earnings before interest, taxes, depreciation and amortization (“EBITDA”) of the most recent twelve months or, when appropriate, the forecasted twelve months.

• Interest Coverage Ratio—EBITDA divided by the total scheduled cash interest payments required to have been made by the portfolio company during the most recent twelve-month period, or when appropriate, the forecasted twelve months.

• Debt Service Coverage Ratio—EBITDA divided by the total scheduled principal amortization and the total scheduled cash interest payments required to have been made during the most recent twelve-month period, or when appropriate, the forecasted twelve months.

We require portfolio companies to provide annual audited and monthly unaudited financial statements. Using these statements, we calculate the statistics described above. Buyout and mezzanine funds typically adjust EBITDA due to the nature of change of control transactions. Such adjustments are intended to normalize and restate EBITDA to reflect the pro forma results of a company in a change of control transaction. For purposes of analyzing the financial performance of the portfolio companies, we make certain adjustments to EBITDA to reflect the pro forma results of a company consistent with a change of control transaction. We evaluate portfolio companies using an adjusted EBITDA measurement. Adjustments to EBITDA may include anticipated cost

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savings resulting from a merger or restructuring, costs related to new product development, compensation to previous owners, non-recurring revenues or expenses, and other acquisition or restructuring related items.

We track our portfolio investments on a static-pool basis, including based on the statistics described above. A static pool consists of the investments made during a given year. The static pool classification is based on the year the initial investment was made. Subsequent add-on investments are included in the static pool year of the original investment. The Pre-1999 static pool consists of the investments made from the time of our IPO through the year ended December 31, 1998. The following table contains a summary of portfolio statistics as of and for the latest twelve months ended September 30, 2005:

Portfolio Statistics (1) ($ in millions, unaudited):	Static Pool
	Pre-1999			1999			2000			2001			2002			2003			2004			2005			Aggregate
Original Investments and Commitments	$	371		$	376		$	285		$	368		$	932		$	1,088		$	1,659		$	2,367		$	7,446
Total Exits and Prepayments of Original Investments	$	119		$	172		$	201		$	213		$	274		$	612		$	315		$	110		$	2,016
Total Interest, Dividends and Fees Collected	$	115		$	115		$	74		$	122		$	182		$	203		$	199		$	88		$	1,098
Total Net Realized (Loss) Gain on Investments	$	(2	)	$	(3	)	$	(85	)	$	49		$	8		$	62		$	7		$	(1	)	$	35
Internal Rate of Return(2)		9.3	%		5.4	%		1.7	%		24.0	%		13.7	%		26.0	%		22.3	%		33.9	%		15.4	%
Current Cost of Investments	$	227		$	190		$	104		$	143		$	632		$	473		$	1,272		$	1,542		$	4,583
Current Fair Value of Investments	$	185		$	96		$	108		$	140		$	608		$	542		$	1,345		$	1,553		$	4,577
Net Unrealized Appreciation/(Depreciation)	$	(42	)	$	(94	)	$	4		$	(3	)	$	(24	)	$	69		$	73		$	11		$	(6	)
Non-Accruing Loans at Face	$	7		$	33		$	—		$	23		$	73		$	—		$	—		$	—		$	136
Equity Interest at Fair Value	$	20		$	5		$	47		$	42		$	192		$	250		$	402		$	426		$	1,384
Debt to EBITDA(3)(4)		9.9			9.1			4.2			5.7			5.8			4.1			4.5			4.4			4.9
Interest Coverage(3)		1.1			1.4			2.3			1.5			2.4			2.6			2.4			2.4			2.3
Debt Service Coverage(3)		0.9			1.2			1.5			1.2			1.7			1.6			1.8			1.7			1.7
Loan Grade(3)		2.6			1.7			3.4			3.1			2.8			3.5			3.3			3.1			3.1
Average Age of Companies		41 yrs			52 yrs			29 yrs			53 yrs			31 yrs			25 yrs			38 yrs			26 yrs			32 yrs
Ownership Percentage		91	%		68	%		36	%		57	%		56	%		57	%		45	%		48	%		51	%
Average Sales(5)	$	93		$	68		$	107		$	204		$	75		$	59		$	86		$	113		$	95
Average EBITDA(6)	$	5		$	5		$	24		$	19		$	11		$	14		$	16		$	18		$	15
Total Sales(5)	$	420		$	487		$	332		$	1,780		$	1,295		$	1,340		$	3,378		$	4,541		$	13,573
Total EBITDA(6)	$	32		$	19		$	69		$	166		$	151		$	239		$	631		$	636		$	1,943
% of Senior Loans(7)		53	%		45	%		0	%		33	%		50	%		31	%		38	%		50	%		43	%
% of Loans with Lien(7)		56	%		45	%		60	%		81	%		85	%		90	%		72	%		76	%		75	%

