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 March 31, 2006

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 or 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.     Yesþ.    No¨.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer x        Accelerated filer ¨        Non-accelerated filer ¨.

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 April 30, 2006 was 133,479,123.

AMERICAN CAPITAL STRATEGIES, LTD.

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION
Item 1.	Consolidated Financial Statements	3
	Consolidated Balance Sheets as of March 31, 2006 (unaudited) and December 31, 2005	3
	Consolidated Statements of Operations for the three months ended March 31, 2006 and 2005 (unaudited)	4
	Consolidated Schedules of Investments as of March 31, 2006 (unaudited) and December 31, 2005	5
	Consolidated Statements of Changes in Net Assets for the three months ended March 31, 2006 and 2005 (unaudited)	32
	Consolidated Statements of Cash Flows for the three months ended March 31, 2006 and 2005 (unaudited)	33
	Consolidated Financial Highlights for the three months ended March 31, 2006 and 2005 (unaudited)	34
	Notes to Consolidated Financial Statements (unaudited)	35
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operation	51
	Portfolio Composition	51
	Results of Operations	53
	Financial Condition, Liquidity and Capital Resources	59
	Portfolio Credit Quality	64
Item 3.	Quantitative and Qualitative Disclosure About Market Risk	67
Item 4.	Controls and Procedures	68
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	69
Item 1A.	Risk Factors	69
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	69
Item 3.	Defaults upon Senior Securities	69
Item 4.	Submission of Matters to a Vote of Security Holders	69
Item 5.	Other Information	69
Item 6.	Exhibits	69
Signatures		72

2

Item 1.Consolidated Financial Statements

AMERICAN CAPITAL STRATEGIES, LTD.

CONSOLIDATED BALANCE SHEETS AND FINANCIAL INFORMATION

(in thousands, except per share amounts)

	March 31, 2006			December 31, 2005
	(unaudited)
Assets
Investments at fair value (cost of $5,501,929 and $5,134,398, respectively)
Non-Control/Non-Affiliate investments (cost of $2,479,607 and $2,156,065, respectively)	$	2,502,646		$	2,135,795
Affiliate investments (cost of $392,786 and $420,370, respectively)		421,029			449,026
Control investments (cost of $2,629,536 and $2,557,963, respectively)		2,547,933			2,516,282
Interest rate derivatives		41,622			18,132
Total investments at fair value		5,513,230			5,119,235
Cash and cash equivalents		67,830			97,134
Restricted cash		84,030			121,772
Interest receivable		34,585			32,668
Other		100,467			78,300
Total assets	$	5,800,142		$	5,449,109
Liabilities and Shareholders’ Equity
Debt (maturing within one year of $200,636, and $180,634, respectively)	$	2,519,082		$	2,466,860
Interest rate derivative agreements		4,670			2,140
Accrued dividends payable		96,601			3,574
Other		58,839			78,898
Total liabilities		2,679,192			2,551,472
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, 123,575 and 119,123 issued and 123,364 and 118,913 outstanding, respectively		1,234			1,189
Capital in excess of par value		3,100,242			2,942,814
Notes receivable from sale of common stock		(6,655	)		(6,655	)
Undistributed (distributions in excess of) net realized earnings		19,498			(22,408	)
Net unrealized appreciation (depreciation) of investments		6,631			(17,303	)
Total shareholders’ equity		3,120,950			2,897,637
Total liabilities and shareholders’ equity	$	5,800,142		$	5,449,109
Net asset value per share	$	25.30		$	24.37

See accompanying notes.

3

AMERICAN CAPITAL STRATEGIES, LTD.

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

(in thousands, except per share data)

	Three Months Ended March 31,
	2006			2005
OPERATING INCOME:
Interest and dividend income
Non-Control/Non-Affiliate investments	$	67,560		$	36,353
Affiliate investments		11,579			12,516
Control investments		51,986			37,549
Total interest and dividend income		131,125			86,418
Fee and Other Income
Non-Control/Non-Affiliate investments		17,894			2,604
Affiliate investments		328			1,833
Control investments		23,831			10,000
Total fee and other income		42,053			14,437
Total operating income		173,178			100,855
OPERATING EXPENSES:
Interest		35,982			17,346
Salaries, benefits and stock-based compensation		23,215			12,312
General and administrative		15,417			6,285
Total operating expenses		74,614			35,943
OPERATING INCOME BEFORE INCOME TAXES		98,564			64,912
Provision for income taxes		(5,668	)		(1,025	)
NET OPERATING INCOME		92,896			63,887
Net realized gain (loss) on investments
Non-Control/Non-Affiliate investments		4,684			1,888
Affiliate investments		4,550			752
Control investments		33,440			5,481
Interest rate derivatives		1,524			(3,295	)
Total net realized gain on investments		44,198			4,826
Net unrealized appreciation (depreciation) of investments
Portfolio company investments		2,974			24,717
Interest rate derivative periodic payment accrual		(1,311	)		(280	)
Interest rate derivatives		22,271			18,530
Total net unrealized appreciation of investments		23,934			42,967
Total net gain on investments		68,132			47,793
INCREASE IN NET ASSETS RESULTING FROM OPERATIONS BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE		161,028			111,680
Cumulative effect of accounting change, net of tax		1,026			—
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS	$	162,054		$	111,680
NET OPERATING INCOME PER COMMON SHARE:
Basic	$	0.77		$	0.71
Diluted	$	0.77		$	0.70
NET EARNINGS PER COMMON SHARE:
Basic	$	1.35		$	1.25
Diluted	$	1.34		$	1.22
WEIGHTED AVERAGE SHARES OF COMMON STOCK OUTSTANDING:
Basic		119,866			89,534
Diluted		121,086			91,401
DIVIDENDS DECLARED PER COMMON SHARE	$	0.80		$	0.73

See accompanying notes.

4

AMERICAN CAPITAL STRATEGIES, LTD.

CONSOLIDATED SCHEDULE OF INVESTMENTS

March 31, 2006

(in thousands, except share data)

Company(4)	Industry	Investments(5)	Principal		Cost		Fair Value
NON-CONTROL/NON-AFFILIATE INVESTMENTS
A.H. Harris & Sons, Inc.	Distributors	Subordinated Debt (12.0%, Due 12/06)	$	10,000	$	9,898	$	9,913
		Common Stock Warrants (2,004 shares)(1)				534		3,522
						10,432		13,435
Aerus, LLC	Household Durables	Common Membership Warrants (250,000 units)(1)				246		—
AmSan, LLC	Distributors	Senior Debt (12.1%, Due 8/10)		25,000		24,667		24,667
Astrodyne Corporation	Electrical Equipment	Senior Debt (12.5%, Due 4/10 – 4/11)		6,800		6,671		6,671
		Subordinated Debt (12.0%, Due 4/12)		11,000		10,850		10,850
		Redeemable Preferred Stock (1 share)(1)				—		—
		Convertible Preferred Stock (552,705 shares)				10,888		10,888
						28,409		28,409
BarrierSafe Solutions International, Inc.	Commercial Services & Supplies	Senior Debt (13.1%, Due 9/10)		15,000		14,854		14,854
		Subordinated Debt (16.0%, Due 9/11 – 9/12)		52,410		51,849		51,849
						66,703		66,703
BBB Industries, LLC	Auto Components	Senior Debt (14.1%, Due 5/11)		20,000		19,745		19,745
		Subordinated Debt (17.5%, Due 11/11)		5,375		5,307		5,307
						25,052		25,052
BC Natural Foods, LLC	Food Products	Subordinated Debt (17.0%, Due 9/10)		15,553		15,087		15,087
		Common Membership Warrants (15.2% membership interest)(1)				3,331		8,658
						18,418		23,745
Beacon Hospice, Inc.	Health Care Providers & Services	Subordinated Debt (14.5%, Due 2/12)		10,299		10,162		10,162
BLI Partners, LLC	Personal Products	Common Membership (20% membership interest)(1)				17,344		—
Breeze Industrial Products Corporation	Auto Components	Subordinated Debt (14.5%, Due 9/12 – 8/13)		13,516		13,375		13,375
Bushnell Performance Optics	Leisure Equipment & Products	Subordinated Debt (12.5%, Due 8/12 – 8/13)		117,728		116,044		116,044
Butler Animal Health Supply, LLC	Health Care Providers & Services	Senior Debt (10.7%, Due 7/12)		3,000		3,000		3,000
Case Logic, Inc.	Textiles, Apparel & Luxury Goods	Subordinated Debt (13.7%, Due 3/10)		24,947		22,149		22,199
		Common Stock Warrants (197,322 shares)(1)				5,418		2,924
		Common Stock (11,850 shares)(1)				—		—
		Preferred Stock Warrants (1,564 shares)(1)				—		—
		Redeemable Preferred Stock (11,850 shares)(1)				441		241
						28,008		25,364
Colts 2005-1	Diversified Financial Services	Common Stock (360 shares)				9,697		11,439

5

AMERICAN CAPITAL STRATEGIES, LTD.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

March 31, 2006

(in thousands, except share data)

Company(4)	Industry	Investments(5)	Principal	Cost	Fair Value
Colts 2005-2	Diversified Financial Services	Common Stock (34,170,000 shares)		35,182	35,182
Confluence Holdings Corp.	Leisure Equipment & Products	Senior Debt (11.8%, Due 5/11)	14,000	13,817	13,817
		Subordinated Debt (14.7%, Due 5/12)	37,786	28,997	34,005
		Redeemable Preferred Stock (20,119 shares)(1)		18,589	—
		Convertible Preferred Stock (950,000 shares)(1)		—	—
		Common Stock (1 share)(1)		—	—
				61,403	47,822
Corporate Benefit Services of America, Inc.	Commercial Services & Supplies	Subordinated Debt (16.0%, Due 7/10)	15,854	15,264	15,264
		Common Stock Warrants (6,828 shares)(1)		695	695
				15,959	15,959
Corrpro Companies, Inc.	Construction & Engineering	Subordinated Debt (12.5%, Due 3/11)	14,000	11,439	11,439
		Common Stock Warrants (5,799,187 shares)(1)		3,865	3,768
		Redeemable Preferred Stock (2,000 shares)		1,686	1,686
				16,990	16,893
DelStar, Inc.	Building Products	Senior Debt (10.1%, Due 3/12)	5,000	5,000	5,000
		Subordinated Debt (14.0%, Due 12/12)	17,718	17,460	17,460
		Convertible Preferred Stock (50,722 shares)		5,140	5,140
		Redeemable Preferred Stock (45,650 shares)		17,780	17,780
		Common Stock Warrants (152,701 shares)(1)		29,019	29,019
				74,399	74,399
Direct Marketing International LLC	Media	Subordinated Debt (14.2%, Due 7/12)	27,373	26,986	26,986
Dynisco Parent, Inc.	Electronic Equipment & Instruments	Common Stock (10,000 shares)(1)		633	996
		Common Stock Warrants (2,115 shares)(1)		133	333
				766	1,329
EAG Acquisition, LLC	Commercial Services & Supplies	Senior Debt (8.6%, Due 9/10)	11,630	11,451	11,451
		Subordinated Debt (16.0%, Due 9/11)	13,275	13,089	13,089
		Common Stock Warrants (7,000,000 shares)(1)		—	1,987
		Redeemable Preferred Stock (7,000,000 shares)		7,328	7,328
				31,868	33,855
Easton Bell Sports LLC	Leisure Equipment & Products	Common Units (3,409,356 units)(1)		3,819	7,223
Edline, LLC	Software	Senior Debt (11.6%, Due 7/10)	2,635	2,600	2,600
		Subordinated Debt (12.0%, Due 7/11)	5,000	3,262	3,262
		Membership Warrants (2,121,212 units)(1)		1,784	2,313
				7,646	8,175
Euro-Caribe Packing Company, Inc.	Food Products	Senior Debt (9.7%, Due 3/08 – 3/10)	8,156	8,129	8,156
		Subordinated Debt (11.0%, Due 3/11)(6)	8,005	7,534	6,518
		Common Stock Warrants (31,897 shares)(1)		1,110	—
		Convertible Preferred Stock (260,048 shares)(1)		5,732	—
				22,505	14,674

6

AMERICAN CAPITAL STRATEGIES, LTD.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

March 31, 2006

(in thousands, except share data)

Company(4)	Industry	Investments(5)	Principal	Cost	Fair Value
FAMS Acquisition, Inc.	Diversified Financial Services	Senior Debt (11.2%, Due 8/10 – 8/11)	31,268	30,786	30,786
		Subordinated Debt (14.8%, Due 8/12 – 8/13)	24,383	24,038	24,038
		Convertible Preferred Stock (1,477,557 shares)(1)		35,880	31,293
				90,704	86,117
Formed Fiber Technologies, Inc.	Auto Components	Subordinated Debt (15.0%, Due 8/11)	14,916	14,750	14,750
		Common Stock Warrants (122,397 shares)(1)		122	1,235
				14,872	15,985
GE Commercial Mortgage Corporation	Diversified Financial Services	Commercial Mortgage Pass-Through Certificates, Series 2006 - C1(5.3%, Due 3/16)	8,868	7,162	7,162
Gibson Guitar Corp.	Leisure Equipment & Products	Senior Debt (11.4%, Due 8/10)	32,500	31,786	31,786
Hopkins Manufacturing Corporation	Auto Components	Subordinated Debt (14.8%, Due 7/12)	31,287	30,950	30,950
		Redeemable Preferred Stock (5,000 shares)		6,540	6,540
				37,490	37,490
HP Evenflo Acquisition Co.	Household Durables	Senior Debt (13.2%, Due 8/10)	20,503	20,297	20,297
		Common Stock (250,000 shares)(1)		2,500	4,125
				22,797	24,422
Infiltrator Systems, Inc.	Building Products	Subordinated Debt (14.0%, Due 9/13)	29,234	28,813	28,813
Innova Holdings, Inc.	Energy Equipment & Services	Senior Debt (11.1%, Due 3/11 – 3/13)	27,095	26,240	26,240
		Subordinated Debt (15.0%, Due 3/14)	17,000	16,745	16,745
		Convertible Preferred Stock (24,500 shares)(1)		24,500	24,500
				67,485	67,485
Inovis International, Inc.	Software	Senior Debt (11.2%, Due 5/10)	90,000	88,725	88,725
IPC Acquisition Corp.	Communications Equipment	Senior Debt (12.1%, Due 8/12)	8,000	8,000	8,000
J.P. Morgan Chase Commercial Mortgage Securities Corp.	Diversified Financial Services	Commercial Mortgage Pass-Through Certificates, Series 2005 - LDP5 (5.0%, Due 12/15)	136,158	78,766	78,766
Johnny Appleseed's Inc.	Internet & Catalog Retail	Subordinated Debt (14.5%, Due 2/12)	15,027	14,804	14,804
Milton’s Fine Foods, Inc.	Food Products	Subordinated Debt (14.5%, Due 4/11)	8,670	8,555	8,555
Mirion Technologies	Electrical Equipment	Senior Debt (9.2%, Due 5/06 – 11/11)	102,121	101,037	100,923
		Subordinated Debt (14.8%, Due 9/09 – 5/12)	45,684	45,173	45,173
		Convertible Preferred Stock (747,431 shares)		59,206	59,206
		Common Stock (42,032 shares)(1)		4,755	7,575
		Common Stock Warrants (279,262 shares)(1)		31,752	68,350
				241,923	281,227
Montana Silversmiths, Inc.	Textiles, Apparel & Luxury Goods	Senior Debt (11.7%, Due 10/11)	16,769	16,488	16,488
		Subordinated Debt (14.0%, Due 10/12)	16,376	16,156	16,156
		Common Stock (797,448 shares)(1)		1,000	1,000
				33,644	33,644

7

AMERICAN CAPITAL STRATEGIES, LTD.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

March 31, 2006

(in thousands, except share data)

Company(4)	Industry	Investments(5)	Principal	Cost	Fair Value
Nailite International, Inc.	Building Products	Subordinated Debt (14.3%, Due 4/10)	9,657	8,722	8,722
		Common Stock Warrants (247,368 shares)(1)		1,232	902
				9,954	9,624
Nursery Supplies, Inc.	Containers & Packaging	Subordinated Debt (14.0%, Due 5/13)	20,348	20,067	20,067
Pelican Products, Inc.	Containers & Packaging	Senior Debt (11.5%, Due 10/11)	15,000	14,808	14,808
PHC Acquisition, Inc.	Diversified Consumer Services	Subordinated Debt (14.7%, Due 3/12 – 3/13)	23,204	22,856	22,856
		Convertible Preferred Stock (11,246 shares)		490	490
		Common Stock(907,692 shares)(1)		39,521	39,521
				62,867	62,867
Phillips & Temro Industries, Inc.	Auto Components	Senior Debt (11.1%, Due 12/10 – 12/11)	26,100	26,030	26,030
		Subordinated Debt (15.0%, Due 12/12)	16,900	16,852	16,852
				42,882	42,882
Plastech Engineered Products, Inc.	Auto Components	Common Stock Warrants (2,145 shares)(1)		2,577	7,300
Retriever Acquisition Co.	Diversified Financial Services	Subordinated Debt (15.0%, Due 6/12)	26,890	26,599	26,599
Rocky Shoes & Boots, Inc. (2)	Textiles, Apparel & Luxury Goods	Senior Debt (12.7%, Due 1/11)	30,000	29,653	29,653
RTL Acquisition Corp.	Health Care Providers & Services	Senior Debt (8.1%, Due 2/11 – 2/12)	31,500	30,963	30,963
		Subordinated Debt (14.0%, Due 2/13)	16,029	15,791	15,791
		Redeemable Preferred Stock (101,967 shares)		11,883	11,883
		Convertible Preferred Stock (221,447 shares)		10,116	10,116
		Common Stock (11,655 shares)(1)		530	530
		Common Stock Warrants (101,967 shares)(1)		4,637	4,637
				73,920	73,920
Safemark Acquisitions, Inc.	Commercial Services & Supplies	Senior Debt (11.9%, Due 6/06 – 6/10)	6,134	6,087	6,087
		Subordinated Debt (14.5%, Due 6/11 – 6/12)	12,627	12,378	12,378
		Convertible Preferred Stock (3,000 shares)(1)		305	305
		Redeemable Preferred Stock (11,000 shares)(1)		6,825	6,825
		Convertible Preferred Stock Warrants (50,175 shares)(1)		5,028	1,279
				30,623	26,874
Sanda Kan (Cayman I) Holdings Company Limited(3)	Leisure Equipment & Products	Common Stock (97,104 shares)(1)		6,582	5,136
Sanlo Holdings, Inc.	Electrical Equipment	Subordinated Debt (13.9%, Due 7/11 – 7/12)	10,500	9,961	9,961
		Common Stock Warrants (5,187 shares)(1)		489	489
				10,450	10,450
Schoor DePalma, Inc.	Construction & Engineering	Senior Debt (11.9%, Due 8/09 – 8/11)	30,663	30,367	30,367
		Common Stock (50,000 shares)(1)		500	500
				30,867	30,867

8

AMERICAN CAPITAL STRATEGIES, LTD.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

March 31, 2006

(in thousands, except share data)

Company(4)	Industry	Investments(5)	Principal	Cost	Fair Value
Selig Sealing Products, Inc.	Containers & Packaging	Senior Debt (11.1%, Due 4/12)	14,500	14,303	14,303
SmithBucklin Corporation	Commercial Services & Supplies	Senior Debt (11.6%, Due 6/11)	10,000	9,866	9,866
		Subordinated Debt (14.5%, Due 6/12)	7,138	7,038	7,038
				16,904	16,904
Soff-Cut Holdings, Inc.	Machinery	Senior Debt (11.3%, Due 8/09-8/12)	22,552	22,307	22,307
Specialty Brands of America, Inc.	Food Products	Senior Debt (10.4%, Due 12/06 – 5/11)	23,843	23,572	23,572
		Subordinated Debt (13.4%, Due 9/08 – 5/14)	39,696	39,470	39,470
		Redeemable Preferred Stock (209,303 shares)		15,229	15,229
		Convertible Preferred Stock (185,950 shares)		18,370	18,370
		Common Stock (33,916 shares)(1)		3,392	3,392
		Common Stock Warrants (97,464 shares)(1)		9,746	9,746
				109,779	109,779
SSH Acquisition, Inc.	Commercial Services & Supplies	Senior Debt (11.6%, Due 9/12)	12,500	12,294	12,294
		Subordinated Debt (14.0%, Due 9/13)	18,729	18,461	18,461
		Convertible Preferred Stock (511,000 shares)		52,498	78,435
				83,253	109,190
Stein World, LLC	Household Durables	Senior Debt (12.3%, Due 10/11)	8,650	8,527	8,527
		Subordinated Debt (16.0%, Due 10/12 – 10/13)	23,539	23,205	23,205
				31,732	31,732
Supreme Corp Holdings, LLC	Household Products	Senior Debt (8.2%, Due 6/09)	4,301	4,201	4,201
		Subordinated Debt (12.0%, Due 6/12)	5,000	4,627	4,627
		Common Membership Warrants (3,359 shares)(1)		381	10
				9,209	8,838
Technical Concepts Holdings, LLC	Building Products	Common Membership Warrants (792,149 shares)(1)		1,703	2,099
The Hilsinger Company	Health Care Equipment & Supplies	Senior Debt (11.9%, Due 5/10)	17,194	16,996	16,996
		Subordinated Debt (14.5%, Due 5/12)	13,113	12,985	12,985
				29,981	29,981
The Tensar Corporation	Construction & Engineering	Senior Debt (12.1%, Due 4/13)	84,000	82,779	82,779
		Subordinated Debt (17.5%, Due 10/13)	21,478	21,186	21,186
				103,965	103,965
Three Sixty Asia, Ltd.(3)	Commercial Services & Supplies	Senior Debt (12.6%, Due 9/08)	7,000	7,000	7,000
		Common Equity(1)		4,093	—
				11,093	7,000
T-NETIX, Inc.	Diversified Telecommunication Services	Common Stock (17,544 shares)(1)		1,000	—

