UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2008

OR

¨ 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)

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

Indicate by check mark 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 Exchange Act.

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

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

The number of shares of the issuer’s common stock, $0.01 par value, outstanding as of October 31, 2008, was 206,753,532.

AMERICAN CAPITAL, LTD.

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION
Item 1.	Consolidated Financial Statements	3
	Consolidated Balance Sheets as of September 30, 2008 (unaudited) and December 31, 2007	3
	Consolidated Statements of Operations for the three and nine months ended September 30, 2008 and 2007 (unaudited)	4
	Consolidated Statements of Changes in Net Assets for the nine months ended September 30, 2008 and 2007 (unaudited)	5
	Consolidated Statements of Cash Flows for the nine months ended September 30, 2008 and 2007 (unaudited)	6
	Consolidated Financial Highlights for the nine months ended September 30, 2008 and 2007 (unaudited)	7
	Consolidated Schedules of Investments as of September 30, 2008 (unaudited) and December 31, 2007	8
	Notes to Consolidated Financial Statements (unaudited)	38
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	58
Item 3.	Quantitative and Qualitative Disclosure About Market Risk	89
Item 4.	Controls and Procedures	89
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	90
Item 1A.	Risk Factors	90
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	90
Item 3.	Defaults upon Senior Securities	90
Item 4.	Submission of Matters to a Vote of Security Holders	90
Item 5.	Other Information	90
Item 6.	Exhibits	91
Signatures		92

2

Item 1. Consolidated Financial Statements

AMERICAN CAPITAL, LTD.

CONSOLIDATED BALANCE SHEETS

(in millions, except per share amounts)

	September 30, 2008			December 31, 2007
	(Unaudited)
Assets
Investments at fair value (cost of $10,794 and $10,667, respectively)
Non-Control/Non-Affiliate investments (cost of $5,989 and $6,467, respectively)	$	5,089		$	6,351
Affiliate investments (cost of $440 and $394, respectively)		395			396
Control investments (cost of $4,365 and $3,806, respectively)		3,611			4,177
Derivative agreements (cost of $0 and $0, respectively)		2			4
Total investments at fair value		9,097			10,928
Cash and cash equivalents		320			143
Restricted cash and cash equivalents		109			401
Interest receivable		49			56
Other		271			204
Total assets	$	9,846		$	11,732
Liabilities and Shareholders’ Equity
Debt ($160 and $267 maturing within one year, respectively)	$	4,542		$	4,824
Derivative agreements		86			77
Accrued dividends payable		—			195
Other		157			195
Total liabilities		4,785			5,291
Commitments and contingencies
Shareholders’ equity:
Undesignated preferred stock, $0.01 par value, 5.0 shares authorized, 0 issued and outstanding		—			—
Common stock, $0.01 par value, 1,000.0 shares authorized, 214.1 and 201.4 issued and 207.2 and 195.9 outstanding, respectively		2			2
Capital in excess of par value		6,571			6,013
Undistributed net realized earnings		275			254
Net unrealized (depreciation) appreciation of investments		(1,787	)		172
Total shareholders’ equity		5,061			6,441
Total liabilities and shareholders’ equity	$	9,846		$	11,732
Net asset value per common share	$	24.43		$	32.88

See accompanying notes.

3

AMERICAN CAPITAL, LTD.

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

(in millions, except per share data)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2008			2007			2008			2007
OPERATING INCOME:
Interest and dividend income
Non-Control/Non-Affiliate investments	$	144		$	165		$	461		$	383
Affiliate investments		9			17			31			51
Control investments		98			86			256			288
Total interest and dividend income		251			268			748			722
Asset management and other fee income
Non-Control/Non-Affiliate investments		12			27			30			72
Affiliate investments		—			1			1			3
Control investments		15			14			54			89
Total asset management and other fee income		27			42			85			164
Total operating income		278			310			833			886
OPERATING EXPENSES:
Interest		50			79			161			214
Salaries, benefits and stock-based compensation		52			59			165			177
General and administrative		21			25			64			72
Total operating expenses		123			163			390			463
NET OPERATING INCOME BEFORE INCOME TAXES		155			147			443			423
(Provision) benefit for income taxes		(2	)		6			6			(3	)
NET OPERATING INCOME		153			153			449			420
Net realized (loss) gain on investments
Non-Control/Non-Affiliate investments		51			(18	)		46			42
Affiliate investments		5			1			7			26
Control investments		17			87			111			89
Taxes on net realized gain		(49	)		(4	)		(53	)		(4	)
Foreign currency transactions		(13	)		—			(7	)		—
Derivative agreements		(14	)		5			(25	)		17
Total net realized (loss) gain on investments		(3	)		71			79			170
Net unrealized (depreciation) appreciation of investments
Portfolio company investments		(599	)		(197	)		(1,932	)		317
Foreign currency translation		(90	)		49			(17	)		61
Derivative agreements		(9	)		(55	)		(10	)		(25	)
Total net unrealized (depreciation) appreciation of investments		(698	)		(203	)		(1,959	)		353
Total net (loss) gain on investments		(701	)		(132	)		(1,880	)		523
NET (DECREASE) INCREASE IN NET ASSETS RESULTING FROM OPERATIONS (NET (LOSS) EARNINGS)	$	(548	)	$	21		$	(1,431	)	$	943
NET OPERATING INCOME PER COMMON SHARE:
Basic	$	0.74		$	0.82		$	2.22		$	2.50
Diluted	$	0.74		$	0.81		$	2.22		$	2.45
NET (LOSS) EARNINGS PER COMMON SHARE:
Basic	$	(2.63	)	$	0.11		$	(7.06	)	$	5.60
Diluted	$	(2.63	)	$	0.11		$	(7.06	)	$	5.50
WEIGHTED AVERAGE SHARES OF COMMON STOCK OUTSTANDING:
Basic		208.1			186.8			202.6			168.3
Diluted		208.1			189.3			202.6			171.4
DIVIDENDS DECLARED PER COMMON SHARE	$	1.05		$	0.92		$	3.09		$	2.72

See accompanying notes.

4

AMERICAN CAPITAL, LTD.

CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS

(unaudited)

(in millions, except per share data)

	Nine Months Ended September 30,
	2008			2007
Operations:
Net operating income	$	449		$	420
Net realized gain on investments		79			170
Net unrealized (depreciation) appreciation of investments		(1,959	)		353
Net (decrease) increase in net assets resulting from operations		(1,431	)		943
Shareholder distributions:
Common stock dividends from net operating income		(406	)		(420	)
Common stock dividends from net realized gain on investments		—			(40	)
Net decrease in net assets resulting from shareholder distributions		(406	)		(460	)
Capital share transactions:
Issuance of common stock		444			1,683
Issuance of common stock under stock option plans		5			23
Issuance of common stock under dividend reinvestment plan		—			36
Purchase of common stock held in deferred compensation trusts		(50	)		(77	)
Purchase of treasury stock		(6	)		—
Deconsolidation of stock held in ECFS deferred compensation trusts		—			22
Stock-based compensation		63			48
Other		1			(2	)
Net increase in net assets resulting from capital share transactions		457			1,733
Total (decrease) increase in net assets		(1,380	)		2,216
Net assets at beginning of period		6,441			4,342
Net assets at end of period	$	5,061		$	6,558
Net asset value per common share at end of period	$	24.43		$	34.92
Common shares outstanding at end of period		207.2			187.8

See accompanying notes.

5

AMERICAN CAPITAL, LTD.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(in millions)

	Nine Months Ended September 30,
	2008			2007
Operating activities:
Net (decrease) increase in net assets resulting from operations	$	(1,431	)	$	943
Adjustments to reconcile net (decrease) increase in net assets resulting from operations to net cash provided by operating activities:
Net unrealized depreciation (appreciation) of investments		1,959			(353	)
Net realized gain on investments		(79	)		(170	)
Accrued payment-in-kind interest and dividends		(146	)		(146	)
Collection of loan origination fees		12			26
Stock-based compensation expense		63			48
Decrease (increase) in interest receivable		9			(29	)
(Increase) decrease in other assets		(50	)		13
Decrease in other liabilities		(102	)		(22	)
Other		4			—
Net cash provided by operating activities		239			310
Investing activities:
Purchases of investments		(1,413	)		(5,211	)
Fundings on portfolio company revolving credit facility investments, net		(328	)		(74	)
Principal repayments		727			1,394
Proceeds from loan syndications and loan sales		343			1,298
Collection of payment-in-kind notes and dividends and accreted loan discounts		60			45
Proceeds from sale of equity investments		800			315
Capital expenditures for property and equipment		(7	)		(30	)
Other		(23	)		18
Net cash provided by (used in) investing activities		159			(2,245	)
Financing activities:
(Repayments) proceeds from issuance of notes payable from asset securitizations, net		(227	)		769
Payments on revolving credit facilities, net		(81	)		(401	)
Proceeds from unsecured debt issuance		—			547
Proceeds (repayments) from TRS facility, net		22			(296	)
Increase in deferred financing costs		(18	)		(14	)
Decrease in debt service escrows		292			109
Issuance of common stock		448			1,706
Purchase of common stock held in deferred compensation trusts		(50	)		(77	)
Purchase of treasury stock		(6	)		—
Distributions paid		(601	)		(382	)
Other		—			(4	)
Net cash (used in) provided by financing activities		(221	)		1,957
Net increase in cash and cash equivalents		177			22
Cash and cash equivalents at beginning of period		143			77
Cash eliminated with deconsolidation of European Capital Financial Services (Guernsey) Limited		—			(7	)
Cash and cash equivalents at end of period	$	320		$	92
Non-cash investing activities:
Stock proceeds received from sale of equity investments	$	—		$	32
Non-cash financing activities:
Issuance of common stock in conjunction with dividend reinvestment plan	$	—		$	36

See accompanying notes.