(1) Static pool classification is based on the year the initial investment was made. Subsequent add-on investments are included in the static pool year of the original investment. Investments in government securities and interest rate derivative agreements are excluded.

(2) Assumes investments are exited at current fair value.

(3) These amounts do not include investments in which we own only equity.

(4) For portfolio companies with a nominal EBITDA amount, the portfolio company’s maximum debt leverage is limited to 15 times EBITDA.

(5) Sales of the most recent twelve months, or when appropriate, the forecasted twelve months.

(6) EBITDA of the most recent twelve months, or when appropriate, the forecasted twelve months.

(7) As a percentage of our total debt investments.

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Item 3. Quantitative and Qualitative Disclosure About Market Risk

Because we fund a portion of our investments with borrowings, our net increase in net assets from operations is affected by the spread between the rate at which we invest and the rate at which we borrow. We attempt to match-fund our liabilities and assets by financing floating rate assets with floating rate liabilities and fixed rate assets with fixed rate liabilities or equity. We enter into interest rate basis swap agreements to match the interest rate basis of our assets and liabilities, thereby locking in the spread between our asset yield and the cost of our borrowings, and to fulfill our obligations under the terms of our revolving debt funding facilities and asset securitizations. However, our derivatives are considered economic hedges that do not qualify for hedge accounting under FASB Statement No. 133, “Accounting for Derivative Instruments and Hedging Activities.” See the footnotes to our consolidated financial statements for additional information on the accounting treatment of our interest rate derivative agreements.

Under our interest rate swap agreements, we either pay a floating rate based on the prime rate and receive a floating interest rate based on one-month LIBOR, or pay a fixed rate and receive a floating interest rate based on LIBOR. We also have interest rate swaption agreements where, if exercised, we receive a fixed rate and pay a floating rate based on one-month LIBOR. We also have interest rate cap agreements that entitle us to receive an amount, if any, by which our interest payments on our variable rate debt exceed specified interest rates.

Periodically, an interest rate swap agreement will also be amended. Any underlying unrealized appreciation or depreciation associated with the original interest rate swap agreement at the time of amendment will be factored into the contractual interest terms of the amended interest rate swap agreement. The contractual terms of the amended interest rate swap agreement are set such that its estimated fair value is equivalent to the estimated fair value of the original interest rate swap agreement. No realized gain or loss is recorded upon amendment when the estimated fair values of the original and amended interest rate swap agreement are substantially the same.