9

AMERICAN CAPITAL STRATEGIES, LTD.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

March 31, 2006

(in thousands, except share data)

Company(4)	Industry	Investments(5)	Principal	Cost	Fair Value
TransFirst Holdings, Inc.	Commercial Services & Supplies	Senior Debt (12.5%, Due 3/11)	13,000	12,899	12,899
		Subordinated Debt (15.0%, Due 4/12)	16,560	16,396	16,396
				29,295	29,295
Tyden Caymen Holdings Corp.	Electronic Equipment & Instruments	Senior Debt (12.1%, Due 11/11)	12,000	11,808	11,808
		Subordinated Debt (13.8%, Due 5/12)	14,500	14,298	14,298
		Common Stock (2,000,000 shares)(1)		2,000	3,195
				28,106	29,301
UAV Corporation	Leisure Equipment & Products	Junior Subordinated Debt (11.6%, Due 5/10)	9,000	8,887	8,887
		Senior Subordinated Debt (16.3%, Due 5/10)(6)	15,731	14,689	2,645
				23,576	11,532
Unique Fabricating Incorporated	Auto Components	Senior Debt (11.8%, Due 2/10 – 2/12)	6,464	6,348	6,348
		Subordinated Debt (15.0%, Due 2/13)	6,897	6,803	6,803
		Redeemable Preferred Stock (2,500 shares)		2,528	2,528
		Common Stock Warrants (6,350 shares)(1)		330	330
				16,009	16,009
Visador Holding Corporation	Building Products	Subordinated Debt (15.0%, Due 2/10)	10,646	10,291	10,291
		Common Stock Warrants (4,284 shares)(1)		462	1,595
				10,753	11,886
Wachovia Bank Commercial Mortgage Trust	Diversified Financial Services	Commercial Mortgage Pass-Through Certificates, Series 2006 - C23(5.1%, Due 2/16 – 11/28)	130,017	64,220	64,220
WIL Research Holding Company, Inc.	Biotechnology	Convertible Preferred Stock (1,210,086 shares)		1,291	1,712
Zenta Global, Ltd.(3)	IT Services	Senior Debt (16.9%, Due 5/11)	64,170	63,254	63,254
		Common Units (265,565 units)(1)		27	27
		Preferred Units (1,380 units)(1)		1,392	1,392
				64,673	64,673
Subtotal Non-Control / Non-Affiliate Investments				2,479,607	2,502,646
AFFILIATE INVESTMENTS
Bankruptcy Management Solutions, Inc.	Commercial Services & Supplies	Senior Debt (13.3%, Due 12/10)	18,000	17,745	17,745
		Subordinated Debt (15.5%, Due 12/12)	28,228	27,854	27,854
		Common Stock (281,534 shares)(1)		—	12,557
		Common Stock Warrants (101,179 shares)(1)		—	4,513
				45,599	62,669
Compusearch Holdings Company, Inc.	Software	Subordinated Debt (12.0%, Due 6/12)	12,500	12,325	12,325
		Convertible Preferred Stock (40,039 shares)		1,589	1,589
				13,914	13,914
Continental Structural Plastics, Inc.	Auto Components	Subordinated Debt (14.0%, Due 2/13)	11,245	11,090	11,090
		Common Stock (3,000 shares)(1)		300	300
		Redeemable Preferred Stock (2,700 shares)		2,944	2,944
				14,334	14,334

10

AMERICAN CAPITAL STRATEGIES, LTD.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

March 31, 2006

(in thousands, except share data)

Company(4)	Industry	Investments(5)	Principal	Cost	Fair Value
FMI Holdco I, LLC	Road & Rail	Subordinated Debt (13.0%, Due 4/10)	13,545	12,625	12,625
		Common Units (626,085 units)(1)		2,682	2,394
		Preferred Units (410,778 units)(1)		1,705	1,705
				17,012	16,724
Kirby Lester Holdings, LLC	Health Care Equipment & Supplies	Senior Debt (11.2%, Due 9/10 – 9/12)	12,250	12,061	12,061
		Subordinated Debt (16.0%, Due 9/13)	11,814	11,645	11,645
		Preferred Units (375 units)(1)		375	375
				24,081	24,081
Marcal Paper Mills, Inc.	Household Products	Common Stock Warrants (209,255 shares)(1)		—	4,594
		Common Stock (209,254 shares)(1)		—	4,591
				—	9,185
Money Mailer, LLC	Media	Common Membership Interest (6% membership interest)(1)		1,500	3,942
Nivel Holdings, LLC	Distributors	Subordinated Debt (14.6%, Due 2/11 – 2/12)	8,876	8,763	8,763
		Preferred Units (900 units)(1)		900	900
		Common Units (100,000 units)(1)		100	650
		Common Membership Warrants (41,360 units)(1)		41	269
				9,804	10,582
Northwest Coatings, LLC	Containers & Packaging	Common Units (309,904 units)(1)		269	—
		Redeemable Preferred Units (2,777,419 units)(1)		2,624	2,575
				2,893	2,575
NPC Holdings, Inc.	Building Products	Senior Debt (11.6%, Due 6/12)	4,500	4,428	4,428
		Subordinated Debt (15.0%, Due 6/13)	8,159	8,043	8,043
		Common Stock (80 shares)(1)		8	8
		Redeemable Preferred Stock (13,275 shares)		9,718	9,718
		Convertible Preferred Stock (13,690 shares)		1,411	1,411
		Convertible Preferred Stock Warrants (43,782 shares)(1)		4,378	4,378
				27,986	27,986
PaR Nuclear Holding Company	Machinery	Common Stock (341,222 shares)(1)		1,052	5,192
Qualitor Component Holdings, LLC	Auto Components	Subordinated Debt (17.0%, Due 12/12)	29,026	28,637	28,637
		Common Units (500,000 units)(1)		500	—
		Preferred Units (4,500,000 units)(1)		4,500	986
				33,637	29,623
Radar Detection Holdings Corp	Household Durables	Senior Debt (12.1%, Due 11/12)	13,000	12,985	12,985
		Common Stock (69,795 shares)(1)		1,029	9,786
				14,014	22,771
Roadrunner Dawes, Inc.	Road & Rail	Subordinated Debt (14.0%, Due 9/12)	17,788	17,620	17,620
		Common Stock (10,000 shares)(1)		10,000	10,000
				27,620	27,620

11

AMERICAN CAPITAL STRATEGIES, LTD.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

March 31, 2006

(in thousands, except share data)

Company(4)	Industry	Investments(5)	Principal	Cost	Fair Value
Seroyal Holdings, L.P.(3)	Health Care Equipment & Supplies	Senior Debt (15.8%, Due 12/10)	5,692	5,615	5,615
		Subordinated Debt (14.5%, Due 12/11)	9,176	8,725	8,725
		Partnership Units (144,552 units)(1)		1,253	1,253
		Preferred Partnership Units (57,143 units)(1)		754	754
				16,347	16,347
TechBooks, Inc.	IT Services	Subordinated Debt (16.3%, Due 8/09)	30,772	30,370	30,370
		Convertible Preferred Stock (4,373,178 shares)(1)		15,000	22,567
				45,370	52,937
The Hygenic Corporation	Health Care Equipment & Supplies	Subordinated Debt (15.5%, Due 1/12)	11,067	10,955	10,955
		Common Stock (200,000 shares)(1)		1,000	7,852
		Redeemable Preferred Stock (9,000 shares)		10,560	10,560
				22,515	29,367
Trinity Hospice, Inc.	Health Care Providers & Services	Senior Debt (11.5%, Due 6/06 – 6/07)	15,422	15,393	15,306
		Common Stock (131,399 shares)(1)		13	—
		Redeemable Preferred Stock (131,399 shares)(1)		3,972	—
				19,378	15,306
Unwired Holdings, Inc.	Household Durables	Senior Debt (12.62%, Due 6/11)	7,600	7,308	7,308
		Senior Subordinated Debt (14.5%, Due 6/12)	10,216	10,074	10,074
		Junior Subordinated Debt (16.0%, Due 6/13)(6)	5,130	4,726	1,817
		Common Stock (100 shares)(1)		1	—
		Preferred Stock (16,200 shares)(1)		16,200	—
		Convertible Preferred Stock (179,901 shares)(1)		1,799	—
				40,108	19,199
WFS Holding, Inc.	Software	Subordinated Debt (14.0%, Due 2/12)	12,285	12,122	12,122
		Convertible Preferred Stock (35,000,000 shares)(1)		3,500	4,553
				15,622	16,675
Subtotal Affiliate Investments				392,786	421,029
CONTROL INVESTMENTS
ACAS Wachovia Investments, L.P.	Diversified Financial Services	Partnership Interest, 90% of L.P.		24,414	25,028
Aeriform Corporation	Chemicals	Senior Debt (9.6%, Due 6/08 – 7/08)	22,936	22,936	22,936
		Senior Subordinated Debt (14.0%, Due 4/06)	511	511	511
		Junior Subordinated Debt (0.0%, Due 5/09)(1)	46,173	34,998	5,158
		Common Stock Warrants (1,991,246 shares)(1)		—	—
		Redeemable Preferred Stock (10 shares)(1)		119	—
				58,564	28,605
American Driveline Systems, Inc.	Commercial Services & Supplies	Senior Debt (8.4%, Due 3/11 – 3/12)	39,200	38,576	38,576
		Subordinated Debt (13.9%, Due 9/11 – 3/13)	31,912	30,831	30,831
		Common Stock(220,735 shares)(1)		18,620	17,330
		Common Stock Warrants (345,568 shares)(1)		29,377	27,158
		Redeemable Preferred Stock (736,820 shares)		49,636	49,636
				167,040	163,531

12

AMERICAN CAPITAL STRATEGIES, LTD.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

March 31, 2006

(in thousands, except share data)

Company(4)	Industry	Investments(5)	Principal	Cost	Fair Value
ASAlliances Biofuels, LLC	Oil, Gas & Consumable Fuels	Common Units (26,667 shares)(1)		—	2,864
		Preferred Units (328,330 shares)(1)		35,085	65,121
				35,085	67,985
ASC Industries, Inc.	Auto Components	Subordinated Debt (12.4%, Due 10/10 – 10/11)	20,500	18,775	18,775
		Common Stock Warrants (74,888 shares)(1)		6,531	25,746
		Redeemable Preferred Stock (72,000 shares)		5,259	5,259
				30,565	49,780
Auxi Health, Inc.	Health Care Providers & Services	Senior Debt (11.6%, Due 12/07)	5,251	5,251	5,251
		Subordinated Debt (13.9%, Due 9/06 – 3/09)	18,836	16,006	16,089
		Subordinated Debt(14.00%, Due 3/09)(6)	8,427	3,233	552
		Common Stock Warrants (4,268,905 shares)(1)		2,599	1,767
		Convertible Preferred Stock (13,301,300 shares)(1)		2,732	—
				29,821	23,659
Biddeford Real Estate Holdings, Inc.	Real Estate	Senior Debt (8.0%, Due 5/14)	3,610	2,964	2,964
		Common Stock (100 shares)(1)		483	476
				3,447	3,440
BPWest, Inc.	Energy Equipment & Services	Senior Debt (12.2%, Due 7/11)	7,000	6,904	6,904
		Subordinated Debt (15.0%, Due 7/12)	6,135	6,050	6,050
		Redeemable Preferred Stock (7,800 shares)		8,258	8,258
		Common Stock (780,000 shares)(1)		1	4,277
				21,213	25,489
Bridgeport International, LLC(3)	Machinery	Common membership units (100 units)(1)		2,730	—
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)	6,757	6,674	6,674
		Common Stock (58,906 shares)(1)		1	2,819
		Redeemable Preferred Stock (3,625,000 shares)		4,003	4,003
				10,678	13,496
DanChem Technologies, Inc.	Chemicals	Senior Debt (10.6%, Due 12/10)	13,259	13,259	13,259
		Common Stock (427,719 shares)(1)		2,500	—
		Redeemable Preferred Stock (12,953 shares)(1)		10,893	845
		Common Stock Warrants (401,622 shares)(1)		2,221	—
				28,873	14,104
ECA Acquisition Holdings, Inc.	Health Care Equipment & Supplies	Senior Debt (13.0%, Due 4/10 – 4/12)	16,100	15,872	15,872
		Subordinated Debt (16.5%, Due 4/14)	9,836	9,699	9,699
		Common Stock (1,000 shares)(1)		19,025	20,995
				44,596	46,566

13

AMERICAN CAPITAL STRATEGIES, LTD.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

March 31, 2006

(in thousands, except share data)

Company(4)	Industry	Investments(5)	Principal	Cost	Fair Value
eLynx Holdings, Inc.	IT Services	Senior Debt (11.7%, Due 12/09)	8,500	8,388	8,388
		Subordinated Debt (15.0%, Due 12/10 – 12/11)	8,782	8,669	8,669
		Common Stock (9,326 shares)(1)		933	933
		Redeemable Preferred Stock (17,488 shares)		8,515	8,515
		Common Stock Warrants (108,735 shares)(1)		10,874	10,874
				37,379	37,379
ETG Holdings, Inc.	Containers & Packaging	Senior Debt (12.2%, Due 5/11)	7,400	7,301	7,301
		Subordinated Debt (16.1%, Due 5/12 – 5/13)	11,323	11,167	11,167
		Convertible Preferred Stock (333,145 shares)		16,571	16,571
				35,039	35,039
European Capital Limited(3)	Diversified Financial Services	Participating Preferred Shares (52,074,548 shares)(1)		236,991	236,991
		Ordinary Shares (100 shares)(1)		—	—
				236,991	236,991
European Touch, LTD. II	Commercial Services & Supplies	Senior Debt (9.0%, Due 11/06)	1,886	1,886	1,886
		Subordinated Debt (12.4%, Due 11/06)	15,640	14,809	14,809
		Common Stock (2,895 shares)(1)		1,500	6,280
		Redeemable Preferred Stock (450 shares)		567	567
		Common Stock Warrants (7,105 shares)(1)		3,683	16,172
				22,445	39,714
Flexi-Mat Holding, Inc.	Textiles, Apparel & Luxury Goods	Senior Debt (18.1%, Due 11/09)	4,500	4,463	4,463
		Subordinated Debt (14.9%, Due 11/10 – 11/11)	12,596	12,486	12,486
		Common Stock (970,583 shares)(1)		9,706	13,871
		Redeemable Preferred Stock (145,000 shares)		11,573	11,573
				38,228	42,393
Fosbel Global Services (LUXCO) S.C.A(3)	Commercial Services & Supplies	Senior Debt (8.6%, Due 7/10 – 7/11)	40,447	39,814	39,814
		Subordinated Debt (14.3%, Due 7/12 – 7/13)	24,372	24,028	24,028
		Redeemable Preferred Stock (31,647,625 shares)(1)		31,648	28,027
		Convertible Preferred Stock (2,606,275 shares)(1)		5,213	—
		Common Stock (186,161 shares)(1)		372	—
				101,075	91,869
Future Food, Inc.	Food Products	Senior Debt (12.6%, Due 7/10)	9,842	9,746	9,746
		Subordinated Debt (12.4%, Due 7/11 – 7/12)	14,000	12,736	12,736
		Common Stock (92,738 shares)(1)		18,500	14,313
		Common Stock Warrants (6,500 shares)(1)		1,297	1,003
				42,279	37,798
FutureLogic, Inc.	Computers & Peripherals	Senior Debt (12.4%, Due 2/10 – 2/12)	49,625	49,002	49,002
		Subordinated Debt (15.0%, Due 2/13)	29,986	29,577	29,577
		Common Stock (221,672 shares)(1)		26,685	15,187
				105,264	93,766

14

AMERICAN CAPITAL STRATEGIES, LTD.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

March 31, 2006

(in thousands, except share data)

Company(4)	Industry	Investments(5)	Principal	Cost	Fair Value
Halex Holdings, Inc.	Construction Materials	Senior Debt (11.4%, Due 7/08 – 10/08)	24,300	24,048	24,048
		Subordinated Debt (17.1%, Due 8/10)	29,702	29,554	29,554
		Common Stock (1,551,971 shares)(1)		9,784	—
		Redeemable Preferred Stock (1,000 shares)(1)		14,631	5,576
		Convertible Preferred Stock (145,996 shares)(1)		1,603	—
				79,620	59,178
Hartstrings Holdings Corp.	Textiles, Apparel & Luxury Goods	Senior Debt (10.9%, Due 12/10)	13,157	12,865	12,865
		Subordinated Debt (17.3%, Due 12/10)(6)	9,495	8,105	4,874
				20,970	17,739
Hospitality Mints, Inc.	Food Products	Senior Debt (12.6%, Due 11/10)	7,406	7,314	7,314
		Subordinated Debt (12.4%, Due 11/11 – 11/12)	18,500	18,210	18,210
		Convertible Preferred Stock (95,198 shares)		22,773	28,480
		Common Stock Warrants (86,817 shares)(1)		54	643
				48,351	54,647
Iowa Mold Tooling Co., Inc.	Machinery	Subordinated Debt (13.0%, Due 10/08)	16,288	15,866	15,921
		Common Stock (426,205 shares)(1)		4,760	6,134
		Redeemable Preferred Stock (23,803 shares)		21,170	30,412
		Common Stock Warrants (530,000 shares)(1)		5,918	4,542
				47,714	57,009
Jones Stephens Corp.	Building Products	Subordinated Debt (16.1 %, Due 10/10 – 10/11)	22,622	22,407	22,407
		Common Stock (8,750 shares)(1)		3,500	16,798
		Redeemable Preferred Stock (1,000 shares)(1)		7,000	7,000
		Convertible Preferred Stock (8,750 shares)(1)		3,500	16,283
				36,407	62,488
KAC Holdings, Inc.	Chemicals	Subordinated Debt (16.6%, Due 2/11 – 2/12)	23,035	22,813	22,813
		Common Stock (1,550,100 shares)(1)		1,550	47,410
		Redeemable Preferred Stock (13,950 shares)		16,570	16,570
				40,933	86,793
KIC Holdings, Inc.	Building Products	Senior Debt (12.5%, Due 9/10)	8,115	8,094	8,094
		Subordinated Debt (11.6%, Due 5/06 – 9/11)(6)	13,325	11,871	941
		Redeemable Preferred Stock (30,356 shares)(1)		16,485	—
		Common Stock (3,761 shares)(1)		5,100	—
		Common Stock Warrants (156,613 shares)(1)		3,060	—
				44,610	9,035
Lifoam Holdings, Inc.	Leisure Equipment & Products	Senior Debt (9.4%, Due 6/07 – 6/10)	40,610	40,324	40,324
		Subordinated Debt (14.2%, Due 6/11 – 6/12)	22,391	22,014	22,014
		Common Stock (20,000 shares)(1)		2,000	342
		Redeemable Preferred Stock (8,800 shares)(1)		5,981	6,179
		Common Stock Warrants (41,164 shares)(1)		4,116	1,276
				74,435	70,135

15

AMERICAN CAPITAL STRATEGIES, LTD.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

March 31, 2006

(in thousands, except share data)

Company(4)	Industry	Investments(5)	Principal	Cost	Fair Value
Logex Corporation	Road & Rail	Subordinated Debt (12.5%, Due 7/08)(6)	31,194	27,459	15,190
		Common Stock Warrants (137,839 shares)(1)		7,454	—
		Redeemable Preferred Stock (695 shares)(1)		3,930	—
				38,843	15,190
LVI Holdings, LLC	Commercial Services & Supplies	Senior Debt (10.1%, Due 2/10)	4,300	4,216	4,216
		Subordinated Debt (18.0%, Due 2/13)	9,642	9,514	9,514
		Preferred Units (800 units)(1)		11,000	15,321
				24,730	29,051
MBT International, Inc.	Distributors	Senior Subordinated Debt (13.0%, Due 5/09)	987	804	804
		Junior Subordinated Debt (9.0%, Due 5/09)(6)	6,387	4,110	3,189
				4,914	3,993
MW Acquisition Corporation	Health Care Providers & Services	Senior Debt (12.1%, Due 2/12)	21,500	21,152	21,152
		Subordinated Debt (15.4%, Due 2/13 – 2/14)	23,791	23,437	23,437
		Common Stock (88,377 shares)(1)		9	9
		Redeemable Preferred Stock (88,377 shares)		31,595	31,595
				76,193	76,193
New Piper Aircraft, Inc.	Aerospace & Defense	Senior Debt (9.5%, Due 6/06 – 8/23)	41,442	40,655	40,668
		Subordinated Debt (8.0%, Due 7/13)	599	118	599
		Common Stock (771,839 shares)(1)		95	921
				40,868	42,188
New Starcom Holdings, Inc.	Construction & Engineering	Subordinated Debt (12.1%, Due 12/08 – 12/09)	32,970	28,164	28,252
		Common Stock (100 shares)(1)		—	—
		Convertible Preferred Stock (32,043 shares)(1)		11,500	15,468
				39,664	43,720
nSpired Holdings, Inc.	Food Products	Senior Debt (9.8%, Due 12/08 – 12/09)	20,190	20,041	20,041
		Subordinated Debt (18.0%, Due 8/07)(6)	9,686	8,917	4,054
		Common Stock (169,018 shares)(1)		5,000	—
		Redeemable Preferred Stock (29,500 shares)(1)		29,500	—
				63,458	24,095
Optima Bus Corporation	Machinery	Senior Debt (9.7%, Due 6/06 – 1/08)	6,205	6,205	6,205
		Subordinated Debt (10.0%, Due 5/11)(6)	3,758	2,230	2,234
		Common Stock (20,464 shares)(1)		1,896	—
		Convertible Preferred Stock (1,913,015 shares)(1)		16,805	2,725
				27,136	11,164
PaR Systems, Inc.	Machinery	Subordinated Debt (12.9%, Due 2/10)	4,632	4,632	4,632
		Common Stock (341,222 shares)(1)		1,089	6,560
		Common Stock Warrants (29,205 shares)(1)		—	561
				5,721	11,753