6

AMERICAN CAPITAL, LTD.

CONSOLIDATED FINANCIAL HIGHLIGHTS

(unaudited)

(in millions, except per share data)

	Nine Months Ended September 30,
	2008			2007
Per Share Data:
Net asset value at beginning of the period	$	32.88		$	29.42
Net operating income(1)		2.22			2.50
Net realized gain on investments(1)		0.39			1.01
Net unrealized (depreciation) appreciation on investments(1)		(9.67	)		2.09
Net (decrease) increase in net assets resulting from operations(1)		(7.06	)		5.60
Issuance of common stock		0.09			2.65
Shareholder distributions		(2.04	)		(2.72	)
Other, net(2)		0.56			(0.03	)
Net asset value at end of period	$	24.43		$	34.92
Ratio/Supplemental Data:
Per share market value at end of period	$	25.51		$	42.73
Total loss(3)		(16.88	)%		(1.45	)%
Shares outstanding at end of period		207.2			187.8
Net assets at end of period	$	5,061		$	6,558
Average net assets(4)	$	5,704		$	5,539
Average debt outstanding(5)	$	4,549		$	4,542
Average debt outstanding per common share(1), (5)	$	22.45		$	26.99
Ratio of operating expenses to average net assets(6)		9.11	%		11.14	%
Ratio of operating expenses, net of interest expense, to average net assets(6)		5.35	%		5.99	%
Ratio of interest expense to average net assets(6)		3.76	%		5.15	%
Ratio of net operating income to average net assets(6)		10.49	%		10.10	%

(1) Weighted average basic per share data.

(2) Represents the impact of (i) the other components in the changes in net assets, including other capital transactions such as the purchase of common stock held in deferred compensation trusts, stock-based compensation, income tax deductions related to the exercise of stock options and distribution of stock awards in excess of GAAP expense credited to additional paid-in capital, repayments of notes receivable from the sale of common stock and the purchase of treasury stock and (ii) the different share amounts used in calculating per share data as a result of calculating certain per share data based upon the weighted average basic shares outstanding during the period and certain per share data based on the shares outstanding as of a period end or transaction date.

(3) Total loss is based on the change in the market value of our common stock taking into account dividends reinvested in accordance with the terms of our dividend reinvestment plan. Total loss is not annualized.

(4) Based on the average of ending net assets as of the end of each reporting period.

(5) Based on a daily weighted average balance of debt outstanding during the period.

(6) Ratios are annualized.

See accompanying notes.

7

AMERICAN CAPITAL, LTD.

CONSOLIDATED SCHEDULE OF INVESTMENTS

September 30, 2008

(unaudited)

(in millions, except share data)

Company (4)	Industry	Investments	Interest Rate (5)		Maturity Date	# of shares/ units owned	Principal		Cost		Fair Value
NON-CONTROL / NON-AFFILIATE INVESTMENTS
Aerus, LLC	Household Durables	Common Membership Warrants(1)				250,000			$	0.2	$	—
Affordable Care Holding Corp.	Health Care Providers & Services	Subordinated Debt(7)	15.0	%	11/13-11/14		$	64.1		63.3		64.1
		Convertible Preferred Stock				70,752				82.3		107.8
		Common Stock(1)				17,687,156				17.7		26.9
										163.3		198.8
Algoma Holding Company	Building Products	Subordinated Debt(7)	13.3	%	4/13			13.3		13.2		13.2
		Convertible Preferred Stock(1)				23,319				—		7.8
										13.2		21.0
American Acquisition, LLC	Diversified Financial Services	Senior Debt	13.3	%	12/12			26.1		25.7		25.7
AmWins Group, Inc.	Insurance	Senior Debt(7)	8.0	%	6/14			18.5		18.6		15.4
Anchor Drilling Fluids USA, Inc.	Energy Equipment & Services	Senior Debt(7)	11.5	%	4/13			8.0		7.9		7.9
		Subordinated Debt(7)	14.5	%	4/15			60.7		60.1		60.1
										68.0		68.0
Aspect Software	IT Services	Senior Debt	9.9	%	7/12			20.0		19.9		18.9
Asurion Corporation	Diversified Consumer Services	Senior Debt	5.8	%	7/14			10.0		9.4		8.5
Avalon Laboratories Holding Corp.	Health Care Equipment & Supplies	Senior Debt(7)	10.0	%	1/14			16.0		15.8		16.0
		Subordinated Debt(7)	18.0	%	1/15			21.5		21.3		21.5
		Convertible Preferred Stock(1)				148,742				24.3		7.1
		Common Stock(1)				7,829				1.3		—
										62.7		44.6
Avanti Park Place LLC	Real Estate	Senior Debt	8.3	%	6/10			5.9		6.1		6.1
Axygen Holdings Corporation	Health Care Equipment & Supplies	Subordinated Debt(7)	14.5	%	9/14			61.1		60.4		61.1
		Redeemable Preferred Stock				205,204				44.2		62.9
		Convertible Preferred Stock				48,736				14.0		14.0
		Common Stock(1)				2,566				0.2		0.2
		Common Stock Warrants(1)				205,204				19.1		17.6
										137.9		155.8
Barton Cotton Holding Corporation	Commercial Services & Supplies	Subordinated Debt(6)	14.0	%	9/14			32.9		28.6		12.4
		Redeemable Preferred Stock(1)				28,263				15.7		—
		Convertible Preferred Stock(1)				67,158				6.7		—
		Common Stock Warrants(1)				125,610				12.6		—
										63.6		12.4
BBB Industries, LLC	Auto Components	Senior Debt(7)	9.1	%	6/14			21.2		21.2		17.9
Belloto Holdings Limited(3)	Household Durables	Subordinated Debt	15.2	%	6/17			3.9		3.8		3.2
		PIK Note(1)	15.0	%	12/17					8.9		0.4
		Ordinary Shares(1)				32,434				0.1		—
										12.8		3.6
Berry-Hill Galleries, Inc.	Distributors	Senior Debt	16.0	%	3/10			7.6		7.6		7.6
		Common Stock Warrants(1)								0.1		0.1
										7.7		7.7
Butler Animal Health Supply, LLC	Health Care Providers & Services	Senior Debt(7)	10.3	%	7/12			8.0		8.0		7.5

8

AMERICAN CAPITAL, LTD.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

September 30, 2008

(unaudited)

(in millions, except share data)

Company (4)	Industry	Investments	Interest Rate (5)		Maturity Date	# of shares/ units owned	Principal	Cost		Fair Value
CAMP Systems International, Inc.	Transportation Infrastructure	Senior Debt(7)	8.8	%	9/14		30.0	29.7		25.6
Carestream Health, Inc.	Health Care Equipment & Supplies	Senior Debt(7)	8.1	%	10/13		15.0	15.0		10.9
CH Holding Corp.	Leisure Equipment & Products	Senior Debt(6)	9.5	%	5/11		13.1	13.0		5.0
		Redeemable Preferred Stock(1)				21,215		42.7		—
		Convertible Preferred Stock(1)				665,000		—		—
		Common Stock(1)				1		—		—
								55.7		5.0
Cinelease, Inc.	Electronic Equipment & Instruments	Senior Debt(7)	9.5	%	12/08-3/13		61.3	60.8		56.2
		Common Stock(1)				583		0.6		0.8
								61.4		57.0
CMX Inc.	Construction & Engineering	Senior Debt(7)	7.6	%	5/11-5/12		113.2	111.9		94.9
		Senior Debt(6)(7)	9.0	%	5/12		31.1	31.1		11.4
		Common Stock(1)				35,000		0.1		—
								143.1		106.3
Compusearch Holdings Company, Inc.	Software	Subordinated Debt(7)	12.0	%	6/12		12.6	12.4		12.4
		Convertible Preferred Stock(1)				23,342		0.9		1.5
								13.3		13.9
Contec. LLC	Household Durables	Subordinated Debt(7)	14.0	%	9/15-9/16		135.0	133.7		133.7
CyrusOne Networks, LLC	IT Services	Senior Debt(7)	9.8	%	1/14		17.6	17.4		17.2
DelStar, Inc.	Building Products	Subordinated Debt(7)	14.0	%	12/12		18.6	18.4		18.6
		Redeemable Preferred Stock				26,613		16.1		33.0
		Convertible Preferred Stock				29,569		3.3		5.2
		Common Stock Warrants(1)				89,020		16.9		15.5
								54.7		72.3
Direct Marketing International LLC	Media	Subordinated Debt(7)	15.2	%	7/12		29.1	28.8		28.8
Dyno Holding Corp.	Auto Components	Senior Debt(7)	6.5	%	11/13		42.2	41.7		42.2
		Subordinated Debt(7)	16.0	%	11/14		27.2	27.0		27.2
		Convertible Preferred Stock				389,759		41.8		25.2
		Common Stock(1)				97,440		10.1		—
								120.6		94.6
Easton Bell Sports LLC	Leisure Equipment & Products	Common Units(1)				1,985,748		0.7		4.2
Edline, LLC	Software	Subordinated Debt(7)	14.0	%	7/13		18.1	14.2		18.4
		Membership Warrants(1)				6,447,500		6.0		16.0
								20.2		34.4
FAMS Acquisition, Inc.	Diversified Financial Services	Subordinated Debt(7)	14.8	%	11/13-11/14		26.0	25.7		26.0
		Convertible Preferred Stock(1)				861,364		20.9		13.4
								46.6		39.4
FCC Holdings, LLC	Commercial Banks	Subordinated Debt	17.6	%	12/12		75.0	74.4		68.0
Foamex, L.P.(2)	Building Products	Senior Debt	8.1	%	2/12-7/14		23.3	22.0		14.8
Ford Motor Company(2)	Automobiles	Revolver Commitment			12/11			(11.7	)	(35.3	)
Formed Fiber Technologies, Inc.	Auto Components	Subordinated Debt(6)	15.0	%	8/11		13.8	11.1		1.6
		Common Stock Warrants(1)				122,397		0.1		—
								11.2		1.6