As of September 30, 2005, our interest rate derivative agreements have a remaining weighted average term of approximately 4.5 years. The following table presents the notional principal amounts of interest rate derivative agreements by class:

	September 30, 2005
Type of Interest Rate Derivative Agreements	Company Pays		Company Receives		Number of Contracts	Notional Value
Interest rate swaps – Pay fixed, receive LIBOR floating	4.24	%(1)	LIBOR		38	$	977,410
Interest rate swaps – Pay prime floating, receive LIBOR floating	Prime		LIBOR + 2.73	%(1)	5		106,869
Interest rate swaptions – Pay LIBOR floating, receive fixed	LIBOR		4.38%(1)		2		7,093
Interest rate caps					5		26,135
Total					50	$	1,117,507
	December 31, 2004
Type of Interest Rate Derivative Agreements	Company Pays		Company Receives		Number of Contracts	Notional Value
Interest rate swaps – Pay fixed, receive LIBOR floating	4.07	%(1)	LIBOR		34	$	1,019,956
Interest rate swaps – Pay prime floating, receive LIBOR floating	Prime		LIBOR + 2.73	%(1)	7		135,103
Interest rate swaptions – Pay LIBOR floating, receive fixed	LIBOR		4.38%(1)		2		7,093
Interest rate caps					5		28,703
Total					48	$	1,190,855

(1) Weighted average.

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Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure based on the definition of “disclosure controls and procedures” as promulgated under the SEC Act of 1934, as amended. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

American Capital, including our chief executive officer and chief financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2005. Based on the foregoing, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective.

Changes in Internal Control over Financial Reporting

There have been no significant changes in our internal controls over financial reporting or in other factors that could significantly affect the internal controls over financial reporting during the third quarter of 2005.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

Neither we, nor any of our consolidated subsidiaries, are currently subject to any material litigation nor, to our knowledge, is any material litigation threatened against us or any consolidated subsidiary, other than routine litigation and administrative proceedings arising in the ordinary course of business. Such proceedings are not expected to have a material adverse effect on the business, financial conditions, or results of our operations.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Not Applicable.

Item 3. Defaults Upon Senior Securities

Not Applicable.

Item 4. Submission of Matters to a Vote of Security Holders

Not Applicable.

Item 5. Other Information

Not Applicable.

Item 6. Exhibits

(a) Exhibits

* 3.1.	American Capital Strategies, Ltd. Second Amended and Restated Certificate of Incorporation, incorporated herein by reference to Exhibit 2.a of the Pre-Effective Amendment No. 1 to the Registration Statement on Form N-2 filed on August 12, 1997 (File No. 333-29943), as amended by a certain Certificate of Amendment, incorporated herein by reference to Exhibit 3.1 of Form 10-K for the year ended December 31, 1999, filed March 29, 2000, as further amended by a Certificate of Amendment No. 2 in the form filed as Appendix I to the Definitive Proxy Statement for the 2000 Annual Meeting filed on April 5, 2000 and as further amended by a Certificate of Amendment No. 3 dated as of May 4, 2004, incorporated herein by reference to Exhibit 2.a of the Pre-Effective Amendment to the Registration Statement on Form N-2 (File No. 333-113859), filed on May 6, 2004.
* 3.2.	American Capital Strategies, Ltd. Second Amended and Restated Bylaws, incorporated herein by reference to Exhibit 2.b of the Pre-Effective Amendment No. 1 to the Registration Statement on Form N-2 (File No. 333-29943), filed on August 12, 1997.
* 4.1.	Instruments defining the rights of holders of securities: See Article IV of our Second Amended and Restated Certificate of Incorporation, incorporated herein by reference to Exhibit 2.a of the Pre-Effective Amendment No. 1 to the Registration Statement on Form N-2 (File No. 333-29943), filed on August 12, 1997.
* 4.2.	Instruments defining the rights of holders of securities: See Section I of our Second Amended and Restated Bylaws, incorporated herein by reference to Exhibit 2.b of the Pre-Effective Amendment No. 1 to the Registration Statement on Form N-2 (File No. 333-29943), filed on August 12, 1997.
* 4.3.	Indenture between Wells Fargo Bank, National Association, as Indenture Trustee and ACAS Business Loan Trust 2002-1, as the Issuer dated as of March 15, 2002, incorporated herein by reference to Exhibit 10.4 of Form 10-Q for the quarter ended March 31, 2002 (File No. 814-00149), filed May 15, 2002.

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* 4.4.	Indenture, between ACAS Business Loan Trust 2002-2 and Wells Fargo Bank, National Association, dated as of August 8, 2002, incorporated herein by reference to Exhibit 10.3 of Form 10-Q for the quarter ended September 30, 2002 (File No. 814-00149), filed November 14, 2002.
* 4.5.	Indenture, between ACAS Business Loan Trust 2003-1 and Wells Fargo Bank, National Association, dated as of May 21, 2003, incorporated by reference to Exhibit 2.k.29 of the Pre-Effective Amendment No. 3 to the Registration Statement on Form N-2 (File No. 333-89340), filed on June 13, 2003.
* 4.6.	Indenture, between Wells Fargo Bank, National Association, as Indenture Trustee and ACAS Business Loan Trust 2003-2, as the Issuer, dated as of December 19, 2003, incorporated by reference to Exhibit 10.28 of Form 10-K for the year ended December 31, 2003 (File No. 814-00149), filed March 9, 2004.
* 4.7.	Indenture, between Wells Fargo Bank, National Association, as Indenture Trustee and ACAS Business Loan Trust 2004-1, as the Issuer, dated as of December 2, 2004, incorporated herein by reference to Exhibit 4.1 of Form 8-K dated December 8, 2004.
4.8.	Indenture, by and between ACAS Business Loan Trust 2005-1, as the Issuer, and Wells Fargo Bank, National Association, as the Indenture Trustee, dated as of October 4, 2005, filed herewith.
10. 1.	Joinder Supplement, dated as of July 6, 2005, among Bayerische Hypo-Und Vereinsbank AG, American Capital Strategies, Ltd., and Wachovia Bank, National Association, filed herewith.
10.2.	Amended, Restated and Substituted Swingline Note in the amount of $25,500,000 made by American Capital Strategies, Ltd. in favor of Wachovia Bank, National Association, dated as of July 6, 2005, filed herewith.
10.3.	Revolving Note in the amount of $25,000,000 made by American Capital Strategies, Ltd. in favor of Bayerische Hypo-Und Vereinsbank AG, dated as of July 6, 2005, filed herewith.
* 10.4.	Note Purchase Agreement, dated as of August 1, 2005, by and among American Capital Strategies, Ltd., Aviva Life Insurance Company, Principal Life Insurance Company, Scottish RE (US) / Nationwide Life Insurance Co. 1 YR Trust, Scottish RE (US) / Nationwide Life Insurance Co. 5 YR Trust, Scottish RE (US) / Lincoln National, Ltd., Teachers Insurance and Annuity Association of America, Allstate Life Insurance Company, Pacific Life Insurance Company, Nationwide Life Insurance Company, Nationwide Life and Annuity Insurance Company, American Equity Investment Life Insurance Company, Ohio National Life Assurance Corporation, The Ohio National Life Insurance Company, Beneficial Life Insurance Company, and Security Financial Life Insurance Co., incorporated by reference to Exhibit 10.1 of Form 10-Q for the quarter ended June 30, 2005 (File No. 814-00149), filed August 9, 2005.
* 10.5.	Underwriting Agreement, dated September 14, 2005, by and among American Capital Strategies, Ltd., J.P. Morgan Securities, Inc. and UBS Securities LLC as representatives of the several underwriters listed on Exhibit A attached thereto, incorporated herein by reference to Exhibit 1.0 of Form 8-K dated September 20, 2005.
* 10.6.	Forward Sale Agreement, dated September 14, 2005, by and among American Capital Strategies, Ltd. and JPMorgan Chase Bank and J.P. Morgan Securities Inc., solely as agent for JPMorgan Chase Bank, incorporated herein by reference to Exhibit 1.1 of Form 8-K dated September 20, 2005.
* 10.7.	Forward Sale Agreement, dated September 14, 2005, by and among American Capital Strategies, Ltd. and JPMorgan Chase Bank and UBS AG, London Branch, incorporated herein by reference to Exhibit 1.2 of Form 8-K dated September 20, 2005.

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* 10.8.	Amendment No. 6 to Second Amended and Restated Loan Funding and Servicing Agreement, dated as of September 15, 2005, among ACS Funding Trust I, American Capital Strategies, Ltd., Variable Funding Capital Corporation, Citigroup Global Markets Realty Corp., Wachovia Capital Markets, LLC, YC SUSI Trust, Bank of America, National Association, JPMorgan Chase Bank, N.A. and Wachovia Bank, National Association, incorporated herein by reference to Exhibit 10.1 of Form 8-K dated September 20, 2005.
* 10.9.	Third Amended and Restated Purchase and Sale Agreement, dated as of September 22, 2005, by and between American Capital Strategies, Ltd. and ACS Funding Trust I, filed September 28, 2005, incorporated herein by reference to Exhibit 10.2 of Form 8-K dated September 28, 2005.
* 10.10.	Third Amended and Restated Loan Funding and Servicing Agreement, dated as of September 22, 2005, among ACS Funding Trust I, American Capital Strategies, Ltd., Variable Funding Capital Corporation, Citigroup Global Markets Realty Corp., Wachovia Capital Markets, LLC, YC SUSI Trust, Bank of America, National Association, JPMorgan Chase Bank, N.A. and Wachovia Bank, National Association, filed September 28, 2005, incorporated herein by reference to Exhibit 10.1 of Form 8-K dated September 28, 2005.
* 10.11.	Structured Note in the principal amount of $26,250,000 made by ACS Funding Trust I in favor of Bank of America, National Association, dated September 23, 2005, incorporated herein by reference to Exhibit 10.3 of Form 8-K dated September 28, 2005.
* 10.12.	Amended, Restated and Substituted Structured Note in the principal amount of $250,000,000 made by ACS Funding Trust I in favor of Citigroup Global Markets Realty Corp., dated September 23, 2005, incorporated herein by reference to Exhibit 10.4 of Form 8-K dated September 28, 2005.
* 10.13.	Amended, Restated and Substituted Structured Note in the principal amount of $250,000,000 made by ACS Funding Trust I in favor of JPMorgan Chase Bank, N.A., dated September 23, 2005, incorporated herein by reference to Exhibit 10.5 of Form 8-K dated September 28, 2005.
* 10.14.	Amended, Restated and Substituted Structured Note in the principal amount of $350,000,000 made by ACS Funding Trust I in favor of Variable Funding Capital Corporation, dated September 23, 2005, incorporated herein by reference to Exhibit 10.6 of Form 8-K dated September 28, 2005.
* 10.15.	Structured Note in the principal amount of $61,250,000 made by ACS Funding Trust I in favor of Wachovia Bank, National Association, dated September 23, 2005, incorporated herein by reference to Exhibit 10.7 of Form 8-K dated September 28, 2005.
* 10.16.	Amended, Restated and Substituted Structured Note in the principal amount of $150,000,000 made by ACS Funding Trust I in favor of YC SUSI Trust, dated September 23, 2005, incorporated herein by reference to Exhibit 10.8 of Form 8-K dated September 28, 2005.
* 10.17.	Swingline Note in the principal amount of $50,000,000 made by ACS Funding Trust I in favor of Wachovia Bank, National Association, dated September 23, 2005, incorporated herein by reference to Exhibit 10.9 of Form 8-K dated September 28, 2005.
10.18.	Amendment No. 1 to Transfer and Servicing Agreement, by and among ACAS Business Loan Trust 2004-1, ACAS Business Loan LLC, 2004-1, American Capital Strategies, Ltd., and Wells Fargo Bank, National Association, dated as of September 22, 2005, filed herewith.
* 10.19.	Note Purchase Agreement by and among American Capital Strategies, Ltd., Bear, Stearns & Co. Inc. and Merrill Lynch International, dated September 26, 2005, incorporated herein by reference to Exhibit 10.10 of Form 8-K dated September 28, 2005.
* 10.20.	Floating Rate Senior Note, Series 2005-B, due October 30, 2020 in the principal amount of $25,000,000 made by American Capital Strategies, Ltd. in favor of Bear Stearns Securities Corp., dated September 26, 2005, incorporated herein by reference to Exhibit 10.11 of Form 8-K dated September 28, 2005.

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* 10.21.	Floating Rate Senior Note, Series 2005-B, due October 30, 2020 in the principal amount of $28,125,000 made by American Capital Strategies, Ltd. in favor of Merrill Lynch, Pierce, Fenner & Smith, dated September 26, 2005, incorporated herein by reference to Exhibit 10.12 of Form 8-K dated September 28, 2005.
* 10.22.	Floating Rate Senior Note, Series 2005-B, due October 30, 2020 in the principal amount of $21,875,000 made by American Capital Strategies, Ltd. in favor of Merrill Lynch, Pierce, Fenner & Smith, dated September 26, 2005, incorporated herein by reference to Exhibit 10.13 of Form 8-K dated September 28, 2005.
10.23.	Amended And Restated Trust Agreement, by and among ACAS Business Loan LLC, 2005-1, Wachovia Bank of Delaware, National Association, and American Capital Strategies, Ltd., dated as of October 4, 2005, filed herewith.
10.24.	Form of Certificate of Trust of ACAS Business Loan Trust 2005-1, filed herewith.
10.25.	Limited Liability Company Operating Agreement of ACAS Business Loan LLC, 2005-1 by American Capital Strategies, Ltd., William Holloran and Evelyne S. Steward, dated September 21, 2005, filed herewith.
10.26.	Form of Certificate of Formation of ACAS Business Loan LLC, 2005-1, filed herewith.
10.27.	ACAS Transfer Agreement, between American Capital Strategies, Ltd. and ACAS Business Loan LLC, 2005-1, dated as of October 4, 2005, filed herewith.
10.28.	Transfer And Servicing Agreement, by and among ACAS Business Loan Trust 2005-1, ACAS Business Loan LLC, 2005-1, American Capital Strategies, Ltd. and Wells Fargo Bank, National Association, dated as of October 4, 2005, filed herewith.
10.29.	Purchase Agreement, by and among American Capital Strategies, Ltd., Wachovia Capital Markets, LLC, Citigroup Global Markets Inc., Banc of America Securities LLC, BB&T Capital Markets, a division of Scott & Stringfellow, Inc., Harris Nesbitt Corp., and HVB Capital Markets, Inc., dated September 29, 2005, filed herewith.
10.30.	Class A-2A Note Purchase Agreement by and among ACAS Business Loan Trust 2005-1, Wells Fargo Bank, National Association, Centauri Corporation and Wachovia Bank, National Association, dated October 4, 2005, filed herewith.
10.31.	Class A-2A Note Purchase Agreement by and among ACAS Business Loan Trust 2005-1, Wells Fargo Bank, National Association, Five Finance Corporation and Wachovia Bank, National Association, dated October 4, 2005, filed herewith.
10.32.	Class A-2A Note Purchase Agreement by and among ACAS Business Loan Trust 2005-1, Wells Fargo Bank, National Association, Dorado Corporation and Wachovia Bank, National Association, dated October 4, 2005, filed herewith.
31.1.	Certification of CEO and CFO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.
32.1.	Certification of CEO and CFO Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.

* Previously filed in whole or in part.

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SIGNATURES

Pursuant to the requirements 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.

AMERICAN CAPITAL STRATEGIES, LTD.
By:	/s/ RICHARD E. KONZMANN
	Richard E. Konzmann Vice President, Accounting and Reporting

Date: November 9, 2005

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