16

AMERICAN CAPITAL STRATEGIES, LTD.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

March 31, 2006

(in thousands, except share data)

Company(4)	Industry	Investments(5)	Principal	Cost	Fair Value
Pasternack Enterprises, Inc.	Electrical Equipment	Senior Debt (10.6%, Due 12/09 – 8/11)	33,347	32,838	32,838
		Subordinated Debt (17.4%, Due 5/10 – 8/11)	27,067	26,758	26,758
		Common Stock (98,799 shares)(1)		20,562	27,090
				80,158	86,686
PHI Acquisitions, Inc.	Internet & Catalog Retail	Senior Debt (11.7%, Due 6/12)	10,000	9,863	9,863
		Subordinated Debt (13.9%, Due 6/13)	24,738	24,391	24,391
		Common Stock (69,120 shares)(1)		6,629	6,629
		Redeemable Preferred Stock (62,210 shares)		46,371	46,371
		Common Stock Warrants (199,095 shares)(1)		19,910	19,910
				107,164	107,164
Precitech, Inc.	Machinery	Senior Debt (11.3%, Due 12/09 – 12/10)	5,280	5,268	5,268
		Senior Subordinated Debt (16.0%, Due 12/11)	2,104	2,104	2,104
		Junior Subordinated Debt (17.00%, Due 12/12)(6)	7,434	5,049	5,336
		Redeemable Preferred Stock (35,807 shares) (1)		7,186	—
		Common Stock (22,040 shares)(1)		2,204	—
		Common Stock Warrants (22,783 shares)(1)		2,278	663
				24,089	13,371
Ranpak Acquisition, Inc.	Containers & Packaging	Senior Debt (7.4%, Due 12/11)	2,993	2,993	2,993
		Subordinated Debt (13.6%, Due 12/12 – 12/13)	103,116	101,607	101,607
		Redeemable Preferred Stock (163,025 shares)		112,753	112,753
		Common Stock (181,139 shares)(1)		18,114	18,114
		Common Stock Warrants (541,970 shares)(1)		54,197	54,197
				289,664	289,664
Reef Point Systems, Inc.	Communications Equipment	Convertible Preferred Stock (27,777,778 shares)(1)		5,000	5,000
SAV Holdings, Inc.	Commercial Services & Supplies	Senior Debt (11.6%, Due 11/11)	17,000	16,542	16,542
		Subordinated Debt (14.0%, Due 11/12)	12,086	11,911	11,911
		Redeemable Preferred Stock (25,920 shares)		26,671	26,671
		Common Stock (2,880,000 shares)(1)		2,880	11,682
				58,004	66,806
Sixnet, LLC	Electronic Equipment & Instruments	Senior Debt (9.6%, Due 6/10)	10,800	10,633	10,633
		Subordinated Debt (17.0%, Due 6/13)	10,171	10,036	10,036
		Membership Units (485 units)(1)		6,061	8,187
				26,730	28,856
S-Tran Holdings, Inc.	Road & Rail	Subordinated Debt (12.5%, Due 12/09)(6)	7,490	6,338	1,250
Stravina Holdings, Inc.	Personal Products	Senior Debt (9.1%, Due 1/10 – 4/11)	35,895	35,549	35,549
		Senior Debt (14.0%, Due 2/11)(6)	12,012	11,750	6,204
		Subordinated Debt (17.6%, Due 2/11)(6)	40,938	30,773	—
		Common Stock (1,000 shares)(1)		1	—
				78,073	41,753

17

AMERICAN CAPITAL STRATEGIES, LTD.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

March 31, 2006

(in thousands, except share data)

Company(4)	Industry	Investments(5)	Principal	Cost		Fair Value
VP Acquisitions Holdings, Inc.	Health Care Equipment & Supplies	Subordinated Debt (14.5%, Due 10/13 – 10/14) Common Stock (33,928 shares)(1)	18,212		17,879 42,410		17,879 46,957
					60,289		64,836
Warner Power, LLC	Electrical Equipment	Senior Debt (11.6%, Due 12/07)	6,531		6,531		6,531
		Subordinated Debt (12.6%, Due 12/06 – 12/07)	4,988		4,403		4,403
		Common Membership Units (47,000 units)(1)			1,623		—
		Common Membership Warrants (916 units)(1)			1,123		175
		Redeemable Preferred Stock (6,012,000 units)(1)			5,197		1,027
					18,877		12,136
Weber Nickel Technologies, Ltd. (3)	Machinery	Subordinated Debt (18.4%, Due 9/12)(6)	17,555		15,763		—
		Common Stock (44,834 shares)(1)			1,171		—
		Redeemable Preferred Stock (14,796 shares)(1)			11,830		—
					28,764		—
WWC Acquisitions, Inc.	Commercial Services & Supplies	Senior Debt (11.6%, Due 12/11)	11,356		11,174		11,174
		Subordinated Debt (14.2%, Due 12/12 – 12/13)	22,496		22,190		22,190
		Common Stock (4,826,476 shares)(1)			21,237		45,644
					54,601		79,008
Subtotal Control Investments					2,629,536		2,547,933
INTEREST RATE DERIVATIVE AGREEMENTS
	Interest Rate Swap— Pay Fixed/ Receive Floating	30 Contracts Notional Amounts Totaling $1,397,554			—		40,647
	Interest Rate Swap— Pay Floating/Receive Floating	1 Contracts Notional Amounts Totaling $2,000			—		—
	Interest Rate Swaption— Pay Floating/ Receive Fixed	3 Contracts Notional Amounts Totaling $47,093			—		389
	Interest Rate Caps	4 Contracts Notional Amounts Totaling $24,587			—		586
Subtotal Interest Rate Derivative Agreements					—		41,622
Total Investment Assets				$	5,501,929	$	5,513,230
INTEREST RATE DERIVATIVE AGREEMENTS
	Interest Rate Swap— Pay Fixed/ Receive Floating	9 Contracts Notional Amounts Totaling $97,125		$	—	$	(4,656	)
	Interest Rate Swap— Pay Floating/ Receive Floating	3 Contracts Notional Amounts Totaling $12,600			—		(14	)
Total Investment Liabilities				$	—	$	(4,670	)

(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.

18

AMERICAN CAPITAL STRATEGIES, LTD.

CONSOLIDATED SCHEDULE OF INVESTMENTS

December 31, 2005

(in thousands, except share data)

Company(4)	Industry	Investments(5)	Principal		Cost		Fair Value
NON-CONTROL/NON-AFFILIATE INVESTMENTS
A.H. Harris & Sons, Inc.	Distributors	Subordinated Debt (12.0%, Due 12/06)	$	10,000	$	9,846	$	9,886
		Common Stock Warrants (2,004 shares)(1)				534		3,044
						10,380		12,930
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		24,653		24,653
Astrodyne Corporation	Electrical Equipment	Senior Debt (12.2%, Due 4/11)		6,500		6,365		6,365
		Subordinated Debt (12.0%, Due 4/12)		11,000		10,845		10,845
		Redeemable Preferred Stock (1 share)(1)				—		—
		Convertible Preferred Stock (552,705 shares)				10,783		10,783
						27,993		27,993
BarrierSafe Solutions International, Inc.	Commercial Services & Supplies	Senior Debt (12.8%, Due 9/10)		15,000		14,847		14,847
		Subordinated Debt (16.0%, Due 9/11 – 9/12)		52,016		51,444		51,444
						66,291		66,291
BBB Industries, LLC	Auto Components	Senior Debt (13.8%, Due 5/11)		20,000		19,736		19,736
		Subordinated Debt (17.5%, Due 11/11)		5,302		5,232		5,232
						24,968		24,968
BC Natural Foods, LLC	Food Products	Subordinated Debt (17.0%, Due 9/10)		15,361		14,881		14,881
		Common Membership Warrants (15.2% membership interest)(1)				3,331		8,658
						18,212		23,539
Beacon Hospice, Inc.	Health Care Providers & Services	Senior Debt (11.4%, Due 2/08 – 2/11)		9,429		9,265		9,265
		Subordinated Debt (14.5%, Due 2/12)		10,234		10,094		10,094
						19,359		19,359
BLI Partners, LLC	Personal Products	Common Membership (20% membership interest)(1)				17,344		—
Breeze Industrial Products Corporation	Auto Components	Subordinated Debt (14.5%, Due 9/12 – 8/13)		13,332		13,189		13,189
Bushnell Performance Optics	Leisure Equipment & Products	Subordinated Debt (12.5%, Due 8/12 – 8/13)		117,436		115,717		115,717
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)		24,606		21,624		21,683
		Common Stock Warrants (197,322 shares)(1)				5,418		2,924
		Common Stock (11,850 shares)(1)				—		—
		Preferred Stock Warrants (1,564 shares)(1)				—		—
		Redeemable Preferred Stock (11,850 shares)(1)				441		241
						27,483		24,848
Colts 2005-1	Diversified Financial Services	Common Stock (360 shares)				11,043		12,785

19

AMERICAN CAPITAL STRATEGIES, LTD.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

December 31, 2005

(in thousands, except share data)

Company(4)	Industry	Investments(5)	Principal	Cost	Fair Value
Confluence Holdings Corp.	Leisure Equipment & Products	Senior Debt (11.3%, Due 5/11)	14,000	13,809	13,809
		Subordinated Debt (14.7%, Due 5/12)	37,529	28,804	37,683
		Redeemable Preferred Stock (20,119 shares)(1)		18,589	128
		Convertible Preferred Stock (950,000 shares)(1)		—	—
		Common Stock (1 share)(1)		—	—
				61,202	51,620
Corporate Benefit Services of America, Inc.	Commercial Services & Supplies	Subordinated Debt (16.0%, Due 7/10)	15,776	15,164	15,164
		Common Stock Warrants (6,828 shares)(1)		695	695
				15,859	15,859
Corrpro Companies, Inc.	Construction & Engineering	Subordinated Debt (12.5%, due 3/11)	14,000	11,360	11,360
		Common Stock Warrants (5,799,187 shares)(1)		3,865	3,768
		Redeemable Preferred Stock (2,000 shares)		1,601	1,601
				16,826	16,729
DelStar, Inc.	Building Products	Senior Debt (8.0%, Due 12/10 – 12/11)	40,007	39,333	39,333
		Subordinated Debt (14.0%, Due 12/12)	17,629	17,367	17,367
		Convertible Preferred Stock (50,722 shares)		5,089	5,089
		Redeemable Preferred Stock (45,650 shares)		16,918	16,918
		Common Stock Warrants (152,701 shares)(1)		29,019	29,019
				107,726	107,726
Direct Marketing International LLC	Media	Subordinated Debt (14.3%, Due 7/12)	24,230	23,881	23,881
Dynisco Parent, Inc.	Electronic Equipment & Instruments	Common Stock (10,000 shares)(1)		633	633
		Common Stock Warrants (2,115 shares)(1)		133	133
				766	766
EAG Acquisition, LLC	Commercial Services & Supplies	Senior Debt (8.3%, Due 1/06 – 9/10)	13,650	13,458	13,458
		Subordinated Debt (16.0%, Due 9/11)	11,655	11,488	11,488
		Common Stock Warrants (7,000,000 shares)(1)		—	—
		Redeemable Preferred Stock (7,000,000 shares)		7,185	7,185
				32,131	32,131
Edline, LLC	Software	Senior Debt (11.3%, Due 7/10)	2,790	2,752	2,752
		Subordinated Debt (12.0%, Due 7/11)	5,000	3,219	3,219
		Membership Warrants (2,121,212 units)(1)		1,784	1,784
				7,755	7,755
FAMS Acquisition, Inc.	Diversifed Financial Services	Senior Debt (10.8%, Due 8/10 – 8/11)	32,134	31,617	31,617
		Subordinated Debt (14.8%, Due 8/12 – 8/13)	24,230	23,880	23,880
		Convertible Preferred Stock (1,477,557 shares)(1)		35,880	35,880
				91,377	91,377
Formed Fiber Technologies, Inc.	Auto Components	Subordinated Debt (15.0%, Due 8/11)	14,804	14,633	14,633
		Common Stock Warrants (122,397 shares)(1)		122	1,235
				14,755	15,868
Gibson Guitar Corp.	Leisure Equipment & Products	Senior Debt (11.0%, Due 8/10)	32,500	31,754	31,754

20

AMERICAN CAPITAL STRATEGIES, LTD.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

December 31, 2005

(in thousands, except share data)

Company(4)	Industry	Investments(5)	Principal	Cost	Fair Value
Hopkins Manufacturing Corporation	Auto Components	Subordinated Debt (14.8%, Due 7/12)	31,020	30,677	30,677
		Redeemable Preferred Stock (5,000 shares)		6,293	6,293
				36,970	36,970
HP Evenflo Acquisition Co.	Household Durables	Senior Debt (12.8%, Due 8/10)	23,000	22,765	22,765
		Common Stock (250,000 shares)(1)		2,500	2,500
��
				25,265	25,265
Infiltrator Systems, Inc.	Building Products	Subordinated Debt (14.0%, Due 9/13)	29,052	28,625	28,625
Inovis International, Inc.	Software	Senior Debt (10.9%, Due 5/10)	90,000	88,666	88,666
IPC Acquisition Corp.	Communications Equipment	Senior Debt (11.7%, Due 8/12)	8,000	8,000	8,000
J.P. Morgan Chase Commercial Mortgage Securities Corp.	Diversified Financial Services	Commercial Mortgage Pass-Through Certificates, Series 2005 - LDP5 (5.0%, Due 12/15)	136,158	78,649	78,649
Milton's Fine Foods, Inc.	Food Products	Subordinated Debt (14.5%, Due 4/11)	8,627	8,509	8,509
Mirion Technologies	Electrical Equipment	Senior Debt (8.8%, Due 5/06 – 11/11)	104,751	103,606	103,339
		Subordinated Debt (14.7%, Due 9/09 – 5/12)	45,256	44,732	44,732
		Convertible Preferred Stock (747,431 shares)		57,528	57,528
		Common Stock (42,032 shares)(1)		4,755	4,755
		Common Stock Warrants (279,262 shares)(1)		31,752	31,752
				242,373	242,106
Montana Silversmiths, Inc.	Textiles, Apparel & Luxury Goods	Senior Debt (11.3%, Due 10/11)	16,826	16,526	16,526
		Subordinated Debt (14.0%, Due 10/12)	16,295	16,070	16,070
		Common Stock (797,448 shares)(1)		1,000	1,000
				33,596	33,596
Nailite International, Inc.	Building Products	Subordinated Debt (14.3%, Due 4/10)	9,627	8,654	8,654
		Common Stock Warrants (247,368 shares)(1)		1,232	1,950
				9,886	10,604
NewQuest, Inc.	Health Care Providers & Services	Subordinated Debt (15.0%, Due 3/12)	35,901	35,405	35,405
Nursery Supplies, Inc.	Containers & Packaging	Subordinated Debt (14.0%, Due 5/13)	20,246	19,959	19,959
Pelican Products, Inc.	Containers & Packaging	Senior Debt (11.5%, Due 10/11)	15,000	14,802	14,802
Phillips & Temro Industries, Inc.	Auto Components	Senior Debt (10.7%, Due 12/10 – 12/11)	26,100	26,028	26,028
		Subordinated Debt (15.0%, Due 12/12)	16,900	16,852	16,852
				42,880	42,880
Plastech Engineered Products, Inc.	Auto Components	Common Stock Warrants (2,145 shares)(1)		2,577	7,300
Retriever Acquisition Co.	Diversified Financial Services	Subordinated Debt (15.0%, Due 6/12)	26,689	26,394	26,394
Rocky Shoes & Boots, Inc.(2)	Textiles, Apparel & Luxury Goods	Senior Debt (12.3%, Due 1/11)	30,000	29,631	29,631

21

AMERICAN CAPITAL STRATEGIES, LTD.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

December 31, 2005

(in thousands, except share data)

Company(4)	Industry	Investments(5)	Principal	Cost	Fair Value
Safemark Acquisitions, Inc.	Commercial Services & Supplies	Senior Debt (12.2%, Due 6/06 – 6/10)	5,195	5,146	5,146
		Subordinated Debt (14.4%, Due 6/11 – 6/12)	12,560	12,305	12,305
		Convertible Preferred Stock (3,000 shares)(1)		305	305
		Redeemable Preferred Stock (11,000 shares)(1)		6,825	6,825
		Convertible Preferred Stock Warrants (50,175 shares)(1)		5,028	1,278
				29,609	25,859
Sanda Kan (Cayman I) Holdings Company Limited(3)	Leisure Equipment & Products	Common Stock (97,104 shares)(1)		6,582	5,798
Sanlo Holdings, Inc.	Electrical Equipment	Subordinated Debt (13.9%, Due 7/11 – 7/12)	10,500	9,947	9,947
		Common Stock Warrants (5,187 shares)(1)		489	489
				10,436	10,436
Schoor DePalma, Inc.	Construction & Engineering	Senior Debt (11.7%, Due 8/09 – 8/11)	30,906	30,585	30,585
		Common Stock (50,000 shares)(1)		500	500
				31,085	31,085
Selig Sealing Products, Inc.	Containers & Packaging	Senior Debt (10.7%, Due 4/12)	14,500	14,298	14,298
SmithBucklin Corporation	Commercial Services & Supplies	Senior Debt (11.2%, Due 6/11)	10,000	9,860	9,860
		Subordinated Debt (14.5%, Due 6/12)	7,093	6,992	6,992
				16,852	16,852
Soff-Cut Holdings, Inc.	Machinery	Senior Debt (10.9%, Due 8/09 – 8/12)	22,627	22,370	22,370
SSH Acquisition, Inc.	Commercial Services & Supplies	Senior Debt (11.3%, Due 9/12)	12,500	12,289	12,289
		Subordinated Debt (14.0%, Due 9/13)	18,624	18,352	18,352
		Convertible Preferred Stock (511,000 shares)		51,859	61,639
				82,500	92,280
Stein World, LLC	Household Durables	Senior Debt (12.3%, Due 10/11)	8,650	8,523	8,523
		Subordinated Debt (16.0%, Due 10/12 – 10/13)	23,305	22,966	22,966
				31,489	31,489
Supreme Corq Holdings, LLC	Household Products	Senior Debt (7.8%, Due 6/09)	3,801	3,693	3,693
		Subordinated Debt (12.0%, Due 6/12)	5,000	4,617	4,617
		Common Membership Warrants (3,359 shares)(1)		381	381
				8,691	8,691
Technical Concepts Holdings, LLC	Building Products	Senior Debt (10.4%, Due 2/08 – 2/10)	13,423	13,388	13,388
		Subordinated Debt (12.3%, Due 2/11 – /12)	15,000	13,616	13,616
		Common Membership Warrants (792,149 shares)(1)		1,703	1,703
				28,707	28,707
The Hilsinger Company	Health Care Equipment & Supplies	Senior Debt (11.5%, Due 5/10)	17,238	17,014	17,014
		Subordinated Debt (14.5%, Due 5/12)	13,032	12,879	12,879
				29,893	29,893
The Tensar Corporation	Construction & Engineering	Senior Debt (11.5%, Due 4/13)	84,000	82,751	82,751
		Subordinated Debt (17.5%, Due 10/13)	20,603	20,306	20,306
				103,057	103,057

22

AMERICAN CAPITAL STRATEGIES, LTD.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

December 31, 2005

(in thousands, except share data)

Company(4)	Industry	Investments(5)	Principal	Cost	Fair Value
Three Sixty Asia, Ltd.(3)	Commercial Services & Supplies	Senior Debt (12.3%, Due 9/08)	7,000	7,000	7,000
		Common Equity(1)		4,093	—
				11,093	7,000
T-NETIX, Inc.	Diversifed Telecommunication Services	Common Stock (17,544 shares)(1)		1,000	973
TransFirst Holdings, Inc.	Commercial Services & Supplies	Senior Debt (12.1%, Due 3/11)	13,000	12,896	12,896
		Subordinated Debt (15.0%, Due 4/12)	16,436	16,269	16,269
				29,165	29,165
Tyden Caymen Holdings Corp.	Electronic Equipment & Instruments	Senior Debt (11.8%, Due 11/11)	12,000	11,801	11,801
		Subordinated Debt (13.8%, Due 5/12)	14,500	14,294	14,294
		Common Stock (2,000,000 shares)(1)		2,000	3,194
				28,095	29,289
UAV Corporation	Leisure Equipment & Products	Junior Subordinated Debt (11.2%, Due 5/10)	9,000	8,879	8,879
		Senior Subordinated Debt (16.3%, Due 5/10)(6)	15,533	14,687	2,643
				23,566	11,522
Unique Fabricating Incorporated	Auto Components	Senior Debt (11.8%, Due 2/10 – 2/12)	5,875	5,754	5,754
		Subordinated Debt (14.9%, Due 2/13)	6,850	6,755	6,755
		Redeemable Preferred Stock (2,500 shares)		2,447	2,447
		Common Stock Warrants (6,350 shares)(1)		330	330
				15,286	15,286
Vector Products, Inc.	Electronic Equipment & Instruments	Senior Debt (11.8%, Due 9/10)	35,000	34,498	34,498
Visador Holding Corporation	Building Products	Subordinated Debt (15.0%, Due 2/10)	10,593	10,223	10,223
		Common Stock Warrants (4,284 shares)(1)		462	1,595
				10,685	11,818
WIL Research Holding Company, Inc.	Biotechnology	Subordinated Debt (13.8%, Due 9/11)	15,552	15,382	15,382
		Redeemable Preferred Stock (5,000,000 shares)		6,046	6,046
		Convertible Preferred Stock (1,210,086 shares)		1,276	1,276
				22,704	22,704
Zenta Global, Ltd.(3)	IT Services	Senior Debt (17.3%, Due 5/11)	47,500	46,814	46,814
		Common Units (265,565 units)(1)		27	27
		Preferred Units (1,330 units)(1)		1,342	1,342
				48,183	48,183
Subtotal Non-Control / Non-Affiliate Investments				2,156,065	2,135,795
AFFILIATE INVESTMENTS
Bankruptcy Management Solutions, Inc.	Commercial Services & Supplies	Senior Debt (12.9%, Due 12/10)	18,000	17,734	17,734
		Subordinated Debt (15.5%, Due 12/12)	27,983	27,601	27,601
		Common Stock (281,534 shares)(1)		—	6,116
		Common Stock Warrants (101,179 shares)(1)		—	2,198
				45,335	53,649
Compusearch Holdings Company, Inc.	Software	Subordinated Debt (12.0%, Due 6/12)	12,500	12,321	12,321
		Convertible Preferred Stock (40,039 shares)		1,559	1,559
				13,880	13,880

23

AMERICAN CAPITAL STRATEGIES, LTD.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

December 31, 2005

(in thousands, except share data)

Company(4)	Industry	Investments(5)	Principal	Cost	Fair Value
Continental Structural Plastics, Inc.	Auto Components	Subordinated Debt (14.0%, Due 2/13)	11,189	11,031	11,031
		Common Stock (3,000 shares)(1)		300	300
		Redeemable Preferred Stock (2,700 shares)		2,887	2,887
				14,218	14,218
Edge Products, LLC	Auto Components	Senior Debt (9.3%, Due 3/10)	10,900	10,715	10,715
		Subordinated Debt (12.4%, Due 3/13)	13,641	13,450	13,450
		Common Membership Units (7,620 units)(1)		1,749	2,320
		Common Membership Warrants (13,780 units)(1)		62	1,767
				25,976	28,252
FMI Holdco I, LLC	Road & Rail	Subordinated Debt (13.0%, Due 4/10)	13,545	12,584	12,584
		Common Units (626,085 units)(1)		2,683	2,394
		Preferred Units (410,778 units)(1)		1,705	1,705
				16,972	16,683
Kirby Lester Holdings, LLC	Health Care Equipment & Supplies	Senior Debt (10.8%, Due 9/10 – 9/12)	11,750	11,551	11,551
		Subordinated Debt (16.0%, Due 9/13)	11,726	11,555	11,555
		Preferred Units (375 units)(1)		375	375
				23,481	23,481
Marcal Paper Mills, Inc.	Household Products	Common Stock Warrants (209,255 shares)(1)		—	3,506
		Common Stock (209,254 shares)(1)		—	3,503
				—	7,009
Money Mailer, LLC	Media	Common Membership Interest (6% membership interest)(1)		1,500	3,942
Nivel Holdings, LLC	Distributors	Subordinated Debt (14.6%, Due 2/11 – 2/12)	8,832	8,701	8,701
		Preferred Units (900 units)(1)		900	900
		Common Units (100,000 units)(1)		100	336
		Common Membership Warrants (41,360 units)(1)		41	139
				9,742	10,076
Northwest Coatings, LLC	Containers & Packaging	Common Units (309,904 units)(1)		269	—
		Redeemable Preferred Units (2,777,419 units)(1)		2,624	2,575
				2,893	2,575
NPC Holdings, Inc.	Building Products	Senior Debt (11.2%, Due 6/12)	4,500	4,415	4,415
		Subordinated Debt (15.0%, Due 6/13)	8,108	7,991	7,991
		Common Stock (80 shares)(1)		8	8
		Redeemable Preferred Stock (13,275 shares)		9,451	9,451
		Convertible Preferred Stock (13,690 shares)		1,398	1,398
		Convertible Preferred Stock Warrants (43,782 shares)(1)		4,378	4,378
				27,641	27,641
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)	28,813	28,418	28,418
		Common Units (500,000 units)(1)		500	—
		Preferred Units (4,500,000 units)(1)		4,500	3,282
				33,418	31,700

24

AMERICAN CAPITAL STRATEGIES, LTD.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

December 31, 2005

(in thousands, except share data)

Company(4)	Industry	Investments(5)	Principal	Cost	Fair Value
Radar Detection Holdings Corp	Household Durables	Senior Debt (11.5%, Due 11/12)	13,000	12,984	12,984
		Common Stock (69,795 shares)(1)		1,029	9,787
				14,013	22,771
Riddell Holdings, LLC	Leisure Equipment & Products	Common Units (3,044,491 units)(1)		3,044	5,902
Roadrunner Dawes, Inc.	Road & Rail	Subordinated Debt (14.0%, Due 9/12)	17,702	17,530	17,530
		Common Stock (10,000 shares)(1)		10,000	10,000
				27,530	27,530
Seroyal Holdings, L.P.(3)	Health Care Equipment & Supplies	Senior Debt (15.4%, Due 12/10)	5,804	5,726	5,726
		Subordinated Debt (14.5%, Due 12/11)	9,130	8,654	8,654
		Partnership Units (144,552 units)(1)		1,253	1,253
		Preferred Partnership Units (57,143 units)(1)		754	754
				16,387	16,387
TechBooks, Inc.	IT Services	Subordinated Debt (16.3%, Due 8/09)	30,467	30,046	30,046
		Convertible Preferred Stock (4,373,178 shares)(1)		15,000	16,859
				45,046	46,905
The Hygenic Corporation	Health Care Equipment & Supplies	Subordinated Debt (15.5%, Due 1/12)	10,971	10,857	10,857
		Common Stock (200,000 shares)(1)		1,000	6,982
		Redeemable Preferred Stock (9,000 shares)		10,380	10,380
				22,237	28,219
Trinity Hospice, Inc.	Health Care Providers & Services	Senior Debt (11.4%, Due 6/06 – 6/07)	16,150	16,114	16,026
		Common Stock (131,399 shares)(1)		13	—
		Redeemable Preferred Stock (131,399 shares)(1)		3,972	—
				20,099	16,026
Unwired Holdings, Inc.	Household Durables	Senior Debt (12.2%, Due 6/10 – 6/11)	7,629	7,323	7,323
		Subordinated Debt (15.0%, Due 6/12 – 6/13)	15,245	15,026	15,026
		Common Stock (100 shares)(1)		1	—
		Preferred Stock (16,200 shares)(1)		16,200	9,082
		Convertible Preferred Stock (179,901 shares)(1)		1,799	—
				40,349	31,431
WFS Holding, Inc.	Software	Subordinated Debt (14.0%, Due 2/12)	12,224	12,057	12,057
		Convertible Preferred Stock (35,000,000 shares)(1)		3,500	3,500
				15,557	15,557
Subtotal Affiliate Investments				420,370	449,026
CONTROL INVESTMENTS
3SI Acquisition Holdings, Inc.	Electronic Equipment & Instruments	Subordinated Debt (14.8%, Due 10/10 – 11/11)	39,740	39,332	39,332
		Common Stock (855 shares)(1)		27,246	55,248
				66,578	94,580
ACAS Wachovia Investments, L.P.	Diversified Financial Services	Partnership Interest, 90% of L.P.		24,185	24,799

25

AMERICAN CAPITAL STRATEGIES, LTD.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

December 31, 2005

(in thousands, except share data)

Company(4)	Industry	Investments(5)	Principal	Cost	Fair Value
Aeriform Corporation	Chemicals	Senior Debt (9.3%, Due 6/08 – 7/08)	22,989	22,989	22,989
		Senior Subordinated Debt (14.0%, Due 5/09)	495	447	447
		Junior Subordinated Debt (0.0%, Due 5/09)(1)	46,158	34,998	1,169
		Common Stock Warrants (1,991,246 shares)(1)		—	—
		Redeemable Preferred Stock (10 shares)(1)		119	—
				58,553	24,605
American Decorative Surfaces International, Inc.	Building Products	Senior Debt (8.7%, Due 5/06)(6)	422	422	—
		Subordinated Debt (7.0%, Due 5/11)(6)	12,097	10,069	—
		Common Stock Warrants (64,868 shares)(1)		—	—
		Convertible Preferred Stock (55,000 shares)(1)		8,211	—
				18,702	—
ASC Industries, Inc.	Auto Components	Subordinated Debt (12.4%, Due 10/10 – 10/11)	20,500	18,681	18,681
		Common Stock Warrants (74,888 shares)(1)		6,531	25,746
		Redeemable Preferred Stock (72,000 shares)		5,102	5,102
				30,314	49,529
Auxi Health, Inc.	Health Care Providers & Services	Senior Debt (11.3%, Due 12/07)	5,251	5,251	5,251
		Subordinated Debt (13.9%, Due 9/06 – 3/09)	18,617	15,696	15,785
		Subordinated Debt (14.0%, Due 3/09)(6)	8,280	3,232	551
		Common Stock Warrants (4,268,905 shares)(1)		2,599	1,767
		Convertible Preferred Stock (13,301,300 shares)(1)		2,732	—
				29,510	23,354
Biddeford Real Estate Holdings, Inc.	Real Estate	Senior Debt (8.0%, Due 5/14)	3,622	2,976	2,976
		Common Stock (100 shares)(1)		483	476
				3,459	3,452
BPWest, Inc.	Energy Equipment & Services	Senior Debt (11.8%, Due 7/11)	7,000	6,901	6,901
		Subordinated Debt (15.0%, Due 7/12)	6,089	6,002	6,002
		Redeemable Preferred Stock (7,800 shares)		8,102	8,102
		Common Stock (780,000 shares)(1)		1	1
				21,006	21,006
Bridgeport International, LLC(3)	Machinery	Senior Debt (12.0%, Due 11/10)	4,648	238	238
		Common membership units (100 units)(1)		7,000	4,830
				7,238	5,068
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)	6,707	6,621	6,621
		Common Stock (58,906 shares)(1)		1	2,545
		Redeemable Preferred Stock (3,625,000 shares)		3,932	3,932
				10,554	13,098
Cottman Acquisitions, Inc.	Commercial Services & Supplies	Subordinated Debt (14.3%, Due 9/11 – 9/12)	15,025	14,176	14,176
		Redeemable Preferred Stock (252,020 shares)		18,489	18,489
		Common Stock Warrants (111,965 shares)(1)		11,197	11,115
		Common Stock (65,000 shares)(1)		6,500	3,073
				50,362	46,853

26

AMERICAN CAPITAL STRATEGIES, LTD.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

December 31, 2005

(in thousands, except share data)

Company(4)	Industry	Investments(5)	Principal	Cost	Fair Value
DanChem Technologies, Inc.	Chemicals	Senior Debt (10.3%, Due 12/10)	12,920	12,920	12,920
		Common Stock (427,719 shares)(1)		2,500	—
		Redeemable Preferred Stock (12,953 shares)(1)		10,893	845
		Common Stock Warrants (401,622 shares)(1)		2,221	—
				28,534	13,765
ECA Acquisition Holdings, Inc.	Health Care Equipment & Supplies	Senior Debt (12.6%, Due 4/10 – 4/12)	16,450	16,209	16,209
		Subordinated Debt (16.5%, Due 4/14)	9,751	9,612	9,612
		Common Stock (1,000 shares)(1)		19,025	19,025
				44,846	44,846
eLynx Holdings, Inc.	IT Services	Senior Debt (11.3%, Due 12/09)	8,875	8,750	8,750
		Subordinated Debt (15.0%, Due 12/10 – 12/11)	8,728	8,611	8,611
		Common Stock (9,326 shares)(1)		933	933
		Redeemable Preferred Stock (17,488 shares)		8,133	8,133
		Common Stock Warrants (108,735 shares)(1)		10,874	10,874
				37,301	37,301
ETG Holdings, Inc.	Containers & Packaging	Senior Debt (11.8%, Due 5/11)	7,400	7,298	7,298
		Subordinated Debt (15.7%, Due 5/12 – 5/13)	11,262	11,102	11,102
		Convertible Preferred Stock (333,145 shares)		16,242	16,242
				34,642	34,642
Euro-Caribe Packing Company, Inc.	Food Products	Senior Debt (9.4%, Due 5/06 – 3/08)	8,149	8,119	8,149
		Subordinated Debt (11.0%, Due 3/08)(6)	7,766	7,645	7,270
		Common Stock Warrants (31,897 shares)(1)		1,110	—
		Convertible Preferred Stock (260,048 shares)(1)		5,732	—
				22,606	15,419
European Capital Limited(3)	Diversified Financial Services	Senior Debt (5.5%, Due 3/06)	24,861	24,861	24,861
		Ordinary Shares (100 shares)(1)		—	—
		Participating Preferred Shares (52,074,548 shares)(1)		153,328	153,328
				178,189	178,189
European Touch, LTD. II	Commercial Services & Supplies	Senior Debt (9.0%, Due 11/06)	2,336	2,336	2,336
		Subordinated Debt (12.4%, Due 11/06)	15,640	14,497	14,497
		Common Stock (2,895 shares)(1)		1,500	6,280
		Redeemable Preferred Stock (450 shares)		556	556
		Common Stock Warrants (7,105 shares)(1)		3,683	16,172
				22,572	39,841
Flexi-Mat Holding, Inc.	Textiles, Apparel & Luxury Goods	Senior Debt (17.7%, Due 11/09)	4,500	4,460	4,460
		Subordinated Debt (14.9%, Due 11/10 – 11/11)	12,514	12,401	12,401
		Common Stock (970,583 shares)(1)		9,706	22,233
		Redeemable Preferred Stock (145,000 shares)		11,226	11,226
				37,793	50,320
Fosbel Global Services (LUXCO) S.C.A(3)	Commercial Services & Supplies	Senior Debt (8.2%, Due 7/10 – 7/11)	39,466	38,789	38,789
		Subordinated Debt (14.3%, Due 7/12 – 7/13)	24,235	23,885	23,885
		Redeemable Preferred Stock (31,647,625 shares)(1)		31,648	34,118
		Convertible Preferred Stock (2,606,275 shares)(1)		5,213	131
		Common Stock (186,161 shares)(1)		372	—
				99,907	96,923

27

AMERICAN CAPITAL STRATEGIES, LTD.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

December 31, 2005

(in thousands, except share data)

Company(4)	Industry	Investments(5)	Principal	Cost	Fair Value
Future Food, Inc.	Food Products	Senior Debt (12.2%, Due 7/10)	9,867	9,766	9,766
		Subordinated Debt (12.4%, Due 7/11 – 7/12)	14,000	12,702	12,702
		Common Stock (92,738 shares)(1)		18,500	16,566
		Common Stock Warrants (6,500 shares)(1)		1,297	1,201
				42,265	40,235
FutureLogic, Inc.	Computers & Peripherals	Senior Debt (12.0%, Due 2/10 – 2/12)	50,250	49,591	49,591
		Subordinated Debt (15.0%, Due 2/13)	29,761	29,346	29,346
		Common Stock (221,672 shares)(1)		26,685	15,186
				105,622	94,123
Halex Holdings, Inc.	Construction Materials	Senior Debt (11.1%, Due 7/08 – 10/08)	24,425	24,148	24,148
		Subordinated Debt (17.1%, Due 8/10)	29,400	29,245	29,245
		Common Stock (163,083 shares)(1)		6,784	985
		Redeemable Preferred Stock (1,000 shares)		14,631	14,631
		Convertible Preferred Stock (145,996 shares)(1)		1,603	1,772
				76,411	70,781
Hartstrings Holdings Corp.	Textiles, Apparel & Luxury Goods	Senior Debt (10.5%, Due 12/10)	14,157	13,859	13,859
		Subordinated Debt (16.0%, Due 12/10)	5,290	4,955	4,955
		Subordinated Debt (19.0%, Due 12/10)(6)	3,807	3,222	1,485
				22,036	20,299
Hospitality Mints, Inc.	Food Products	Senior Debt (12.2%, Due 11/10)	7,425	7,329	7,329
		Subordinated Debt (12.4%, Due 11/11 – 11/12)	18,500	18,202	18,202
		Convertible Preferred Stock (95,198 shares)		22,325	28,032
		Common Stock Warrants (86,817 shares)(1)		54	643
				47,910	54,206
Iowa Mold Tooling Co., Inc.	Machinery	Subordinated Debt (13.0%, Due 10/08)	16,288	15,810	15,872
		Common Stock (426,205 shares)(1)		4,760	1,998
		Redeemable Preferred Stock (23,803 shares)		20,189	29,251
		Common Stock Warrants (530,000 shares)(1)		5,918	4,328
				46,677	51,449
Jones Stephens Corp.	Building Products	Subordinated Debt (16.1%, Due 10/10 – 10/11)	22,450	22,228	22,228
		Common Stock (8,750 shares)(1)		3,500	15,369
		Redeemable Preferred Stock (1,000 shares)(1)		7,000	7,000
		Convertible Preferred Stock (8,750 shares)(1)		3,500	14,981
				36,228	59,578
KAC Holdings, Inc.	Chemicals	Subordinated Debt (16.6%, Due 2/11 – 2/12)	22,790	22,562	22,562
		Common Stock (1,550,100 shares)(1)		1,550	60,966
		Redeemable Preferred Stock (13,950 shares)		16,242	16,242
				40,354	99,770
KIC Holdings, Inc.	Building Products	Senior Debt (12.5%, Due 9/07)	7,464	7,440	7,440
		Subordinated Debt (11.8%, Due 9/08)	3,883	3,725	3,725
		Subordinated Debt (18.3%, Due 9/08)(6)	7,769	7,448	2,780
		Redeemable Preferred Stock (30,356 shares)(1)		16,485	—
		Common Stock (3,761 shares)(1)		5,100	—
		Common Stock Warrants (156,613 shares)(1)		3,060	—
				43,258	13,945

28

AMERICAN CAPITAL STRATEGIES, LTD.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

December 31, 2005

(in thousands)

Company(4)	Industry	Investments(5)	Principal	Cost	Fair Value
Lifoam Holdings, Inc.	Leisure Equipment & Products	Senior Debt (9.1%, Due 6/07 – 6/10)	35,400	35,085	35,085
		Subordinated Debt (14.2%, Due 6/11 – 6/12)	22,266	21,881	21,881
		Common Stock (20,000 shares)(1)		2,000	966
		Redeemable Preferred Stock (8,800 shares)		5,981	5,981
		Common Stock Warrants (41,164 shares)(1)		4,116	3,341
				69,063	67,254
Logex Corporation	Road & Rail	Senior Subordinated Debt (12.0%, Due 7/08)	23,203	22,051	22,051
		Junior Subordinated Debt (14.0%, Due 7/08)(6)	6,545	4,758	4,135
		Common Stock Warrants (137,839 shares)(1)		7,454	—
		Redeemable Preferred Stock (695 shares)(1)		3,930	—
				38,193	26,186
LVI Holdings, LLC	Commercial Services & Supplies	Senior Debt (9.8%, Due 2/10)	4,600	4,509	4,509
		Subordinated Debt (18.0%, Due 2/13)	9,499	9,369	9,369
		Preferred Units (800 units)(1)		11,000	15,321
				24,878	29,199
MBT International, Inc.	Distributors	Senior Subordinated Debt (13.0%, Due 5/09)	987	794	794
		Junior Subordinated Debt (9.0%, Due 5/09)(6)	6,253	4,120	3,199
				4,914	3,993
Network for Medical Communication & Research, LLC	Commercial Services & Supplies	Subordinated Debt (13.0%, Due 12/06)	10,400	9,923	9,923
		Common Membership Warrants (50,128 units)(1)		2,038	25,148
				11,961	35,071
New Piper Aircraft, Inc.	Aerospace & Defense	Senior Debt (9.3%, Due 6/06 – 8/23)	54,992	54,163	54,179
		Subordinated Debt (8.0%, Due 7/13)	587	106	587
		Common Stock (771,839 shares)(1)		95	921
				54,364	55,687
New Starcom Holdings, Inc.	Construction & Engineering	Subordinated Debt (12.1%, Due 12/08 – 12/09)	32,994	27,915	28,009
		Common Stock (100 shares)(1)		—	—
		Convertible Preferred Stock (32,043 shares)(1)		11,500	17,085
				39,415	45,094
nSpired Holdings, Inc.	Food Products	Senior Debt (9.5%, Due 12/08 – 12/09)	17,431	17,268	17,268
		Subordinated Debt (18.0%, Due 8/07)(6)	9,614	9,133	4,270
		Common Stock (169,018 shares)(1)		5,000	—
		Redeemable Preferred Stock (29,500 shares)(1)		29,500	—
				60,901	21,538
Optima Bus Corporation	Machinery	Senior Debt (9.2%, Due 6/06 – 1/08)	5,455	5,456	5,456
		Subordinated Debt (10.0%, Due 5/11)(6)	3,758	2,336	2,354
		Common Stock (20,464 shares)(1)		1,896	—
		Convertible Preferred Stock (1,913,015 shares)(1)		16,807	—
				26,495	7,810
PaR Systems, Inc.	Machinery	Subordinated Debt (12.9%, Due 2/10)	4,632	4,632	4,632
		Common Stock (341,222 shares)(1)		1,089	6,560
		Common Stock Warrants (29,205 shares)(1)		—	561
				5,721	11,753

29

AMERICAN CAPITAL STRATEGIES, LTD.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

December 31, 2005

(in thousands, except share data)

Company(4)	Industry	Investments(5)	Principal	Cost	Fair Value
Pasternack Enterprises, Inc.	Electrical Equipment	Senior Debt (10.2%, Due 12/09 – 8/11)	34,134	33,591	33,591
		Subordinated Debt (17.4%, Due 5/10 – 8/11)	26,769	26,455	26,455
		Common Stock (98,799 shares)(1)		20,562	20,562
				80,608	80,608
PHI Acquisitions, Inc.	Internet & Catalog Retail	Senior Debt (11.2%, Due 6/12)	10,000	9,859	9,859
		Subordinated Debt (13.7%, Due 6/13)	24,663	24,310	24,310
		Common Stock (69,120 shares)(1)		6,629	6,629
		Redeemable Preferred Stock (62,210 shares)		45,071	45,071
		Common Stock Warrants (199,095 shares)(1)		19,910	19,910
				105,779	105,779
Precitech, Inc.	Machinery	Senior Debt (11.1%, Due 12/09 – 12/10)	5,338	5,327	5,327
		Senior Subordinated Debt (16.0%, Due 12/11)	2,083	2,083	2,083
		Junior Subordinated Debt (17.0%, Due 12/12) (6)	7,127	5,049	5,336
		Redeemable Preferred Stock (35,807 shares)(1)		7,187	—
		Common Stock (22,040 shares)(1)		2,204	—
		Common Stock Warrants (22,783 shares)(1)		2,278	663
				24,128	13,409
Ranpak Acquisition, Inc.	Containers & Packaging	Senior Subordinated Debt (13.6%, Due 12/12 – 12/13)	102,603	101,068	101,068
		Redeemable Preferred Stock (163,025 shares)		109,480	109,480
		Common Stock (181,139 shares)(1)		18,114	18,114
		Common Stock Warrants (541,970 shares)(1)		54,197	54,197
				282,859	282,859
SAV Holdings, Inc.	Commercial Services & Supplies	Senior Debt (11.2%, Due 11/11)	17,000	16,526	16,526
		Subordinated Debt (14.0%, Due 11/12)	12,026	11,847	11,847
		Redeemable Preferred Stock (26,370 shares)		26,145	26,145
		Common Stock (2,930,000 shares)(1)		2,880	2,880
				57,398	57,398
Sixnet, LLC	Electronic Equipment & Instruments	Senior Debt (9.3%, Due 6/10)	11,325	11,144	11,144
		Subordinated Debt (17.0%, Due 6/13)	10,045	9,906	9,906
		Membership Units (760 units)(1)		9,500	11,205
				30,550	32,255
Specialty Brands of America, Inc.	Food Products	Senior Debt (10.0%, Due 12/06 – 5/11)	25,343	25,055	25,055
		Subordinated Debt (15.4%, Due 9/08 – 5/13)	22,015	21,781	21,781
		Redeemable Preferred Stock (209,303 shares)		14,739	14,739
		Convertible Preferred Stock (336,000 shares)		35,208	35,208
		Common Stock (33,916 shares)(1)		3,392	3,392
		Common Stock Warrants (97,464 shares)(1)		9,746	9,746
				109,921	109,921
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 (12.2%, Due 1/10 – 4/11)	47,307	46,964	46,964
		Subordinated Debt (17.4%, Due 4/13) (6)	34,542	26,243	4,555
		Common Stock (1,000 shares) (1)		1	—
				73,208	51,519

30

AMERICAN CAPITAL STRATEGIES, LTD.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

December 31, 2005

(in thousands, except share data)

Company(4)	Industry	Investments(5)	Principal	Cost		Fair Value
VP Acquisition Holdings, Inc.	Health Care Equipment & Supplies	Senior Debt (8.3%, Due 10/11)	500		428		428
		Subordinated Debt (14.5%, Due 10/13 – 10/14)	18,099		17,831		17,831
		Common Stock (33,928 shares)(1)			42,410		42,410
					60,669		60,669
Warner Power, LLC	Electrical Equipment	Senior Debt (11.2%, Due 12/07)	6,616		6,616		6,616
		Subordinated Debt (12.6%, Due 12/06 – 12/07)	4,988		4,454		4,482
		Common Membership Units (47,000 units)(1)			1,623		—
		Common Membership Warrants (916 units)(1)			1,123		175
		Redeemable Preferred Stock (5,012,000 units)(1)			4,197		27
					18,013		11,300
Weber Nickel Technologies, Ltd.(3)	Machinery	Subordinated Debt (17.7%, Due 2/06 – 9/12)(6)	16,776		15,996		8,534
		Common Stock (44,834 shares)(1)			1,171		—
		Redeemable Preferred Stock (14,796 shares)(1)			11,847		—
					29,014		8,534
WWC Acquisitions, Inc.	Commercial Services & Supplies	Senior Debt (11.2%, Due 12/11)	11,385		11,193		11,193
		Subordinated Debt (14.2%, Due 12/12 – 12/13)	22,399		22,088		22,088
		Common Stock (4,826,476 shares)(1)			21,236		41,587
					54,517		74,868
Subtotal Control Investments					2,557,963		2,516,282
INTEREST RATE DERIVATIVE AGREEMENTS
	Interest Rate Swap— Pay Fixed/Receive Floating	29 Contracts Notional Amounts Totaling $1,357,142			—		17,006
	Interest Rate Swaption— Pay Floating/Receive Fixed	3 Contracts Notional Amounts Totaling $47,093			—		654
	Interest Rate Caps	5 Contracts Notional Amounts Totaling $25,361			—		472
Subtotal Interest Rate Derivative Agreements					—		18,132
Total Investment Assets				$	5,134,398	$	5,119,235
INTEREST RATE DERIVATIVE AGREEMENTS
	Interest Rate Swap— Pay Fixed/Receive Floating	8 Contracts Notional Amounts Totaling $96,025		$	—	$	(2,035	)
	Interest Rate Swap— Pay Floating/ Receive Floating	5 Contracts Notional Amounts Totaling $106,730			—		(105	)
Total Investment Liabilities				$	—	$	(2,140	)

(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.

31

AMERICAN CAPITAL STRATEGIES, LTD.

CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS

(unaudited)

(in thousands, except per share data)

	Three Months Ended March 31,
	2006			2005
Operations:
Net operating income	$	92,896		$	63,887
Net realized gain on investments		44,198			4,826
Net unrealized appreciation of investments		23,934			42,967
Cumulative effect of accounting change, net of tax		1,026			—
Net increase in net assets resulting from operations		162,054			111,680
Shareholder distributions:
Common stock dividends		(96,214	)		(65,817	)
Net decrease in net assets resulting from shareholder distributions		(96,214	)		(65,817	)
Capital share transactions:
Issuance of common stock		154,142			50,577
Issuance of common stock under stock option plans		2,428			14,845
Issuance of common stock under dividend reinvestment plan		190			228
Purchase of common stock held in deferred compensation trust		(501	)		—
Stock-based compensation		3,184			3,196
Cumulative effect of accounting change		(1,432	)		—
Other		(538	)		20
Net increase in net assets resulting from capital share transactions		157,473			68,866
Total increase in net assets		223,313			114,729
Net assets at beginning of period		2,897,637			1,872,426
Net assets at end of period	$	3,120,950		$	1,987,155
Net asset value per common share	$	25.30		$	21.84
Common shares outstanding at end of period		123,364			90,977

See accompanying notes.

32

AMERICAN CAPITAL STRATEGIES, LTD.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(in thousands)

	Three Months Ended March 31,
	2006			2005
Operating activities:
Net increase in net assets resulting from operations	$	162,054		$	111,680
Adjustments to reconcile net increase in net assets resulting from operations to net cash provided by operating activities:
Net unrealized appreciation of investments		(23,934	)		(42,967	)
Net realized gain on investments		(44,198	)		(4,826	)
Accretion of loan discounts		(3,074	)		(3,129	)
Increase in accrued payment-in-kind interest and dividends		(29,459	)		(16,763	)
Collection of loan origination fees		5,007			4,258
Amortization of deferred finance costs and net debt discount		2,668			1,883
Stock-based compensation and other deferred compensation expense		5,063			3,196
Cumulative effect of accounting change, net of tax		(1,026	)		—
Depreciation of property and equipment		969			401
Funding of deferred compensation plan		(26,460	)		—
Increase in interest receivable		(2,587	)		(6,977	)
Decrease in other assets		5,002			2,437
Decrease in other liabilities		(21,874	)		(14,406	)
Net cash provided by operating activities		28,151			34,787
Investing activities:
Purchases of investments		(882,969	)		(393,645	)
Principal repayments		437,919			124,166
Proceeds from sale of senior debt investments		42,607			47,305
Collection of payment-in-kind notes and dividends		5,585			3,457
Collection of accreted loan discounts		2,011			978
Proceeds from sale of equity investments		98,842			11,331
Purchase of government securities		—			(99,938	)
Interest rate derivative receipts (payments), net		1,524			(3,295	)
Capital expenditures of property and equipment		(5,394	)		(646	)
Repayments of employee notes receivable issued in exchange for common stock		—			20
Net cash used in investing activities		(299,875	)		(310,267	)
Financing activities:
Proceeds from asset securitizations		67,975			—
(Repayments) of draws on revolving debt facilities, net		(2,230	)		147,611
Repayment of notes payable		(60,764	)		(84,528	)
Proceeds from debt issuances		21,977			—
Proceeds from short-term secured financing agreements, net		25,115			113,938
Increase in deferred financing costs		(467	)		(2,227	)
Decrease in debt service escrows		37,742			72,108
Issuance of common stock		156,570			65,422
Purchase of common stock held in deferred compensation trust		(501	)		—
Distributions paid		(2,997	)		(5,094	)
Net cash provided by financing activities		242,420			307,230
Net increase (decrease) in cash and cash equivalents		(29,304	)		31,750
Cash and cash equivalents at beginning of period		97,134			58,367
Cash and cash equivalents at end of period	$	67,830		$	90,117
Non-cash financing activities:
Issuance of common stock in conjunction with dividend reinvestment plan	$	190		$	228

See accompanying notes.

33

AMERICAN CAPITAL STRATEGIES, LTD.

CONSOLIDATED FINANCIAL HIGHLIGHTS

(unaudited)

(in thousands, except per share data)

	Three Months Ended March 31,
	2006			2005
Per Share Data:
Net asset value at beginning of the period	$	24.37		$	21.11
Net operating income(1)		0.77			0.71
Net realized gain on investments(1)		0.37			0.06
Net unrealized appreciation on investments(1)		0.20			0.48
Cumulative effect of accounting change, net of tax(1)		0.01			—
Net increase in net assets resulting from operations(1)		1.35			1.25
Issuance of common stock		0.39			0.19
Effect of (dilution) antidilution(2)		(0.01	)		0.02
Distribution of net investment income		(0.80	)		(0.73	)
Net asset value at end of period	$	25.30		$	21.84
Ratio/Supplemental Data:
Per share market value at end of period	$	35.16		$	31.41
Total loss(3)		(0.6	)%		(3.5	)%
Shares outstanding at end of period		123,364			90,977
Net assets at end of period	$	3,120,950		$	1,987,155
Average net assets	$	3,009,294		$	1,929,791
Average debt outstanding	$	2,431,000		$	1,572,900
Average debt per common share(1)	$	20.28		$	17.57
Ratio of operating expenses, net of interest expense, to average net assets		1.28	%		0.96	%
Ratio of interest expense to average net assets		1.20	%		0.90	%
Ratio of operating expenses to average net assets		2.48	%		1.86	%
Ratio of net operating income to average net assets		3.09	%		3.31	%

(1) Weighted average basic per share data.

(2) Represents the 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.

See accompanying notes.

34

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”) 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 fund management services to a European investment fund. We are headquartered in Bethesda, Maryland, and have offices in New York, San Francisco, Los Angeles, Philadelphia, Chicago, Dallas, Boston, Palo Alto, London and Paris.

Note 3. Consolidation

Under the investment company rules and regulations pursuant to Article 6 of Regulation S-X and the AICPA Audit and Accounting Guide for Investment Companies, 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. Our investments in other investment companies or funds are recorded as investments in the accompanying consolidated financial statements and are not consolidated. We also have wholly-owned affiliated statutory trusts that were established to facilitate secured borrowing arrangements whereby assets were transferred to the affiliated statutory trusts and notes were sold by the trusts. These transfers of assets to the trusts are treated as secured borrowing arrangements in accordance with FASB Statement No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities,” and our consolidated financial statements include the accounts of our affiliated statutory trusts established for secured financing arrangements. We also have established trusts to fund deferred compensation plans for employees. Our consolidated financial statements include the accounts of these trusts. All intercompany accounts have been eliminated in consolidation.

35

AMERICAN CAPITAL STRATEGIES, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

(in thousands, except per share data)

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 of the portfolio company, third party sale offers, potential strategic buyer analysis 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 equal the face value of the debt security. For commercial mortgage backed securities (“CMBS”) and collateralized debt obligation (“CDO”) securities, we prepare a fair value analysis that is based on a discounted cash flow model utilizing prepayment and loss assumptions based on historical experience and projected performance, economic factors, the characteristics of the underlying cash flow, and comparable yields for similar securities, when available.

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 March 31, 2006 and December 31, 2005, 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 more than 25% 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 between 5% and 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

36

AMERICAN CAPITAL STRATEGIES, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

(in thousands, except per share data)

current income. These investments typically consist of equity warrants, common equity, and preferred equity and are identified in the accompanying consolidated schedule of investments. We also invest in CMBS and CDO non-investment grade securities. As of March 31, 2006, loans on non-accrual status were $177,341, calculated as the cost plus unamortized OID. As of March 31, 2006, loans, excluding loans on non-accrual status, with a principal balance of $34,808 were greater than three months past due. As of December 31, 2005, loans on non-accrual status were $132,330, calculated as the cost plus unamortized OID. As of December 31, 2005, loans, excluding loans on non-accrual status, with a principal balance of $34,498 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 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. For CMBS and CDO securities, we recognize interest income using the effective interest method, using the anticipated yield over the projected life of the investment.

Summaries of the composition of our investment portfolio as of March 31, 2006 and December 31, 2005 at cost and fair value are shown in the following table:

	March 31, 2006		December 31, 2005
COST
Senior debt	27.2	%	29.3	%
Subordinated debt	34.6	%	36.9	%
Preferred equity	18.4	%	17.1	%
Equity warrants	4.9	%	4.8	%
Common equity	10.9	%	9.7	%
CMBS & CDO securities	4.0	%	2.2	%
	March 31, 2006		December 31,2005
FAIR VALUE
Senior debt	27.3	%	29.5	%
Subordinated debt	32.5	%	35.2	%
Preferred equity	17.1	%	15.2	%
Equity warrants	6.0	%	5.8	%
Common equity	13.0	%	12.0	%
CMBS & CDO Securities	4.1	%	2.3	%

37

AMERICAN CAPITAL STRATEGIES, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

(in thousands, except per share data)

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:

	March 31, 2006		December 31, 2005
COST
Commercial Services & Supplies	14.0	%	12.9	%
Diversified Financial Services	10.5	%	8.0	%
Electrical Equipment	6.9	%	7.4	%
Containers & Packaging	6.8	%	7.2	%
Leisure Equipment & Products	5.8	%	6.1	%
Food Products	5.7	%	6.0	%
Building Products	4.3	%	6.1	%
Auto Components	4.2	%	5.0	%
Healthcare Providers & Services	3.9	%	2.1	%
Healthcare Equipment & Supplies	3.6	%	3.8	%
Construction & Engineering	3.5	%	3.7	%
Machinery	2.9	%	3.2	%
Textiles, Apparel & Luxury Goods	2.7	%	2.9	%
IT Services	2.7	%	2.5	%
Chemicals	2.3	%	2.5	%
Software	2.3	%	2.5	%
Internet & Catalog Retail	2.2	%	2.1	%
Computers & Peripherals	1.9	%	2.1	%
Personal Products	1.7	%	1.8	%
Road & Rail	1.6	%	1.7	%
Energy Equipment & Services	1.6	%	0.4	%
Household Durables	1.6	%	1.7	%
Construction Materials	1.4	%	1.5	%
Diversified Consumer Services	1.1	%	0.0	%
Electronic Equipment & Instruments	1.0	%	3.1	%
Distributors	0.9	%	1.0	%
Aerospace & Defense	0.7	%	1.1	%
Oil, Gas & Consumable Fuels	0.6	%	0.0	%
Household Products	0.6	%	0.7	%
Media	0.5	%	0.5	%
Other	0.5	%	0.4	%

38

AMERICAN CAPITAL STRATEGIES, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

(in thousands, except per share data)

	March 31, 2006		December 31, 2005
FAIR VALUE
Commercial Services & Supplies	15.6	%	14.4	%
Diversified Financial Services	10.5	%	8.1	%
Electrical Equipment	7.7	%	7.3	%
Containers & Packaging	6.9	%	7.2	%
Leisure Equipment & Products	5.3	%	5.7	%
Food Products	5.0	%	5.4	%
Auto Components	4.6	%	5.5	%
Building Products	4.1	%	5.7	%
Healthcare Equipment & Supplies	3.9	%	4.0	%
Healthcare Providers & Services	3.7	%	1.9	%
Construction & Engineering	3.6	%	3.8	%
IT Services	2.8	%	2.6	%
Textiles, Apparel & Luxury Goods	2.7	%	3.1	%
Chemicals	2.4	%	2.7	%
Software	2.3	%	2.5	%
Internet & Catalog Retail	2.2	%	2.1	%
Machinery	2.2	%	2.5	%
Computers & Peripherals	1.7	%	1.8	%
Energy Equipment & Services	1.7	%	0.4	%
Household Durables	1.3	%	1.7	%
Oil, Gas & Consumable Fuels	1.2	%	0.0	%
Diversified Consumer Services	1.1	%	0.0	%
Road & Rail	1.1	%	1.4	%
Electronic Equipment & Instruments	1.1	%	3.8	%
Construction Materials	1.1	%	1.4	%
Distributors	1.0	%	1.0	%
Household Products	0.8	%	0.8	%
Aerospace & Defense	0.8	%	1.1	%
Personal Products	0.8	%	1.0	%
Media	0.6	%	0.5	%
Other	0.2	%	0.6	%

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.

	March 31, 2006		December 31, 2005
COST
Mid-Atlantic	20.6	%	21.3	%
Southwest	23.2	%	22.3	%
Southeast	13.8	%	14.6	%
North-Central	11.3	%	12.9	%
South-Central	7.4	%	5.9	%
Northwest	0.8	%	0.8	%
Northeast	14.4	%	14.5	%
International	8.5	%	7.7	%

39

AMERICAN CAPITAL STRATEGIES, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

(in thousands, except per share data)

	March 31, 2006		December 31, 2005
FAIR VALUE
Mid-Atlantic	21.8	%	22.8	%
Southwest	22.5	%	21.1	%
Southeast	13.0	%	14.4	%
North-Central	13.0	%	14.4	%
South-Central	7.2	%	5.0	%
Northwest	0.8	%	0.8	%
Northeast	14.0	%	14.3	%
International	7.7	%	7.2	%

Note 5. Borrowings

Our debt obligations consisted of the following as of March 31, 2006 and December 31, 2005:

Debt	March 31, 2006		December 31, 2005
Secured revolving debt-funding facility, $1,000,000 commitment	$	538,139	$	593,369
Unsecured revolving debt-funding facility, $310,000 commitment		215,000		162,000
Secured revolving debt-funding facility, $125,000 commitment		—		—
Unsecured debt due through September 2011		167,000		167,000
Unsecured debt due August 2010		126,000		126,000
Unsecured debt due October 2020		75,473		75,481
Unsecured debt due February 2011		22,126		—
TRS Facility		135,334		110,219
ACAS Business Loan Trust 2002-2 asset securitization		—		5,406
ACAS Business Loan Trust 2003-1 asset securitization		—		23,320
ACAS Business Loan Trust 2003-2 asset securitization		238		32,268
ACAS Business Loan Trust 2004-1 asset securitization		409,772		409,772
ACAS Business Loan Trust 2005-1 asset securitization		830,000		762,025
Total	$	2,519,082	$	2,466,860

The weighted average debt balance for the three months ended March 31, 2006 and 2005 was $2,431,000 and $1,572,900, respectively. The weighted average interest rate on all of our borrowings, including amortization of deferred financing costs, for the three months ended March 31, 2006 and 2005 was 5.92% and 4.41%, respectively. We are currently in compliance with all of our debt covenants.

As of December 31, 2005, we had a $255,000 unsecured revolving line of credit with a syndication of lenders. In January 2006, we expanded the committed amount of our existing unsecured debt-funding facility from $255,000 to $310,000 as a result of new lender commitments.

In February 2006, we entered into a note purchase agreement to issue €14 million and £3 million of senior unsecured five-year notes to institutional investors in a private placement offering. The €14 million Series 2006-A Notes have a fixed interest rate of 5.177% and the £3 million Series 2006-B Notes have a fixed interest rate of 6.565%. Each series matures in February 2011. The note purchase agreement contains customary default provisions.

40

AMERICAN CAPITAL STRATEGIES, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

(in thousands, except per share data)

In January 2006, we issued the remaining $67,975 of Class A-2A notes under our asset securitization for ACAS Business Loan Trust 2005-1.

We have a total return swap facility (the “TRS Facility”) with Wachovia Bank, N.A. (“Wachovia”) under which we pledge certain of our investments to Wachovia from time to time in exchange for financing. Subject to the terms and conditions of the TRS Facility, we may generally repay and reborrow proceeds and are required to make payments to Wachovia on outstanding funds at a rate equal to one-month LIBOR plus 125 basis points. We must also repay all or a portion of any funded amount upon the occurrence of certain events. In addition to the pledged assets, Wachovia has recourse to us for any collateral shortfall up to $150 million. The TRS Facility contains customary default provisions and is scheduled to terminate in December 2006. We have treated the TRS Facility as a secured financing arrangement with the outstanding funded amount included as a debt obligation on the accompanying consolidated balance sheets.

We considered an interpretation of GAAP relating to the treatment of transactions where investments acquired by us from a particular counterparty are simultaneously financed through a financing arrangement with that same counterparty or an affiliate thereof. Currently, in such cases, we record such transactions as a sale of the investment to us and such related debt provided to us as a secured financing arrangement. An alternative interpretation of GAAP, however, concerns whether such investment should be presented on a net basis and treated as a derivative.

In the first quarter of 2006, we purchased several tranches of CMBS from an affiliate of Wachovia and subsequently pledged certain tranches of the acquired CMBS investment to Wachovia through the TRS Facility. If we recorded certain tranches of this CMBS investment as a derivative at the time of acquisition, total assets and total liabilities would have been affected for the quarter ended March 31, 2006. The accounting for these types of transactions is being considered for further technical guidance by the accounting standard setters. Future guidance may require us to adjust our accounting of these transactions.

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 Principle 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.

In December 2004, the FASB issued FASB Statement No. 123 (revised 2004), “Share-Based Payment,” a revision to FASB Statement No. 123. FASB Statement No. 123(R) also supersedes APB Opinion No. 25 and amends FASB Statement No. 95, “Statement of Cash Flows.” Generally, the approach in FASB Statement No. 123(R) is similar to the approach described in FASB Statement No. 123. However, FASB Statement 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative. In the first quarter of 2006, we adopted FASB Statement No. 123(R) using the “modified prospective” method. Under the modified prospective method, the consolidated financial statements for prior year interim periods and fiscal years will not reflect any restated amounts.

41

AMERICAN CAPITAL STRATEGIES, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

(in thousands, except per share data)

All of our stock options granted prior to January 1, 2003 that were accounted for under APB Opinion No. 25 and not expensed in our consolidated statements of operations were fully vested as of December 31, 2005 and therefore, no additional stock compensation costs for those stock option grants will be recorded subsequent to the adoption of FASB Statement No. 123(R). When recognizing compensation cost under FASB Statement No. 123, we elected to adjust the compensation costs for forfeitures when the unvested awards were actually forfeited. However, under FASB Statement No. 123(R), we are required to estimate forfeitures of unvested awards when recognizing compensation cost. Upon the adoption of FASB Statement 123(R) on January 1, 2006, we recorded a cumulative effect of a change in accounting principle to adjust compensation cost, net of related tax effects, for the difference in compensation costs recognized in prior periods had forfeitures been estimated during those periods of $1,026, or $0.01 per basic share and $0.01 per diluted share. We calculated the compensation costs that would have been recognized in prior periods and during the three months ended March 31, 2006 using an estimated annual forfeiture rate of 6.7%.

During the three months ended March 31, 2006, we granted 1,990 options to purchase shares of common stock. We estimated the weighted average fair value on the date of grant of $2.26 per option using a Black-Scholes option pricing model using the following assumptions: exercise price at market on date of grant, expected dividend yield of 9.4%, weighted average risk-free interest rate of 4.4%, expected volatility factor of 0.23, and expected term of 5 years. In prior periods, we determined our expected volatility used in a Black-Scholes option pricing model based on our historical volatility during the expected term of the option. Beginning in the first quarter of 2006, we determined our expected volatility based on a combination of our historical volatility during the expected term of the option and our implied volatility based on the market prices of traded options of our stock.

As of March 31, 2006, the total compensation cost related to nonvested stock option awards not yet recognized was $54,449 that has a weighted average period to be recognized of 3.5 years.

42

AMERICAN CAPITAL STRATEGIES, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(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 March 31, 2005
Net operating income
As reported	$	63,887
Stock-based employee compensation		(345	)
Pro forma	$	63,542
Net operating income per common share
Basic as reported	$	0.71
Basic pro forma	$	0.71
Diluted as reported	$	0.70
Diluted pro forma	$	0.70
Net increase in net assets resulting from operations
As reported	$	111,680
Stock-based employee compensation		(345	)
Pro forma	$	111,335
Net increase in net assets resulting from operations per common share
Basic as reported	$	1.25
Basic pro forma	$	1.24
Diluted as reported	$	1.22
Diluted pro forma	$	1.22

A summary of the status of all of our stock option plans as of and for the three months ended March 31, 2006 is as follows:

	Three Months Ended March 31, 2006
	Shares		Weighted Average Exercise Price
Options outstanding, beginning of year	10,060		$	28.71
Granted	1,990		$	34.79
Exercised	(111	)	$	21.84
Canceled and expired	(13	)	$	22.21
Options outstanding, end of period	11,926		$	29.80
Options exercisable at period end	2,477		$	25.18

Our shareholders had previously approved a non-employee director option plan providing for grants of 150 shares of common stock. In the first quarter of 2006, we received an order from the Securities and Exchange Commission authorizing the plan.

43

AMERICAN CAPITAL STRATEGIES, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

(in thousands, except per share data)

Note 7. Deferred Compensation Plans

In the first quarter of 2006, we established a non-qualified deferred compensation plan (the “Plan”) for the purpose of granting bonus awards to our domestic employees. The compensation and corporate governance committee of our board of directors is the administrator of the Plan. The Plan is funded through a trust which is administered by a third-party trustee (the “Trust”). The compensation and corporate governance committee determines bonus awards to be granted under the Plan and the terms of such awards, including vesting schedules. Awards may vest contingent on the employee’s continued employment and the achievement of performance goals, if any, as determined by the compensation and corporate governance committee. The Trust provides certain protections of its assets from events other than claims against our assets in the case of bankruptcy.

The assets and liabilities of the Trust are consolidated in the accompanying consolidated financial statements. During the first quarter of 2006, we contributed $26,460 to the Trust. The Trust has not acquired shares of our common stock as of March 31, 2006, but it intends to do so subject to shareholder approval. Until such approval is received, the amounts contributed have been invested in short-term investments and are included in other assets on the accompanying consolidated balance sheets. The expected payment of the deferred compensation liability is recorded as compensation cost pro rata over the requisite service period. For the quarter ended March 31, 2006, we recorded $1,292 of deferred compensation cost for bonus awards granted under the Plan.

We also have a deferred compensation plan for the benefit of certain European employees funded through a separate trust administered by a third party trustee. The trust uses the funds provided by us to purchase shares of our common stock on the open market that will vest to the employee pro rata over a five-year period. The expected payment of the deferred compensation liability is recorded as compensation cost pro rata over the requisite service period. The deferred compensation liability is classified as a liability in our accompanying consolidated balance sheet and is adjusted through compensation cost to reflect changes in the fair value of our common stock for the obligation of the awards that are vested. Our common stock held by the trust is accounted for as treasury stock in the accompanying consolidated balance sheet.

Note 8. Earnings Per Share

The following table sets forth the computation of basic and diluted earnings per share for the three months ended March 31, 2006 and 2005:

	Three Months Ended March 31,
	2006		2005
Numerator for basic and diluted net operating income per share	$	92,896	$	63,887
Numerator for basic and diluted earnings per share	$	162,054	$	111,680
Denominator for basic weighted average shares		119,866		89,534
Employee stock options and awards		887		857
Shares issuable under forward sale agreements		333		1,010
Denominator for diluted weighted average shares		121,086		91,401
Basic net operating income per common share	$	0.77	$	0.71
Diluted net operating income per common share	$	0.77	$	0.70
Basic earnings per common share	$	1.35	$	1.25
Diluted earnings per common share	$	1.34	$	1.22

44

AMERICAN CAPITAL STRATEGIES, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

(in thousands, except per share data)

Note 9. Segment Data

Our reportable segments are our investing operations as a business development company and our financial advisory operations.

The following table presents segment data for the three months ended March 31, 2006:

	Investing			Financial Advisory			Consolidated
Interest and dividend income	$	131,101		$	24		$	131,125
Fee and other income		4,833			37,220			42,053
Total operating income		135,934			37,244			173,178
Interest expense		35,982			—			35,982
Salaries, benefits and stock-based compensation		7,386			15,829			23,215
General and administrative		5,810			9,607			15,417
Total operating expenses		49,178			25,436			74,614
Operating income before income taxes		86,756			11,808			98,564
Provision for income taxes		(412	)		(5,256	)		(5,668	)
Net operating income		86,344			6,552			92,896
Net realized gain on investments		44,198			—			44,198
Net unrealized appreciation of investments		23,934			—			23,934
Increase in net assets resulting from operations before cumulative effect of accounting change		154,476			6,552			161,028
Cumulative effect of accounting change, net of tax		449			577			1,026
Net increase in net assets resulting from operations	$	154,925		$	7,129		$	162,054

The following table presents segment data for the three months ended March 31, 2005:

	Investing		Financial Advisory			Consolidated
Interest and dividend income	$	86,417	$	1		$	86,418
Fee and other income		1,560		12,877			14,437
Total operating income		87,977		12,878			100,855
Interest		17,346		—			17,346
Salaries, benefits and stock-based compensation		3,913		8,399			12,312
General and administrative		3,284		3,001			6,285
Total operating expenses		24,543		11,400			35,943
Operating income before income taxes		63,434		1,478			64,912
Provision for income taxes		—		(1,025	)		(1,025	)
Net operating income		63,434		453			63,887
Net realized gain on investments		4,826		—			4,826
Net unrealized appreciation of investments		42,967		—			42,967
Net increase in net assets resulting from operations	$	111,227	$	453		$	111,680

45

AMERICAN CAPITAL STRATEGIES, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

(in thousands, except per share data)

Note 10. Commitments

As of March 31, 2006, we had commitments under loan and financing agreements to fund up to $309,697 to 47 portfolio companies. These commitments are primarily composed of working capital credit facilities, acquisition credit facilities and subscription agreements. The commitments are generally subject to the borrowers meeting certain criteria. The terms of the borrowings and financings subject to commitment are comparable to the terms of other debt and equity securities in our portfolio.

As of March 31, 2006, we were also subject to a subscription agreement to fund up to €322,848 (or $389,880) of equity commitments to European Capital Limited (See Note 13).

Note 11. Shareholders’ Equity

Our common share activity for the three months ended March 31, 2006 and 2005 was as follows:

	March 31, 2006		March 31, 2005
Common shares outstanding at beginning of period	118,913		88,705
Issuance of common stock	4,337		1,700
Issuance of common stock under stock option plans	111		565
Issuance of common stock under dividend reinvestment plan	6		7
Purchase of common stock held in deferred compensation trust	(3	)	—
Common shares outstanding at end of period	123,364		90,977

Forward Sale Agreements

We periodically complete public offerings where shares of our common stock are sold in which a portion of the shares are offered directly by us and a portion of the shares are sold by third parties in connection with agreements to purchase common stock from us for future delivery dates pursuant to forward sale agreements. The shares of common stock sold by third parties are borrowed from third party market sources by counterparties, or forward purchasers, of the forward sale agreements who then sell the shares to the public. Pursuant to the forward sale agreements, we are required to sell to the forward purchasers shares of our common stock generally at such times as we elect over a one-year period. The forward sale agreements provide for settlement on a settlement date or dates specified at our discretion within a one-year period. On a settlement date, we issue shares of our common stock to the forward purchaser at the then applicable forward sale price. The forward sale price is initially the public offering price of shares of our common stock less the underwriting discount. The forward sale agreements provide that the initial forward sale price per share is subject to daily adjustment based on a floating interest factor equal to the federal funds rate, less a spread, and also is subject to specified decreases on certain dates during the duration of the agreement. The forward sale prices are also subject to decrease if the total cost to the forward purchasers of borrowing our common stock exceeds a specified amount.

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

46

AMERICAN CAPITAL STRATEGIES, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

(in thousands, except per share data)

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.

Equity Offerings

For the first quarters of 2006 and 2005, we completed several public offerings of our common stock and entered into several forward sale agreements. The following table summarizes the total shares sold, including shares sold pursuant to the underwriters’ over-allotment options and through forward sale agreements, and the proceeds we received, excluding issuance costs, for the public offerings of our common stock for the first quarters of 2006 and 2005:

	Shares Sold	Proceeds, Net of Underwriters’ Discount		Average Price per Share
February 2006 public offering	987	$	35,620	$	36.10
January 2006 public offering	600	$	20,904	$	34.84
Issuances under November 2005 Forward Sale Agreements	2,000	$	71,661	$	35.83
Issuances under September 2005 Forward Sale Agreements	750	$	26,113	$	34.82
Total for the three months ended March 31, 2006	4,337	$	154,298	$	35.58
March 2005 public offering	700	$	21,080	$	30.11
Issuances under September 2004 Forward Sale Agreements	1,000	$	29,506	$	29.51
Total for the three months ended March 31, 2005	1,700	$	50,586	$	29.76

In November 2005, we entered into forward sale agreements (the November 2005 Forward Sale Agreements”) to purchase 5,000 shares of common stock. The 5,000 shares of common stock were borrowed from third party market sources by counterparties, or forward purchasers, of the November 2005 Forward Sale Agreements who then sold the shares to the public. Pursuant to the November 2005 Forward Sale Agreements, we must sell to the forward purchasers 5,000 shares of our common stock generally at such times as we elect over a one-year period. The November 2005 Forward Sale Agreements provide for settlement on a settlement date or dates to be specified at our discretion within the duration of the November 2005 Forward Sale

47

AMERICAN CAPITAL STRATEGIES, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

(in thousands, except per share data)

Agreements through termination in November 2006. On a settlement date, we will issue shares of our common stock to the forward purchasers at the then applicable forward sale price. The forward sale price was initially $36.941 per share, which was the public offering price of shares of our common stock less the underwriting discount. The November 2005 Forward Sale Agreements provide that the initial forward sale price per share is subject to daily adjustment based on a floating interest factor equal to the federal funds rate, less a spread, and is subject to decrease by $0.79, $0.03, $0.80, $0.81 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 March 31, 2006, there are 1,500 shares available under the November 2005 Forward Sale Agreements at a forward sale price of $35.83 per share.

In January 2006, we entered into a forward sale agreement (the “January 2006 Forward Sale Agreement”) to purchase 4,000 shares of common stock. The 4,000 shares of common stock were borrowed from third party market sources by the counterparty, or forward purchaser, of the January 2006 Forward Sale Agreement who then sold the shares to the public. Pursuant to the January 2006 Forward Sale Agreement, we must sell to the forward purchaser 4,000 shares of our common stock generally at such times as we elect over a one-year period. The January 2006 Forward Sale Agreement provides for settlement date or dates to be specified at our discretion within the duration of the January 2006 Forward Sale Agreement through termination in January 2007. 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 $34.84 per share, which was the public offering price of shares of our common stock less the underwriting discount. The January 2006 Forward Sale Agreement provides that the initial forward sale price per share is subject to daily adjustment based on a floating interest factor equal to the federal funds rate, less a spread, and is subject to a decrease by $0.80, $0.82, $0.85, and $0.86 on each of March 3, 2006, June 2, 2006, September 1, 2006 and December 1, 2006, respectively. The forward sale price will also be subject to decrease if the cost to the forward purchaser of borrowing our common stock exceeds a specified amount. As of March 31, 2006, there are 4,000 shares available under the January 2006 Forward Sale Agreement at a forward sale price of $34.35 per share.

As of March 31, 2006, all other forward sale agreements had been fully settled.

Note 12. 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 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.

48

AMERICAN CAPITAL STRATEGIES, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

(in thousands, except per share data)

Note 13. Investment in European Capital Limited

On September 30, 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”), invests in and sponsors management and employee buyouts, invests in private equity buyouts and provides capital directly to private and mid-sized public companies primarily in Europe. As of March 31, 2006, we have funded €197,898 ($236,991) of our equity commitment and have a remaining unfunded commitment of €322,848 ($389,880). During the first quarter of 2006, we also provided ECAS Holding with senior bridge loan financing of $193,608, which was fully repaid as of March 31, 2006. During the first quarter of 2006, ECAS obtained commitments for a €400,000 multi-currency secured revolving credit facility to fund investments. Our total investment in ECAS Holding as of March 31, 2006 of $236,991 is included as an investment in our accompanying consolidated balance sheet.

Our wholly-owned subsidiary 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 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. For the three months ended March 31, 2006, we recorded $7,519 of revenue from these agreements consisting of $2,819 of management fees and $4,700 for reimbursements of costs and expenses. As of March 31, 2006 and December 31, 2005, we had a receivable of $3,519 and $10,402, respectively, due from ECAS and ECAS Holding for management fees and reimbursements of costs and expenses, which is included in other assets in the accompanying consolidated balance sheets.

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 at least €0.10 per preference share up to a maximum of €10 per preference share. The €10 per preference share price is the initial contribution per preference share at the initial capital commitment. 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 the preference shares in the future. In the event that ECAS Holding issues additional preference shares, we will receive additional warrants to purchase preference shares in ECAS so that at all times the warrants issued to us as manager are not less than 20% of ECAS Holding’s preference shares on a fully-diluted basis. 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%.

49

AMERICAN CAPITAL STRATEGIES, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

(in thousands, except per share data)

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 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 14. Subsequent Event

In April 2006, we completed a public offering in which 9,800 shares of our common stock, including an underwriters’ over-allotment of 1,800 shares, were sold at a public offering price of $35.31 per share. Upon completion of the offering and exercise of the underwriters’ over-allotment option, we received proceeds, net of the underwriters’ discount, of $333,062.

As part of the public offering in April 2006, we also entered into forward sale agreements (the “April 2006 Forward Sale Agreements”) to purchase 4,000 shares of common stock. The 4,000 shares of common stock were borrowed from third party market sources by the counterparties, or forward purchasers, of the April 2006 Forward Sale Agreements who then sold the shares to the public. Pursuant to the April 2006 Forward Sale Agreements, we must sell to the forward purchasers 4,000 shares of our common stock generally at such times as we elect over a one-year period. The April 2006 Forward Sale Agreements provide for settlement date or dates to be specified at our discretion within the duration of the April 2006 Forward Sale Agreements through termination in April 2007. On a settlement date, we will issue shares of our common stock to the forward purchasers at the then applicable forward sale price. The forward sale price was initially $33.9859 per share, which was the public offering price of shares of our common stock less the underwriting discount. The April 2006 Forward Sale Agreements provide that the initial forward sale price per share is subject to daily adjustment based on a floating interest factor equal to the federal funds rate, less a spread, and is subject to a decrease by $0.82, $0.83, $0.84, and $0.85 on each of June 2, 2006, September 1, 2006, December 1, 2006 and March 2, 2007, 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.

50

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; (xiv) our strategy of becoming an asset manager of funds of private assets may not be successful and therefore have a negative impact on our results of operation; and (xv) 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. The total portfolio value of investments was $5,508,560 and $5,117,095 as of March 31, 2006 and December 31, 2005, respectively. During the three months ended March 31, 2006 we made investments totaling $697,100, including $112,700 in funds committed but undrawn under credit facilities and equity commitments at the date of the investment. During the three months ended March 31, 2005 we made investments totaling $405,800, including $35,800 in funds committed but undrawn under credit facilities at the date of the investment. The weighted average effective interest rate on debt securities was 12.7% and 12.8% at March 31, 2006 and December 31, 2005, respectively.

We invest in and sponsor management and employee buyouts, invest in private equity sponsored buyouts, provide capital directly to early stage and mature private and small public companies, invest in commercial mortgage backed securities and collateralized debt obligation securities and invest in investment funds managed by us. We provide senior debt, mezzanine debt and equity to fund growth, acquisitions and recapitalizations. We, through our asset management business, are also a manager of debt and equity investments in private companies. 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

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complete business or specific lines of a business that are related to the portfolio company’s business, (ii) recapitalization at the 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 during the three months ended March 31, 2006 and 2005 were as follows:

	Three Months Ended March 31, 2006		Three Months Ended March 31, 2005
American Capital Sponsored Buyouts	$	404,800	$	137,900
Financing for Private Equity Buyouts		15,000		129,700
Direct Investments		12,000		60,300
CMBS & CDO Investments		107,500		19,400
Add-On Financing for Acquisitions		140,100		29,100
Add-On Financing for Recapitalization		8,000		2,400
Add-On Financing for Growth		1,500		5,000
Add-On Financing for Working Capital		8,200		22,000
Total	$	697,100	$	405,800

During the three months ended March 31, 2006, we received cash proceeds of $368,529 from exits of portfolio investments, excluding $218,435 of repayments of bridge notes to ECAS Holding. This is composed of $13,705 of scheduled principal amortization, $42,607 of senior loan sales, $205,779 of principal prepayments, $7,596 of payments of accrued PIK interest and dividends and accreted OID and $98,842 from the sale of equity investments.

Critical Accounting Policies

Stock-based Compensation

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 Principle 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.

In December 2004, the FASB issued FASB Statement No. 123 (revised 2004), “Share-Based Payment,” a revision to FASB Statement No. 123. FASB Statement No. 123(R) also supersedes APB Opinion No. 25 and amends FASB Statement No. 95, “Statement of Cash Flows.” Generally, the approach in FASB Statement No. 123(R) is similar to the approach described in FASB Statement No. 123. However, FASB Statement 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative. In the first quarter of 2006, we adopted FASB Statement No. 123(R) using the “modified prospective” method. Under the modified prospective method, the consolidated financial statements for prior year interim periods and fiscal years will not reflect any restated amounts.

All of our stock options granted prior to January 1, 2003 that were accounted for under APB Opinion No. 25 and not expensed in our consolidated statements of operations were fully vested as of December 31, 2005 and

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therefore, no additional stock compensation costs for those stock option grants will be recorded subsequent to the adoption of FASB Statement No. 123(R). When recognizing compensation cost under FASB Statement No. 123, we elected to adjust the compensation costs for forfeitures when the unvested awards were actually forfeited. However, under FASB Statement No. 123(R), we are required to estimate forfeitures of unvested awards when recognizing compensation cost. Upon the adoption of FASB Statement 123(R) on January 1, 2006, we recorded a cumulative effect of a change in accounting principle to adjust compensation cost, net of related tax effects, for the difference in compensation costs recognized in prior periods had forfeitures been estimated during those periods of $1,026, or $0.01 per basic share and $0.01 per diluted share. We calculated the compensation costs that would have been recognized in prior periods and during the three months ended March 31, 2006 using an estimated annual forfeiture rate of 6.7%.

During the three months ended March 31, 2006, we granted 1,990 options to purchase shares of common stock. We estimated the weighted average fair value on the date of grant of $2.26 per option using a Black-Scholes option pricing model using the following assumptions: exercise price at market on date of grant, expected dividend yield of 9.4%, weighted average risk-free interest rate of 4.4%, expected volatility factor of 0.23, and expected term of 5 years. In prior periods, we determined our expected volatility used in a Black-Scholes option pricing model based on our historical volatility during the expected term of the option. Beginning in the first quarter of 2006, we determined our expected volatility based on a combination of our historical volatility during the expected term of the option and our implied volatility based on the market prices of traded options of our stock.

As of March 31, 2006, the total compensation cost related to nonvested stock option awards not yet recognized was $54,449 that has a weighted average period to be recognized of 3.5 years.

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, asset management and transaction structuring activities, less our operating expenses and provision for income taxes. The second element is “Net realized gain (loss) on investments,” which reflects 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 periodic settlements of interest rate derivatives. The third element is “Net unrealized appreciation (depreciation) of investments,” which is the net change in the estimated fair values of our portfolio investments and 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 consolidated operating results for the three months ended March 31, 2006 and 2005 follows:

	Three Months Ended March 31, 2006			Three Months Ended March 31, 2005
Operating income	$	173,178		$	100,855
Operating expenses		74,614			35,943
Operating income before income taxes		98,564			64,912
Provision for income taxes		(5,668	)		(1,025	)
Net operating income		92,896			63,887
Net realized gain on investments		44,198			4,826
Net unrealized appreciation of investments		23,934			42,967
Increase in net assets resulting from operations before cumulative effect of accounting change		161,028			111,680
Cumulative effect of accounting change, net of tax		1,026			—
Net increase in net assets resulting from operations	$	162,054		$	111,680

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Operating Income

Total operating income is comprised of two components: interest and dividend income and fee and other income. For the three months ended March 31, 2006, total operating income increased $72,323, or 72%, over the three months ended March 31, 2005.

Interest and dividend income consisted of the following for the three months ended March 31, 2006 and 2005:

	Three Months Ended March 31, 2006		Three Months Ended March 31, 2005
Interest income on debt securities	$	110,602	$	78,872
Interest income on bank deposits and employee loans		1,701		659
Dividend income on equity securities		18,822		6,887
Total interest and dividend income	$	131,125	$	86,418

Interest income on debt securities increased by $31,730 or 40%, to $110,602 for the three months ended March 31, 2006 from $78,872 for the comparable period in 2005, primarily due to an increase in our debt investments, which was partially offset by a decline in the daily weighted average interest rate on our debt investments. Our daily weighted average debt investments at cost increased from $2,467,200 in the three month period ended March 31, 2005 to $3,504,800 in the comparable period in 2006 resulting from new loan originations net of loan repayments during the last twelve months ended March 31, 2006.

The daily weighted average effective interest rate on debt investments decreased from 13.0% in the three month period ended March 31, 2005 to 12.8% in the comparable period in 2006 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 to 44% as of March 31, 2006 from 36% as of March 31, 2005. Our senior loans generally yield lower rates than our higher yielding subordinated loans, but they are typically variable rate based loans that do not necessitate the use of interest rate swap agreements thereby reducing our overall interest swap costs in 2006. 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, 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 March 31, 2006 decreased 20 basis points to 12.8% as compared to the three months ended March 31, 2005. However, including the impact of the interest rate swap agreements, our daily weighted average effective interest rate for the three months ended March 31, 2006 increased 30 basis points to 12.7% as compared to the three months ended March 31, 2005.

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.” 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 net realized gain (loss) on investments on the interest settlement date. During the three months ended March 31, 2006 and 2005, the total interest cost of interest rate derivative agreements included in both net realized gain (loss) on investments and net unrealized appreciation (depreciation) of investments was $640 and $3,575, respectively. The decrease in our interest cost of interest rate derivative agreements is due primarily to the increase in the average monthly LIBOR rate from 2.73% in the three month period March 31, 2005 to 4.68% in the three month period ended March 31, 2006.

The decrease in our daily weighted average effective interest rate as a result of the increase in our senior debt investments is partially offset by the increase in the interest rates of our variable rate based loans due to the increases in average monthly LIBOR in the three month period ended March 31, 2006.

Dividend income on equity securities increased by $11,935 to $18,822 for the three months ended March 31, 2006 from $6,887 for the comparable period in 2005 due primarily to an increase in preferred stock

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investments. We have grown our investments in equity securities to a fair value of $2,051,200 as of March 31, 2006, a 104% increase over our investments in equity securities as of March 31, 2005. 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 $3,347,600 in the three months ended March 31, 2005 to $5,230,900 in the comparable period in 2006. The daily weighted average yield on total debt and equity investments decreased to 10.0% for the three months ended March 31, 2006 from 10.4% for the comparable period in 2005 due to the reasons discussed above including an overall increase in equity investments in the last twelve months ended March 31, 2006 that do not produce a current yield. Including the interest cost of interest rate derivative 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 on total debt and equity investments would have been 10.0% for both the three months ended March 31, 2006 and 2005.

Fee and other income consisted of the following for the three months ended March 31, 2006 and 2005:

	Three Months Ended March 31, 2006		Three Months Ended March 31, 2005
Transaction structuring fees	$	11,272	$	2,820
Fund management fees and reimbursements		7,519		—
Equity financing fees		6,387		1,665
Financial advisory and administrative fees		5,621		3,409
Loan financing fees		3,389		2,414
Prepayment fees		3,027		902
Other structuring fees		2,467		947
Other		2,371		2,280
Total fee and other income	$	42,053	$	14,437

Fee and other income increased by $27,616, or 191%, to $42,053 for the three months ended March 31, 2006 from $14,437 in the comparable period in 2005. For the three months ended March 31, 2006, we recorded $11,272 in transaction structuring fees for six buyout investments, including one add-on acquisition, totaling $524,400 of American Capital financing. For the three months ended March 31, 2005, we recorded $2,820 in transaction structuring fees for two buyout investments totaling $137,900 of American Capital financing. The transaction structuring fees were 2.1% and 2.0% of American Capital financing in 2006 and 2005, respectively.

Fund management fees and reimbursements represent fees recognized for providing investment advisory and management services to ECAS pursuant to investment management and services agreements. We recognized $2,819 of management fees and $4,700 for reimbursements of costs and expenses for the three months ended March 31, 2006 for salaries, employee benefits and general and administrative expenses.

Equity financing fees for the three months ended March 31, 2006 increased $4,722 over the comparable period in 2005. The increase in equity financing fees was attributable to an increase in new equity investments from $51,600 in the three month period ended March 31, 2005 to $240,600 in the comparable period in 2006. Equity financing fees were 2.7% and 3.2% of equity financing in 2006 and 2005, respectively.

Financial advisory and administrative fees for the three months ended March 31, 2006 increased $2,212, or 65%, over the comparable period in 2005. The increase in financial advisory and administrative fees is attributable primarily to the increase in the number of portfolio companies under management.

Loan financing fees for the three months ended March 31, 2006 increased $975, or 40%, over the comparable period in 2005. The increase in loan financing fees was attributable to an increase in new debt investments from $334,800 in 2005 to $349,000 in 2006. The loan financing fees were 1.0% and 0.7% of loan originations in 2006 and 2005, respectively. Loan fees we receive that are representative of additional yield are deferred as a discount and accreted into interest income and are not recorded as fee income.

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The prepayment fees of $3,027 for the three months ended March 31, 2006 are the result of the prepayment by six portfolio companies of loans totaling $125,200 compared to prepayment fees of $902 for the three months ended March 31, 2005 as the result of the prepayment by two portfolio companies of loans totaling $50,800. Prepayment fees were 2.4% and 1.8% of debt repayments that were subject to a prepayment penalty in 2006 and 2005, respectively.

Operating Expenses

Operating expenses for the three months ended March 31, 2006 increased $38,671, or 108%, over the comparable period in 2006. Our operating leverage was 2.1% and 1.6% for the three months ended March 31, 2006 and 2005, respectively. Operating leverage is our annualized operating expenses, excluding stock-based compensation, interest expense and operating expenses reimbursed under management agreements, divided by our total assets at period end. The increase in our operating leverage is partially due to additional salary and overhead expenses incurred during the three months ended March 31, 2006 attributable to our new business initiative of becoming an asset manager of funds of private assets.

Interest expense increased from $17,346 for the three months ended March 31, 2005 to $35,982 in the comparable period in 2005. The increase in interest expense is due both to an increase in our weighted average borrowings from $1,572,900 in the three months ended March 31, 2005 to $2,431,000 in the comparable period in 2006 and to an increase in our weighted average interest rate on outstanding borrowings, including amortization of deferred financing costs, from 4.41% during the three months ended March 31, 2005 to 5.92% during the comparable period in 2006. As discussed above, the increase in the weighted average interest rate is primarily due to an increase in the average monthly LIBOR rate from 2.73% in 2005 to 4.68% in 2006.

Salaries, benefits and stock-based compensation expense increased 89% from $12,312 in the three months ended March 31, 2005 to $23,215 in the comparable period in 2006. Salaries, benefits and stock-based compensation consisted of the following for the three months ended March 31, 2006 and 2005:

	Three Months Ended March 31,
	2006		2005
Salaries	$	15,621	$	7,018
Benefits		3,823		2,098
Stock-based compensation		3,771		3,196
Total salaries, benefits and stock-based compensation	$	23,215	$	12,312

The total increases are due primarily to an increase in employees from 200 at March 31, 2005 to 359 at March 31, 2006 and annual salary rate increases. The increase in the number of employees is due to our growth as we have added investment professionals and administrative staff as we continue to build our investment platform and our asset management business, including the opening of four offices in London, Paris, Boston and Palo Alto.

General and administrative expenses increased from $6,285 in the three months ended March 31, 2005 to $15,417 in the comparable period in 2006. The increase is due primarily to additional overhead attributable to the increase in the number of employees and the opening of four new offices, including higher employee recruiting costs and rent expense, as well as due diligence costs related to prospective investment transactions that were terminated by us.

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

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and currently intend to distribute sufficient dividends to eliminate investment company taxable income. However, we are subject to a nondeductible federal excise tax of 4% on our undistributed investment company taxable income if we do not distribute at least 98% of our investment company ordinary taxable income in any calendar year, 98% of our capital gain net income for each one-year period ending on October 31 and any shortfall in distributing taxable income from the prior calendar year. For calendar year 2005, we retained $48,282 of our investment company taxable income. For the three months ended March 31, 2006, we accrued a federal excise tax of $412.

Our consolidated taxable operating subsidiaries, ACFS and ECFS, are subject to corporate level federal, state and local income tax in their respective jurisdictions. ECFS is incorporated in Guernsey where it has received an exempt status and therefore does not pay any income tax; however, the wholly-owned subsidiaries of ECFS are subject to corporate level income tax. For the three months ended March 31, 2006, we recorded a tax provision of $5,256 attributable to our taxable operating subsidiaries. For the three months ended March 31, 2005, we recorded a tax provision of $1,025 attributable to our taxable operating subsidiaries. The increase in the tax provision in 2006 as compared to 2005 is due primarily to the increase in fee income earned by ACFS in 2006 as a result of an increase in American Capital sponsored buyout transactions structured by ACFS.

Net Realized Gains (Losses) on Investments

Our net realized gains (losses) for the three months ended March 31, 2006 and 2005 consisted of the following:

	Three Months Ended March 31, 2006			Three Months Ended March 31, 2005
3SI Acquisition Holdings, Inc.	$	26,617		$	—
Network for Medical Communication & Research, LLC		21,548			—
Edge Products, LLC		4,087			—
Alemite Holdings, Inc.		1,997			—
Technical Concepts Holdings, LLC		1,403			—
Cycle Gear, Inc.		—			3,706
The Lion Brewery, Inc.		—			1,896
ACS PTI, Inc.		—			1,891
Other, net		3,253			1,404
Total gross realized portfolio company gains		58,905			8,897
American Decorative Surfaces International, Inc.		(15,758	)		—
Other, net		(473	)		(776	)
Total gross realized portfolio company losses		(16,231	)		(776	)
Total net realized portfolio company gains		42,674			8,121
Interest rate derivatives		1,524			(3,295	)
Total net realized gains	$	44,198		$	4,826

In the first quarter of 2006, we received full repayment of our remaining $39,921 subordinated debt investment in 3SI Acquisition Holdings, Inc. and sold all of our common equity for $53,463 in proceeds realizing a total gain of $26,617 offset by a reversal of unrealized appreciation of $28,002. The sale proceeds we recognized include proceeds we expect to receive held in escrow of $4,464.

In the first quarter of 2006, we received full repayment of our remaining $10,400 subordinated debt investment in Network for Medical Communication & Research, LLC and sold all of our common equity warrants for $22,275 in proceeds realizing a total gain of $21,548 offset by a reversal of unrealized appreciation of $23,110. The sale proceeds we recognized include proceeds we expect to receive held in escrow of $1,320.

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In the first quarter of 2006, we received full repayment of our $24,495 senior and subordinated debt investments in Edge Products, LLC and sold all of our equity investments for $5,539 in proceeds, net of tax, realizing a total gain of $4,087 offset by a reversal of unrealized appreciation of $2,276. The sale proceeds we recognized include proceeds we expect to receive held in escrow of $869.

In the first quarter of 2006, American Decorative Surfaces International, Inc. ceased business operations and a receiver was appointed to liquidate its remaining assets. Although we are pursuing our claims in the receivership, we do not expect to receive any additional proceeds from the liquidation. Our remaining subordinated debt and equity investments were deemed worthless and we recognized a realized loss of $15,758 offset by the reversal of unrealized depreciation of $18,703.

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 $3,706 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.

Unrealized Appreciation and Depreciation of Investments

The net unrealized appreciation and depreciation 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 months ended March 31, 2006 and 2005:

	Number of Companies	Three Months Ended March 31, 2006			Number of Companies	Three Months Ended March 31, 2005
Gross unrealized appreciation of portfolio company investments	29	$	159,526		20	$	75,343
Gross unrealized depreciation of portfolio company investments	22		(119,054	)	11		(41,891	)
Reversal of prior period unrealized appreciation upon a realization	6		(37,498	)	3		(8,735	)
Net unrealized appreciation of portfolio company investments	57		2,974		34		24,717
Interest rate derivative periodic payment accrual	—		(1,311	)	—		(280	)
Interest rate derivative agreements	—		22,271		—		18,530
Net unrealized appreciation of investments	57	$	23,934		34	$	42,967

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. The increase in the fair value of our interest rate derivative agreements in the three month period ended March 31, 2006 is due primarily to the increase in average LIBOR in 2006 and a resulting increase in the forward interest rate yield curve.

As previously discussed, we record the accrual of the periodic interest settlements of interest rate swaps in net unrealized appreciation (depreciation) of investments and subsequently record the amount as a realized gain (loss) on investments on the interest settlement date.

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Our board of directors is responsible for determining the fair value of our portfolio investments on a quarterly basis. In that regard, the board has retained Houlihan Lokey Howard & Zukin Financial Advisors, Inc. (“Houlihan Lokey”) to assist it by having Houlihan Lokey regularly review a designated percentage of our fair value determinations. Houlihan Lokey is a leading valuation firm in the U.S., engaged in approximately 1,000 valuation assignments per year for clients worldwide. Each quarter, Houlihan Lokey reviews our determination of the fair value of approximately 25% of American Capital’s portfolio company investments that have been portfolio companies for at least one year and that have a fair value in excess of $10 million.

For the first quarter of 2006, Houlihan Lokey reviewed our valuations of 21 portfolio companies having an aggregate $730,000 in fair value as reflected in our consolidated financial statements as of March 31, 2006. Over the last four quarters, Houlihan Lokey has reviewed 96 portfolio companies totaling $3,208,000 in fair value as of their respective valuation dates. In addition, Houlihan Lokey representatives attend our quarterly valuation meetings and provide periodic reports and recommendations to our audit and compliance committee of the board of directors. For those portfolio company investments that Houlihan Lokey has reviewed using the scope of review set forth by our board, our board has made a fair value determination that is within the aggregate range of fair value for such investments as determined by Houlihan Lokey.

In February 2006, we entered into a commitment to provide $84,993 of mezzanine and equity financing to ASAlliances Biofuels, LLC to fund its development of three large scale ethanol production facilities. Construction of two of the facilities has commenced and construction of the third facility is projected to commence in the third quarter of 2006. The facilities are projected to be in operation in late 2007 to early 2008. As of March 31, 2006, our cost basis in ASAlliances Biofuels was $35,085, which represents a 43% diluted ownership interest. As of March 31, 2006, the fair value of our investment has appreciated to a fair value of $67,985. The increase in the valuation is driven in part by recent developments in the ethanol and energy markets and market comparables. In addition to its standard scope, we engaged Houlihan Lokey to review the value of ASAlliances Biofuels, since we determined that its fair value had risen significantly in the quarter in which the investment was made. The fair value of this investment as determined by our Board is within the range of fair value for the investment as determined by Houlihan Lokey.

Houlihan Lokey has been engaged, or may in the future be engaged, directly by us or our portfolio companies to provide investment banking services.

Financial Condition, Liquidity, and Capital Resources

At March 31, 2006, we had $67,830 in cash and cash equivalents and $84,030 in restricted cash. Our restricted cash consists primarily of collections of interest and principal payments 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 March 31, 2006, we had availability of $681,861 under our revolving debt funding facilities and $191,145 under our forward equity sale agreements assuming the forward prices as of March 31, 2006. During the three months ended March 31, 2006, we principally funded investments using draws on the revolving debt funding facilities, unsecured debt issuances and equity offerings, including forward equity sale agreements, as well as proceeds from sales of senior loans, repayments of loans and sales of equity investments.

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. In August 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

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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 March 31, 2006 and December 31, 2005, our asset coverage was 224% and 217%, respectively.

Equity Capital Raising Activities

Forward Sale Agreements

We periodically complete public offerings where shares of our common stock are sold in which a portion of the shares are offered directly by us and a portion of the shares are sold by third parties in connection with agreements to purchase common stock from us for future delivery dates pursuant to forward sale agreements. The shares of common stock sold by third parties are borrowed from third party market sources by counterparties, or forward purchasers, of the forward sale agreements who then sell the shares to the public. Pursuant to the forward sale agreements, we are required to sell to the forward purchasers shares of our common stock generally at such times as we elect over a one-year period. The forward sale agreements provide for settlement on a settlement date or dates specified at our discretion within a one-year period. On a settlement date, we issue shares of our common stock to the forward purchaser at the then applicable forward sale price. The forward sale price is initially the public offering price of shares of our common stock less the underwriting discount. The forward sale agreements provide that the initial forward sale price per share is subject to daily adjustment based on a floating interest factor equal to the federal funds rate, less a spread, and also is subject to specified decreases on certain dates during the duration of the agreement. The forward sale prices are also subject to decrease if the total cost to the forward purchasers of borrowing our common stock exceeds a specified amount.

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.

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Our objective with the use of forward sale agreements is to allow us to manage more efficiently our debt to equity ratio, considering applicable statutory requirements and our capital needs associated with funding our investment activities. As a BDC, we are able to issue debt securities and preferred stock in an amount such that our asset coverage is at least 200% of the amount of our outstanding debt securities and preferred stock. Because we do not currently have any preferred stock outstanding, this provision of the 1940 Act effectively limits our ratio of debt to equity at this time to 1:1. However, as a practical matter, in order to provide sufficient flexibility to fund our projected investments and a cushion, we generally keep our debt to equity ratio somewhat below 1:1. For example, as of March 31, 2006, our ratio of debt to equity was 0.81:1.

A principal consideration in keeping our debt to equity ratio at less than 1:1 is that given the nature and variability of the equity capital markets, it is not practical to raise equity in frequent small increments, which would match in amount and timing our needs for investment funds. Thus, we are required to raise equity in larger increments than may be immediately invested and therefore we repay advances on our credit facilities with the proceeds of such equity issuances. We then make investments and manage our cash needs by drawing on our credit facilities. The funding sequence of issuing equity, repaying our credit facilities and then drawing on the credit facilities to fund new investments causes our average debt to equity ratio to be materially below 1:1. Moreover, because we cannot be assured that access to equity markets will be available whenever we may need equity capital to make a new investment, we must generally keep our credit availability somewhat higher and our debt to equity ratio materially lower than what would otherwise be if we were more readily assured access to equity capital. The use of the forward sale agreements beginning in 2004 has enabled us to increase our debt to equity ratio from 0.71 as of December 31, 2003 to 0.81 as of March 31, 2006.

The use of forward sale contracts is expected to allow us to deliver common stock and receive cash at our election to the extent covered by outstanding contracts, without undertaking a new offering of common stock. Because we would be more assured of access to equity capital, we expect to be in a position to allow our debt to equity ratio to be closer to 1:1 than without the use of forward sale agreements. During periods in which we have reported earnings, having a higher debt to equity ratio should have a beneficial effect on our overall cost of capital, which could result in increased earnings.

Equity Offerings

For the first quarters of 2006 and 2005, we completed several public offerings of our common stock and entered into several forward sale agreements. The following table summarizes the total shares sold, including shares sold pursuant to the underwriters’ over-allotment options and through forward sale agreements, and the proceeds we received, excluding issuance costs, for the public offerings of our common stock for the first quarters of 2006 and 2005:

	Shares Sold	Proceeds, Net of Underwriters’ Discount		Average Price per Share
February 2006 public offering	987	$	35,620	$	36.10
January 2006 public offering	600	$	20,904	$	34.84
Issuances under November 2005 Forward Sale Agreements	2,000	$	71,661	$	35.83
Issuances under September 2005 Forward Sale Agreements	750	$	26,113	$	34.82
Total for the three months ended March 31, 2006	4,337	$	154,298	$	35.58
March 2005 public offering	700	$	21,080	$	30.11
Issuances under September 2004 Forward Sale Agreements	1,000	$	29,506	$	29.51
Total for the three months ended March 31, 2005	1,700	$	50,586	$	29.76

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In November 2005, we entered into forward sale agreements (the November 2005 Forward Sale Agreements”) to purchase 5,000 shares of common stock. The 5,000 shares of common stock were borrowed from third party market sources by counterparties, or forward purchasers, of the November 2005 Forward Sale Agreements who then sold the shares to the public. Pursuant to the November 2005 Forward Sale Agreements, we must sell to the forward purchasers 5,000 shares of our common stock generally at such times as we elect over a one-year period. The November 2005 Forward Sale Agreements provide for settlement on a settlement date or dates to be specified at our discretion within the duration of the November 2005 Forward Sale Agreements through termination in November 2006. On a settlement date, we will issue shares of our common stock to the forward purchasers at the then applicable forward sale price. The forward sale price was initially $36.941 per share, which was the public offering price of shares of our common stock less the underwriting discount. The November 2005 Forward Sale Agreements provide that the initial forward sale price per share is subject to daily adjustment based on a floating interest factor equal to the federal funds rate, less a spread, and is subject to decrease by $0.79, $0.03, $0.80, $0.81 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 March 31, 2006, there are 1,500 shares available under the November 2005 Forward Sale Agreements at a forward sale price of $35.83 per share.

In January 2006, we entered into a forward sale agreement (the “January 2006 Forward Sale Agreement”) to purchase 4,000 shares of common stock. The 4,000 shares of common stock were borrowed from third party market sources by the counterparty, or forward purchaser, of the January 2006 Forward Sale Agreement who then sold the shares to the public. Pursuant to the January 2006 Forward Sale Agreement, we must sell to the forward purchaser 4,000 shares of our common stock generally at such times as we elect over a one-year period. The January 2006 Forward Sale Agreement provides for settlement date or dates to be specified at our discretion within the duration of the January 2006 Forward Sale Agreement through termination in January 2007. 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 $34.84 per share, which was the public offering price of shares of our common stock less the underwriting discount. The January 2006 Forward Sale Agreement provides that the initial forward sale price per share is subject to daily adjustment based on a floating interest factor equal to the federal funds rate, less a spread, and is subject to a decrease by $0.80, $0.82, $0.85, and $0.86 on each of March 3, 2006, June 2, 2006, September 1, 2006 and December 1, 2006, respectively. The forward sale price will also be subject to decrease if the cost to the forward purchaser of borrowing our common stock exceeds a specified amount. As of March 31, 2006, there are 4,000 shares available under the January 2006 Forward Sale Agreement at a forward sale price of $34.35 per share.

As of March 31, 2006, all other forward sale agreements had been fully settled.

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Debt Capital Raising Activities

Our debt obligations consisted of the following as of March 31, 2006 and December 31, 2005:

Debt	March 31, 2006		December 31, 2005
Secured revolving debt-funding facility, $1,000,000 commitment	$	538,139	$	593,369
Unsecured revolving debt-funding facility, $310,000 commitment		215,000		162,000
Secured revolving debt-funding facility, $125,000 commitment		—		—
Unsecured debt due through September 2011		167,000		167,000
Unsecured debt due August 2010		126,000		126,000
Unsecured debt due October 2020		75,473		75,481
Unsecured debt due February 2011		22,126		—
TRS Facility		135,334		110,219
ACAS Business Loan Trust 2002-2 asset securitization		—		5,406
ACAS Business Loan Trust 2003-1 asset securitization		—		23,320
ACAS Business Loan Trust 2003-2 asset securitization		238		32,268
ACAS Business Loan Trust 2004-1 asset securitization		409,772		409,772
ACAS Business Loan Trust 2005-1 asset securitization		830,000		762,025
Total	$	2,519,082	$	2,466,860

The weighted average debt balance for the three months ended March 31, 2006 and 2005 was $2,431,000 and $1,572,900, respectively. The weighted average interest rate on all of our borrowings, including amortization of deferred financing costs, for the three months ended March 31, 2006 and 2005 was 5.92% and 4.41%, respectively. We are currently in compliance with all of our debt covenants.

As of December 31, 2005, we had a $255,000 unsecured revolving line of credit with a syndication of lenders. In January 2006, we expanded the committed amount of our existing unsecured debt-funding facility from $255,000 to $310,000 as a result of new lender commitments.

In February 2006, we entered into a note purchase agreement to issue €14 million and £3 million of senior unsecured five-year notes to institutional investors in a private placement offering. The €14 million Series 2006-A Notes have a fixed interest rate of 5.177% and the £3 million Series 2006-B Notes have a fixed interest rate of 6.565%. Each series matures in February 2011. The note purchase agreement contains customary default provisions.

In January 2006, we issued the remaining $67,975 of Class A-2A notes under our asset securitization for ACAS Business Loan Trust 2005-1.

We have a total return swap facility (the “TRS Facility”) with Wachovia Bank, N.A. (“Wachovia”) under which we pledge certain of our investments to Wachovia from time to time in exchange for financing. Subject to the terms and conditions of the TRS Facility, we may generally repay and reborrow proceeds and are required to make payments to Wachovia on outstanding funds at a rate equal to one-month LIBOR plus 125 basis points. We must also repay all or a portion of any funded amount upon the occurrence of certain events. In addition to the pledged assets, Wachovia has recourse to us for any collateral shortfall up to $150 million. The TRS Facility contains customary default provisions and is scheduled to terminate in December 2006. We have treated the TRS Facility as a secured financing arrangement with the outstanding funded amount included as a debt obligation on the accompanying consolidated balance sheets.

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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. We assign only one loan grade to each portfolio company for all loan investments in that portfolio company.

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.

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 March 31, 2006 and December 31, 2005, respectively. The weighted average loan grade was 3.0 as of both March 31, 2006 and December 31, 2005, 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 March 31, 2006 and December 31, 2005, our investment portfolio was graded as follows:

	March 31, 2006										December 31, 2005
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	$	941,277	19.2	%	$	500,860	15.3	%	$	916,910	18.6	%	$	519,053	15.7	%
3		3,400,710	69.5	%		2,249,056	68.8	%		3,578,268	72.4	%		2,369,924	71.8	%
2		444,388	9.1	%		413,604	12.6	%		336,791	6.8	%		301,094	9.1	%
1		107,366	2.2	%		107,351	3.3	%		110,601	2.2	%		110,585	3.4	%
	$	4,893,741	100.0	%	$	3,270,871	100	%	$	4,942,570	100.0	%	$	3,300,656	100	%

The amounts above do not include our investments for which we have only invested in the equity securities of the company and our investments in CMBS and CDO securities.

In the first quarter of 2006, seven portfolio companies were upgraded from a loan grade 3 to a loan grade 4 and one portfolio company was upgraded from a loan grade 1 to a loan grade 2, while one portfolio company was downgraded from a loan grade 4 to a loan grade 3, five 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. As of March 31, 2006, loans on non-accrual status for fourteen portfolio companies were $177,341, calculated as the cost plus unamortized OID, and had a fair value of $54,789. Loans with eight of the fourteen portfolio companies are grade 2 loans and loans with six of the fourteen portfolio companies are grade 1 loans. These loans include a total of $158,554 with PIK interest features. As of December 31, 2005, loans on non-accrual status for fourteen portfolio companies were $132,330, calculated as the cost plus unamortized OID, and had a fair value of $48,304. Loans with eight of the fourteen portfolio companies are grade 2 loans and loans with six of the fourteen portfolio companies are grade 1 loans. These loans include a total of $109,477 with PIK interest features.

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As of March 31, 2006 and December 31, 2005, loans on accrual status, past due loans and loans on non-accrual status were as follows:

	Number of Portfolio Companies	March 31, 2006			Number of Portfolio Companies	December 31, 2005
Current	105	$	3,229,164		111	$	3,285,981
One Month Past Due			32,786				8,151
Two Months Past Due			—				11,026
Three Months Past Due			—				—
Greater than Three Months Past Due			34,808				34,498
Loans on Non-accrual Status			177,341				132,330
Subtotal	15		244,935		14		186,005
Total	120	$	3,474,099		125	$	3,471,986
Past Due and Non-accruing Loans as a Percent of Total Loans			7.1	%			5.4	%

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

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 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

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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 March 31, 2006:

Static Pool
Portfolio Statistics (1) ($ in millions, unaudited):	Pre-1999			1999			2000			2001			2002			2003			2004			2005			2006			Aggregate			2001-2006 Aggregate
Original Investments and Commitments	$	375		$	380		$	389		$	368		$	939		$	1,316		$	1,632		$	3,159		$	542		$	9,100		$	7,956
Total Exits and Prepayments of Original Investments	$	141		$	191		$	226		$	258		$	404		$	701		$	472		$	468		$	—		$	2,861		$	2,303
Total Interest, Dividends and Fees Collected	$	132		$	129		$	89		$	142		$	226		$	263		$	246		$	195		$	22		$	1,444		$	1,094
Total Net Realized (Loss) Gain on Investments	$	(19	)	$	(22	)	$	(75	)	$	49		$	16		$	120		$	9		$	5		$	—		$	83		$	199
Internal Rate of Return(2)		9.1	%		4.9	%		4.6	%		22.9	%		10.7	%		25.7	%		19.1	%		20.7	%		997.7	%		15.3	%		20.0	%
Current Cost of Investments	$	192		$	175		$	180		$	92		$	488		$	625		$	1,121		$	2,187		$	442		$	5,502		$	4,955
Current Fair Value of Investments	$	160		$	93		$	186		$	78		$	406		$	689		$	1,166		$	2,219		$	475		$	5,472		$	5,033
Net Unrealized Appreciation/(Depreciation)	$	(32	)	$	(82	)	$	6		$	(14	)	$	(82	)	$	64		$	45		$	32		$	33		$	(30	)	$	78
Non-Accruing Loans at Face	$	12		$	30		$	—		$	29		$	75		$	10		$	16		$	5		$	—		$	177		$	135
Equity Interest at Fair Value	$	19		$	7		$	44		$	40		$	77		$	296		$	393		$	943		$	232		$	2,051		$	1,981
Debt to EBITDA(3)(4)(5)		7.4			8.3			4.8			4.3			7.0			4.8			4.6			4.6			4.6			5.0			4.8
Interest Coverage(3)(5)		1.5			1.7			2.7			1.7			2.1			2.3			2.2			2.3			1.8			2.2			2.2
Debt Service Coverage(3)(5)		1.4			1.4			1.9			1.3			1.7			1.8			1.5			1.8			1.2			1.6			1.6
Investment Grade(3)(5)		2.8			1.9			3.3			3.2			2.4			3.2			3.3			3.1			3.0			3.1			3.1
Average Age of Companies		39 yrs			54 yrs			28 yrs			38 yrs			34 yrs			15 yrs			41 yrs			29 yrs			17 yrs			30 yrs			29 yrs
Ownership Percentage		88	%		70	%		24	%		66	%		56	%		70	%		50	%		54	%		56	%		56	%		56	%
Average Sales(5)(6)	$	101		$	68		$	116		$	176		$	89		$	107		$	80		$	108		$	32		$	95		$	94
Average EBITDA(5)(7)	$	6		$	6		$	32		$	19		$	10		$	22		$	16		$	24		$	9		$	19		$	19
Total Sales(5)(6)	$	463		$	397		$	354		$	1,763		$	1,120		$	1,474		$	3,020		$	4,461		$	255		$	13,307		$	12,093
Total EBITDA(5)(7)	$	37		$	29		$	79		$	163		$	104		$	301		$	556		$	728		$	42		$	2,039		$	1,894
% of Senior Loans(5)(8)		49	%		50	%		58	%		23	%		58	%		46	%		43	%		42	%		46	%		46	%		45	%
% of Loans with Lien(5)(8)		65	%		50	%		85	%		100	%		99	%		97	%		80	%		84	%		100	%		85	%		87	%

(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) Excludes investments in CMBS and CDO securities and European Capital Limited.

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

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

(8) 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 footnote 12 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 March 31, 2006, our interest rate derivative agreements have a remaining weighted average term of approximately 5.3 years. The following table presents the notional principal amounts of interest rate derivative agreements by class:

	March 31, 2006
Type of Interest Rate Derivative Agreements	Company Pays	Company Receives	Number of Contracts	Notional Value
Interest rate swaps – Pay fixed, receive LIBOR floating	4.51%(1)	LIBOR	39	$	1,494,679
Interest rate swaps – Pay prime floating, receive LIBOR floating	Prime	LIBOR + 2.71%(1)	4		14,600
Interest rate swaptions – Pay LIBOR floating, receive fixed	LIBOR	4.54%(1)	3		47,093
Interest rate caps			4		24,587
Total			50	$	1,580,959

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	December 31, 2005
Type of Interest Rate Derivative Agreements	Company Pays		Company Receives		Number of Contracts	Notional Value
Interest rate swaps – Pay fixed, receive LIBOR floating	4.44	%(1)	LIBOR		37	$	1,453,167
Interest rate swaps – Pay prime floating, receive LIBOR floating	Prime		LIBOR + 2.73	%(1)	5		106,730
Interest rate swaptions – Pay LIBOR floating, receive fixed	LIBOR		4.54	%(1)	3		47,093
Interest rate caps					5		25,361
Total					50	$	1,632,351

(1) Weighted average.

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 March 31, 2006. 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 first quarter of 2006.

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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 1A.Risk Factors

Investments in non-investment grade commercial mortgage-backed securities and collateralized debt obligations may be illiquid, may have a higher risk of default, and may not produce current returns

The commercial mortgage-backed securities and collateralized debt obligation bonds and preferred shares in which we invest are not investment grade, which means that nationally recognized statistical rating organizations rate them below the top four investment-grade rating categories (i.e., “AAA” through “BBB”), and are sometimes referred to as “junk bonds.” Non-investment grade commercial mortgage-backed securities and collateralized debt obligation bonds and preferred shares tend to be less liquid, may have a higher risk of default and may be more difficult to value. Non-investment grade securities usually provide a higher yield than do investment grade securities, but with the higher return comes greater risk of default. In addition, the fair value of these securities may change as interest rates change over time. Economic recessions or downturns may cause defaults or losses on collateral securing these securities to increase. Non-investment grade securities are considered speculative, and their capacity to pay principal and interest in accordance with the terms of their issue is not ensured.

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

None.

Item 3.Defaults Upon Senior Securities

None.

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

None.

Item 5.Other Information

None.

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.

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*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 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.
*4.4.	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.
*4.5.	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.
*4.6.	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, incorporated herein by reference to Exhibit 4.8 of Form 10-Q for the quarter ended June 30, 2005 (File No. 814-00149), filed November 9, 2005.
*10.1.	Underwriting Agreement, dated January 5, 2006, by and between American Capital Strategies, Ltd. and Wachovia Capital Markets LLC, incorporated herein by reference to Exhibit 1.0 of Form 8-K dated January 11, 2006.
*10.2.	Forward Agreement, dated January 6, 2006, by and between American Capital Strategies, Ltd. and Wachovia Capital Markets, LLC, as agent for Wachovia Bank, National Association, incorporated herein by reference to Exhibit 1.1 of Form 8-K dated January 11, 2006.
*10.3.	Underwriting Agreement, dated March 29, 2006, by and among American Capital Strategies, Ltd., Citigroup Global Markets Inc., Wachovia Capital Markets LLC, J.P. Morgan Securities, LLC, UBS Securities LLC, A.G. Edwards & Sons, Inc., Bear, Stearns & Co. Inc., BB&T Capital Markets, a division of Scott & Stringfellow, Inc., Piper Jaffray & Co., BNP Paribas Securities Corp., Calyon Securities (USA) Inc. and RBC Capital Markets Corporation, incorporated herein by reference to Exhibit 1.0 of Form 8-K dated April 4, 2006.
*10.4.	Forward Agreement, dated March 29, 2006, by and between American Capital Strategies, Ltd. and Citigroup Global Markets Inc., incorporated herein by reference to Exhibit 1.1 of Form 8-K dated April 4, 2006.
*10.5.	Forward Agreement, dated March 29, 2006, by and between American Capital Strategies, Ltd. and Wachovia Capital Markets, LLC, as agent for Wachovia Bank, National Association, incorporated herein by reference to Exhibit 1.2 of Form 8-K dated April 4, 2006.
*10.6.	Form of American Capital Strategies, Ltd. 2006 Employee Stock Option Plan incorporated by reference to Exhibit I to the Definitive Proxy Statement for the 2006 Annual Meeting (File No. 814-00149) filed on April 11, 2006.

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*10.7.	Form of Amended and Restated American Capital Incentive Bonus Plan incorporated by reference to Exhibit II to the Definitive Proxy Statement for the 2006 Annual Meeting (File No. 814-00149) filed on April 11, 2006.
*10.8.	Amended, Restated and Substituted Note in the amount of $31,000,000 made by American Capital Strategies, Ltd. in favor of Wachovia Bank, National Association, dated as of January 6, 2006, incorporated herein by reference to Exhibit 10.21 of Form 10-K dated March 14, 2006.
10.9.	Employment Agreement between the Company and Brian Graff, dated as of April 19, 2006, filed herewith.
*10.10	Note Purchase Agreement by and among American Capital Strategies, Ltd., The Prudential Assurance Company Limited (PAC), Panther CDO III B.V. and Panther CDO I B.V., dated February 9, 2006, incorporated herein by reference to Exhibit 10.01 of Form 8-K dated February 15, 2006.
*10.12	Fixed Rate Senior Note, Series 2006-A, due February 9, 2011 in the principal amount of 10,000,000 Euro made by American Capital Strategies, Ltd. in favor of The Prudential Assurance Company Limited (PAC), dated February 9, 2006, incorporated herein by reference to Exhibit 10.02 of Form 8-K dated February 15, 2006.
*10.13	Fixed Rate Senior Note, Series 2006-A, due February 9, 2011 in the principal amount of 4,000,000 Euro made by American Capital Strategies, Ltd. in favor of Panther CDO III B.V., dated February 9, 2006, incorporated herein by reference to Exhibit 10.03 of Form 8-K dated February 15, 2006.
*10.14	Fixed Rate Senior Note, Series 2006-B, due February 9, 2011 in the principal amount of 3,000,000 Sterling made by American Capital Strategies, Ltd. in favor of Panther CDO I B.V., dated February 9, 2006, incorporated herein by reference to Exhibit 10.04 of Form 8-K dated February 15, 2006.
31.	Certification of CEO and CFO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.
32.	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
	Senior Vice President, Accounting and Reporting

Date: May 10, 2006

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