9

AMERICAN CAPITAL, LTD.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

September 30, 2008

(unaudited)

(in millions, except share data)

Company (4)	Industry	Investments	Interest Rate (5)		Maturity Date	# of shares/ units owned		Principal	Cost	Fair Value
FPI Holding Corporation	Food Products	Senior Debt	13.9	%	5/11-5/15			35.4	35.0	35.4
		Subordinated Debt	16.8	%	5/11-5/16			9.0	9.0	9.0
		Subordinated Debt(6)	14.7	%	5/14			8.6	8.4	8.7
		Redeemable Preferred Stock(1)				4,469			39.1	1.0
		Convertible Preferred Stock(1)				21,715			23.3	—
		Common Stock(1)				5,429			5.8	—
									120.6	54.1
French Lick Resorts & Casino Hotels, LLC	Hotels, Restaurants & Leisure	Senior Debt	10.8	%	4/14			31.7	25.5	24.2
FU/WD Opa Locka, LLC	Real Estate	Senior Debt	8.0	%	9/17-9/24			32.6	31.1	28.7
Genband Inc.	Communications Equipment	Common Stock(1)				2,975,631			14.7	4.0
Golden Key US LLC	Diversified Financial Services	Commercial Paper(1)	5.3	%	10/07			7.3	7.3	4.3
HMSC Corporation	Insurance	Senior Debt(7)	8.3	%	10/14			3.5	3.5	2.6
HomeAway, Inc.	Diversified Consumer Services	Senior Debt(7)	8.2	%	12/12			88.2	87.3	87.6
		Redeemable Preferred Stock				384,297			0.7	0.6
		Convertible Preferred Stock				1,923,786			11.0	28.8
		Common Stock(1)				153,475			0.3	2.3
									99.3	119.3
Hopkins Manufacturing Corporation	Auto Components	Subordinated Debt(7)	15.3	%	7/12			36.3	36.0	36.0
		Redeemable Preferred Stock				2,915			5.7	5.7
									41.7	41.7
III Exploration II, LP	Oil, Gas & Consumable Fuels	Senior Debt(7)	9.9	%	4/14			20.0	20.0	18.7
Infiltrator Systems, Inc.	Building Products	Senior Debt(7)	9.5	%	10/13			52.2	51.6	50.8
Innova Holdings, Inc.	Energy Equipment & Services	Senior Debt(7)	10.0	%	3/13			11.5	11.4	11.4
		Subordinated Debt(7)	15.0	%	3/14			17.6	17.4	17.4
		Convertible Preferred Stock				14,283			18.5	30.9
									47.3	59.7
Inovis International, Inc.	Software	Senior Debt(7)	9.2	%	5/10			88.0	87.4	87.4
Intergraph Corporation	Software	Senior Debt(7)	8.8	%	12/14			3.0	3.0	2.7
iTradeNetwork, Inc.	IT Services	Senior Debt(7)	11.5	%	12/13			25.0	24.8	24.3
JHCI Acquisition, Inc.	Commercial Services & Supplies	Senior Debt(7)	9.2	%	12/14			19.0	19.1	14.5
Jones Stephens Corp.	Building Products	Subordinated Debt(7)	13.5	%	9/13-9/14			23.1	22.8	22.8
J-Pac, LLC	Health Care Equipment & Supplies	Senior Debt(7)	12.0	%	1/12-1/14			15.1	14.9	15.3
		Subordinated Debt	18.9	%	1/14			9.1	8.8	8.8
		Preferred Unit Warrants(1)				763,158			0.2	0.2
									23.9	24.3
KIK Custom Products, Inc.(3)	Household Products	Senior Debt(6)	8.2	%	11/14			21.6	21.6	8.9
LabelCorp Holdings, Inc	Paper & Forest Products	Senior Debt	8.4	%	8-13-8/14			1.9	1.5	1.5
		Subordinated Debt	14.0	%	8/15-8/16			60.2	59.6	59.6
									61.1	61.1
LCW Holdings, LLC	Real Estate	Senior Debt	9.0	%	10/12			31.9	30.9	33.3
		Warrant(1)				12.5	%		0.8	5.4
									31.7	38.7

10

AMERICAN CAPITAL, LTD.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

September 30, 2008

(unaudited)

(in millions, except share data)

Company (4)	Industry	Investments	Interest Rate (5)		Maturity Date	# of shares/ units owned	Principal	Cost	Fair Value
LJVH Holdings Inc.(3)	Beverages	Senior Debt(7)	8.6	%	1/15		28.5	28.6	24.9
LN Acquisition Corp.	Machinery	Senior Debt(7)	8.2	%	1/15		21.5	21.6	21.0
Logex Corporation	Road & Rail	Subordinated Debt(6)	12.2	%	10/08		12.8	9.1	0.2
LTM Enterprises, Inc.	Personal Products	Senior Debt(7)	10.8	%	11/11		19.0	19.0	17.6
MagnaCare Holdings, Inc.	Health Care Providers & Services	Subordinated Debt(7)	14.8	%	1/13		14.0	13.8	13.8
Medical Billing Holdings, Inc.	Commercial Services & Supplies	Subordinated Debt(7)	15.0	%	9/13		10.6	10.5	10.6
		Convertible Preferred Stock				13,199,000		15.4	15.7
		Common Stock(1)				3,299,582		3.3	2.5
								29.2	28.8
MGM Holdings II, Inc.	Media	Senior Debt	6.1	%	6/11		2.0	1.7	1.7
Mirion Technologies	Electrical Equipment	Senior Debt(7)	8.2	%	5/10-11/11		122.6	121.9	124.2
		Subordinated Debt(7)	15.5	%	9/09-5/12		50.3	50.0	50.4
		Convertible Preferred Stock				435,724		47.1	92.2
		Common Stock(1)				24,503		2.8	3.6
		Common Stock Warrants(1)				222,156		18.6	30.9
								240.4	301.3
Mitchell International, Inc.	IT Services	Senior Debt(7)	9.1	%	3/15		5.0	5.0	4.8
National Processing Company Group, Inc.	Diversified Financial Services	Senior Debt(7)	9.3	%	9/14		53.0	52.8	45.7
NBD Holdings Corp.	Diversified Financial Services	Senior Subordinated Debt(7)	14.0	%	8/13		45.4	44.9	44.9
		Convertible Preferred Stock				84,174		10.2	10.2
		Common Stock(1)				633,408		0.1	0.1
								55.2	55.2
Net1 Las Colinas Manager, LLC	Real Estate	Senior Debt	7.7	%	10/15		5.3	5.3	4.9
Nivel Holdings, LLC	Distributors	Senior Debt(7)	10.6	%	10/13		62.4	61.8	59.3
Orchard Brands Corporation	Internet & Catalog Retail	Senior Debt(7)	9.8	%	4/13-4/14		305.3	302.3	262.3
		Subordinated Debt	12.5	%	4/14		58.4	58.4	43.9
		Common Stock(1)				565,885		—	0.6
								360.7	306.8
Pan Am International Flight Academy, Inc.	Commercial Services & Supplies	Subordinated Debt(7)	16.0	%	7/13		27.8	27.5	25.4
		Convertible Preferred Stock(1)				8,234		8.2	—
								35.7	25.4
Panavision, Inc.	Electronic Equipment & Instruments	Senior Debt	7.8	%	3/11		2.0	1.7	1.8
PaR Systems, Inc.	Machinery	Senior Debt	6.3	%	7/13		4.9	4.7	4.7
Phillips & Temro Industries, Inc.	Auto Components	Senior Debt(7)	9.0	%	12/10-12/11		23.8	23.7	23.7
		Subordinated Debt(7)	15.0	%	12/12		17.2	17.2	17.2
								40.9	40.9
Qioptiq S.A.R.L.(3)	Electronic Equipment & Instruments	Subordinated Debt	13.5	%	3/18		28.9	28.6	28.6
Ranpak Acquisition Company	Containers & Packaging	Senior Debt(7)	11.4	%	12/13-12/14		142.2	140.8	131.2
RDR Holdings, Inc.	Household Durables	Subordinated Debt(7)	15.4	%	10/14-10/15		200.3	198.5	200.3
		Convertible Preferred Stock				154,142		164.5	157.8
		Common Stock(1)				1,541,415		1.6	—
								364.6	358.1

11

AMERICAN CAPITAL, LTD.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

September 30, 2008

(unaudited)

(in millions, except share data)

Company (4)	Industry	Investments	Interest Rate (5)		Maturity Date	# of shares/ units owned	Principal	Cost	Fair Value
Roarke—Money Mailer, LLC	Media	Common Membership Units(1)				20,404		0.9	1.7
Scanner Holdings Corporation	Computers & Peripherals	Senior Debt(7)	6.0	%	5/12-5/13		13.2	12.9	13.2
		Subordinated Debt(7)	14.0	%	5/14		20.5	20.4	20.5
		Convertible Preferred Stock(1)				77,640,000		7.8	7.4
		Common Stock(1)				78,242		0.1	—
								41.2	41.1
Securus Technologies, Inc.	Diversified Telecommunication Services	Common Stock(1)				12,281		0.7	—
Seroyal Holdings, L.P.(3)	Health Care Equipment & Supplies	Redeemable Preferred Partnership Units				26,274		0.5	0.6
		Partnership Units(1)				95,280		0.8	1.6
								1.3	2.2
Sleep Innovations, Inc.	Distributors	Senior Debt(6)	7.6	%	3/11-4/13		30.6	23.0	4.5
Small Smiles Holding Company, LLC	Health Care Providers & Services	Senior Debt	7.8	%	9/12		9.1	5.0	6.4
		Subordinated Debt(7)	14.5	%	9/13		74.8	73.9	44.3
		Subordinated Debt(6)	16.5	%	9/14		24.2	17.3	—
								96.2	50.7
Soil Safe Holdings, LLC	Commercial Services & Supplies	Senior Debt	7.8	%	8/13-8/14		53.2	52.6	52.6
		Subordinated Debt(7)	14.7	%	8/15-8/17		57.5	57.0	57.0
								109.6	109.6
Spectrum Brands, Inc.(2)	Household Products	Senior Debt	7.5	%	3/13		8.7	8.3	6.6
Supreme Corq Holdings, LLC	Household Products	Common Membership Warrants(1)				5,670		0.4	—
Swank Audio Visuals, L.L.C.	Commercial Services & Supplies	Senior Debt(7)	9.5	%	8/14		48.5	48.1	38.3
Tanenbaum-Harber Co. Holdings, Inc.	Insurance	Redeemable Preferred Stock(1)				376		0.5	0.5
		Common Stock(1)				3,861		—	—
								0.5	0.5
TestAmerica Environmental Services, LLC	Commercial Services & Supplies	Senior Debt(7)	9.1	%	12/11-12/13		26.6	26.2	20.6
		Subordinated Debt(6)(7)	14.0	%	12/14		41.5	39.5	20.1
		Preferred Unit(1)				11,659,298		6.9	—
		Preferred Unit Warrants(1)				1,998,961		4.8	—
								77.4	40.7
The Tensar Corporation	Construction & Engineering	Senior Debt(7)	11.7	%	5/13		82.0	81.1	81.1
		Subordinated Debt	17.5	%	10/13		41.7	41.4	41.4
								122.5	122.5
ThreeSixty Sourcing, Inc.(3)	Commercial Services & Supplies	Common Stock Warrants(1)				35		4.1	2.0
TransFirst Holdings, Inc.	Commercial Services & Supplies	Senior Debt(7)	9.8	%	6/15		50.0	49.5	43.8
triVIN, Inc.	Commercial Services & Supplies	Subordinated Debt(7)	15.0	%	6/14-6/15		19.7	19.5	19.7
		Convertible Preferred Stock				247,000,000		27.5	23.8
		Common Stock(1)				6,319,923		6.3	—
								53.3	43.5
True Temper Sports, Inc.	Distributors	Senior Debt	8.3	%	3/11		2.0	1.9	1.8

12

AMERICAN CAPITAL, LTD.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

September 30, 2008

(unaudited)

(in millions, except share data)

Company (4)	Industry	Investments	Interest Rate (5)		Maturity Date	# of shares/ units owned	Principal	Cost	Fair Value
Tyden Caymen Holdings Corp.	Electronic Equipment & Instruments	Senior Debt(7)	10.5	%	5/10-11/11		12.0	11.9	12.0
		Subordinated Debt(7)	13.8	%	5/12		14.5	14.4	14.6
		Common Stock(1)				1,165,930		1.2	2.9
								27.5	29.5
Velocity Financial Group, Inc.	Diversified Financial Services	Subordinated Debt	15.0	%	4/14		15.0	14.9	14.9
		Convertible Preferred Stock(1)				11,659,298		20.4	18.8
								35.3	33.7
Venus Swimwear, Inc.	Internet & Catalog Retail	Senior Debt	10.3	%	12/11-12/12		27.0	26.7	21.8
		Subordinated Debt(6)	20.0	%	12/13		24.9	19.2	3.7
								45.9	25.5
WRH, Inc.	Life Sciences Tools & Services	Senior Debt(7)	6.2	%	9/13-9/14		4.3	4.3	4.3
		Subordinated Debt(7)	14.9	%	7/14-9/14		81.1	80.4	80.9
		Convertible Preferred Stock				2,008,575		221.4	290.8
		Common Stock(1)				502,144		49.9	70.1
								356.0	446.1
WWC Acquisitions, Inc.	Commercial Services & Supplies	Senior Debt(7)	9.2	%	12/11-12/13		35.6	35.1	32.6
Zencon Holdings Corporation	Internet Software & Services	Senior Debt(7)	8.6	%	5/13		17.7	17.5	17.7
		Subordinated Debt(7)	15.3	%	5/14		20.8	20.7	20.8
		Convertible Preferred Stock(1)				5,246,686		7.5	21.7
								45.7	60.2
ZSF/WD Fitzgerald, LLC	Real Estate	Senior Debt	8.2	%	9/24		1.2	1.1	0.6
ZSF/WD Hammond, LLC	Real Estate	Senior Debt	8.0	%	9/17-9/24		40.9	39.1	33.3
ZSF/WD Jacksonville, LLC	Real Estate	Senior Debt	8.1	%	9/17-9/24		20.5	19.5	15.9
ZSF/WD Montgomery-31, LLC	Real Estate	Senior Debt	8.0	%	9/17-9/24		33.9	32.4	28.0
ZSF/WD Opa Locka, LLC	Real Estate	Senior Debt	8.2	%	9/24		0.4	0.4	0.4
ZSF/WD Orlando, LLC	Real Estate	Senior Debt	8.1	%	9/17-9/24		20.8	19.8	16.3
CMBS AND REAL ESTATE CDO INVESTMENTS
ACAS CRE CDO 2007-1, Ltd.	Real Estate	Class C through Class N Notes	5.7	%	11/31		347.7	201.3	40.9
		Preferred Shares				417,086,293		17.7	6.3
								219.0	47.2
Bank of America	Real Estate	Forward Purchase commitment to purchase Banc of America Commercial Mortgage Trust 2007-1, Commercial Mortgage Pass-Through Certificates (3.5%, Expiring 10/08)(7)(8)	5.8	%	2/17-2/18		12.4	2.3	1.7
CD 2007-CD4 Commercial Mortgage Trust	Real Estate	Commercial Mortgage Pass-Through Certificates(7)	5.7	%	4/17		14.1	8.7	3.3
CD 2007-CD5 Mortgage Trust	Real Estate	Commercial Mortgage Pass-Through Certificates	6.2	%	12/17		14.9	10.2	5.4
Citigroup Commercial Mortgage Securites Trust 2007-C6	Real Estate	Commercial Mortgage Pass-Through Certificates(7)	5.5	%	7/17		184.4	83.9	50.6

13

AMERICAN CAPITAL, LTD.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

September 30, 2008

(unaudited)

(in millions, except share data)

Company (4)	Industry	Investments	Interest Rate (5)		Maturity Date	# of shares/ units owned	Principal	Cost	Fair Value
COBALT CMBS Commercial Mortgage Trust 2007-C3	Real Estate	Commercial Mortgage Pass-Through Certificates	5.2	%	10/17		11.2	8.5	2.3
Countrywide Commercial Mortgage Trust 2007-MF1	Real Estate	Commercial Mortgage Pass-Through Certificates	6.1	%	11/40		24.1	9.3	4.1
Credit Suisse Commercial Mortgage Trust 2007-C3	Real Estate	Commercial Mortgage Pass-Through Certificates	5.6	%	7/17		13.2	10.6	2.8
Credit Suisse Commercial Mortgage Trust Series 2007-C4	Real Estate	Commercial Mortgage Pass-Through Certificates	5.8	%	8/17		20.9	12.0	10.3
GE Commercial Mortgage Corporation, Series 2007-C1	Real Estate	Commercial Mortgage Pass-Through Certificates(7)	5.5	%	12/19		37.1	31.4	9.1
GS Morgtage Securities Trust 2006-GG10	Real Estate	Commercial Mortgage Pass-Through Certificates(7)	5.7	%	7/17		64.0	52.1	12.8
J.P. Morgan Chase Commercial Mortgage Securities Trust 2007-LDP11 Real Estate		Commercial Mortgage Pass-Through Certificates(7)	5.6	%	7/17		143.4	62.9	27.0
J.P. Morgan Chase	Real Estate	Forward Purchase commitment to purchase J.P. Morgan Chase Commercial Mortgage Securities Trust 2007-LDP11, Commercial Mortgage Pass-Through Certificates (4.3%, Expiring 10/08)(8)	5.6	%	7/17		19.0	5.7	3.5
J.P. Morgan Chase	Real Estate	Forward Purchase commitment to purchase ML-CFC Commercial Mortgage Trust 2007-6, Commercial Mortgage Pass-Through Certificates (4.7%, Expiring 10/08)(8)	5.8	%	4/17		9.8	2.2	1.6
ML-CFC Commercial Mortgage Trust 2007-8	Real Estate	Commercial Mortgage Pass-Through Certificates	6.0	%	8/17		33.0	19.3	12.0
LB-UBS Commercial Mortgage Trust 2007-C6	Real Estate	Commercial Mortgage Pass-Through Certificates	6.2	%	8/17		11.2	5.3	3.3
LB-UBS Commercial Mortgage Trust 2008-C1	Real Estate	Commercial Mortgage Pass-Through Certificates(7)	6.2	%	7/23-7/24		19.5	7.3	5.4
UBS	Real Estate	Forward Purchase commitment to purchase LB-UBS Commercial Mortgage Trust 2007-C6, Commercial Mortgage Pass-Through Certificates (6.0%, Expiring 10/08)(8)	6.2	%	8/17		25.4	12.5	5.4
Wachovia Bank Commercial Mortgage Trust 2007-C31	Real Estate	Commercial Mortgage Pass-Through Certificates(7)	5.8	%	5/17		20.1	11.3	7.7
Wachovia Bank Commercial Mortgage Trust, Series 2007-C32	Real Estate	Commercial Mortgage Pass-Through Certificates(7)	5.7	%	10/17		162.0	75.9	34.4

14

AMERICAN CAPITAL, LTD.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

September 30, 2008

(unaudited)

(in millions, except share data)

Company (4)	Industry	Investments	Interest Rate (5)		Maturity Date	# of shares/ units owned	Principal	Cost	Fair Value
Wachovia Bank Commercial Mortgage Trust, Series 2007-C34	Real Estate	Commercial Mortgage Pass-Through Certificates(7)	5.3	%	10/17-9/24		96.5	43.1	21.5
Wachovia Bank Commercial Trust 2006-C28	Real Estate	Commercial Mortgage Pass-Through Certificates(7)	6.0	%	11/16		5.0	3.1	1.6
CLO INVESTMENTS
ACAS CLO 2007-1, Ltd.	Diversified Financial Services	Secured Notes	9.6	%	11/31-11/52		8.5	8.4	2.8
		Subordinated Notes					25.9	23.7	11.2
								32.1	14.0
Ares IIIR/IVR CLO Ltd.	Diversified Financial Services	Subordinated Notes					20.0	17.0	9.2
Ares VIII CLO, Ltd.	Diversified Financial Services	Preference Shares				6,241		4.1	2.2
Avalon Capital Ltd. 3	Diversified Financial Services	Preferred Securities				13,796		4.8	5.1
Babson CLO Ltd. 2006-II	Diversified Financial Services	Income Notes					15.0	13.7	7.6
BALLYROCK CLO 2006-2 LTD.	Diversified Financial Services	Deferrable Notes					2.5	2.1	1.2
Cent CDO 12 Limited	Diversified Financial Services	Income Notes					26.4	22.6	10.1
Centurion CDO 8 Limited	Diversified Financial Services	Subordinated Notes					5.0	3.2	1.8
Champlain CLO	Diversified Financial Services	Preferred Securities				1,000,000		0.4	0.5
CoLTs 2005-1 Ltd.(3)	Diversified Financial Services	Preference Shares(1)				360		6.7	0.8
CoLTs 2005-2 Ltd.(3)	Diversified Financial Services	Preference Shares				34,170,000		29.7	6.2
CREST Exeter Street Solar 2004-2	Diversified Financial Services	Preferred Securities				3,089,177		2.7	1.1
Eaton Vance CDO X PLC(3)	Diversified Financial Services	Secured Subordinated Income Notes					30.0	13.0	6.9
Essex Park CDO Ltd.	Diversified Financial Services	Preferred Securities				5,750,000		1.8	2.0
Flagship CLO V	Diversified Financial Services	Deferrable Notes					1.7	1.3	0.7
		Subordinated Securities				15,000		13.2	6.3
								14.5	7.0
Galaxy III CLO, Ltd	Diversified Financial Services	Subordinated Notes					4.0	2.2	1.4
LightPoint CLO IV, LTD	Diversified Financial Services	Income Notes					6.7	6.0	1.7
LightPoint CLO VIII, Ltd.	Diversified Financial Services	Deferrable Notes					7.0	6.4	4.5
LightPoint CLO VII, Ltd.	Diversified Financial Services	Subordinated Notes				90		7.6	4.0
Mayport CLO Ltd.	Diversified Financial Services	Income Notes					14.0	12.1	5.3

15

AMERICAN CAPITAL, LTD.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

September 30, 2008

(unaudited)

(in millions, except share data)

Company (4)	Industry	Investments	Interest Rate (5)		Maturity Date	# of shares/ units owned	Principal	Cost		Fair Value
NYLIM Flatiron CLO 2006-1 LTD.(3)	Diversified Financial Services	Subordinated Securities					10.0		9.0		3.8
Octagon Investment Partners VII, Ltd.	Diversified Financial Services	Preferred Securities				5,000,000			2.0		1.6
Sapphire Valley CDO I, Ltd.	Diversified Financial Services	Subordinated Notes					14.0		12.5		5.9
Vitesse CLO, Ltd.	Diversified Financial Services	Preferred Securities				20,000,000			15.2		6.4
Subtotal Non-Control / Non-Affiliate Investments (56% of total investment assets and liabilities at fair value)								$	5,989.0	$	5,088.7
AFFILIATE INVESTMENTS
Aptara, Inc.	IT Services	Subordinated Debt(7)	16.6	%	8/09		54.6		54.4		48.1
		Redeemable Preferred Stock(1)				15,107			14.1		—
		Convertible Preferred Stock(1)				2,549,410			8.7		—
		Preferred Stock Warrants(1)				230,681			1.0		—
									78.2		48.1
BLI Partners, LLC	Personal Products	Common Membership Interest(1)							17.3		1.7
Coghead, Inc.	Internet Software & Services	Convertible Preferred Stock(1)				5,489,656			2.6		2.6
Corrpro Companies, Inc.	Construction & Engineering	Subordinated Debt(7)	12.5	%	3/11		13.0		11.4		11.6
		Redeemable Preferred Stock				1,165,930			1.6		2.1
		Common Stock Warrants(1)				5,022,576			3.5		10.4
									16.5		24.1
Creditcards.com, Inc.	Diversified Consumer Services	Senior Debt(7)	11.0	%	6/13		141.3		140.4		140.4
		Subordinated Debt	15.0	%	6/14		28.4		28.0		28.0
		Common Stock(1)				1,094,645			1.6		8.6
									170.0		177.0
Egenera, Inc.	Computers & Peripherals	Convertible Preferred Stock(1)				8,046,865			25.0		25.0
HALT Medical, Inc.	Health Care Equipment & Supplies	Convertible Preferred Stock(1)				3,231,417			5.2		5.2
IS Holdings I, Inc.	Software	Senior Debt(7)	8.5	%	6/14		20.0		19.8		17.4
		Redeemable Preferred Stock				1,297			1.5		1.5
		Common Stock(1)				1,165,930			—		5.8
									21.3		24.7
Narus, Inc.	Internet Software & Services	Convertible Preferred Stock(1) Preferred Stock Warrants(1)				23,583,196 5,440,881			8.4 —		5.7 —
									8.4		5.7
Nursery Supplies, Inc.	Containers & Packaging	Redeemable Preferred Stock(1)				2,116			—		—
		Common Stock Warrants(1)				625			—		—
									—		—
Primrose Holding Corporation	Diversified Consumer Services	Common Stock(1)				4,213			2.7		7.1
Qualitor Component Holdings, LLC	Auto Components	Subordinated Debt(7)	17.0	%	12/12		34.8		34.5		35.0
		Redeemable Preferred Stock(1)				3,150,000			3.2		1.2
		Common Units(1)				350,000			0.4		—
									38.1		36.2
Radar Detection Holdings Corp.	Household Durables	Senior Debt(7)	9.7	%	11/12		13.0		13.0		12.6
		Common Stock(1)				40,688			0.6		2.9
									13.6		15.5

16

AMERICAN CAPITAL, LTD.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

September 30, 2008

(unaudited)

(in millions, except share data)

Company (4)	Industry	Investments	Interest Rate (5)		Maturity Date	# of shares/ units owned		Principal	Cost		Fair Value
Roadrunner Dawes, Inc.	Road & Rail	Subordinated Debt(7)	15.0	%	9/12			19.2		19.0		19.2
		Common Stock(1)				7,000				7.0		2.4
										26.0		21.6
Tymphany Corporation	Electronic Equipment & Instruments	Convertible Preferred Stock(1) Guarantee				7,723,525				12.3 —		—   (3.2	)
										12.3		(3.2	)
WFS Holding, Inc.	Software	Convertible Preferred Stock				20,403,772				2.7		3.4
Subtotal Affiliate Investments (4% of total investment assets and liabilities at fair value)									$	439.9	$	394.7
CONTROL INVESTMENTS
ACAS Equity Holdings Corp.		Common Stock(1)				589				14.7		5.4
ACAS Real Estate Holdings Corporation	Real Estate	Common Stock(1)				1,000				5.3		—
American Capital Agency Corp(2)	Real Estate Investment Trusts	Common Stock(9)				5,000,100				100.0		75.8
American Capital, LLC	Capital Markets	Senior Debt	9.5	%	9/12			10.6		10.4		10.6
		Common Membership interest(1)				100	%			58.5		306.9
										68.9		317.5
American Driveline Systems, Inc.	Diversified Consumer Services	Subordinated Debt(7)	14.0	%	12/14-12/15			41.5		41.0		41.6
		Redeemable Preferred Stock				403,357				27.5		43.2
		Common Stock				128,681				10.8		6.2
		Common Stock Warrants(1)				204,663				17.3		9.8
										96.6		100.8
Auxi Health, Inc.	Health Care Providers & Services	Subordinated Debt(6)	14.0	%	3/09			8.7		3.2		1.1
Capital.com, Inc.	Diversified Financial Services	Common Stock(1)				8,500,100				1.5		0.4
CIBT Travel Solutions, Inc	Commercial Services & Supplies	Senior Debt	6.5	%	1/13-1/14			75.0		74.1		75.0
		Subordinated Debt(7)	15.0	%	1/10-1/16			42.8		42.4		42.8
		Convertible Preferred Stock(1)				776,800				77.7		46.4
		Common Stock(1)				194,200				19.4		—
										213.6		164.2
Consolidated Bedding, Inc.	Household Durables	Senior Debt	12.0	%	6/13			10.3		10.2		11.8
		Senior Debt(6)	12.0	%	6/13			109.5		103.7		9.1
		Subordinated Debt(6)	21.2	%	12/13			75.8		66.4		—
		Convertible Preferred Stock (1)				16,423				3.0		—
		Common Stock(1)				471,470				—		—
										183.3		20.9
Contour Semiconductor, Inc.	Semiconductors & Semiconductor Equipment	Convertible Preferred Stock(1)				9,738,995				10.0		10.3
Core Business Credit, LLC	Diversified Financial Services	Subordinated Debt	14.7	%	5/15			19.6		19.4		19.4
		Convertible Preferred Units(1)				133,250				13.3		13.3
		Common Units(1)				33,313				3.3		3.3
										36.0		36.0
Credit Opportunities Fund I, LLC	Diversified Financial Services	Common Stock(1)				100	%			1.3		1.3

17

AMERICAN CAPITAL, LTD.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

September 30, 2008

(unaudited)

(in millions, except share data)

Company (4)	Industry	Investments	Interest Rate (5)		Maturity Date	# of shares/ units owned		Principal	Cost	Fair Value
eLynx Holdings, Inc.	IT Services	Senior Debt(7)	10.0	%	6/13			9.1	9.1	9.1
		Subordinated Debt(7)	7.6	%	6/13			7.1	7.1	7.1
		Subordinated Debt(6)(7)	8.4	%	6/13			7.0	6.1	1.5
		Redeemable Preferred Stock(1)				21,114			8.9	—
		Convertible Preferred Stock(1)				7,929			6.0	—
		Common Stock(1)				11,261			1.1	—
		Common Stock Warrants(1)				1,199,444			13.1	—
									51.4	17.7
Endeavor Fund I, LP	Thrifts & Mortgage Finance	Limited Partnership Interest(1)				94	%		130.0	112.6
ETG Holdings, Inc.	Containers & Packaging	Senior Debt(6)	11.0	%	5/11			13.1	10.8	11.0
		Subordinated Debt(6)	14.9	%	5/12-5/13			15.2	10.9	—
		Convertible Preferred Stock(1)				233,201		—	11.4	—
		Preferred Stock Warrants(1)				40,000		—	—	—
									33.1	11.0
European Capital Limited(2)(3)	Diversified Financial Services	Senior Debt	9.8	%	2/11			338.2	335.0	338.2
		Ordinary Shares				72,305,938			921.9	449.2
									1,256.9	787.4
European Touch, LTD. II	Commercial Services & Supplies	Senior Subordinated Debt	12.0	%	12/09			3.0	3.0	3.0
		Senior Subordinated Debt(6)	18.1	%	12/10			19.5	15.6	4.9
		Redeemable Preferred Stock(1)				263			0.3	—
		Common Stock(1)				1,688			0.9	—
		Common Stock Warrants(1)				7,105			3.7	—
									23.5	7.9
EXPL Pipeline Holdings LLC	Oil, Gas & Consumable Fuels	Senior Debt	8.8	%	1/17			42.2	41.8	42.2
		Common Membership Units(1)				58,297			44.6	32.8
									86.4	75.0
Fosbel Global Services (LUXCO) S.C.A(3)	Commercial Services & Supplies	Subordinated Debt(7)	15.4	%	12/13-12/14			37.3	37.0	37.3
		Redeemable Preferred Stock(1)				18,449,456			18.9	10.5
		Convertible Preferred Stock(1)				1,519,368			3.0	—
		Common Stock(1)				108,526			0.2	—
									59.1	47.8
Fountainhead Estate Holding Corp.(3)	Internet Software & Services	Senior Debt	6.2	%	10/13			24.5	24.5	24.5
		Redeemable Preferred Stock(1)				115,538			11.6	11.6
		Convertible Preferred Stock(1)				59,250			59.3	2.6
									95.4	38.7
FreeConferenceroom.com, Inc.	Diversified Telecommunication Services	Senior Debt(7)	8.9	%	4/11-5/11			15.4	15.2	15.4
		Subordinated Debt	15.0	%	5/12			10.0	9.9	10.0
		Redeemable Preferred Stock(1)				14,042,095			12.8	4.5
		Common Stock(1)				6,088,229			2.3	—
		Common Stock Warrants(1)				8,181,695			—	—
									40.2	29.9
Future Food, Inc.	Food Products	Senior Debt	7.5	%	7/10			16.8	16.7	16.8
		Senior Subordinated Debt(6)	12.4	%	7/11-7/12			13.5	12.6	3.8
		Common Stock(1)				64,917			12.9	—
		Common Stock Warrants(1)				6,500			1.3	—
									43.5	20.6
FutureLogic, Inc.	Computers & Peripherals	Senior Debt(7)	10.2	%	2/10-2/12			49.1	48.8	49.2
		Subordinated Debt(7)	15.0	%	2/13			32.4	32.1	32.4
		Common Stock(1)				129,514			15.6	20.6
									96.5	102.2

18

AMERICAN CAPITAL, LTD.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

September 30, 2008

(unaudited)

(in millions, except share data)

Company (4)	Industry	Investments	Interest Rate (5)		Maturity Date	# of shares/ units owned		Principal	Cost	Fair Value
FV Holdings Corporation	Food Products	Subordinated Debt(7)	14.5	%	6/15			22.9	22.9	22.9
		Convertible Preferred Stock(1)				292			14.3	26.1
		Common Stock(1)				125			6.1	11.2
									43.3	60.2
Group Montana, Inc.	Textiles, Apparel & Luxury Goods	Senior Debt(7)	14.5	%	10/10-10/11			20.3	20.1	20.1
		Subordinated Debt(6)	25.0	%	10/12			17.5	13.7	2.3
		Convertible Preferred Stock(1)				1,041			1.0	—
		Common Membership Interest(1)				2.5	%		0.7	—
									35.5	22.4
Halex Holdings Corp.	Construction Materials	Senior Debt(6)	15.6	%	9/11-10/13			24.1	23.4	8.2
		Subordinated Debt(6)	18.8	%	8/15			23.2	15.9	—
		Redeemable Preferred Stock(1)				21,464,046			28.5	—
		Common Stock(1)				30,263,219			—	—
		Common Stock Warrants(1)				18,750,000			—	—
									67.8	8.2
Hartstrings Holdings Corp.	Textiles, Apparel & Luxury Goods	Senior Debt	7.5	%	12/10			14.2	14.2	14.2
		Senior Debt(6)	10.5	%	12/10			3.1	2.9	1.5
		Convertible Preferred Stock(1)				10,196			3.0	—
		Common Stock(1)				14,250			4.8	—
									24.9	15.7
Imperial Supplies Holdings, Inc	Trading Companies and Distributors	Subordinated Debt	16.0	%	10/14			21.9	21.6	21.6
		Redeemable Preferred Stock				19,604			14.3	21.2
		Convertible Preferred Stock				19,604			21.4	21.4
		Common Stock(1)				442,187			11.4	1.9
									68.7	66.1
Kingway Inca Clymer Holdings, Inc.	Building Products	Subordinated Debt(6)	12.3	%	4/12			1.7	—	—
		Redeemable Preferred Stock(1)				13,709			9.2	0.7
									9.2	0.7
Lifoam Holdings, Inc.	Leisure Equipment & Products	Senior Debt	9.6	%	6/13			21.0	21.0	21.0
		Subordinated Debt	8.7	%	6/13			18.0	17.9	17.9
		Subordinated Debt(6)	8.3	%	6/13			18.0	16.0	2.2
		Redeemable Preferred Stock(1)				6,160			4.2	—
		Convertible Preferred Stock(1)				15,797			12.2	—
		Common Stock(1)				14,000			1.4	—
		Common Stock Warrants(1)				992,456			2.9	—
									75.6	41.1
LLSC Holdings Corporation	Personal Products	Senior Debt(7)	8.3	%	8/12			5.6	5.6	5.6
		Subordinated Debt(7)	12.0	%	8/13			5.5	5.5	5.5
		Convertible Preferred Stock(1)				7,496			8.1	5.4
		Common Stock(1)				833			—	—
		Common Stock Warrants(1)				675			—	—
									19.2	16.5
LVI Holdings, LLC	Commercial Services & Supplies	Senior Debt(7)	9.5	%	2/10			1.9	1.9	1.9
		Subordinated Debt(7)	18.0	%	2/13			11.2	11.1	11.1
									13.0	13.0
Montgomery Lane, LLC	Diversified Financial Services	Common Membership Units(1)				100			10.7	6.7
Montgomery Lane, LTD(3)	Diversified Financial Services	Common Membership Units(1)				50,000			7.3	0.9

19

AMERICAN CAPITAL, LTD.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

September 30, 2008

(unaudited)

(in millions, except share data)

Company (4)	Industry	Investments	Interest Rate (5)		Maturity Date	# of shares/ units owned	Principal	Cost	Fair Value
MW Acquisition Corporation	Health Care Providers & Services	Senior Subordinated Debt(7)	13.5	%	2/13-2/14		24.9	24.6	24.9
		Convertible Preferred Stock				38,016		15.5	21.1
		Common Stock(1)				51,521		—	7.7
								40.1	53.7
NECCO Holdings, Inc.	Food Products	Senior Debt	7.0	%	12/12		9.0	8.9	9.0
		Common Stock(1)				760,869		0.1	1.2
								9.0	10.2
NECCO Realty Investments, LLC	Real Estate	Senior Debt(7)	14.0	%	12/17		37.1	36.4	37.1
		Common Membership Units(1)				7,000		4.9	13.7
								41.3	50.8
Oceana Media Finance, LLC	Commercial Banks	Common Membership Units(1)				145,742		14.6	12.0
Paradigm Precision Holdings, LLC	Aerospace & Defense	Senior Debt	7.0	%	11/08		20.0	19.8	19.8
		Subordinated Debt	18.0	%	10/13-10/14		90.9	90.0	90.0
		Common Membership Units(1)				478,488		17.5	6.1
								127.3	115.9
PHC Sharp Holdings, Inc.	Commercial Services & Supplies	Senior Debt(7)	8.4	%	12/11/-12/12		15.2	15.0	15.2
		Subordinated Debt	17.0	%	12/14		8.0	7.9	7.4
		Subordinated Debt(6)	19.0	%	12/14		8.1	7.4	4.1
		Common Stock(1)				367,881		4.2	—
								34.5	26.7
PHI Acquisitions, Inc.	Internet & Catalog Retail	Senior Debt(7)	9.5	%	6/12		10.0	9.9	10.0
		Subordinated Debt(7)	13.2	%	6/13		23.5	23.3	23.5
		Redeemable Preferred Stock(1)				36,267		24.7	22.8
		Common Stock(1)				40,295		3.9	—
		Common Stock Warrants(1)				116,065		11.6	—
								73.4	56.3
Piper Aircraft, Inc.	Aerospace & Defense	Subordinated Debt	8.0	%	7/13		0.7	0.2	0.7
		Common Stock(1)				478,797		0.1	29.2
								0.3	29.9
Precitech Holdings, Inc.	Machinery	Subordinated Debt(6)	17.0	%	12/12		8.4	2.7	0.8
Resort Funding Holdings, Inc.	Diversified Financial Services	Senior Debt	10.5	%	4/10		10.6	10.6	10.6
		Common Stock				583		20.5	6.6
								31.1	17.2
Sixnet, LLC	Electronic Equipment & Instruments	Senior Debt(7)	10.4	%	6/12-6-13		37.5	37.2	38.6
		Membership Units(1)				356		4.5	9.6
								41.7	48.2
SMG Holdings, Inc.	Hotels, Restaurants & Leisure	Senior Debt(7)	6.9	%	7/14		5.9	5.9	5.9
		Subordinated Debt(7)	12.5	%	6/15		118.2	117.2	118.2
		Convertible Preferred Stock				1,101,673		119.6	101.0
		Common Stock(1)				275,419		27.6	—
								270.3	225.1
Specialty Brands of America, Inc.	Food Products	Subordinated Debt(7)	14.0	%	5/14		33.9	33.6	33.9
		Redeemable Preferred Stock				122,017		7.9	13.6
		Common Stock(1)				128,175		2.3	7.1
		Common Stock Warrants(1)				56,819		1.4	3.1
								45.2	57.7
SPL Acquisition Corp.	Pharmaceuticals	Senior Debt	9.1	%	10/12-10/13		79.6	78.7	79.6
		Senior Subordinated Debt(7)	15.3	%	8/14-8/15		49.5	48.9	49.5
		Convertible Preferred Stock				84,043		46.9	46.9
		Common Stock(1)				84,043		—	10.5
								174.5	186.5

20

AMERICAN CAPITAL, LTD.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

September 30, 2008

(unaudited)

(in millions, except share data)

Company (4)	Industry	Investments	Interest Rate (5)		Maturity Date	# of shares/ units owned		Principal	Cost		Fair Value
Stravina Holdings, Inc.	Personal Products	Senior Debt(6)	6.0	%	4/11			3.5		3.5		—
Sunfuel Midstream, LLC	Oil, Gas & Consumable Fuels	Common Membership Units(1)				300,000				0.3		-
UFG Holding Corp.	Food Products	Subordinated Debt	15.0	%	5/15-5/16			56.4		55.8		56.4
		Redeemable Preferred Stock(1)				20,602				12.6		—
		Convertible Preferred Stock(1)				4,777				4.6		6.7
		Common Stock(1)				51,504				13.2		—
										86.2		63.1
UFG Real Estate Holdings, LLC	Real Estate	Common Membership(1)								—		1.4
Unique Fabricating Incorporated	Auto Components	Senior Debt(7)	12.6	%	2/10-2/12			4.8		4.7		4.5
		Senior Subordinated Debt(7)	16.5	%	2/13			5.9		5.9		5.9
		Junior Subordinated Debt(6)(7)	18.5	%	2/13			1.8		1.4		0.9
		Redeemable Preferred Stock(1)				292,958				1.6		0.3
		Common Stock Warrants(1)				6,862				0.2		—
										13.8		11.6
Unwired Holdings, Inc.	Household Durables	Senior Debt	7.2	%	6/13			1.0		0.9		0.9
		Senior Debt(6)	10.7	%	6/11			10.1		7.5		8.8
		Subordinated Debt(6)	14.5	%	6/12			20.7		14.1		—
		Redeemable Preferred Stock(1)				12,740				12.7		—
		Preferred Stock Warrants(1)				39,690				—		—
		Common Stock(1)				126,001				1.3		—
		Common Stock Warrants(1)				439,205				—		—
										36.5		9.7
VECAP Medical, LLC	Health Care Equipment & Supplies	Subordinated Debt(7)	15.3	%	10/13-12/14			32.3		31.9		32.3
		Common Membership Units(1)				52,373				35.8		80.9
										67.7		113.2
Warner Power, LLC	Electrical Equipment	Subordinated Debt(7)	12.6	%	10/09			5.0		5.0		5.0
		Redeemable Preferred Membership Units				3,796,269				4.6		5.4
		Common Membership Units(1)				27,629				1.9		5.5
										11.5		15.9
WIS Holding Company, Inc.	Commercial Services & Supplies	Subordinated Debt(7)	14.8	%	1/14-1/15			102.6		101.7		102.6
		Convertible Preferred Stock				703,406				80.7		131.0
		Common Stock(1)				175,852				17.6		30.2
										200.0		263.8
WSACS RR Holdings LLC	Real Estate	Common Membership Units(1)				2,585,558				2.6		2.6
CDO / CLO INVESTMENTS
ACAS Wachovia Investments, L.P.	Diversified Financial Services	Partnership Interest				90	%			11.3		3.1
Subtotal Control Investments (40% of total investment assets and liabilities at fair value)									$	4,365.0	$	3,611.4

21

AMERICAN CAPITAL, LTD.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

September 30, 2008

(unaudited)

(in millions, except share data)

Counterparty (4)	Instrument	Interest Rate (5)		Expiring (5)	# of Contracts	Notional	Cost		Fair Value
DERIVATIVE AGREEMENTS
Wachovia Bank, N.A.	Interest Rate Swap – Pay Fixed/ Receive Floating	5.1	%	8/19	1	44.5		—		0.1
Citibank, N.A.	Interest Rate Swaption – Pay Floating/ Receive Fixed	4.6	%	4/12	1	40.0		—		1.1
BMO Financial Group	Interest Rate Swaption – Pay Floating/ Receive Fixed	5.5	%	11/12	1	22.9		—		0.5
Subtotal Derivative Agreements (less than 1% of total investment assets and liabilities at fair value)								—		1.7
Total Investment Assets							$	10,793.9	$	9,096.5
DERIVATIVE AGREEMENTS
Citibank, N.A.	Interest Rate Swap – Pay Fixed/ Receive Floating	4.8	%	4/12-11/19	5	709.4		—		(24.7	)
BMO Financial Group	Interest Rate Swap – Pay Fixed/ Receive Floating	5.4	%	2/13-8/17	5	479.9		—		(27.3	)
Wachovia Bank, N.A.	Interest Rate Swap – Pay Fixed/ Receive Floating	4.8	%	4/16-8/19	3	416.8		—		(16.2	)
UniCredit Group	Interest Rate Swap – Pay Fixed/ Receive Floating	5.7	%	7/17	1	66.0		—		(5.8	)
WestLB AG	Interest Rate Swap – Pay Fixed/ Receive Floating	5.8	%	6/17	1	55.0		—		(5.8	)
Credit Suisse International	Interest Rate Swap – Pay Fixed/ Receive Floating	5.8	%	6/17	1	26.1		0.7		(2.8	)
Fortis Financial Services LLC	Interest Rate Swap – Pay Fixed/ Receive Floating	5.7	%	7/17	1	22.3		—		(2.3	)
Citibank, N.A.	Foreign Exchange Swap – Pay Euros/ Receive GBP			2/11	1			—		(0.6	)
Total Investment Liabilities (less than 1% of total investment assets and liabilities at fair value)							$	0.7	$	(85.5	)

(1) Non-income producing.

(2) Publicly traded company or a consolidated subsidiary of a public company.

(3) International investment.

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

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

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

(7) All or a portion of the securities are pledged as collateral under various secured financing arrangements.

(8) Stated net of loan obligations with the counterparty.

(9) Securities are subject to an underwriters’ lock-up agreement and are restricted for sale until May 2009.

22

AMERICAN CAPITAL, LTD.

CONSOLIDATED SCHEDULE OF INVESTMENTS

December 31, 2007

(in millions, except share data)

Company (4)	Industry	Investments	Interest Rate (5)	Maturity Date (5)	# of shares/ units owned	Principal/ Notional		Cost		Fair Value
NON-CONTROL/NON-AFFILIATE INVESTMENTS
Aerus, LLC	Household Durables	Common Membership Warrants(1)			250,000			$	0.2	$	—
Affordable Care Holding Corp.	Health Care Providers & Services	Subordinated Debt(7)	15.0%	11/13-11/14		$	52.8		52.1		52.1
		Convertible Preferred Stock			70,752				77.4		92.4
		Common Stock(1)			17,687,156				17.7		23.1
									147.2		167.6
Algoma Holding Company	Building Products	Subordinated Debt(7)	13.8%	4/13			13.0		12.9		12.9
		Convertible Preferred Stock(1)			23,319				—		7.8
									12.9		20.7
American Acquisition, LLC	Diversified Financial Services	Senior Debt	14.7%	12/13			13.0		12.5		12.5
AmWins Group, Inc.	Insurance	Senior Debt(7)	11.1%	6/14			18.6		18.6		18.6
Aspect Software	IT Services	Senior Debt	12.3%	7/12			20.0		19.8		19.8
Astrodyne Corporation	Electrical Equipment	Senior Debt(7)	13.2%	4/11			6.5		6.4		6.4
		Subordinated Debt(7)	12.0%	4/12			11.0		10.9		10.9
		Redeemable Preferred Stock(1)			1				—		—
		Convertible Preferred Stock			322,208				6.8		11.3
									24.1		28.6
Avanti Park Place LLC	Real Estate	Senior Debt	8.3%	6/10			6.3		6.3		6.3
Axygen Holdings Corporation	Health Care Equipment & Supplies	Subordinated Debt(7)	14.5%	9/14			60.0		59.2		59.2
		Redeemable Preferred Stock			205,204				40.5		40.5
		Convertible Preferred Stock			48,736				13.5		13.5
		Common Stock(1)			2,566				0.3		0.4
		Common Stock Warrants(1)			205,204				19.1		47.7
									132.6		161.3
Barton-Cotton Holding Corporation	Commercial Services & Supplies	Subordinated Debt(7)	14.0%	9/14			29.6		29.2		29.2
		Redeemable Preferred Stock(1)			28,263				15.7		19.8
		Convertible Preferred Stock(1)			67,158				6.7		—
		Common Stock Warrants(1)			125,610				12.6		3.5
									64.2		52.5
BBB Industries, LLC	Auto Components	Senior Debt(7)	10.8%	6/14			21.2		21.2		21.2
Belloto Holdings Limited(3)	Household Durables	Subordinated Debt	15.1%	6/17			3.8		3.7		3.7
		PIK Note(1)	15.0%	12/17					9.0		9.1
		Ordinary Shares(1)			32,434				0.1		0.1
									12.8		12.9
Berry-Hill Galleries, Inc.	Distributors	Senior Debt(7)	8.1%	9/08-3/12			37.2		36.9		36.9
		Common Stock Warrants(1)							0.1		0.1
									37.0		37.0
BLI Partners, LLC	Personal Products	Common Membership Interest(1)							17.3		2.3
BSW Investors II, LLC	Real Estate	Senior Debt(7)	7.3%	8/28			2.0		2.0		2.0
Butler Animal Health Supply, LLC	Health Care Providers & Services	Senior Debt(7)	11.4%	7/12			8.0		8.0		8.0
CAMP Systems International, Inc.	Transportation Infrastructure	Senior Debt(7)	10.6%	9/14			30.0		29.7		29.7
Carestream Health, Inc.	Health Care Equipment & Supplies	Senior Debt(7)	10.3%	10/13			15.0		15.0		15.0

23

AMERICAN CAPITAL, LTD.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

December 31, 2007

(in millions, except share data)

Company (4)	Industry	Investments	Interest Rate (5)	Maturity Date (5)	# of shares/ units owned	Principal/ Notional	Cost	Fair Value
CH Holding Corp.	Leisure Equipment & Products	Senior Debt(6)	12.0%	5/11		13.1	13.0	3.5
		Redeemable Preferred Stock(1)			21,215		42.7	—
		Convertible Preferred Stock(1)			665,000		—	—
		Common Stock(1)			1		—	—
							55.7	3.5
CIBT Global Inc.	Commercial Services & Supplies	Senior Debt(7)	11.0%	5/11-6/12		108.0	106.8	106.8
Cinelease, Inc.	Electronic Equipment & Instruments	Senior Debt(7)	10.6%	12/08-3/13		60.6	60.0	60.0
		Common Stock(1)			583		0.6	0.6
							60.6	60.6
CMX Inc.	Construction & Engineering	Senior Debt(7)	10.4%	5/11-5/12		146.1	144.6	144.6
		Common Stock(1)			35,000		0.1	0.1
							144.7	144.7
Compusearch Holdings Company, Inc.	Software	Subordinated Debt(7)	12.0%	6/12		12.6	12.4	12.4
		Convertible Preferred Stock(1)			23,342		0.9	0.9
							13.3	13.3
Consolidated Bedding, Inc.	Household Durables	Senior Debt(7)	11.5%	6/13		95.0	94.9	94.9
		Senior Debt(7)(6)	12.4%	6/13		27.8	26.7	10.2
		Subordinated Debt(6)	14.0%	12/13		30.5	28.1	—
		Common Stock Warrants(1)			154,127		—	—
							149.7	105.1
Contec Holdings Ltd.	Household Durables	Subordinated Debt(7)	14.0%	6/13-6/14		86.7	85.6	85.6
		Convertible Preferred Stock			76,952		86.6	130.9
		Common Stock(1)			19,237,842		19.2	32.7
							191.4	249.2
Corrpro Companies, Inc.	Construction & Engineering	Subordinated Debt(7)	12.5%	3/11		14.0	12.1	12.1
		Redeemable Preferred Stock			1,165,930		1.4	1.4
		Common Stock Warrants(1)			5,022,576		3.5	8.2
							17.0	21.7
CyrusOne Networks, LLC	IT Services	Senior Debt(7)	12.4%	1/14		15.1	14.9	14.9
DelStar, Inc.	Building Products	Subordinated Debt(7)	14.0%	12/12		18.4	18.1	18.1
		Redeemable Preferred Stock			26,613		14.3	14.3
		Convertible Preferred Stock			29,569		3.2	3.5
		Common Stock Warrants(1)			89,020		16.9	28.4
							52.5	64.3
Direct Marketing International LLC	Media	Subordinated Debt(7)	14.2%	7/12		28.5	28.2	28.2
Dyno Holding Corp.	Auto Components	Senior Debt	9.2%	11/13		45.5	45.0	45.0
		Subordinated Debt	16.0%	11/14		26.6	26.3	26.3
		Convertible Preferred Stock			389,759		40.7	40.7
		Common Stock(1)			97,440		10.1	10.1
							122.1	122.1
Easton Bell Sports LLC	Leisure Equipment & Products	Common Units(1)			2,049,204		0.7	4.2
Edline, LLC	Software	Subordinated Debt(7)	14.0%	7/13		17.8	13.6	13.6
		Membership Warrants(1)			6,447,500		6.0	13.3
							19.6	26.9
FAMS Acquisition, Inc.	Diversified Financial Services	Subordinated Debt(7)	14.8%	11/13-11/14		25.5	25.2	25.2
		Convertible Preferred Stock(1)			861,364		20.9	20.2
							46.1	45.4

24

AMERICAN CAPITAL, LTD.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

December 31, 2007

(in millions, except share data)

Company (4)	Industry	Investments	Interest Rate (5)	Maturity Date (5)	# of shares/ units owned	Principal/ Notional	Cost	Fair Value
FCC Holdings, LLC	Commercial Banks	Subordinated Debt(7)	19.9%	12/12		75.0	74.3	74.3
Ford Motor Company(2)	Automobiles	Senior Debt		6/11			(5.3)	(10.1)
Formed Fiber Technologies, Inc.	Auto Components	Subordinated Debt(6)	15.0%	8/11		15.9	11.4	2.0
		Common Stock Warrants(1)			122,397		0.1	—
							11.5	2.0
FPI Holding Corporation	Food Products	Senior Debt(7)	8.7%	5/11-5/12		50.0	49.2	49.2
		Subordinated Debt(6)(7)	15.0%	5/13		39.9	36.6	34.0
		Convertible Preferred Stock(1)			21,715		23.3	—
		Common Stock(1)			5,429		5.8	—
							114.9	83.2
French Lick Resorts & Casino Hotels, LLC	Hotels, Restaurants & Leisure	Senior Debt	10.8%	4/14		47.7	40.3	35.8
FU/WD Opa Locka, LLC	Real Estate	Senior Debt	8.0%	9/17-9/24		33.1	31.5	31.5
Golden Key US LLC	Diversified Financial Services	Commercial Paper(1)	5.3%	10/07		7.3	7.3	6.8
HMSC Corporation	Insurance	Senior Debt(7)	10.7%	10/14		3.5	3.5	3.5
HomeAway, Inc.	Diversified Consumer Services	Senior Debt(7)	10.9%	12/12		98.4	97.3	97.3
		Redeemable Preferred Stock			384,297		0.7	0.7
		Convertible Preferred Stock			1,923,786		10.4	16.7
		Common Stock(1)			384,297		0.8	3.3
							109.2	118.0
Hopkins Manufacturing Corporation	Auto Components	Subordinated Debt(7)	16.1%	7/12		34.6	34.3	34.3
		Redeemable Preferred Stock			2,915		5.1	5.1
							39.4	39.4
III Exploration II, LP	Oil, