UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

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

For the fiscal year ended December 31, 2011

OR

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

Commission file number 814-00149

AMERICAN CAPITAL, LTD.

(Exact name of registrant as specified in its charter)

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

2 Bethesda Metro Center

14th Floor

Bethesda, Maryland 20814

(Address of principal executive offices)

(301) 951-6122

(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Name of each exchange on which registered
Common Stock, $0.01 par value per share	The NASDAQ Stock Market LLC (NASDAQ Global Select Market)

Securities registered pursuant to section 12(g) of the Act: NONE

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes  o    No  x.

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes  o    No  x.

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes  o    No  o

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

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

Large accelerated filer  x		Accelerated filer  o
Non-accelerated filer  o	(Do not check if a smaller reporting company)	Smaller Reporting Company  o

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

As of June 30, 2011, the aggregate market value of the Registrant's common stock held by non-affiliates of the Registrant was approximately $3.4 billion based upon a closing price of the Registrant's common stock of $9.93 per share as reported on The NASDAQ Global Select Market on that date. (For this computation, the registrant has excluded the market value of all shares of its common stock reported as beneficially owned by executive officers and directors of the registrant and certain other shareholders; such an exclusion shall not be deemed to constitute an admission that any such person is an “affiliate” of the registrant.)

As of February 1, 2012, there were 336,585,013 shares of the Registrant's common stock legally outstanding.

DOCUMENTS INCORPORATED BY REFERENCE. The Registrant's definitive proxy statement for the 2012 Annual Meeting of Stockholders is incorporated by reference into certain sections of Part III herein.

Certain exhibits previously filed with the Securities and Exchange Commission are incorporated by reference into Part IV of this report.

________________________________________________________________________________________________________________________

AMERICAN CAPITAL, LTD. TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1.	Business	3
Item 1A.	Risk Factors	17
Item 1B.	Unresolved Staff Comments	25
Item 2.	Properties	25
Item 3.	Legal Proceedings	25
Item 4.	Mine Safety Disclosures	25
PART II.
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	26
Item 6.	Selected Financial Data	28
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	30
Item 7A.	Quantitative and Qualitative Disclosure About Market Risk	63
Item 8.	Financial Statements and Supplementary Data	65
Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	118
Item 9A.	Controls and Procedures	119
Item 9B.	Other Information	119
PART III.
Item 10.	Directors, Executive Officers and Corporate Governance	120
Item 11.	Executive Compensation	120
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	120
Item 13.	Certain Relationships and Related Transactions, and Director Independence	120
Item 14.	Principal Accounting Fees and Services	120
PART IV.
Item 15.	Exhibits, Financial Statement Schedules	120
Signatures		124

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PART I.

Item 1. Business

General

American Capital, Ltd. (which is referred to throughout this report as “American Capital”, “we”, “our” and “us”) is a publicly traded private equity firm and global asset manager. We invest in private equity, private debt, private real estate securities and other investments, technology investments, special situation investments and alternative asset funds managed by us. These investments constitute, in part, what are considered alternative assets. We provide investors the opportunity to participate in the private equity and alternative asset management industry through an investment in our publicly traded stock.

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”). We primarily invest in senior and mezzanine debt and equity in buyouts of private companies sponsored by us (“One Stop Buyouts®”) or sponsored by other private equity funds (“Private Equity Buyouts”) and provide capital directly to early stage and mature private and small public companies. We refer to our investments in these companies as our private finance portfolio. Our primary business objectives are to increase our net earnings and net asset value (“NAV”) by making investments with attractive current yields and/or potential for equity appreciation and realized gains.

We are also an alternative asset manager with $68 billion of assets under management as of December 31, 2011, including $62 billion of third-party assets. Our alternative asset fund management is conducted through our wholly-owned portfolio company, American Capital, LLC. American Capital, LLC manages the following alternative asset funds: European Capital Limited (“European Capital”), American Capital Agency Corp. (“AGNC”), American Capital Mortgage Investment Corp. (“MTGE”), American Capital Equity I, LLC (“ACE I”), American Capital Equity II, LP (“ACE II”) and ACAS CLO 2007-1, Ltd. (“ACAS CLO-1”) .

We are taxed as a corporation and pay federal and applicable state corporate taxes on our taxable income. From 1997 through the tax year ended September 30, 2010, we were taxed as a regulated investment company (“RIC”) as defined in Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”). As a RIC, we were not subject to federal income tax on the portion of our taxable income and capital gains we distributed to our shareholders, but we were also not able to carry forward net operating losses (“NOL”) from year to year. Beginning with our tax year ended September 30, 2011, our status changed from a RIC subject to taxation under Subchapter M to a corporation subject to taxation under Subchapter C. Under Subchapter C, we are able to carry forward any NOLs historically incurred to succeeding years, which we would not be able to do if we were subject to taxation as a RIC under Subchapter M. This change in tax status does not affect our status as a BDC under the 1940 Act or our compliance with the portfolio composition requirements of that statute.

American Capital Investment Portfolio

We primarily invest in middle market companies, which we generally consider to be companies with revenue between $10 million and $750 million. Currently, we will invest up to $300 million in a single middle market company in North America. We also have investments in structured finance investments (“Structured Products”), including commercial mortgage backed securities (“CMBS”), collateralized loan obligation (“CLO”) securities and collateralized debt obligation (“CDO”) securities and invest in alternative asset funds managed by us.

Since our IPO through December 31, 2011, we have invested committed capital of over $5.8 billion in equity securities and over $17.3 billion in debt securities of middle market companies and also have invested $1.6 billion in Structured Products. We have had 326 exits and repayments of over $16.7 billion of our originally invested committed capital, representing 68% of our total capital committed since our IPO, earning an 11% compounded annual return on these investments. We have earned a 29% compounded annual return on our exited equity securities.

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Portfolio Composition

As of December 31, 2011, we had investments in 152 portfolio companies totaling $5.1 billion at fair value, with an average investment size of $34 million, or 0.6% of total assets. As of December 31, 2011, our ten largest investments at fair value were $2.8 billion, or 47% of total assets, and are as follows (in millions):

Company	Product Line	Industry	Fair Value		Cost Basis
European Capital Limited	European Capital	Diversified Financial Services	$	621	$	1,341
American Capital, LLC	Asset Management	Capital Markets	396		46
Mirion Technologies, Inc.	One Stop Buyouts®	Electrical Equipment	365		270
SMG Holdings, Inc.	One Stop Buyouts®	Hotels, Restaurants & Leisure	299		318
WIS Holding Company, Inc.	One Stop Buyouts®	Commercial Services & Supplies	299		211
Affordable Care Holding Corp.	One Stop Buyouts®	Health Care Providers & Services	209		154
WRH, Inc.	One Stop Buyouts®	Life Sciences Tools & Services	181		382
The Tensar Corporation	Private Equity Buyouts	Construction & Engineering	142		129
Paradigm Precision Holdings, LLC	One Stop Buyouts®	Aerospace & Defense	136		168
SPL Acquisition Corp.	One Stop Buyouts®	Pharmaceuticals	130		142
Total			$	2,778	$	3,161

Our investments are composed of the following six product lines: (i) One Stop Buyouts^®, (ii) Private Equity Buyouts, (iii) Direct and Other Investments, (iv) European Capital, (v) Asset Management and (vi) Structured Products.

The composition of our investment portfolio as of December 31, 2011, at fair value, as a percentage of total investments based on these different product lines, is shown below:

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The composition summary of our investment portfolio as of December 31, 2011, at fair value as a percentage of total investments by security type, is shown below:

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Other than our investment in European Capital, our investments are primarily in portfolio companies located in the United States. For summary financial information by geographic area, see Note 3 to our consolidated financial statements in this Annual Report on Form 10-K. We have a diversified investment portfolio and do not concentrate in any one or two industry sectors. We use the Global Industry Classification Standards for classifying the industry groupings of our portfolio companies. The following chart shows the portfolio composition by industry grouping at fair value as a percentage of total investments as of December 31, 2011. Our investments in European Capital and CLO and CDO securities are excluded from the table below. Our investments in CMBS are classified in the Real Estate and Real Estate Investment Trusts category.

Private Finance Investments

A majority of our investments have been to assist in the funding of change of control buyouts of privately held middle market companies, which we expect to continue in the future. A change of control transaction could be the result of a corporate divestiture, a sale of a family-owned or closely-held business, a going private transaction, the sale by a private equity fund of a portfolio company or an ownership transition. Our financing of a change of control transaction could either be for a One Stop Buyout^® or for a Private Equity Buyout. In One Stop Buyouts^®, we lend senior and mezzanine debt and make majority equity investments. As an investor in Private Equity Buyouts, we lend senior and mezzanine debt and make minority equity co-investments.

Our private finance portfolio investments consist of loans and equity securities primarily to privately-held middle market companies. Our private finance loans consist of first lien secured revolving credit facilities, first lien secured loans, second lien secured loans and secured and unsecured mezzanine loans. Our loans typically mature in five to ten years and require monthly or quarterly interest payments at fixed rates or variable rates generally based on LIBOR, plus a margin. Certain of our loans permit the interest to be paid-in-kind by adding it to the outstanding loan balance and paid at maturity. We price our debt and equity investments based on our analysis of each transaction. As of December 31, 2011, the weighted average effective interest rate on our private finance debt investments was 10.7%, which includes the impact of non-accruing loans. As of December 31, 2011, our fully-diluted weighted average ownership interest in our private finance portfolio companies, excluding our investment in European Capital, was 62%, with a total equity investment at fair value of approximately $1.8 billion.

There is generally no publicly available information about these companies and a primary or secondary market for the trading of these privately issued loans and equity securities generally does not exist. These investments have been historically exited through normal repayment, a change in control transaction or recapitalization of the portfolio company. However, we may also sell our loans or equity securities.

Our ability to fund the entire capital structure is a competitive advantage in completing many middle market transactions. We sponsor One Stop Buyouts^® in which we provide most, if not all, of the senior and mezzanine debt and equity financing in the

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transaction. We may initially fund all of the senior debt at closing and syndicate it to third-party lenders post closing. We have a loan syndications group that arranges to have all or part of the senior loans syndicated to third-party lenders.

As a BDC, we are required by law to make significant managerial assistance available to most of our portfolio companies. Such assistance typically involves providing guidance and counsel concerning the management, operations and business objectives and policies of the portfolio company to its management and board of directors, including participating on the company's board of directors. We have an operations team with significant turnaround and bankruptcy experience that assists our investment professionals in providing intensive operational and managerial assistance to our portfolio companies. As of December 31, 2011, we had board seats at 66 out of 109 of our private finance companies and had board observation rights on 9 of our remaining private finance portfolio companies. Providing assistance to our portfolio companies serves as an opportunity for us to maximize their value.

American Capital, LLC Investment

Our alternative asset management business is conducted through our wholly-owned portfolio company, American Capital, LLC. In general, subsidiaries of American Capital, LLC enter into management agreements with each of its managed alternative asset funds. As of December 31, 2011, our investment in American Capital, LLC was $46 million at cost and $396 million at fair value, or 8% of our total investments. The discussion of the operations of American Capital, LLC includes its consolidated subsidiaries. As of December 31, 2011, its third-party assets under management totaled $62 billion, including $58 billion of assets under management in American Capital Agency Corp. (NASDAQ: AGNC) and $2 billion of assets under management in American Capital Mortgage Investment Corp. (NASDAQ: MTGE), which are publicly traded residential mortgage real estate investment trusts (“REITs”).

American Capital, LLC had over 65 employees as of December 31, 2011, including eight investment teams with over 20 investment professionals located in Bethesda (Maryland), London and Paris. We have entered into service agreements with American Capital, LLC to provide it with additional asset management service support. Through these agreements, we provide investment advisory and oversight services to American Capital, LLC, as well as access to our employees, infrastructure, business relationships, management expertise and capital raising capabilities. We charge American Capital, LLC a fee for the use of these services. American Capital, LLC generally earns base management fees based on the shareholders' equity or the net cost basis of the assets of the alternative asset funds under management and may earn incentive income, or a carried interest, based on the performance of the funds. In addition, we may invest directly into these alternative asset funds and earn investment income from our investments in those funds.

The following table sets forth certain information with respect to American Capital, LLC's funds under management as of December 31, 2011:

	European Capital	AGNC	MTGE	ACE I	ACE II	ACAS CLO-1
Fund type	Private Equity Fund	Publicly Traded REIT - NASDAQ (AGNC)	Publicly Traded REIT - NASDAQ (MTGE)	Private Equity Fund	Private Equity Fund	CLO
Established	2005	2008	2011	2006	2007	2006
Assets under management	$1.5 Billion	$58.0 Billion	$2.2 Billion	$0.6 Billion	$0.2 Billion	$0.4 Billion
Investment types	Senior & Mezzanine Debt, Equity, Structured Products	Agency Securities	Mortgage Investments	Equity	Equity	Senior Debt
Capital type	Permanent	Permanent	Permanent	Finite Life	Finite Life	Finite Life

Under its investment management agreement with European Capital, American Capital, LLC generally receives an annual management fee of 2% of the weighted average monthly consolidated gross asset value of all the investments of European Capital, an incentive fee equal to 100% of the net earnings in excess of a return of 8% but less than a return of 10%, and 20% of the net earnings thereafter.

AGNC is a publicly traded REIT, which invests on a leveraged basis primarily in residential mortgage pass-through securities and collateralized mortgage obligations, for which the interest and principal payments are guaranteed by a U.S. government agency or U.S. government-sponsored entity. Its shares are traded on The NASDAQ Global Select Market under the symbol “AGNC.” American Capital, LLC earns a base management fee of 1.25% of AGNC's shareholders' equity, as defined in the management agreement. As of December 31, 2011, AGNC's total shareholders' equity was $6.2 billion.

MTGE is also a publicly traded REIT, which invests in and manages a leveraged portfolio of agency mortgage investments, non-agency mortgage investments and other mortgage-related investments. Its shares are traded on The NASDAQ Global Select

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Market under the symbol “MTGE.” American Capital, LLC earns a base management fee of 1.50% of MTGE's shareholders' equity, as defined in the management agreement. As of December 31, 2011, MTGE's total shareholders' equity was $209 million.

ACE I is a private equity fund, which was established in 2006 with $1 billion of equity commitments from third-party investors. At the closing of the fund, ACE I used the majority of its committed capital to purchase 30% of our equity investments in 96 portfolio companies for an aggregate purchase price of $671 million. Also, ACE I co-invested with American Capital in an amount equal to 30% of equity investments made by us between October 2006 and November 2007 until the $329 million remaining equity commitment was exhausted. In addition, 10%, or $100 million, of the $1 billion of distributions to the ACE I investors is recallable for add-on investments . As of December 31, 2011, ACE I investors had invested $1,032 million, received distributions of $804 million, had $580 million in fair value currently invested and had $68 million of recallable distributions available for add-on investments. American Capital, LLC manages ACE I in exchange for a 2% base management fee on the net cost basis of ACE I's assets (as of December 31, 2011, the cost basis of ACE I's assets were $586 million) and 10% to 30% of the net profits of ACE I, subject to certain hurdles.

ACE II is a private equity fund, which was established in 2007 with $585 million of equity commitments from third-party investors. At the closing of the fund, ACE II used the majority of its committed capital to purchase 17% of our equity investments in 80 portfolio companies for an aggregate purchase price of $488 million. The remaining $97 million equity commitment is being used to fund add-on investments in the 80 portfolio companies. As of December 31, 2011, ACE II investors had invested $503 million, received distributions of $296 million, had $246 million in fair value currently invested and had $59 million of unfunded committed equity. American Capital, LLC manages ACE II in exchange for a 2% base management fee on the net cost basis of ACE II's assets (as of December 31, 2011, the cost basis of ACE II's assets were $296 million) and 10% to 35% of the net profits of ACE II, subject to certain hurdles.

In April 2007, ACAS CLO-1 completed a $400 million securitization that invests in broadly syndicated and middle market commercial senior loans. American Capital, LLC earns a base management fee of 0.68% of ACAS CLO-1's assets and receives 20% of the net profits of ACAS CLO-1, subject to certain hurdles.

European Capital Investment

We own all of European Capital, an investment fund incorporated in Guernsey that invests in One Stop Buyouts^®, Private Equity Buyouts and provides capital directly to early stage and mature private and small public companies primarily in Europe. It primarily invests in senior and mezzanine debt and equity.

As of December 31, 2011, European Capital had investments in 52 portfolio companies totaling $1.3 billion at fair value, with an average investment size of $24 million, or 1.6% of its total assets. As of December 31, 2011, European Capital's five largest investments at fair value were $447 million, or 31% of its total assets.

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The composition of European Capital's investment portfolio as of December 31, 2011, at fair value, as a percentage of its total investments based on its different product lines, is shown below:

As of December 31, 2011, European Capital's NAV at fair value was $815 million. As of December 31, 2011, our investment in European Capital consisted of an equity investment with a cost basis and fair value of $1,267 million and $547 million, respectively, and a debt investment with a fair value and cost basis of $73 million. As of December 31, 2011, we valued our equity investment in European Capital below its NAV as a result of applying several discounts to its NAV in computing the fair value. See Note 2 to our consolidated financial statements in this Annual Report on Form 10-K for a further discussion of our valuation of European Capital.

Structured Products Investments

Our Structured Products investments consist of investments in CMBS, CLO and CDO securities. Our Structured Products investments are generally in non-investment grade securities. Non-investment grade tranches have a higher risk of loss, but are expected to provide a higher yield than investment grade securities. We may also make select investments in investment grade tranches if the expected returns meet our overall portfolio targeted returns. We invest in Structured Products with the intention of holding them until maturity. An active market generally does not exist for most of the non-investment grade tranches of Structured Products in which we invest.

Our investments in CMBS bonds are secured by diverse pools of commercial mortgage loans. As of December 31, 2011, our total investment in CMBS bonds was $239 million at cost and $28 million at fair value, or 1% of our total investments.

Our investments in CLO securities are generally secured by diverse pools of commercial corporate loans. Our investments are in 26 CLO funds managed by 19 separate portfolio managers. We also have investments in CDO securities, which are generally secured by diverse pools of bonds of other securitizations including commercial loans, CMBS and residential mortgage backed securities. Certain of our commercial CLO investments are in a joint venture portfolio company. As of December 31, 2011, our investment in CLO and CDO securities was $217 million at cost and $190 million at fair value, or 4% of our total investments.

Business Actions and Strategy

During the ten years following our 1997 IPO, our common stock generally traded at a premium to our NAV. However, since 2009, our common stock has generally traded at a discount to our NAV. This low stock valuation has had an adverse impact on our shareholders and our ability to raise capital at an attractive cost, among other consequences. The situation may be attributable to numerous factors including our recent financial performance, general market conditions and investor expectations with regard to future events and performance. There are a number of actions that we have taken and plan to take that are intended to improve

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our business, deliver attractive returns to our shareholders and improve our stock valuation. These actions include generating earnings that utilize our NOLs, making appropriate investments in existing portfolio companies, making investments in attractive new portfolio companies, developing our asset management business, repaying or refinancing our debt due at the end of 2013, repurchasing shares of our common stock when they trade below NAV and paying a dividend when we trade above NAV.

In addition to these actions, we have undertaken a process to evaluate our corporate structure and the various legal, regulatory, tax and accounting regimes under which we operate for the purpose of determining whether they are the optimum means for the operation and capitalization of our business. Our recent change from a RIC to a taxable company, which has allowed us to carry forward NOLs from past periods and to shelter a significant amount of future income from taxation, as well as retain our earnings, which we could not do if we were a RIC, is an illustration of how we can be affected by these regimes in ways that may or may not be in the interests of all of our shareholders. As a result of these evaluations, we may decide to proceed with structural and organizational changes (certain of which may require the approval of our shareholders), which could result in the spinning out to our shareholders an externally managed debt focused BDC, changes in our corporate form, termination of our election to be regulated as a BDC, our conversion from an investment company to an operating company or other fundamental changes. We may conclude, for example, that it would be preferable to purchase and operate businesses as an operating company rather than invest in One Stop Buyouts® as an investment company. If we made that decision, we might also conclude that it would be preferable to continue to invest in debt and minority equity in change of control transactions sponsored by other private equity firms through a BDC. Any such changes would be made with the primary intention of promoting shareholder value. Such changes could result in a change in how we account for our investments and our assets, including the consolidation of certain majority owned companies with which we do not now consolidate as an investment company.

Our evaluation process is likely to be lengthy and any changes to our structure or operations may not be made for several years, if at all. In completing the evaluation process, we may incur various costs for which we will not receive any benefit and take certain exploratory actions that may not be indicative of any eventual decisions. We may not necessarily make further announcements about the progress or results of this evaluation process.

Lending and Investment Decision Criteria

We generally review certain criteria in order to make investment decisions. The list below represents a general overview of the criteria we use in making our lending and investment decisions in our private finance business. Not all criteria are required to be favorable in order for us to make an investment. Add-on investments for growth, acquisitions or recapitalizations are based on the same general criteria. Add-on investments in distressed situations are based on the same general criteria, but are also evaluated on the potential to preserve prior investments.

Operating History. We generally focus on middle market companies that have been in business over ten years and have an attractive operating history, including generating positive cash flow. We generally target companies with significant market share in their products or services relative to their competitors. In addition, we consider factors such as customer concentration, performance during recessionary periods, competitive environment and ability to sustain margins. As of December 31, 2011, our current private finance portfolio companies had an average age of 33 years with average revenue and average adjusted earnings before interest, taxes, depreciation and amortization (“Adjusted EBITDA”) for the latest available twelve month period of $151 million, and $36 million, respectively. Adjusted EBITDA may reflect certain adjustments to the reported EBITDA of a portfolio company for non-recurring, unusual or infrequent items or other pro-forma items or events to normalize current earnings which a buyer may consider in a change in control transactions.

Growth. We consider a target company's ability to increase its cash flow. Anticipated growth is a key factor in determining the ability of the company to repay its debt and the value ascribed to any warrants and equity interests acquired by us.

Liquidation Value of Assets. Although we do not operate as an asset-based lender, liquidation value of the assets collateralizing our loans is a factor in many credit decisions. Emphasis is placed both on tangible assets such as accounts receivable, inventory, plant, property and equipment as well as intangible assets such as brand recognition, market reputation, customer lists, networks, databases and recurring revenue streams.

Experienced Management Team. We consider the quality of senior management to be extremely important to the long-term performance of most companies. Therefore, we consider it important that senior management be experienced and properly incentivized through meaningful ownership interest in the company.

Exit Strategy. Almost all of our investments consist of securities acquired directly from their issuers in private transactions. These securities are rarely traded in public markets, thus limiting their liquidity. Therefore, we consider it important that a prospective portfolio company have a number of methods by which our financing can be repaid and our equity investment sold or redeemed. These methods would typically include the sale or refinancing of the business or the ability to generate sufficient cash flow to repurchase our equity securities and repay our loans.

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Structured Products Criteria. We receive extensive information from the issuer regarding the commercial mortgage loans, commercial loans and other securities that are the underlying collateral for a CMBS, CLO or CDO pool. We do extensive underwriting of the collateral securing our investment as appropriate.

Institutional Approach to Investing

We have built an institution with a leading capability to originate, underwrite, finance, syndicate, monitor and exit investments that generate attractive returns. Our dedicated teams of investment professionals are the cornerstone of our institution. We have also created an extensive support structure that provides in-house due diligence, operational, legal and human resources support to our investment professionals and to our portfolio company, American Capital, LLC. The following are the key functional teams that execute our alternative asset management business.

Investment Teams: As of December 31, 2011, we had 26 Investment Teams with over 65 professionals located in our five offices in the United States. The Investment Teams originate, review and screen investment opportunities, conduct business, management and operations due diligence, prepare investment committee reports and models, make recommendations to the investment committee, execute investments, represent us on the boards of directors of portfolio companies, assist in monitoring and valuing of investments and manage acquisitions, divestures and exiting of investments. Our Investment Teams are organized so that each team focuses on a specific investment strategy and work cooperatively to share expertise. Our Investment Teams include:

• American Capital Buyout: A 20-person team that implements One Stop Buyouts^® of middle market companies including corporate divestitures, acquisitions of portfolio companies from private equity funds, acquisitions of family-owned or closely held businesses, going private transactions and ownership transitions. They originate senior and mezzanine debt and equity in American Capital controlled buyouts.

• Sponsor Finance: A 14-person team that makes senior and mezzanine debt investments and equity co-investments in Private Equity Buyouts. In addition, they make senior and mezzanine debt and equity investments in privately and publicly-held middle market companies.

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• Energy Investment: A 2-person team that implements One Stop Buyouts^®, Private Equity Buyouts and other direct investments in the entire chain of energy exploration, production and distribution, and services, manufacturing, power and utility services. They also consider investments in alternative energy, including wind power, solar energy and biofuels. They make senior and mezzanine debt and equity investments.

• Special Situations: A 5-person team that implements One Stop Buyouts^®, Private Equity Buyouts and other direct investments in distressed companies, companies undergoing turnarounds, bankruptcy auctions, debtor-in-possession, exit financing and other special situations in middle market companies. They make senior and mezzanine debt and equity investments.

• Technology Investment: A 3-person team that implements our One Stop Buyouts^®, Private Equity Buyouts and other direct investments in technology companies. They will invest in various technology sectors including networking, software, communications, enterprise data, new media, consumer technologies and industrial technology. They make senior and mezzanine debt and equity investments.

• Commercial Mortgage Asset Management: A 5-person team that invests in commercial mortgages and related assets. The team also participates in underwriting, due diligence and financing of real estate owned by our portfolio companies.

• Collateralized Loan Obligation: A 6-person team that has responsibility for our investments in and manages senior loan collateral for third-party investors through structured finance products such as a CLO. The team invests in middle market senior loans originated through our various Investment Teams and also by purchasing rated, broadly syndicated commercial senior debt. They also invest in non-rated tranches of CLOs managed by other third-party fund managers.

Operations Team: A 14-person team with expertise in manufacturing services, consumer products, financial services, energy services, supply chain management, outsourcing and technology. The Operations Team includes 7 former CEOs and Presidents, 1 former COO and 3 supply chain and outsourcing specialists. The Operations Team conducts operational due diligence on prospective portfolio companies and reports and makes recommendations to our investment committee. The team will also assist portfolio companies post close with operational improvement. If we have a portfolio company that is underperforming, the Operations Team will work closely with the portfolio company to improve performance by providing interim leadership at the portfolio company and to identify business actions to help improve performance. The team will provide hands-on assistance to reduce costs, systemize sales and marketing, develop and align business plans, grow the business and strengthen management talent at the portfolio company.

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Investment Committee Support Team: A 4-person team that assists our investment committee (the “Investment Committee”) in establishing procedures and controls, establishing due diligence protocol and working with Investment Teams to establish due diligence plans for each prospective investment, developing standard investment committee reports and models, organizing investment committee meetings, monitoring and reporting investment committee results and tracking subsequent developments.

Financial Accounting and Compliance Team (“FACT”): A 24-person team of certified public accountants, chartered accountants and valuation and audit professionals. FACT is responsible for providing pre- and post-investment financial due diligence, portfolio monitoring and quarterly valuations of portfolio company investments. FACT assists our Investment Teams in conducting extensive financial, accounting, tax and information technology due diligence of each target investment company, which includes one or more on-site visits, a review of the portfolio company's historical and prospective financial information, and identifying and confirming pro-forma financial adjustments. FACT also monitors the existing portfolio investments by gathering, inputting into an automated database, analyzing and regularly reviewing monthly financial information and other materials to assess financial performance as well as to ensure compliance with loan covenants. Also, FACT, with the assistance of our Investment Teams and subject to the oversight of senior management and the Audit and Compliance Committee, prepares a quarterly valuation of each portfolio company investment.

Syndications Team: A 4-person team that is responsible for arranging syndications of all or part of the senior debt of our portfolio companies either at closing or subsequent to the closing of a senior financing transaction. They perform a variety of functions relating to the marketing and completing of such transactions.

Capital Markets, Finance and Treasury Team: A 23-person team that is responsible for raising equity and debt capital, investor relations, financial budgeting and forecasting and daily liquidity and cash management. Through its debt capital raising activities, the team is responsible for structuring, selling and administering on-balance sheet term debt securitizations of debt investments, secured and unsecured bonds and various other revolving facilities and term debt facilities for us and our alternative asset funds under management. Through its equity capital raising activities, the team is responsible for structuring and selling equity for us and our public and private funds. The team is also responsible for monitoring and reporting on capital market conditions and researching, developing and raising private and public capital for new third-party funds for our alternative asset management business. The team is also responsible for arranging syndications of all or part of the equity of our portfolio companies either at closing or subsequent to the closing of an equity financing transaction.

Accounting, Tax and Reporting Team: A 35-person team that is responsible for the accounting of our financial results as well as that of our managed funds, including financial reporting and communications to our shareholders, partners and regulatory bodies. Among its tasks are preparing financial statements, investment accounting, analysis of investment performance, loan servicing, billing, accounts receivable and payable, tax compliance, external audit coordination and developing and monitoring our internal controls.

Legal and Compliance Team: A 22-person team that provides legal support on corporate, capital raising and investing matters, is involved in regular reporting and special communications with our shareholders and regulatory bodies and manages the outside law firms that provide transactional, litigation and regulatory services to us. In addition, as required by the Securities and Exchange Commission (“SEC”), we have appointed a Chief Compliance Officer, who is responsible for administering our code of ethics and conduct and our legal compliance activities.

Internal Audit Team: A 4-person team that reports directly to the Audit and Compliance Committee of our Board of Directors. The team tests our internal controls over financial reporting to assist management's assessment of the effectiveness of our internal controls over financial reporting under the Sarbanes-Oxley Act of 2002.

Human Resources Team: A 7-person team that assists in recruiting and hiring as well as reviewing, establishing and administering compensation programs and benefit plans for our employees. In addition, the team is available to the Investment Teams and the Operations Team to assist with executive management and other human resources issues at portfolio companies.

Information Technology Team: A 26-person team that assists all departments in researching, developing, implementing and maintaining communication and technological resources for our multi-office operations, including highly specialized systems for the input, processing and reporting of data.

Investment Process

Investment Sourcing and Screening: We have a multi-disciplined approach to reach diverse channels of deal sources. Our Investment Teams target a referral network comprised of investment bankers, private equity firms, subordinated debt funds, trade organizations, commercial bankers, attorneys and business and financial brokers. We developed and maintain a proprietary industry-wide database of reported middle market transactions, which enables us to monitor and evaluate the middle market investing environment. This database is used to help us assess whether we are penetrating our target markets and to track terms and pricing. Our financial professionals review financing memorandums and private placement memorandums sourced from this referral

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network in search of potential buyout or financing opportunities. Our Investment Teams undertake a preliminary evaluation and analysis of potential investment opportunities to determine whether or not they meet our criteria based upon the limited information received in these early stages of the investment process. For investment opportunities that pass an initial screening process, our Investment Teams prepare an initial investment thesis and analysis that is presented to an internal Investment Committee, which includes representatives of our senior officers depending on the nature of the proposed investment, for approval to proceed further.

Due Diligence: In our private finance investments, our investment professionals along with FACT and our Operations Team conduct due diligence of each target company that passes the initial screening process. This includes one or more on-site visits, a review of the target company's historical and prospective financial information, identifying and confirming pro-forma financial adjustments, interviews with and assessments of management, employees, customers and vendors, review of the adequacy of the target company's systems, background investigations of senior management and research on the target company's products, services and industry. We often engage professionals such as environmental consulting firms, accounting firms, law firms, risk management companies and management consulting firms with relevant industry expertise to perform elements of the due diligence.

Investment Approval: Upon completion of our due diligence, our Investment Teams, FACT and our Operations Team, as well as any consulting firms that we have engaged, prepare and present a report containing the due diligence information for review by our Investment Committee. Our Board of Directors has delegated authority to the Investment Committee to conduct the initial review and approval of our investments. Our Investment Committee generally must approve each investment. Investments exceeding a certain size or meeting certain other criteria must also be approved by our Board of Directors. Our Investment Committee is supported by a dedicated staff that focuses on the due diligence and other research done with regard to each proposed investment.

Documentation and Negotiations: Documentation for the legal agreements for a transaction is completed either by our in-house legal team or through the retention of outside legal counsel. We maintain custody of our investment securities and the original related investment documentation in custodial accounts with qualified banks and members of national securities exchanges in accordance with applicable regulatory and financing requirements.

Investment Funding: Prior to the release of any funding for investments, our treasury department prepares a summary of the investment terms, the funding amounts approved by our Investment Committee and wiring instructions. Our treasury department performs various procedures to confirm any wiring instructions. A senior executive officer must approve this summary of terms and funding amounts prior to the disbursement of the funds.

Portfolio Monitoring: In addition to the due diligence at the time of the original investment decision, we seek to preserve and enhance the performance of our portfolio companies under management through our active involvement with the portfolio companies. As a BDC, we are required by law to make significant managerial assistance available to most of our portfolio companies. This generally includes providing guidance and counsel concerning the management, operations and business objectives and policies of the portfolio company to the portfolio company's management and board of directors, including participating on the company's board of directors. The respective Investment Teams, FACT and Operations Teams regularly review each portfolio company's monthly financial statements to assess performance and trends, periodically conduct on-site financial and operational reviews and evaluate industry and economic issues that may affect the portfolio company.

Investment Exits: We regularly evaluate each investment to determine the appropriate time to exit an investment. For investments that we control, portfolio companies are usually sold through an auction process, following the engagement of an investment bank. For performing investments that we do not control, the exit typically occurs when the sponsor or other party in control of the portfolio company decides to recapitalize or sell the business. In both instances, our debt investment is typically paid in full and any equity investment we own realizes a value consistent with the value realized by the controlling parties. For non-performing investments that we do not control, we may determine that based on the facts and circumstances relating to the investment, to accept an amount less than what we are legally owed with any such decision requiring approval by our Investment Committee.

Portfolio Valuation

FACT, with the assistance of our Investment Teams, and subject to the oversight of senior management and the Audit and Compliance Committee, prepares a quarterly valuation of each of our portfolio company investments. Our Board of Directors approves our portfolio valuations as required by the 1940 Act.

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Competition

We compete with strategic buyers, private equity funds, subordinated debt funds and other buyers and financing sources, including traditional financial services companies such as finance companies, commercial banks, investment banks and other equity and non-equity based investment funds. Some of our competitors are substantially larger and have considerably greater financial resources than we do. Competitors may have a lower cost of funds and many have access to funding sources that are not available to us. In addition, certain of our competitors may have higher risk tolerances or different risk assessments, which could allow them to consider a wider variety of investments and establish more relationships and build their market shares. There is no assurance that the competitive pressures we face will not have a material adverse effect on our business, financial condition and results of operations. In addition, as a result of this competition, we may not be able to take advantage of attractive investment opportunities from time to time and there can be no assurance that we will be able to identify and make investments that satisfy our investment objectives or that we will be able to meet our investment goals.

Corporate Information

Our executive offices are located at 2 Bethesda Metro Center, 14^th Floor, Bethesda, Maryland 20814, and our telephone number is (301) 951-6122. In addition to our executive offices, we or subsidiaries of our wholly-owned portfolio company American Capital, LLC, maintain offices in New York, Chicago, Dallas, Boston, London, and Paris.

We make available all of our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to such reports free of charge on our internet website at www.AmericanCapital.com as soon as reasonably practical after such material is electronically filed with or furnished to the SEC. These reports are also available on the SEC's internet website at www.sec.gov. The public may also read and copy paper filings that we have made with the SEC at the SEC's Public Reference Room, located at 100 F Street, NE, Washington, D.C. 20549. Information on the operation of the Public Reference Room may be obtained by calling (800) SEC-0330.

Employees

As of December 31, 2011, we employed 249 full-time employees compared to 242 and 264 full-time employees as of December 31, 2010 and 2009, respectively. We believe that we have excellent relations with our employees.

Business Development Company Requirements

We are a closed-end, non-diversified, management investment company that has elected to be regulated as a BDC under the 1940 Act, and, as such, are subject to regulation under that act.

Qualifying Assets

As a BDC, we may not acquire any asset other than “qualifying assets,” as defined by the 1940 Act, unless, at the time the acquisition is made, the value of our qualifying assets represent at least 70% of the value of our total assets. The principal categories of qualifying assets relevant to our business include the following:

• securities purchased in transactions not involving any public offering from:

a) an issuer that (i) is organized and has its principal place of business in the United States, (ii) is neither an investment company other than a wholly-owned small business investment company nor an entity that would be an investment company but for certain statutory exemptions, and (iii) does not have any class of securities listed on a national securities exchange with a market capitalization in excess of $250 million; or

b) an issuer that satisfies the criteria set forth in clauses (a) (i) and (ii) above but not clause (a)(iii), so long as, at the time of purchase, we own at least 50% of (i) the greatest amount of equity securities of the issuer, including securities convertible into such securities and (ii) the greatest amount of certain debt securities of such issuer, held by us at any point in time during the period when such issuer was an eligible portfolio company, except that options, warrants, and similar securities which have by their terms expired and debt securities which have been converted, or repaid or prepaid in the ordinary course of business or incident to a public offering of securities of such issuer, shall not be considered to have been held by us, and we are one of the 20 largest holders of record of such issuer's outstanding voting securities;

• securities of an issuer described in clauses (a)(i) and (ii) above with respect to which we control (alone or together as a part of a group), we in fact exercise a controlling influence over such issuer's management or policies and a person affiliated with us is on the issuer's board of directors;

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• securities received in exchange for or distributed with respect to securities described above, or pursuant to the exercise of options, warrants or rights relating to such securities; and

• cash, cash items, U.S. government securities, or high quality debt securities maturing in one year or less from the time of investment.

To include certain securities above as qualifying assets for the purpose of the 70% test, a BDC must either control the issuer of the securities or offer to make significant managerial assistance available to the issuer of those securities, such as providing significant guidance and counsel concerning the management, operations, or business objectives and policies of a portfolio company or making loans to a portfolio company. We make significant managerial assistance available to each of our portfolio companies.

Under the 1940 Act, we may not change the nature of our business so as to cease to be, or withdraw our election as, a BDC without consent of the holders of a majority of our outstanding voting securities. Since we made our BDC election, we have not made any substantial change in our structure or in the nature of our business.

Temporary Investments

Pending investment in other types of Qualifying Assets, we may invest our otherwise uninvested cash in cash, cash items, government securities, agency paper or high quality debt securities maturing in one year or less from the time of investment in such high quality debt investments, referred to as temporary investments, so that at least 70% of our assets are Qualifying Assets.

Leverage

The 1940 Act permits us, as a BDC, to issue senior debt securities and preferred stock (collectively, “Senior Securities”) in amounts such that our asset coverage is at least 200% after each issuance of Senior Securities. Asset coverage is defined in the 1940 Act as the ratio which the value of the total assets, less all liabilities and indebtedness not represented by Senior Securities, bears to the aggregate amount of Senior Securities representing indebtedness. Such indebtedness may also be incurred for the purpose of effecting share repurchases. As a result, we are exposed to the risks of leverage. Although we have no current intention to do so, we have retained the right to issue preferred stock, subject to certain limitations under the 1940 Act. As permitted by the 1940 Act, we may, in addition, borrow amounts up to 5% of our total assets for temporary purposes. As of December 31, 2011, our asset coverage was 465%.

Under the 1940 Act, if a BDC has any senior debt securities outstanding that were publicly issued, the BDC must make provision to prohibit the declaration of any dividend (except a dividend payable in the stock of the BDC) if its asset coverage is below 200% at the time of the distribution after deducting the amount of such dividend.

Issuance of Stock

As a BDC, we are generally not able to issue and sell our common stock at a price below our NAV per share, exclusive of any distributing commission or discount, except (i) with the prior approval of a majority of our shareholders, (ii) in connection with a rights offering to our existing shareholders, or (iii) under such other circumstances as the SEC may permit. As of December 31, 2011, our NAV was $13.87 per share and our closing market price was $6.73 per share. As of the date of this filing, we do not have any authorization to issue shares of our common stock below our NAV per share.

Investment Objectives

Our primary business objectives are to increase our net earnings and NAV by investing in senior and mezzanine debt and equity securities of private companies and alternative asset funds managed by American Capital, LLC with attractive current yields and/or potential for equity appreciation and realized gains. Our investment objectives provide that:

• We will at all times conduct our business so as to retain our status as a BDC. In order to retain that status, we may not acquire any assets (other than non-investment assets necessary and appropriate to our operations as a BDC) if after giving effect to such acquisition the value of our qualifying assets amounts to less than 70% of the value of our total assets. See Item 1. Business-Business Development Company Requirements for a summary definition of qualifying assets. We believe most of the securities we will acquire (provided that we control, or through our officers or other participants in the financing transaction, make significant managerial assistance available to the issuers of these securities), as well as temporary investments, will generally be qualifying assets. Securities of public companies with a market capitalization in excess of $250 million, on the other hand, are generally not qualifying assets unless they were acquired in a distribution, in exchange for or upon the exercise of a right relating to securities that were qualifying assets.

• We may invest up to 100% of our assets in securities acquired directly from issuers in privately-negotiated transactions. With respect to such securities, we may, for the purpose of public resale, be deemed an “underwriter” as that term is defined in the Securities Act of 1933. We may invest up to 50% of our assets to acquire securities of issuers for the purpose

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of acquiring control (up to 100% of the voting securities) of such issuers. We will not concentrate our investments in any particular industry or group of industries. Therefore, we will not acquire any securities (except upon the exercise of a right related to previously acquired securities) if, as a result, 25% or more of the value of our total assets consists of securities of companies in the same industry.

• We may issue Senior Securities to the extent permitted by the 1940 Act for the purpose of making investments, to fund share repurchases, or for temporary or emergency purposes. As a BDC, we may issue Senior Securities up to an amount so that the asset coverage, as defined in the 1940 Act, is at least 200% immediately after each issuance of Senior Securities.

• We generally will not (a) act as an underwriter of securities of other issuers (except to the extent that we may (i) be deemed an “underwriter” of securities purchased by us that must be registered under the Securities Act of 1933 before they may be offered or sold to the public or (ii) underwrite securities to be distributed to or purchased by our shareholders in connection with offerings of securities by companies in which we are a shareholder); (b) sell securities short (except with regard to managing risks associated with publicly traded securities issued by portfolio companies); (c) purchase securities on margin (except to the extent that we may purchase securities with borrowed money); (d) write or buy put or call options (except (i) to the extent of warrants or conversion privileges in connection with our acquisition financing or other investments, and rights to require the issuers of such investments or their affiliates to repurchase them under certain circumstances, or (ii) with regard to managing risks associated with publicly traded securities issued by portfolio companies); (e) engage in the purchase or sale of commodities or commodity contracts, including futures contracts (except where necessary in working out distressed loan or investment situations); or (f) acquire more than 3% of the voting stock of, or invest more than 5% of our total assets in any securities issued by, any other investment company (as defined in the 1940 Act), except as they may be acquired as part of a merger, consolidation or acquisition of assets. With regard to that portion of our investments in securities issued by other investment companies it should be noted that such investments may subject our shareholders to additional expenses.

The percentage restrictions set forth above, other than the restriction pertaining to the issuance of Senior Securities, as well as those contained elsewhere herein, apply at the time a transaction is effected, and a subsequent change in a percentage resulting from market fluctuations or any cause other than an action by us will not require us to dispose of portfolio securities or to take other action to satisfy the percentage restriction.

The above investment objectives have been set by our Board of Directors and do not require shareholder consent to be changed.

Investment Advisor

We have no investment advisor and are internally managed by our executive officers under the supervision of our Board of Directors.

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Item 1A. Risk Factors

You should carefully consider the risks described below and all other information contained in this Annual Report on Form 10-K, including our consolidated financial statements and the related notes thereto before making a decision to purchase our securities. The risks and uncertainties described below are not the only ones facing us. Additional risks and uncertainties not presently known to us, or not presently deemed material by us, may also impair our operations and performance.

If any of the following risks actually occur, our business, financial condition or results of operations could be materially adversely affected. If that happens, the trading price of our securities could decline, and you may lose all or part of your investment.

Risks Related to Our Business and Structure

Our business has significant capital requirements and may be adversely affected by a prolonged inability to access the capital markets or to sell assets

Our business requires a substantial amount of capital to operate. We historically have financed our operations, including the funding of new investments, through cash generated by our operating activities, the repayment of debt investments, the sale of equity investments, the issuance of debt by special purpose affiliates to which we have contributed loan assets, the sale of our stock and through secured and unsecured borrowings. Our ability to continue to rely on such sources or other sources of capital is affected by restrictions in both the 1940 Act and in certain of our debt agreements relating to the incurrence of additional indebtedness as well as changes in the capital markets from the recent economic recession. It is also affected by legal, structural and other factors. There can be no assurance that we will be able to earn or access the funds necessary for our liquidity requirements.

Future adverse market and economic conditions could cause harm to our operating results

Past recessions have had a significant negative impact on the operating performance and fair value of our portfolio investments. Many of our portfolio companies could be adversely impacted again by any future economic downturn or recession and may be unable to repay our debt investments, may be unable to be sold at a price that would allow us to recover our investment, or may be unable to operate during such recession. Such portfolio company performance could have a material adverse effect on our business, financial condition and results of operations.

We have loans to and investments in middle market borrowers who may default on their loans or provide no return on our investments

We have invested in and made loans to privately-held, middle market businesses and plan to continue to do so. There is generally a limited amount of publicly available information about these businesses. Therefore, we rely on our principals, associates, analysts, other employees and consultants to investigate and monitor these businesses. The portfolio companies in which we have invested may have significant variations in operating results, may from time to time be parties to litigation, may be engaged in rapidly changing businesses with products subject to a substantial risk of obsolescence, may require substantial additional capital to support their operations, to finance expansion or to maintain their competitive position, may otherwise have a weak financial position or may be adversely affected by changes in the business cycle. Our portfolio companies may not meet net income, cash flow and other coverage tests typically imposed by senior lenders. Numerous factors may affect a portfolio company's ability to repay its loans, including the failure to meet its business plan, a downturn in its industry or negative economic conditions. Deterioration in a portfolio company's financial condition and prospects may be accompanied by deterioration in the collateral for the loan. We have also made unsecured and mezzanine loans and invested in equity securities, which involve a higher degree of risk than senior secured loans. In certain cases, our involvement in the management of our portfolio companies may subject us to additional defenses and claims from borrowers and third-parties. These conditions may make it difficult for us to obtain repayment of our investments.

Middle market businesses typically have narrower product lines and smaller market shares than large businesses. They tend to be more vulnerable to competitors' actions and market conditions, as well as general economic downturns. In addition, these companies may face intense competition, including competition from companies with greater financial resources, more extensive development, manufacturing, marketing, and other capabilities, and a larger number of qualified managerial and technical personnel.

These businesses may also experience substantial variations in operating results. Typically, the success of a middle market business also depends on the management talents and efforts of one or two persons or a small group of persons. The death, disability or resignation of one or more of these persons could have a material adverse impact on us. In addition, middle market businesses often need substantial additional capital to expand or compete and may have borrowed money from other lenders with claims that are senior to our claims.

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Our senior loans generally are secured by the assets of our borrowers, however certain of our senior loans may have a second priority lien and thus, our security interest may be subordinated to the payment rights and security interest of the first lien senior lender. Additionally, our mezzanine loans may or may not be secured by the assets of the borrower; however, if a mezzanine loan is secured, our rights to payment and our security interest are usually subordinated to the payment rights and security interests of the first and second lien senior lenders. Therefore, we may be limited in our ability to enforce our rights to collect our second lien senior loans or mezzanine loans and to recover any of the loan balance through a foreclosure of collateral.

There is uncertainty regarding the value of our portfolio investments

A substantial portion of our portfolio investments are not publicly traded. As required by law, we fair value these investments in accordance with the 1940 Act and Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 820, Fair Value Measurements and Disclosures (“ASC 820”) based on a determination made in good faith by our Board of Directors. Due to the uncertainty inherent in valuing investments that are not publicly traded, as set forth in our consolidated financial statements in this Annual Report on Form 10-K, our determinations of fair value may differ materially from the values that would exist if a ready market for these investments existed. Our determinations of the fair value of our investments have a material impact on our net earnings through the recording of unrealized appreciation or depreciation of investments as well as our assessment of income recognition. Thus, our NAV could be materially affected in the event of any changes in applicable law or accounting pronouncements governing how we currently fair value assets, or if our determinations regarding the fair value of our investments are materially different from the values that would exist if a ready market existed for these securities.

Our ability to recognize the benefits of our deferred tax asset is dependent on future taxable income and could be substantially limited if we experience an “ownership change” within the meaning of Section 382 of the Internal Revenue Code

We recognize the expected future tax benefit from a deferred tax asset when the tax benefit is considered more likely than not to be realized. Otherwise, a valuation allowance is applied against the deferred tax asset. Assessing the recoverability of a deferred tax asset requires management to make significant estimates related to expectations of future taxable income. Estimates of future taxable income are based on forecasted cash flows from investments and operations, the character of expected income or loss as either capital or ordinary and the application of existing tax laws in each jurisdiction. To the extent that future cash flows and the amount or character of taxable income differ significantly from estimates, our ability to realize the deferred tax asset could be impacted. Furthermore, $51 million of our $428 million deferred tax assets relate to timing differences associated with stock-based compensation and if the related tax benefit realized is less than the related US GAAP expense for a grant, the remaining related deferred tax asset would be written off. See Note 12-Income Taxes to our consolidated financial statements in this Annual Report on Form 10-K.

Additionally, under Sections 382 and 383 of the Code, following an “ownership change,” certain limitations apply to the use by a “loss corporation” of certain tax attributes including net operating loss carryforwards, capital loss carryforwards, unrealized built-in losses and tax credits arising before the “ownership change.” Such tax attributes represent substantially all of our deferred tax assets. In general, an “ownership change” would occur if there is a cumulative change in the ownership of our common stock of more than 50 percentage points by one or more “5% shareholders” during a three-year period. In the event of an “ownership change,” the tax attributes that may be used to offset our future taxable income in each year after the “ownership change” will be subject to an annual limitation. In general, the annual limitation is equal to the product of the fair market value of our common stock on the date of the “ownership change” and the “long term tax exempt rate” (which is published monthly by the Internal Revenue Service), subject to specified adjustments. This limitation could accelerate our cash tax payments and could result in a significant portion of our deferred tax asset expiring before we could fully use them.

Changes in laws or regulations governing our operations or our failure to comply with those laws or regulations may adversely affect our business

We and our portfolio companies are subject to regulation by laws at the local, state, federal and foreign level, including with respect to securities laws, tax and accounting standards. These laws and regulations, as well as their interpretation, may be changed from time to time. Accordingly, any change in these laws or regulations or the failure to comply with these laws or regulations could have a material adverse impact on our business. Certain of these laws and regulations pertain specifically to BDCs.

We may materially change our corporate structure and the nature of our business

We are very much affected by the legal, regulatory, tax and accounting regimes under which we operate. We are evaluating whether those regimes and our existing corporate structure are the optimum means for the operation and capitalization of our business. As a result of these evaluations, we may decide to proceed with structural and organizational changes (certain of which may require the approval of our shareholders), which could result in spinning out to our shareholders an externally managed debt focused BDC, changes in our corporate form, termination of our election to be regulated as a BDC, our conversion from an

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investment company to an operating company or other fundamental changes. If we were no longer an investment company, our accounting practices would change and, for example, lead to the consolidation of certain majority owned companies with which we do not now consolidate as an investment company. Additionally, if we were no longer an investment company, our shareholders would not benefit from the investor protections provided by the 1940 Act. We may incur certain costs in completing these evaluations and may receive no benefit from these expenditures, particularly if we do not proceed with any changes. No decisions have been made with respect to any such changes and there is no timetable for making any decisions, including any decision not to proceed with any such changes.

A change in interest rates may adversely affect our profitability

Because we have funded a portion of our investments with borrowings, our earnings are affected by the spread between the interest rate on our investments and the interest rate at which we borrowed funds. We have attempted 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 have entered into interest rate basis swap agreements to match the interest rate basis of a portion 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 asset securitizations. However, our derivatives are considered economic hedges that do not qualify for hedge accounting under ASC Topic 815, Derivatives and Hedging (“ASC 815”). Therefore, payments under the hedges are recorded in net realized (loss) gain on investments in our consolidated statements of operations in this Annual Report on Form 10-K and not in interest income or expense.

Under our interest rate swap agreements, we generally pay a fixed rate and receive a floating interest rate based on LIBOR. We may enter into interest rate swaption agreements where, if exercised, we would receive a fixed rate and pay a floating rate based on LIBOR. We may also enter into interest rate cap agreements that would entitle us to receive an amount, if any, by which our interest payments on our variable rate debt exceed specified interest rates.

An increase or decrease in interest rates could reduce the spread between the rate at which we invest and the rate at which we borrow, and thus, adversely affect our profitability, if we have not appropriately match-funded our liabilities and assets or hedged against such event. Alternatively, our interest rate hedging activities may limit our ability to participate in the benefits of lower interest rates with respect to the hedged portfolio.

Also, the fair value of certain of our debt investments is based in part on the current market yields or interest rates of similar securities. A change in interest rates could have a significant impact on our determination of the fair value of these debt investments. In addition, a change in interest rates could also have an impact on the fair value of our interest rate swap agreements that could result in the recording of unrealized appreciation or depreciation in future periods. For example, a decline, or a flattening, of the forward interest rate yield curve will typically result in the recording of unrealized depreciation of our interest rate swap agreements.

Therefore, adverse developments resulting from changes in interest rates could have a material adverse effect on our business, financial condition and results of operations. See Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations-Quantitative and Qualitative Disclosures About Market Risk and Item 8. Financial Statements and Supplementary Data for additional information on interest rate swap agreements.

A change in currency exchange rates may adversely affect our profitability

We have or may make investments in debt instruments that are denominated in currencies other than the U.S. dollar. In addition, we have or may make investments in the equity of portfolio companies whose functional currency is not the U.S. dollar. Our domestic portfolio companies may also transact a significant amount of business in foreign countries and therefore their profitability may be impacted by changes in foreign currency exchange rates. The functional currency of our largest portfolio company, European Capital, is the Euro. European Capital also has investments in other European currencies, including the British Pound. As a result, an adverse change in currency exchange rates may have a material adverse impact on our business, financial condition and results of operations.

We may experience fluctuations in our quarterly results

We have and could experience material fluctuations in our quarterly operating results due to a number of factors including, among others, variations in and the timing of the recognition of realized and unrealized gains or losses, placing and removing investments on non-accrual status, the degree to which we encounter competition in our markets, the ability to sell investments at attractive terms, the ability to fund and close suitable investments, the timing of the recognition of fee income from closing investment transactions and general economic conditions. As a result of these factors, results for any period should not be relied upon as being indicative of performance in future periods. See Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.

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We are dependent upon our key management personnel for our future success

We are dependent on the diligence and skill of our senior management and other members of management for raising capital and the selection, structuring, monitoring, restructuring/amendment, sale and exiting of our investments. Our future success depends to a significant extent on the continued service of our senior management and other members of management. Our failure to raise additional capital that would enhance the growth of our business, or our failure to provide appropriate opportunities for or compensate competitively senior management and other members of management may make it difficult to retain such individuals. The departure of certain executive officers or key employees could materially adversely affect our ability to implement our business strategy. We do not maintain key man life insurance on any of our officers or employees.

We operate in a highly competitive market for investment opportunities

We compete with strategic buyers and hundreds of private equity and mezzanine debt funds and other financing sources, including traditional financial services companies such as finance companies, commercial banks, investment banks and other equity and non-equity based investment funds. Some of our competitors are substantially larger and have considerably greater financial resources than us. Competitors may have lower cost of funds and many have access to funding sources that are not available to us. In addition, certain of our competitors may have higher risk tolerances or different risk assessments, which could allow them to offer better pricing and terms to prospective portfolio companies, consider a wider variety of investments and establish more relationships and build their market shares. There is no assurance that the competitive pressures we face will not have a material adverse effect on our business, financial condition and results of operations. In addition, as a result of this competition, we may not be able to take advantage of attractive investment opportunities from time to time and there can be no assurance that we will be able to identify and make investments that satisfy our investment objectives or that we will be able to meet our investment goals.

We could face losses and potential liability if intrusions, viruses or similar disruptions to our technology jeopardize our confidential information or that of users of our technology

Although we have implemented, and will continue to implement, security measures, our technology platform is and will continue to be vulnerable to intrusion, computer viruses or similar disruptive problems caused by transmission from unauthorized users. In addition, any misappropriation of proprietary information could expose us to a risk of loss or litigation.

Risks Related to Liquidity and Capital Resources

Our secured borrowing arrangements impose significant limitations on us

Certain tranches of our secured notes are call-protected and except under certain circumstances, may only be redeemed by us prior to August 1, 2012 if we pay a fee. Our other secured loans and notes have scheduled amortization and are subject to mandatory redemptions with all or part of the proceeds from new debt, equity issuances, realized proceeds from portfolio exits and excess cash flow.

Our secured notes and loans have covenants that in certain circumstances limit our ability to enter into new debt financing, pay cash dividends, dispose of assets or fund new investments. In addition, our secured notes and loans include financial covenants that require us to maintain a minimum ratio of operating cash flow to interest expense and a minimum ratio of pledged asset value to secured debt. There can be no assurance that we will be able to maintain compliance with each of these covenants and a failure to do so could have a material adverse effect on our business, financial condition and results of operations.

Additionally, debt obligations outstanding under our asset securitizations currently require that all principal and interest received on the loans securing such debt be used to repay such debt. Accordingly, we do not currently have access to the liquidity or current cash flows from the loans securing the debt in our asset securitizations for funding new investments or general corporate needs.

The 1940 Act limits our ability to issue Senior Securities in Certain Circumstances

As a BDC, the 1940 Act generally limits our ability to issue Senior Securities if our asset coverage ratio does not exceed 200% immediately after each issuance of Senior Securities or is improved immediately upon the issuance. Asset coverage ratio is defined in the 1940 Act as the ratio that the value of the total assets, less all liabilities and indebtedness not represented by Senior Securities, bears to the aggregate amount of Senior Securities representing indebtedness. We have operated at times in the past with our asset coverage ratio below 200% and there are no assurances that we will always operate above this ratio. The resulting restrictions on issuing Senior Securities could have a material adverse impact on our business operations.

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The 1940 Act limits our ability to issue equity below our NAV per share

As a BDC, the 1940 Act generally limits our ability to issue and sell our common stock at a price below our NAV per share, exclusive of any distributing commission or discount, without shareholder approval. Since 2008, shares of our common stock have traded below our NAV per share. If our common stock continues to trade at a price below our NAV per share, there are no assurances that we can issue or sell shares of our common stock if needed to fund our business. In addition, even in certain instances where we could issue or sell shares of our common stock at a price below our NAV per share, such issuance could result in dilution in our NAV per share, which could result in a decline of our stock price.

Our interest rate swap agreements contain covenants that place limitations on us

We enter into interest rate swap agreements to manage interest rate risk and also to fulfill our obligations under the terms of our asset securitizations. Our interest rate swap agreements contain various events of default, including in certain cases an event of default that allows the counterparty to terminate transactions outstanding under the agreement following the occurrence of a cross default on certain of our other indebtedness. Certain of our interest rate swap agreements also contain an event of default that allows a counterparty to terminate transactions outstanding under the agreement if certain of our other indebtedness, as applicable, is accelerated. An event of default under certain of our interest rate swap agreements could also trigger a default under our secured debt arrangements. Also, certain of our interest rate swap agreements are secured by a first priority lien (subject to certain permitted liens) on substantially all of our non-securitized assets pari passu with our secured notes and loans. The remaining interest rate swap agreements are secured by a first priority lien (subject to certain permitted liens) on our securitized assets pari passu with our securitized debt. Thus, if we violate the covenants in any of the interest rate swap agreements, it could have a material adverse effect on our business, financial condition and results of operations.

The lack of liquidity in our privately-held securities may adversely affect our business

Most of our investments consist of securities acquired directly from their issuers in private transactions. Some of these securities are subject to restrictions on resale or otherwise are less liquid than public securities. The illiquidity of our investments may make it difficult for us to obtain cash equal to the value at which we record our investments upon exiting the investment.

We and certain of our executive officers are defendants in a purported class action lawsuit

We and certain of our executive officers were named as defendants in a purported class action lawsuit, filed on behalf of the purchasers of our common stock between October 31, 2007 and November 7, 2008. The complaint alleges certain securities law violations relating to the revision of our dividend guidance for 2008. The complaint seeks unspecified damages, costs and expenses. On February 22, 2012, the court granted preliminary approval of a settlement submitted by the parties. The terms of the settlement include payment by our insurers in exchange for a full release of the claims and provides that there is no admission as to the validity of the claims. The settlement is subject to certain contingencies including final court approval following notice and hearing and the right of the defendants to terminate the settlement if a certain number of shareholders opt out of the class after notice. The final approval hearing is scheduled for June 7, 2012. While we do not expect that the outcome of the lawsuit will materially affect our financial condition or results of operations, until the court issues a final order approving the settlement and dismissing the case, there can be no assurance whether this legal proceeding will have a material adverse effect on our financial condition or results of operations in any future reporting period.

Risks Related to Our Investing and Financing Strategy

We have and may incur additional debt that could increase your investment risks

We and certain of our consolidated affiliates have borrowed money or issued debt securities, which give our lenders and the holder of our debt securities fixed dollar claims on our assets or the assets of such consolidated affiliates that are senior to the claims of our shareholders and, thus, our lenders have preference over our shareholders with respect to these assets. In particular, the assets that our consolidated affiliates have pledged to lenders under our asset securitizations were sold or contributed to separate affiliated statutory trusts prior to such pledge. While we own a beneficial interest in these trusts, these assets are the property of the respective trusts, available to satisfy the debts of the trusts, and would only become available for distribution to our shareholders to the extent specifically permitted under the agreements governing those term debt notes. Additionally, we have granted a security interest in substantially all of our other assets to the holders of our secured debt due 2013 which impose certain limitations on us.

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The following table is designed to illustrate the effect on returns to a holder of our common stock of the leverage created by our use of borrowing, at the weighted average interest rate of 5.5% for the year ended December 31, 2011, and assuming hypothetical annual returns on our portfolio of minus 15% to plus 15%. As illustrated below, leverage generally increases the return to shareholders when the portfolio return is positive and decreases the return when the portfolio return is negative. Actual returns may be greater or less than those appearing in the table.

Assumed Return on Portfolio (Net of Expenses)(1)	(15)%	(10)%	(5)%	—%	5%	10%	15%
Corresponding Return to Stockholders(2)	(18)%	(11)%	(5)%	2%	9%	15%	22%

(1) The assumed portfolio return is required by regulation of the SEC and is not a prediction of, and does not represent, our projected or actual performance.

(2) In order to compute the “Corresponding Return to Shareholders,” the “Assumed Return on Portfolio” is multiplied by the total value of our assets at the beginning of the period to obtain an assumed return to us. From this amount, all interest expense accrued during the period is subtracted to determine the return available to shareholders. The return available to shareholders is then divided by the total value of our net assets as of the beginning of the period to determine the “Corresponding Return to Shareholders.”

Although outstanding debt increases the potential for gain, it also increases the risk of loss of income or capital. This is the case, whether we are impacted by an increase or decrease in income or due to increases or decreases in asset values. Our ability to pay dividends is similarly impacted by outstanding debt.

We currently have a non-investment grade corporate credit rating and we could experience further downgrades

As of December 31, 2011, our corporate credit rating was B2, B and B+ by Moody's Investor Services, Standard & Poor's Ratings Services and Fitch Ratings, respectively. Any rating below BBB or Baa2 is considered non-investment grade. If these credit ratings were to not improve or be further downgraded, our ability to refinance or raise additional debt could be negatively impacted. Any of these occurrences could have a material effect on our business, financial condition and results of operations.

Our credit ratings may not reflect all risks of an investment in our debt securities

Our credit ratings are an assessment by major debt rating agencies of our ability to pay our obligations. Consequently, actual or expected changes in our credit ratings will likely affect the market value of our traded debt securities. Our credit ratings, however, may not fully or accurately reflect all of the credit and market risks associated with our outstanding debt securities.

Under certain circumstances, we are unable to sell assets below a certain fraction of their fair values

We may need to sell certain assets to produce liquidity from time to time in order to repay our secured debt when it comes due in December 2013 and remaining unsecured public notes when they come due or to cover our current operating and financing costs under circumstances when our income is insufficient to cover such costs. In order to generate liquidity, we may need to sell certain assets at prices lower than their fair values or at prices lower than we could realize in future periods if we were to continue to hold the investments. We are limited under the terms of our debt agreements from selling a substantial portion of our portfolio investments below their fair market values under certain circumstances if such debt remains outstanding subsequent to the sale. Thus, there can be no assurances that we will be able to sell assets to generate sufficient liquidity in such circumstances.

We may not realize gains from our equity investments

We invest in equity assets with the goal to realize income and gains from the performance and disposition of these assets. Some or all of these equity assets may not produce income or gains; accordingly, we may not be able to realize income or gains from our equity assets.

We may reduce our income and return on equity if we sell certain income producing assets

We may need to sell assets to repay debt or for other corporate purposes. This may reduce our income and return on equity.

Our portfolio companies may be highly leveraged with debt

The debt levels of our portfolio companies may have important adverse consequences to such companies and to us as an investor. Portfolio companies that are indebted may be subject to restrictive financial and operating covenants. The leverage may impair these companies' ability to finance their future operations and capital needs. As a result, their flexibility to respond to changing business and economic conditions and to business opportunities may be limited. A company's income and net worth will tend to increase or decrease at a greater rate than if the company did not capitalize itself in part with debt.

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Investments in non-investment grade Structured Products may be illiquid, may have a higher risk of default, and may not produce current returns

Our investments in Structured Products securities are generally non-investment grade. Non-investment grade Structured Products bonds and preferred shares tend to be illiquid, have a higher risk of default and may be more difficult to value than investment grade bonds. Recessions or poor economic or pricing conditions in the markets associated with Structured Products may cause higher defaults or losses than expected on these bonds and preferred shares. 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 certain.

Our assets include investments in Structured Products that are subordinate in right of payment to more senior securities

Our assets include subordinated CMBS, CLO and CDO securities, which are subordinated classes of securities in a structure of securities secured by a pool of loans. Accordingly, such securities are the first or among the first to bear the loss upon a restructuring or liquidation of the underlying collateral and the last to receive payment of interest and principal. Thus, there is generally only a nominal amount of equity or other debt securities junior to our positions, if any, issued in such structures. Additionally, the estimated fair values of our subordinated interests tend to be much more sensitive to changes in economic conditions than more senior securities.

The trading market or market value of our debt securities may fluctuate

Many factors may materially adversely affect the trading market for, and market value of, our debt securities including, but not limited to, the following:

• future defaults under the securities;

• our creditworthiness;

• the time remaining to the maturity of these debt securities;

•

• the outstanding principal amount of debt securities with terms identical to these debt securities;

• the supply of debt securities trading in the secondary market, if any;

• the redemption or repayment features, if any, of these debt securities;

• the level, direction and volatility of market interest rates generally; and

• market rates of interest that are higher or lower than rates borne by the debt securities.

There may also be a limited number of buyers when an investor decides to sell its debt securities. This too may materially adversely affect the market value of the debt securities or the trading market for the debt securities.

We have restrictions on the type of assets we can invest in as a BDC

As a BDC, we may not acquire any assets other than “qualifying assets”, as defined in the 1940 Act, unless, at the time of and after giving effect to such acquisition, at least 70% of our total assets are qualifying assets. Thus, we may be precluded from investing in potentially attractive investments if such investments are not qualifying assets for purposes of the 1940 Act. In addition, there is a risk that this restriction could prevent us from making additional investments in our existing non-qualifying investments, which could cause our position to be diluted or limit the access to capital of our non-qualifying investments.

Risks Related to Our Common Stock

We may not pay any cash dividends

We are subject to federal and applicable state corporate income taxes on our taxable ordinary income and capital gains beginning with our tax year ended September 30, 2011, and are not subject to the annual distribution requirements under Subchapter M of the Code. Thus, there can be no assurance that we will pay any cash dividends as we may retain our earnings in certain circumstances to facilitate the growth of our business, to finance our investments, to provide liquidity or for other corporate purposes.

Future equity issuances may be on terms adverse to shareholder interests

We may issue equity capital at prices below our NAV per share with shareholder approval. As of the date of this filing, we do not have such authorization; however, we may seek such approval in the future or we may elect to conduct a rights offering, which would not require shareholder approval under the 1940 Act. If we issue any shares of common stock below our NAV per

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share, the interests of our existing shareholders may be diluted. Any such dilution could include a reduction in our NAV per share as a result of the issuance of shares at a price below the NAV per share and a decrease in a shareholder's interest in our earnings and assets and voting interest. As of December 31, 2011, the closing price of our common stock was below our NAV per share.

The following table is designed to illustrate the dilutive effect on NAV per share if we issue shares of common stock below our NAV per share. The table below reflects NAV per share diluted for the hypothetical issuance of 50,000,000 shares of common stock (about 15% of outstanding shares as of December 31, 2011), at hypothetical sales prices of 5%, 10%, 15%, 20%, 25% and 50% below the December 31, 2011 NAV of $13.87 per share.

Assumed Sales price per share below NAV per share(1)	(50)%	(25)%	(20)%	(15)%	(10)%	(5)%
Diluted NAV per share	$12.95	$13.41	$13.50	$13.59	$13.68	$13.78
% Dilution	(6.6)%	(3.3)%	(2.6)%	(2.0)%	(1.3)%	(0.7)%

(1) The assumed sales price per share is assumed to be net of any applicable underwriting commissions or discounts.

If we cannot meet NASDAQ's continued listing requirements, NASDAQ may delist our common stock, which could have an adverse impact on the liquidity and market price of our common stock

Our common stock is currently listed on The NASDAQ Global Select Market. Under NASDAQ rules, a stock can be delisted and not allowed to trade on NASDAQ if the closing bid price of the stock over a 30 consecutive trading-day period is less than $1.00 per share. There is a risk that the share price of our common stock could decline to levels over a period of time so that we could no longer meet these listing requirements, and thus may be delisted from NASDAQ. A delisting of our common stock could negatively impact us by reducing the liquidity and market price of our common stock and the number of investors willing to hold or acquire our common stock, which could negatively impact our stock price and ability to raise equity financing.

The market price of our common stock may fluctuate significantly

The market price and marketability of shares of our securities may from time to time be significantly affected by numerous factors, including many over which we have no control and that may not be directly related to us. These factors include the following:

• price and volume fluctuations in the stock market from time to time, which are often unrelated to the operating performance of particular companies;

• defaulting on our debt covenants;

• significant volatility in the market price and trading volume of securities of BDCs, financial service companies, asset managers or other companies in our sector, which is not necessarily related to the operating performance of particular companies;

• changes in laws, regulatory policies, tax guidelines or financial accounting standards, particularly with respect to BDCs;

• changes in our earnings or variations in operating results;

• any shortfall in revenue or net income or any increase in losses from levels expected by securities analysts and the market in general;

• decreases in our NAV per share;

• general economic trends and other external factors; and

• loss of a major funding source.

Fluctuations in the trading price of our common stock may adversely affect the liquidity of the trading market for our common stock and, in the event that we seek to raise capital through future equity financings, our ability to raise such equity capital.

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Our common stock may be difficult to resell

Investors may not be able to resell shares of common stock at or above their purchase prices due to a number of factors, including:

• actual or anticipated fluctuation in our operating results;

• volatility in our common stock price;

• changes in expectations as to our future financial performance or changes in financial estimates of securities analysts; and

• departures of key personnel.

Provisions of our Charter and Bylaws could deter takeover attempts

Our charter and bylaws and the Delaware General Corporation Law contain certain provisions that may have the effect of discouraging and delaying or making more difficult a change in control. For example, we are subject to Section 203 of the Delaware General Corporation Law, which prohibits business combinations with interested shareholders except in certain cases. The existence of these provisions may negatively impact the price of our common stock and may discourage third-party bids. These provisions may also reduce any premiums paid to our shareholders for shares of our common stock that they own.

Item 1B. Unresolved Staff Comments

None.

Item 2. Properties

We do not own any real estate or other physical properties materially important to our operations. We lease office space in five locations for terms ranging up to twelve years.

Item 3. Legal Proceedings

We and certain of our executive officers are defendants in a purported class action lawsuit in the United States District Court for the District of Maryland styled as Klugmann v. American Capital, Ltd., et al. The lawsuit was filed on behalf of the purchasers of our common stock between October 31, 2007 and November 7, 2008, and alleges violations of Sections 10(b) and 20A of the Exchange Act and Rule 10b-5 promulgated thereunder, violations of Sections 11 and 12(a)(2) of the Securities Act of 1933, as amended, and in the case of the individual defendants, the control person provisions of the Exchange Act. The factual assertions in the complaint consist primarily of the allegation that the defendants made incorrect statements related to our dividend guidance for 2008. The complaint seeks unspecified damages, costs and expenses.

On February 22, 2012, the court granted preliminary approval of a settlement submitted by the parties. The terms of the settlement include payment by our insurers in exchange for a full release of the claims and provides that there is no admission as to the validity of the claims. The settlement is subject to certain contingencies including final court approval following notice and hearing and the right of defendants to terminate the settlement if a certain number of shareholders opt out of the class after notice. The final approval hearing is scheduled for June 7, 2012.

Item 4. Mine Safety Disclosures

Not applicable.

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PART II.

Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Quarterly Stock Prices

Our common stock is quoted on The NASDAQ Global Select Market under the ticker symbol “ACAS”. As of February 15, 2012, we had 833 shareholders of record. Most of the shares of our common stock are held by brokers and other institutions on behalf of shareholders. We believe that there are currently over 131,500 additional beneficial holders of our common stock. During the years ended December 31, 2011 and 2010, we did not declare any dividends on our common stock. The following table sets forth the range of high and low sales prices of our common stock as reported on The NASDAQ Global Select Market for the years ended December 31, 2011 and 2010.

	Sales Prices
	High		Low
2011
First Quarter	$	9.93	$	7.65
Second Quarter	$	10.85	$	8.60
Third Quarter	$	10.29	$	6.75
Fourth Quarter	$	8.16	$	5.98
2010
First Quarter	$	5.23	$	2.46
Second Quarter	$	6.65	$	4.16
Third Quarter	$	5.99	$	4.48
Fourth Quarter	$	8.17	$	5.65

Stock Repurchase and Dividend Program

The following table presents information with respect to purchases of our common stock made during the three months ended December 31, 2011, by us or any “affiliated purchaser” of us, as defined in Rule 10b-18(a)(3) under the Exchange Act (in millions, except per share amounts):

	Total Number of Shares Purchased(1)	Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(2)	Maximum Number of Shares That May Yet Be Purchased Under the Publicly Announced Plans or Programs
November 3, 2011 through November 23, 2011	4.3	$	7.22	4.3	N/A
December 8, 2011 through December 15, 2011	4.1	$	6.71	4.1	N/A
Fourth Quarter 2011	8.4	$	6.97	8.4	N/A

(1) All shares were purchased by us pursuant to the stock repurchase and dividend program described in footnote 2 below.

(2) On September 15, 2011, we announced a program that may provide for stock repurchases or dividend payments. The stock repurchase and dividend program is expected to be in effect through December 31, 2012. Under the newly adopted program, quarterly, we will consider setting an amount to be utilized for stock repurchases or dividends.

Dividend Reinvestment Plan

At the option of a holder of record of common stock, all cash distributions can be reinvested automatically under our dividend reinvestment plan (“DRIP”) in additional whole and fractional shares. Pursuant to our DRIP, a shareholder whose shares are registered in his own name may opt in to the plan and elect to reinvest all or a portion of his or her dividends in shares of our common stock by providing the required enrollment notice to the plan administrator, Computershare Investor Services. Shareholders whose shares are held in the name of a broker or the nominee of a broker may have distributions reinvested only if such service is provided by the broker or the nominee, or if the broker or the nominee permits participation in our DRIP. Shareholders

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whose shares are held in the name of a broker or other nominee should contact the broker or nominee for details. Shareholders that participate in the DRIP will receive the number of whole or fractional shares that can be obtained based on the price per share the plan administrator purchases the shares of common stock. Such shares will be acquired by the plan administrator through either receipt of newly issued shares or treasury shares from us or by purchase of outstanding shares of common stock on the open market. If the market price per share of our common stock on the dividend payment date equals or exceeds by at least 110% the NAV per share of our common stock as of the end of the most recently completed fiscal quarter (or as of such other time as may be determined by our Board of Directors), then our plan administrator will acquire shares of our common stock directly from us at a price equal to the greater of NAV per share or the market price on that date less a 2% discount. However, (i) if the market price per share of our common stock on the dividend payment date does not exceed 110% of the NAV per share of our common stock as of the end of the most recently completed fiscal quarter or (ii) if we advise the plan administrator that since such NAV per share was last determined we have become aware of events that indicate the possibility of a change in NAV per share as a result of which the NAV per share of the common stock on the dividend payment date might be higher than the current market price per share of our common stock, then the plan administrator will not acquire any newly issued shares from us at a discount and instead will buy shares of our common stock in the open market. You can find out more information about the DRIP by reading our Third Amended and Restated Dividend Reinvestment Plan, a copy of which is located on our internet website at www.AmericanCapital.com.

Our stock transfer agent, registrar and dividend reinvestment plan administrator is Computershare Investor Services. Requests for information from Computershare can be sent to Computershare Trust Company, N.A., P.O. Box 43078, Providence, RI 02940, and their telephone number is 1-800-733-5001.

For the three fiscal years ended December 31, 2011, we have not sold any equity securities that were not registered under the Securities Act.

Equity Compensation Plans

The following table summarizes information, as of December 31, 2011, relating to our equity compensation plans pursuant to which grants of options or other rights to acquire shares of our common stock may be granted from time to time. See Item 8. Financial Statements and Supplementary Data-Notes to Consolidated Financial Statements for a description of our equity compensation plans (shares in millions).

Plan category	Number of securities to be issued upon exercise of outstanding options	Weighted-average exercise price of outstanding options		Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in the first column of this table)
Equity compensation plans approved by security holders(1)	58.9	$	8.03	9.5
Equity compensation plans not approved by security holders(1)	—	—		—
Total	58.9	$	8.03	9.5

(1) All of our equity compensation plans have been approved by our shareholders.

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Performance Graph

The performance graph below compares the total cumulative shareholder return on our common stock with the cumulative shareholder return on the equity securities of companies included in the Standard & Poor's 500 Stock Index (“S&P 500”), S&P 500 Financials Sector Index and BDC Peer Group, measured as of the last trading day of each year shown. The performance graph represents past performance and should not be considered to be an indication of future performance.

The preceding graph and the following table compares a shareholder's cumulative total return for the last five fiscal years, assuming $100 invested at December 31, 2006, with the reinvestment of all dividends without commissions, as if such amounts had been invested in: (i) our common stock; (ii) the stocks included in the S&P 500; (iii) the stocks included in the S&P 500 Financials Sector Index; and (iv) an index of selected issuers in our BDC Peer group, composed of Apollo Investment Corporation, Ares Capital Corporation, Gladstone Capital Corporation, MCG Capital Corporation and Prospect Capital Corporation.

	Cumulative Total Return
	12/06		12/07		12/08		12/09		12/10		12/11
AMERICAN CAPITAL, LTD.	$	100	$	174	$	20	$	21	$	65	$	58
S&P 500	100		105		66		84		97		99
S&P 500 FINANCIALS SECTOR INDEX	100		81		36		43		48		40
BDC PEER GROUP	100		79		46		69		93		80

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Item 6.Selected Financial Data

AMERICAN CAPITAL, LTD.

Consolidated Selected Financial Data

(in millions, except per share data)

The selected financial data should be read in conjunction with our consolidated financial statements in this Annual Report on Form 10-K and notes thereto.

	Year Ended December 31,
	2011			2010			2009			2008			2007
Total operating income	$	591		$	600		$	697		$	1,051		$	1,240
Total operating expenses	288			396			582			521			640
Net operating income before income taxes	303			204			115			530			600
Tax benefit (provision)(1)	145			—			20			(37		)	(6		)
Net operating income (“NOI”)	448			204			135			493			594
Net gain on extinguishment of debt	—			—			12			—			—
Net realized (loss) gain(1)	(310		)	(576		)	(825		)	32			214
Net realized earnings (loss)	138			(372		)	(678		)	525			808
Net unrealized appreciation (depreciation)(1)	836			1,370			(232		)	(3,640		)	(108		)
Net increase (decrease) in net assets resulting from operations (“Net earnings (loss)”)	$	974		$	998		$	(910	)	$	(3,115	)	$	700
Per share data:
NOI:
Basic	$	1.30		$	0.63		$	0.56		$	2.42		$	3.42
Diluted	$	1.26		$	0.62		$	0.56		$	2.42		$	3.36
Net earnings (loss):
Basic	$	2.83		$	3.06		$	(3.77	)	$	(15.29	)	$	4.03
Diluted	$	2.74		$	3.02		$	(3.77	)	$	(15.29	)	$	3.96
Dividends declared(2)	$	—		$	—		$	1.07		$	3.09		$	3.72
Balance sheet data:
Total assets	$	5,961		$	6,084		$	6,672		$	7,910		$	11,732
Total debt	$	1,251		$	2,259		$	4,142		$	4,428		$	4,824
Total shareholders' equity	$	4,563		$	3,668		$	2,329		$	3,155		$	6,441
NAV per share	$	13.87		$	10.71		$	8.29		$	15.41		$	32.88
Other data (unaudited):
Number of portfolio companies at period end	152			160			187			223			219
New investments(3)	$	317		$	234		$	109		$	2,607		$	7,928
Realizations(4)	$	1,066		$	1,293		$	1,143		$	2,176		$	4,537
NOI return on average equity at cost(5)	7.5		%	3.4		%	2.1		%	7.5		%	11.3		%
Net realized earnings (loss) return on average equity at cost(5)	2.3		%	(6.2		%)	(10.7		%)	8.0		%	15.3		%
Net earnings (loss) return on average equity at fair value(6)	23.3		%	33.5		%	(37.3		%)	(60.0		%)	12.2		%
Assets under management(7)	$	68,129		$	22,645		$	14,022		$	12,804		$	16,265

(1) In 2011, we were no longer taxed as a RIC under Subchapter M of the Code and instead became subject to taxation as a corporation under Subchapter C of the Code. As a result, we recorded a net deferred tax asset of $428 million in 2011 recorded as a deferred tax benefit of $145 million in NOI, $75 million in net realized (loss) gain and $208 million in net unrealized appreciation (depreciation) in our consolidated statements of operations in this Annual Report on Form 10-K.

(2) In 2009, we declared a dividend of $1.07 per share, which was paid part in cash and stock in August 2009.

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(3) New investments include amounts as of the investment dates that are committed.

(4) Realizations represent cash proceeds received upon the exit of investments including payment of scheduled principal amortization, debt prepayments, proceeds from loan syndications and sales, payment of accrued PIK notes, and dividends and payments associated with accreted original issue discounts and sale of equity and other securities.

(5) Equity calculated before the effect of net unrealized appreciation and depreciation of investments. Average equity is calculated based on the quarterly shareholders' equity balances.

(6) Return represents net increase or decrease in net assets resulting from operations. Average equity is calculated based on the quarterly shareholders' equity balances.

(7) Assets under management include both (i) the total assets of American Capital and (ii) the total assets of the funds under management by American Capital, LLC, excluding any direct investment we have in those funds.

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ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations(in millions, except per share data)

Forward-Looking Statements

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 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, and a change in estimate could affect our NAV; (iv) our investments in securities of privately-held companies may be illiquid, which could affect our ability to realize the investment; (v) our portfolio companies could default on their loans or provide no returns on our investments, which could affect our operating results; (vi) we use external financing to fund our business, which may not always be available; (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 immediately after a debt issuance we maintain an asset coverage of at least 200%, or equal to or greater than our asset coverage prior to such issuance, which may affect returns to our shareholder; (xii) our common stock price may be volatile; and (xiii) general business and economic conditions and other risk factors described in our reports filed from time to time with the SEC. 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.

American Capital Investing Activity

We primarily invest in middle market companies, which we generally consider to be companies with revenue between $10 million and $750 million. We primarily invest in One Stop Buyouts^® or Private Equity Buyouts and provide capital directly to early stage and mature private and small public companies. Currently, we will invest up to $300 million in a single middle market company in North America. We also have investments in alternative asset funds that we manage and Structured Products.

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 to our portfolio companies fund (i) strategic acquisitions by a portfolio company of either a complete business or specific lines of a business that are related to the portfolio company's business, (ii) recapitalization of a portfolio company to raise financing on better terms, buyout one or several owners or to pay a dividend, (iii) growth of the portfolio company such as product development or plant expansions, or (iv) working capital for a portfolio company, sometimes in distressed situations, that needs capital to fund operating costs, debt service or growth in receivables or inventory.

The total fair value of our investment portfolio was $5.1 billion, $5.5 billion and $5.6 billion as of December 31, 2011, 2010 and 2009, respectively. Our new investments totaled $317 million, $234 million and $109 million during the years ended December 31, 2011, 2010 and 2009, respectively. The amounts of our new investments include both funded commitments and unfunded commitments as of the investment date.

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The type and aggregate dollar amount of new investments were as follows (in millions):

	2011		2010		2009
Investments in managed funds	$	40	$	—	$	—
Private Equity Buyouts	25		—		—
One Stop Buyouts®	1		—		—
Direct and other investments	15		35		—
Add-on financing for growth and working capital	112		2		4
Add-on financing for acquisitions	58		22		4
Add-on financing for working capital in distressed situations	35		38		81
Add-on financing for recapitalizations, not including distressed investments	27		80		20
Add-on financing for purchase of debt of a portfolio company	4		57		—
Total	$	317	$	234	$	109

The amounts of our new investments include both funded commitments and unfunded commitments as of the investment date. Included in the add-on financing for growth and working capital of $112 million for the year ended December 31, 2011 was a $97 million increase in a revolving credit facility commitment to European Capital from $53 million to $150 million. Effective June 30, 2011, the commitment was reduced to $100 million. Included in the add-on financing for recapitalizations of $80 million for the year ended December 31, 2010 was a $75 million bridge loan issued to European Capital, the proceeds of which were utilized to repay in full and terminate European Capital’s unsecured multicurrency revolving facility. European Capital subsequently repaid in full the $75 million bridge loan and the facility was terminated in March 2010.

We received cash proceeds from realizations and repayments of portfolio investments as follows (in millions):

	2011		2010		2009
Principal prepayments	$	510	$	874	$	316
Sale of equity investments	394		266		323
Payment of accrued PIK notes and dividend and accreted original issue discounts	108		77		48
Loan syndications and sales	16		40		410
Scheduled principal amortization	38		36		46
Total	$	1,066	$	1,293	$	1,143

RESULTS OF OPERATIONS

The following analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements in this Annual Report on Form 10-K and the notes thereto.

Our consolidated financial performance, as reflected in our consolidated statements of operations, is composed of the following three primary elements:

• The first element is “Net operating income,” which is primarily the interest, dividends, prepayment fees, finance and transaction fees and portfolio company management fees earned from investing in debt and equity securities and the fees we earn from fund asset management, 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 an investment and the cost at which the investment was carried on our consolidated balance sheets and periodic interest settlements and termination receipts or payments on derivatives, foreign currency transaction gains or losses and taxes on realized gains or losses.

• The third element is “Net unrealized appreciation (depreciation) of investments,” which is the net change in the estimated fair value of our portfolio investments and 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, and taxes on unrealized gains or losses. In addition, our net unrealized depreciation of investments includes the foreign currency translation from converting the cost basis of our assets and liabilities denominated in a foreign currency to the US dollar.

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The consolidated operating results were as follows (in millions):

	2011			2010			2009
Operating income	$	591		$	600		$	697
Operating expenses	288			396			582
NOI before income taxes	303			204			115
Benefit for income taxes	145			—			20
NOI	448			204			135
Net gain on extinguishment of debt	—			—			12
Net realized loss	(310		)	(576		)	(825		)
Net realized earnings (loss)	138			(372		)	(678		)
Net unrealized appreciation (depreciation)	836			1,370			(232		)
Net earnings (loss)	$	974		$	998		$	(910	)

Fiscal Year 2011 Compared to Fiscal Year 2010

Operating Income

We derive the majority of our operating income by investing in senior and mezzanine debt and equity of middle market companies with attractive current yields and/or potential for equity appreciation and realized gains. We also derive operating income from investing in Structured Products and in our wholly-owned asset manager, American Capital, LLC. Operating income consisted of the following (in millions):

	2011		2010
Interest income on debt investments	$	350	$	434
Interest income on Structured Products investments	56		52
Dividend income on private finance portfolio investments	106		58
Dividend income from American Capital, LLC	30		—
Interest income on bank deposits	1		2
Interest and dividend income	543		546
Portfolio company advisory and administrative fees	14		18
Advisory and administrative services - American Capital, LLC	20		16
Other fees	14		20
Fee income	48		54
Total operating income	$	591	$	600

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Interest and Dividend Income

The following table summarizes selected data for our debt, Structured Products and equity investments outstanding, at cost (dollars in millions):

	2011			2010
Debt investments(1)	$	3,198		$	4,137
Effective interest rate on debt investments(1)	11.0		%	10.5		%
Average non-accrual debt investments at cost(2)	$	574		$	723
Structured Products investments(1)	$	548		$	749
Effective interest rate on Structured Products investments(1)	10.3		%	6.9		%
Debt and Structured Products investments(1)	$	3,746		$	4,886
Effective interest rate on debt and Structured Products investments(1)	10.9		%	9.9		%
Average monthly one-month LIBOR	0.2		%	0.3		%
Equity investments - private finance portfolio(1)(3)	$	2,228		$	2,313
Effective dividend yield on equity investments - private finance portfolio(1)(3)	4.7		%	2.5		%
Debt, Structured Products and equity investments(1)(3)	$	7,241		$	8,467
Effective yield on debt, Structured Products and equity investments(1)(3)	7.1		%	6.4		%

 ——————————

(1) Monthly weighted average.

(2) Quarterly average.

(3) Excludes our equity investment in American Capital, LLC.

Debt Investments

Interest income on debt investments decreased by $84 million, or 19%, for the year ended December 31, 2011, over the comparable period in 2010, primarily due to a decrease in our monthly weighted average debt investments outstanding. Our weighted average debt investments outstanding decreased by $0.9 billion for the year ended December 31, 2011 over the comparable period in 2010 primarily as a result of the repayment or sale of debt investments or write-off of non-performing debt investments.

When a debt investment is placed on non-accrual, we may record reserves on uncollected payment-in-kind (“PIK”) interest income recorded in prior periods as a reduction of interest income in the current period. Conversely, when a debt investment is removed from non-accrual, we record interest income in the current period on prior period uncollected PIK interest income which was reserved in prior periods. For the year ended December 31, 2011, we recorded additional interest income on uncollected PIK interest income recorded in prior periods of $2 million as a result of debt investments being removed from non-accrual. For the year ended December 31, 2010, we recorded net reserves on uncollected PIK interest income recorded in prior periods of $7 million as a result of debt investments being placed on non-accrual.

Structured Products

Interest income on Structured Products investments increased by $4 million, or 8%, for the year ended December 31, 2011, respectively, over the comparable period in 2010 primarily due to an increase in interest income recognized on our CLO investments due to increases in projected cash flows. Our weighted average Structured Products investments outstanding decreased for the year ended December 31, 2011 over the comparable period in 2010 primarily as a result of the write-off of non-performing CMBS investments. See Note 2—Interest and Dividend Income Recognition policy to our consolidated financial statements in this Annual Report on Form 10-K for a description of how projected cash flows affect revenue recognition on our Structured Products investments.

Equity Investments - Private Finance Portfolio

Dividend income on private finance portfolio investments increased by $48 million, or 83%, for the year ended December 31, 2011 over the comparable period in 2010 primarily due to the recognition of prior period dividend income for private finance preferred stock investments removed from non-accrual during the year ended December 31, 2011, as well as the recording of reserves on uncollected accrued dividend income recorded in prior periods from private finance preferred stock investments during the year ended December 31, 2010. As a result, the monthly weighted average effective dividend yield on equity investments was 4.7% for the year ended December 31, 2011, a 220 basis point increase over the comparable period in 2010.

When a preferred equity investment is placed on non-accrual, we may record net reserves on uncollected accrued dividend income recorded in prior periods as a reduction of dividend income in the current period. Conversely, when a preferred equity

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investment is removed from non-accrual, we record dividend income in the current period for prior period uncollected accrued dividend income which was reserved in prior periods. For the year ended December 31, 2011, we recorded dividend income for the reversal of reserves of accrued dividend income attributable to prior periods from private finance preferred stock investments of $36 million, which had an approximate 30 basis point impact on the effective dividend yield on equity investments. For the year ended December 31, 2010, we recorded reserves on uncollected accrued dividend income recorded in prior periods from private finance preferred stock investments of $11 million, which had an approximate 50 basis point impact on the effective dividend yield on equity investments.

Equity Investments - American Capital, LLC

Dividend income from American Capital, LLC was $30 million and $0 million for the years ended December 31, 2011 and 2010, respectively. In addition, for the years ended December 31, 2011 and 2010, we received an additional $11 million and $17 million, respectively, of dividends from American Capital, LLC that was recorded as a reduction to cost basis. The increase in dividends received in 2011 was primarily due to an increase in net income primarily generated from management fees earned for the management of AGNC, which experienced significant growth in their equity capital as a result of follow-on equity offerings.

Fee Income

Portfolio Company Advisory and Administrative Fees

As a BDC, we are required by law to make significant managerial assistance available to most of our portfolio companies. This generally includes providing guidance and counsel concerning the management, operations and business objectives and policies of the portfolio company to the portfolio company's management and board of directors, including participating on the company's board of directors. Our portfolio company advisory and administrative fees for the years ended December 31, 2011 and 2010 were $14 million and $18 million, respectively.

Advisory and Administrative Services - American Capital, LLC

We have entered into service agreements with American Capital, LLC to provide additional asset management service support so that American Capital, LLC can fulfill its responsibilities under its management agreements. The fees generated from these service agreements for the years ended December 31, 2011 and 2010 were $20 million and $16 million, respectively.

Other Fees

Other fees are primarily composed of transaction fees for structuring, financing and executing middle market portfolio transactions, which may not be recurring in nature. These fees amounted to $14 million and $20 million for the years ended December 31, 2011 and 2010, respectively.

Operating Expenses

Operating expenses decreased $108 million, or 27%, for the year ended December 31, 2011, respectively, over the comparable period in 2010. Operating expenses consisted of the following (in millions):

	2011		2010
Interest	$	90	$	177
Salaries, benefits and stock-based compensation	143		134
General and administrative	55		64
Debt refinancing costs	—		21
Total operating expenses	$	288	$	396

Interest

Interest expense for the year ended December 31, 2011 decreased $87 million, or 49%, over the comparable period in 2010. The decrease in interest expense was primarily attributable to a decrease in the weighted average borrowings outstanding for the year ended December 31, 2011 over the comparable period in 2010 partially offset by a $12 million increase in the amortization of deferred financing costs primarily as a result of unscheduled payments on our outstanding secured borrowings during 2011.

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The components of interest expense, cash paid for interest expense, average interest rates and average outstanding balances for our borrowings are as follows (dollars in millions):

	2011			2010
Asset Securitizations:
Cash interest expense	$	8		$	12
Amortization of deferred financing costs	3			4
Total interest expense	$	11		$	16
Weighted average interest rate, including amortization of deferred financing costs	1.3		%	1.0		%
Weighted average interest rate, excluding amortization of deferred financing costs	0.9		%	0.8		%
Weighted average balance outstanding	$	915		$	1,537
Public and Private Borrowings:
Cash interest expense	$	59		$	154
Amortization of deferred financing costs	20			7
Total interest expense	$	79		$	161
Weighted average interest rate, including amortization of deferred financing costs	10.6		%	9.3		%
Weighted average interest rate, excluding amortization of deferred financing costs	7.9		%	8.9		%
Weighted average balance outstanding	$	747		$	1,738
Total Borrowings:
Cash interest expense	$	67		$	166
Amortization of deferred financing costs	23			11
Total interest expense	$	90		$	177
Weighted average interest rate, including amortization of deferred financing costs	5.5		%	5.4		%
Weighted average interest rate, excluding amortization of deferred financing costs	4.1		%	5.1		%
Weighted average balance outstanding	$	1,662		$	3,275

Amortization of deferred financing costs on our public and private borrowings for the year ended December 31, 2011 increased $13 million from the comparable period in 2010 primarily due to the acceleration of the amortization of deferred financing costs resulting from additional principal paydowns on our secured debt in 2011.

Salaries, Benefits and Stock-based Compensation

Salaries, benefits and stock-based compensation consisted of the following (in millions):

	2011		2010
Base salaries	$	53	$	56
Incentive compensation	35		26
Benefits	10		10
Stock-based compensation	45		42
Total salaries, benefits and stock-based compensation	$	143	$	134

Salaries, benefits and stock-based compensation for the year ended December 31, 2011 increased $9 million, or 7%, from the comparable period in 2010 primarily due to an increase in stock-based and incentive compensation. As of December 31, 2011, we had 249 total employees compared to 242 total employees as of December 31, 2010.

In 2011, we granted 23.6 million stock options with a weighted average fair value of $3.05 per option, or $72 million, and in 2010, we granted 17.7 million stock options with a weighted average fair value of $2.07 per option, or $37 million. For a further discussion on stock-based compensation, see Note 5 and Note 6 to our consolidated financial statements in this Annual Report on Form 10-K.

General and Administrative

General and administrative expenses decreased by $9 million, or 14%, for the year ended December 31, 2011, respectively, over the comparable period in 2010 primarily due to a reduction in legal and public reporting costs and $6 million of restructuring charges during the year ended December 31, 2010 related to excess facilities from office closures.

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Debt Refinancing Costs

During the year ended December 31, 2010, we incurred $21 million of non-recurring debt refinancing costs from both our unsecured creditors’ legal and financial advisors that were engaged in connection with our debt refinancing negotiations and the closing of our debt refinancing transaction in June 2010.

Tax Benefit

During our tax year ended September 30, 2011, due to a shift in the composition and value of our assets we did not meet the quarterly investment diversification requirements to continue to be taxed as a RIC. Therefore, we are now subject to taxation as a corporation under Subchapter C of the Code beginning with our tax year ended September 30, 2011. As a result of our change in tax status during our tax year ended September 30, 2011, we are now required to recognize deferred tax assets and liabilities. During the fourth quarter of 2011, we reversed part of our valuation allowance totaling $428 million, which is recorded in our consolidated statements of operations for the year ended December 31, 2011 as $145 million in net operating income, $75 million in total net realized loss and $208 million in total net unrealized appreciation (depreciation). See Note 12 to our consolidated financial statements in this Annual Report on Form 10-K for a further discussion of deferred taxes.

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Net Realized Gain (Loss)

Our net realized gain (loss) consisted of the following individual portfolio company realized gains (losses) greater than $15 million (in millions):

	2011			2010
VP Acquisition Holdings, Inc.	$	93		$	—
CIBT Travel Solutions, LLC	43			—
American Capital Agency Corp.	—			21
Other, net	22			33
Total gross realized portfolio gain	158			54
Orchard Brands Corporation	(174		)	(50		)
Contec, LLC	(117		)	—
J.P. Morgan Chase Commercial Mortgage Securities Trust 2007-LDP11	(47		)	—
Citigroup Commercial Mortgage Securities Trust 2007-C6	(30		)	—
Small Smiles Holding Company, LLC	(19		)	—
GE Commercial Mortgage Corporation, Series 2007-C1	(18		)	(9		)
NECCO Holdings, Inc.	(18		)	—
European Touch, LTD. II	(18		)	—
ACAS CRE CDO 2007-1, Ltd.	—			(170		)
UFG Member, LLC	—			(83		)
GS Mortgage Securities Trust 2007-GG10	—			(49		)
Fountainhead Estate Holding Corp.	—			(25		)
ETG Holdings, Inc.	—			(22		)
J-Pac, LLC	—			(21		)
Wachovia Bank Commercial Mortgage Trust, Series 2007-C32	—			(19		)
Resort Funding Holdings, Inc.	—			(17		)
CCRD Operating Company, Inc.	—			(15		)
Genband Inc.	—			(15		)
Other, net	(52		)	(58		)
Total gross realized portfolio loss	(493		)	(553		)
Total net realized portfolio loss	(335		)	(499		)
Tax benefit	75			—
Interest rate derivative periodic interest payments, net	(45		)	(61		)
Interest rate derivative termination payments	(5		)	(14		)
Foreign currency transactions	—			(2		)
Total net realized loss	$	(310	)	$	(576	)

The following are summary descriptions of portfolio company realized gains or losses greater than $30 million.

During 2011, we sold all of our equity investments and received full repayment of our debt investments in VP Acquisition Holdings, Inc. for $138 million in total proceeds, realizing a gain of $93 million partially offset by a reversal of unrealized appreciation of $60 million.

During 2011, we sold substantially all of our equity investments and received full repayment of our debt investments in CIBT Travel Solutions, LLC and its subsidiaries for $215 million in total cash proceeds, realizing a gain of $43 million fully offset by a reversal of unrealized appreciation of $45 million. In addition, we expect to receive $15 million of additional cash proceeds from CIBT Travel Solutions, LLC that are held in a sale escrow.

During 2011, Appleseed's Intermediate Holdings, LLC, a wholly-owned operating subsidiary of Orchard Brands Corporation, emerged from bankruptcy after voluntarily filing for bankruptcy protection under Chapter 11 of the US Bankruptcy Code. Based on the reorganization plan, our existing senior first lien notes and senior second lien term A notes were exchanged

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for new senior first lien notes, junior term notes and common equity of Orchard Brands Corporation and our remaining senior second lien term notes were canceled. As a result, we recognized a realized loss of $174 million partially offset by a reversal of unrealized depreciation of $173 million.

During 2011, we wrote off a portion of our unsecured mezzanine debt investment in Contec, LLC. We did not receive any proceeds, realizing a loss of $117 million fully offset by a reversal of unrealized depreciation.

During 2011, we wrote off $47 million of non-investment grade CMBS bonds in J.P. Morgan Chase Commercial Mortgage Securities Trust 2007-LDP11. We did not receive any proceeds, realizing a loss of $47 million fully offset by a reversal of unrealized depreciation.

As a result of further deterioration of the commercial mortgage loan collateral securing the CMBS bonds in ACAS CRE CDO 2007-1, Ltd. (“ACAS CRE CDO”) during 2010, we no longer are receiving or expect to receive future cash flows on any of our remaining bonds in ACAS CRE CDO. Accordingly, during 2010, we wrote off our remaining bonds in ACAS CRE CDO. We did not receive any proceeds, realizing a loss of $170 million, which was fully offset by a reversal of unrealized depreciation.

During 2010, our portfolio company UFG Member, LLC was sold. As part of the sale proceeds, we received a partial payment on our remaining mezzanine debt investment. The sale proceeds we received included a subordinated note from the purchaser, AFA Investments, Inc., that had a fair value of $4 million. We wrote off our remaining mezzanine debt investment and our equity investment in UFG Member, LLC realizing a loss of $83 million offset by a reversal of unrealized depreciation of $68 million.

During 2010, we sold our unsecured mezzanine debt investment in Orchard Brands Corporation for nominal proceeds, realizing a loss of $50 million fully offset by a reversal of unrealized depreciation.

During 2010, we wrote off $49 million of non-investment grade CMBS bonds in GS Mortgage Securities Trust 2007-GG10. We did not receive any proceeds, realizing a loss of $49 million fully offset by a reversal of unrealized depreciation.

We have entered into interest rate swap agreements in which we pay a fixed rate and receive a floating rate based on LIBOR. The net interest payments or receipts are recorded as a realized gain (loss) on the interest settlement dates. For the years ended December 31, 2011 and 2010, we recorded a realized loss of $45 million and $61 million, respectively, for net interest rate derivative periodic interest payments due to the significant decline in LIBOR as compared to LIBOR at the date of the origination of the interest rate swap agreements.

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Net Unrealized Appreciation (Depreciation)

The following table itemizes the change in net unrealized appreciation (depreciation) (in millions):

	2011			2010
Gross unrealized appreciation of private finance portfolio investments	$	403		$	611
Gross unrealized depreciation of private finance portfolio investments	(433		)	(289		)
Net unrealized (depreciation) appreciation of private finance portfolio investments	(30		)	322
Net unrealized (depreciation) appreciation of European Capital investment	(34		)	371
Net unrealized appreciation of European Capital foreign currency translation	3			97
Net unrealized appreciation of American Capital, LLC	280			111
Net unrealized appreciation of Structured Products investments	52			50
Reversal of prior period net unrealized depreciation upon realization	375			517
Net unrealized appreciation of portfolio investments	646			1,468
Foreign currency translation - European Capital	(29		)	(104		)
Foreign currency translation - other	(2		)	(3		)
Derivative agreements	13			9
Net unrealized appreciation of investments	628			1,370
Tax benefit	208			—
Net unrealized appreciation	$	836		$	1,370

See our “Investment Valuation Policy” in Note 2 in this Annual Report on Form 10-K for a description of our valuation methodologies.

Private Finance Portfolio

Our private finance portfolio investments consist of loans and equity securities primarily to privately-held middle market companies with a cost basis of $4,896 million and fair value of $3,895 million as of December 31, 2011. There is generally no publicly available information about these companies and an active primary or secondary market for the trading of these privately issued loans and securities generally does not exist. Our investments have been historically exited through normal repayment or a change in control transaction such as a sale or recapitalization of the portfolio company.

For the year ended December 31, 2011, the $30 million of net unrealized depreciation on our private finance portfolio investments was driven primarily by specific company performance. For the year ended December 31, 2011, our private finance portfolio of One Stop Buyouts^® experienced $97 million of net unrealized appreciation while our private finance portfolio of Private Equity Buyouts, direct and other investments experienced $127 million of net unrealized depreciation.

For the year ended December 31, 2010, the $322 million of net unrealized appreciation on our private finance portfolio investments was driven primarily by improved portfolio company performance, multiple expansion of comparable companies and narrowing investment spreads.

European Capital

For the year ended December 31, 2011, we recognized net unrealized depreciation of $31 million on our investment in European Capital comprised of $34 million unrealized depreciation on our investment and $3 million of unrealized appreciation from foreign currency translation of the cumulative unrealized depreciation of European Capital. As of December 31, 2011, our investment in European Capital consisted of an equity investment with a cost basis and fair value of $1,267 million and $547 million, respectively, and a debt investment with a cost basis and fair value of $73 million.

For the year ended December 31, 2010, we recognized unrealized appreciation of $468 million on our investment in European Capital comprised of $371 million unrealized appreciation on our investment and $97 million of unrealized appreciation from foreign currency translation of the cumulative unrealized depreciation of European Capital.

European Capital, a wholly-owned portfolio company of American Capital, is an investment fund which invests in One Stop Buyouts^®, Private Equity Buyouts and provides capital directly to early stage and mature private and small public companies primarily in Europe. It primarily invests in senior and mezzanine debt and equity. European Capital's underlying portfolio investments are recorded at fair value determined in accordance with ASC 820. In determining the fair value of our investment in European Capital, we concluded that our investment should be less than the NAV of European Capital due to comparable public traded funds which were trading at a discount to NAV on the measurement date and the risks associated with our ability to realize

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the full fair value of European Capital's underlying assets for several reasons, including a public to private liquidity discount and the ability to demonstrate an implied market return on equity required by market participants for a measurable period of time, which indicate fair values at a discount to the NAV. During the year ended December 31, 2011, the unrealized depreciation on our investment of $34 million, excluding unrealized appreciation (depreciation) on foreign currency translation, was due primarily to a decrease in the NAV of European Capital and an increase to the discount applied to NAV. During the year ended December 31, 2010, the unrealized appreciation of $371 million, excluding unrealized appreciation (depreciation) on foreign currency translation, was due primarily to an increase in the NAV of European Capital and a reduction to the discount applied to NAV

The following is a summary composition of European Capital's NAV at fair value and our equity investment's implied discount to its NAV at fair value (€ and $ in millions) as of December 31, 2011 and 2010:

	2011			2010
Debt investments at fair value	€	712		€	868
Equity investments at fair value	262			207
Other assets and liabilities, net	92			38
Secured debt at cost	(271		)	(353		)
Unsecured debt at cost	(111		)	(110		)
Unsecured debt from American Capital at cost	(57		)	(21		)
NAV (Euros)	€	627		€	629
Exchange rate	1.30			1.33
NAV (US dollars)	$	815		$	837
Fair value of American Capital equity investment	$	547		$	608
Implied discount to NAV	32.9		%	27.4		%

American Capital, LLC

American Capital, LLC had a cost basis of $46 million and fair value of $396 million as of December 31, 2011. During the years ended December 31, 2011 and 2010, we recognized $280 million and $111 million of unrealized appreciation on our investment in American Capital, LLC, respectively. The unrealized appreciation in the fair value of American Capital, LLC for the years ended December 31, 2011 and 2010 was primarily due to increases in the projected management fees for managing AGNC due to significant growth in the equity capital of AGNC as a result of follow-on equity offerings and the lowering of the discount rate for the year ended December 31, 2011. During the year ended December 31, 2011, AGNC has raised $4.4 billion of common equity capital. The funds managed by subsidiaries of American Capital, LLC are European Capital, AGNC, MTGE, ACE I, ACE II and ACAS CLO-1.

Structured Products Investments

American Capital has investments in Structured Products such as investment and non-investment grade tranches of CMBS, CLO and CDO securities with a cost basis of $456 million and fair value of $218 million as of December 31, 2011. During the year ended December 31, 2011, we recorded $52 million of net unrealized appreciation on our Structured Products investments. Our CMBS portfolio experienced $11 million of net unrealized appreciation during the year ended December 31, 2011. Our investments in CLO and CDO portfolios of commercial loans experienced $41 million of net unrealized appreciation during the year ended December 31, 2011, due primarily to a narrowing of investment spreads, higher broker quotes and improved projected cash flows.

During the year ended December 31, 2010, we recorded $50 million of net unrealized appreciation on our Structured Products investments. Our CMBS portfolio experienced $15 million of net unrealized depreciation during the year ended December 31, 2010, due primarily to lower projected future cash flows due to continued credit impairments in the overall commercial real estate markets. Our investments in CLO and CDO portfolios of commercial loans experienced $65 million of net unrealized appreciation during the year ended December 31, 2010, due primarily to a narrowing of investment spreads and higher broker quotes.

Foreign Currency Translation

We have investments in portfolio companies, including European Capital, for which the investment is denominated in a foreign currency, primarily the Euro. We also have other assets and liabilities denominated in foreign currencies. Fluctuations in exchange rates therefore impact our financial condition and results of operations, as reported in US dollars. For the years ended December 31, 2011 and 2010, we recorded net unrealized depreciation of $31 million and $107 million for foreign currency translation. This is primarily as a result of changes in the Euro and US dollar exchange rates.

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For foreign currency denominated investments recorded at fair value, such as European Capital, the net unrealized appreciation or deprecation from foreign currency translation on the accompanying consolidated statements of operations represents the economic impact of translating the cost basis of the investment from a foreign currency, such as the Euro, to the US dollar. However, the economic impact of translating the cumulative unrealized appreciation or depreciation from a foreign currency to the US dollar is not recorded as net unrealized depreciation or appreciation from foreign currency translation but rather is included as net unrealized appreciation or depreciation of portfolio company investments on the accompanying consolidated statements of operations. For the years ended December 31, 2011 and 2010, we recorded unrealized depreciation of $29 million and $104 million for foreign currency translation, respectively, on the cost basis in our investment in European Capital (included in our total unrealized depreciation of $31 million and $107 million for foreign currency translation for the years ended December 31, 2011 and 2010, respectively), which was partially offset by unrealized appreciation of $3 million and $97 million, respectively, for the foreign currency translation of our cumulative unrealized depreciation of our investment in European Capital, which is included in our total net unrealized appreciation (depreciation) of portfolio investments in our consolidated statements of operations.

Derivative Agreements

During the years ended December 31, 2011 and 2010, we recorded $13 million and $9 million of net unrealized appreciation from derivative agreements, primarily interest rate swaps, respectively. The fair value of the net liability for our derivative agreements as of December 31, 2011 was $89 million, which included a $17 million net reduction related to the incorporation of an adjustment for nonperformance risk of us and our counterparties. The fair value of the net liability for our derivative agreements as of December 31, 2010 was $102 million, which included a $13 million net reduction due to the incorporation of an adjustment for nonperformance risk of us and our counterparties.

For interest rate swap agreements, we estimate the fair value based on the estimated net present value of the future cash flows using a forward interest rate yield curve in effect as of the end of the measurement period, adjusted for nonperformance risk, if any, including an evaluation of our credit risk and our counterparty's credit risk. A negative fair value would represent an amount we would have to pay a third-party and a positive fair value would represent an amount we would receive from a third-party to assume our obligation under an interest rate swap agreement. The derivative agreements generally appreciate or depreciate primarily based on relative market interest rates and their remaining term to maturity as well as changes in our and our counterparty's credit risk.

Return on Shareholders’ Equity

The following table summarizes our returns on shareholders’ equity for the years ended December 31, 2011 and 2010:

	2011		2010
NOI return on average equity at cost	7.5	%	3.4	%
Net realized earnings (loss) return on average equity at cost	2.3	%	(6.2	)%
Net earnings return on average equity at fair value	23.3	%	33.5	%

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Fiscal Year 2010 Compared to Fiscal Year 2009

Operating Income

We derive the majority of our operating income by investing in senior and mezzanine debt and equity of middle market companies with attractive current yields and/or potential for equity appreciation and realized gains. We also derive operating income from investing in Structured Products and in our wholly-owned asset manager, American Capital, LLC. Operating income consisted of the following (in millions):

	2010		2009
Interest income on debt investments	$	434	$	478
Interest income on Structured Products investments	52		81
Dividend income on private finance portfolio investments	58		72
Dividend income from American Capital, LLC	—		4
Interest income on bank deposits	2		3
Interest and dividend income	546		638
Portfolio company advisory and administrative fees	18		20
Advisory and administrative services - American Capital, LLC	16		22
Other fees	20		17
Fee income	54		59
Total operating income	$	600	$	697

Interest and Dividend Income

The following table summarizes selected data for our debt, Structured Products and equity investments outstanding, at cost (dollars in millions):

	2010			2009
Debt investments(1)	$	4,137		$	5,596
Effective interest rate on debt investments(1)	10.5		%	8.5		%
Average non-accrual debt investments at cost(2)	$	723		$	915
Structured Products investments(1)	$	749		$	940
Effective interest rate on Structured Products investments(1)	6.9		%	8.6		%
Debt and Structured Products investments(1)	$	4,886		$	6,536
Effective interest rate on debt and Structured Products investments(1)	9.9		%	8.5		%
Average monthly one-month LIBOR	0.3		%	0.3		%
Equity investments - private finance portfolio(1)(3)	$	2,313		$	2,409
Effective dividend yield on equity investments - private finance portfolio(1)(3)	2.5		%	3.0		%
Debt, Structured Products and equity investments(1)(3)	$	8,467		$	10,139
Effective yield on debt, Structured Products and equity investments(1)(3)	6.4		%	6.2		%

 ——————————

(1) Monthly weighted average.

(2) Quarterly average.

(3) Excludes our equity investment in American Capital, LLC.

Debt Investments

Interest income on debt investments decreased by $44 million, or 9%, for the year ended December 31, 2010, over the comparable prior period in 2009, primarily due to a decrease in our monthly weighted average debt investments outstanding. Our weighted average debt investments decreased for the year ended December 31, 2010 over the comparable period in 2009 primarily as a result of the repayment, sale or write-off of debt investments.

When a debt investment is placed on non-accrual, we may record reserves on uncollected PIK interest income recorded in prior periods as a reduction of interest income in the current period. Conversely, when a debt investment is removed from non-accrual, we record interest income in the current period on prior period uncollected PIK interest income which was reserved in prior periods. For the years ended December 31, 2010 and 2009, we recorded a net reserve on uncollected PIK interest income recorded in prior periods of $7 million and $49 million, respectively, as a result of debt investments being placed on non-accrual,

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which had an approximate 10 basis point and 80 basis point, respectively, negative impact on the weighted average effective interest rate.

Structured Products

Interest income on Structured Products investments decreased by $29 million, or 36%, for the year ended December 31, 2010, over the comparable prior period in 2009, primarily due to a decrease in interest income recognized on our CMBS investments.

Equity Investments - Private Finance Portfolio

Dividend income decreased by $14 million, or 19%, for the year ended December 31, 2010, over the comparable period in 2009 primarily due to a decline in dividends from common stock investments that were sold. As a result, the monthly weighted average effective dividend yield on equity investments was 2.5% for the year ended December 31, 2010, a 50 basis point decrease from the comparable period in 2009.

When a preferred equity investment is placed on non-accrual, we may record net reserves on uncollected accrued dividend income recorded in prior periods as a reduction of dividend income in the current period. Conversely, when a preferred equity investment is removed from non-accrual, we record dividend income in the current period for prior period uncollected accrued dividend income which was reserved in prior periods. For the years ended December 31, 2010 and 2009, we recorded net reserves on uncollected accrued dividend income recorded in prior periods from private finance preferred stock investments of $11 million and $20 million, respectively.

Equity Investments - American Capital, LLC

Dividend income from American Capital, LLC was $4 million for the year ended December 31, 2009. In addition, for the years ended December 31, 2010 and 2009, we received $17 million and $3 million, respectively, of cash dividends from American Capital, LLC that we recorded as a reduction to our cost basis.

Fee Income

We provide advisory and administrative services to American Capital, LLC, our alternative asset manager portfolio company. Our fund asset management fees and reimbursements income for the years ended December 31, 2010 and 2009 represent fees of $16 million and $22 million, respectively, for providing advisory and administrative services to American Capital, LLC.

Our fee income includes financial advisory services provided to our private finance portfolio companies and includes both management fees for providing managerial advice and analysis, which can be recurring in nature, and transaction structuring and financing fees for structuring, financing and executing middle market portfolio transactions, which may not be recurring in nature.

Operating Expenses

Operating expenses decreased $186 million, or 32%, for the year ended December 31, 2010 over the comparable period in 2009. Operating expenses consisted of the following (in millions):

	2010		2009
Interest	$	177	$	256
Salaries, benefits and stock-based compensation	134		215
General and administrative	64		91
Debt refinancing costs	21		20
Total operating expenses	$	396	$	582

Interest

Interest expense for the year ended December 31, 2010 decreased $79 million, or 31%, over the comparable period in 2009. The decrease in interest expense was primarily attributable to a decline in the weighted average interest rate on our borrowings and lower weighted average borrowings as a result of our debt refinancing and the associated pay down of $1,030 million of outstanding borrowings on June 28, 2010, the subsequent pay down of an additional $307 million of our secured debt due 2013, and the repayment of $544 million of on-balance sheet securitized debt. The weighted average interest rate on all of our borrowings, including amortization of deferred financing costs, for the year ended December 31, 2010 was 5.4%, compared to 5.9% for the year ended December 31, 2009. Comparison to the prior year of the weighted average interest is also impacted by additional interest expense incurred during the year ended December 31, 2009 for the accrual of a $22 million make-whole interest payment on our unsecured debt that was refinanced in the second quarter of 2010. Our weighted average borrowings decreased to $3,275 million for the year ended December 31, 2010 from $4,307 million in the comparable period in 2009, and our year-end borrowings

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decreased from $4,142 million as of December 31, 2009 to $2,259 million as of December 31, 2010.

Salaries, Benefits and Stock-based Compensation

Salaries, benefits and stock-based compensation consisted of the following (in millions):

	2010		2009
Base salaries	$	56	$	73
Incentive compensation	26		34
Severance costs	—		9
Benefits	10		13
Stock-based compensation	42		86
Total salaries, benefits and stock-based compensation	$	134	$	215

Salaries, benefits and stock-based compensation for the year ended December 31, 2010 decreased $81 million, or 38%, over the comparable period in 2009 primarily due to (i) a decrease in the number of employees, (ii) severance costs recorded in the prior year and (iii) lower stock-based compensation during the year ended December 31, 2010 as a result of the acceleration of stock-based compensation in the fourth quarter of 2009 from the completion of a tender offer for certain eligible employee stock options.

In 2010, we granted 17.7 million stock options with a weighted average fair value of $2.07 per option, or $37 million, and in 2009, we granted 17.0 million stock options with a weighted average fair value of $1.41 per option, or $24 million. For a further discussion on stock based compensation, see Note 5 to our consolidated financial statements in this Annual Report on Form 10-K.

To better align our organization and cost structure with the current economic conditions, we continued to conduct strategic reviews of our business in 2009 which resulted in aggregate restructuring charges of $25 million for the year ended December 31, 2009. The restructuring charges included $9 million for severance and related costs associated with 72 employees for the year ended December 31, 2009. As of December 31, 2010, 2009 and 2008, we had total employees of 242, 264 and 384, respectively.

In December 2009, we completed a tender offer for certain eligible employee stock options. Pursuant to the tender offer, we offered employees a $0.6 million cash payment for the voluntary cancellation of certain eligible outstanding employee stock options. For each tendered option, non-executive officer employees received a cash payment of $0.05 per eligible stock option and executive officer employees received $0.01 per eligible stock option. For a further discussion on the tender offer, see Note 5 to our consolidated financial statements in this Annual Report on Form 10-K. As a result of the tender offer, unrecognized compensation cost of $21 million for the tendered unvested options expected to vest was accelerated and recorded as compensation expense for the year ended December 31, 2009. Accordingly, the stock-based compensation cost for the year ended December 31, 2010 is lower as compared to the comparable prior period in part due to the positive impact of the accelerated employee stock options in future periods.

General and Administrative

General and administrative expenses decreased by $27 million, or 30%, for the year ended December 31, 2010 over the comparable period in 2009. The decrease is primarily due to $16 million in restructuring charges related to excess facilities from office closures and employee headcount reductions for the year ended December 31, 2009, compared to $9 million for the year ended December 31, 2010, and lower overall general and administrative expenses due to fewer employees and offices in 2010 as compared to 2009.

Debt Refinancing Costs

During the years ended December 31, 2010 and 2009, we incurred non-recurring debt refinancing costs of $21 million and $20 million, respectively, from both fees related to our unsecured creditors' legal and financial advisors who were engaged in connection with our debt refinancing negotiations and the closing of our debt refinancing transaction in June 2010.

Tax Benefit

As a RIC, we were subject to a nondeductible federal excise tax of 4% if we did not distribute at least 98% of our ordinary income, excluding net short-term capital gains, in any calendar year and 98% of our capital gains for each one-year period ending October 31, including any undistributed income from the prior excise tax year. For the calendar years ended December 31, 2010 and 2009 and the one-year periods ending October 31, 2010 and 2009, we did not accrue federal excise tax because we had taxable ordinary losses and capital losses for the respective excise tax years. However, we accrued an $8 million tax benefit in the year

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ended December 31, 2009 related to excise tax for the calendar year ended December 31, 2008 and one year period ending October 1, 2008 as a result of a change in estimated taxable income of such prior year, which was included in our benefit for income taxes on the accompanying statements of operations.

Our consolidated taxable operating subsidiary, American Capital Financial Services, Inc. (“ACFS”), which was merged into American Capital on June 30, 2010, was subject to federal, state and local income taxes. During the year ended December 31, 2009, we recorded a tax benefit of $12 million related to ACFS. On November 6, 2009, The Worker, Homeownership, and Business Assistance Act of 2009 was enacted. As part of this legislation, the carryback period for NOLs arising in either 2008 or 2009 was increased from two years to three, four or five years at the election of the taxpayer. As a result of this new legislation, ACFS was able to carryback its NOL for the tax year ended September 30, 2009 to prior years to claim a refund. This resulted in American Capital recording a tax benefit of $10 million for the year ended December 31, 2009, which was included in our benefit (provision) for income taxes on the accompanying consolidated statements of operations.

Net Gain on Extinguishment of Debt

In 2009, we repurchased $20 million of Class B notes issued by our indirect wholly-owned consolidated subsidiary, ACAS Business Loan Trust 2007-1, for $3 million. As a result of this purchase, we recognized a $17 million gain during the year ended December 31, 2009, which is recorded in net gain on extinguishment of debt in the accompanying consolidated statements of operations.

On March 12, 2009, we terminated our $500 million secured revolving credit facility with Wachovia Capital Markets, LLC, as deal agent. All borrowings under the facility were repaid during 2008 and had not been redrawn. We terminated the facility in connection with our effort to further delever our balance sheet and to reduce our overall borrowing costs. We recorded a loss on debt extinguishment of $5 million as a result of writing off the deferred debt issuance costs during the year ended December 31, 2009, which is recorded in net gain on extinguishment of debt in the accompanying consolidated statements of operations.

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Net Realized Gain (Loss) on Investments

Our net realized (loss) gain on investments consisted of the following individual portfolio company realized gain (loss) greater than $15 million (in millions):

	2010			2009
American Capital Agency Corp.	$	21		$	—
Axygen Holdings Corporation	—			35
Piper Aircraft, Inc.	—			31
Edline, LLC	—			16
Other, net	33			40
Total gross realized portfolio gain	54			122
ACAS CRE CDO 2007-1, Ltd.	(170		)	(41		)
UFG Member, LLC	(83		)	—
Orchard Brands Corporation	(50		)	—
GS Mortgage Securities Trust 2007-GG10	(49		)	—
Fountainhead Estate Holding Corp.	(25		)	—
ETG Holdings, Inc.	(22		)	(11		)
J-Pac, LLC	(21		)	—
Wachovia Bank Commercial Mortgage Trust, Series 2007-C32	(19		)	—
Resort Funding Holdings, Inc.	(17		)	—
CCRD Operating Company, Inc.	(15		)	—
Genband Inc.	(15		)	—
Consolidated Bedding, Inc.	—			(196		)
CMX Inc.	—			(121		)
Barton-Cotton Holding Corporation	—			(74		)
Anchor Drilling Fluids USA, Inc.	—			(55		)
Sale of commercial mortgage loan portfolio	—			(39		)
TestAmerica Environmental Services, LLC	—			(39		)
Halex Corporation	—			(29		)
Ranpak Acquisition Company	—			(23		)
Venus Swimwear, Inc	—			(21		)
Ford Motor Company	—			(18		)
Foamex, L.P.	—			(18		)
Small Smiles Holding Company, LLC	—			(17		)
Other, net	(67		)	(136		)
Total gross realized portfolio loss	(553		)	(838		)
Total net realized portfolio loss	(499		)	(716		)
Interest rate derivative periodic interest payments, net	(61		)	(58		)
Interest rate derivative termination payments	(14		)	(4		)
European Capital put option agreement	—			(44		)
Foreign currency transactions	(2		)	(3		)
Total net realized loss	$	(576	)	$	(825	)

See “Fiscal Year 2011 Compared to Fiscal Year 2010” for discussion on the net realized gains (losses) for the year ended December 31, 2010. The following are summary descriptions of portfolio company realized gains or losses greater than $30 million during 2009.

During 2009, we received full payment of our remaining mezzanine debt investment in Axygen Holdings Corporation and sold all of our equity interests for $182 million in total proceeds realizing a gain of $35 million offset by a reversal of unrealized appreciation of $37 million.

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During 2009, we received full repayment of our remaining mezzanine debt investment in Piper Aircraft, Inc. and sold all of our equity interests for $31 million in total proceeds realizing a gain of $31 million offset by a reversal of unrealized appreciation of $23 million.

During 2009, Consolidated Bedding, Inc. (“Consolidated Bedding”) sold all of its remaining assets to several purchasers for total proceeds consisting of cash, a 49% equity interest in one of the purchasers, Spring Air International, LLC, and the future collection by one of the purchasers of certain accounts receivable of Consolidated Bedding. The total fair value of the cash and non-cash proceeds received was $14 million, the proceeds of which were used to partially pay down our debt investments. Subsequently, Consolidated Bedding filed for bankruptcy protection under Chapter 7 of the U.S. Bankruptcy Code. We do not expect to receive any further proceeds for our debt and equity investments in Consolidated Bedding. We deemed our remaining investments to be worthless and recognized a realized loss of $196 million offset by a reversal of unrealized depreciation of $189 million.

During 2009, we wrote off a portion of our senior debt investment in CMX Inc. We did not receive any proceeds, realizing a loss of $121 million partially offset by a reversal of unrealized depreciation of $110 million.

During 2009, Barton-Cotton, Incorporated, the wholly-owned operating subsidiary of Barton-Cotton Holding Corporation (“Barton-Cotton”), filed for bankruptcy protection under Chapter 7 of the U.S. Bankruptcy Code. We do not expect to receive any proceeds for our mezzanine debt or equity investments in Barton-Cotton. We deemed our investments to be worthless and recognized a realized loss of $74 million fully offset by a reversal of unrealized depreciation.

During 2009, we wrote off $55 million of our mezzanine debt investment in Anchor Drilling Fluids USA, Inc. We did not receive any proceeds, realizing a loss of $55 million fully offset by a reversal of unrealized depreciation.

During 2009, we sold a portfolio of commercial mortgage loans secured by Winn-Dixie supermarkets for total cash proceeds of $103 million realizing a loss of $39 million fully offset by the reversal of unrealized depreciation. The commercial mortgage loans were made to the following real estate limited liability companies that were each portfolio companies of us: FU/WD Opa Locka, LLC, ZSF/WD Fitzgerald, LLC, ZSF Hammond, LLC, ZSF/WD Jacksonville, LLC, ZSF Montgomery-31, LLC, ZSF/WD Opa Locka, LLC and ZSF/WD Orlando, LLC.

During 2009, we wrote off our mezzanine debt investment in TestAmerica Environmental Services, LLC. We did not receive any proceeds, realizing a loss of $39 million fully offset by a reversal of unrealized depreciation.

We have entered into interest rate swap agreements in which we pay a fixed rate and receive a floating rate based on LIBOR. The net interest payments or receipts are recorded as a realized gain (loss) on the interest settlement dates. For the years ended December 31, 2010 and 2009, we recorded $61 million and $58 million, respectively, for net interest rate derivative periodic interest payments due to the significant decline in LIBOR as compared to LIBOR at the date of the origination of the interest rate swap agreements.

On November 19, 2008, we entered into a put option agreement with European Capital under which European Capital could put some or all of certain investments to us at a predetermined put price. Under the terms of the agreement, the put option could be exercised at any time commencing on January 1, 2010 and expiring on December 31, 2010. In consideration for entering into the put option agreement, European Capital paid us €16 million ($20 million). On March 30, 2009, we entered into a termination agreement with European Capital to terminate the put option agreement. Under the terms of the termination agreement, we settled the put option obligation by paying European Capital the fair value of the put option obligation of $65 million (€49 million). As a result, we recognized a realized loss of $44 million offset by the reversal of unrealized depreciation of $49 million in our consolidated statements

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Net Unrealized Appreciation (Depreciation) of Investments

The following table itemizes the change in net unrealized appreciation (depreciation) of investments (in millions):

	2010		2009
Gross unrealized appreciation of private finance portfolio investments	$	611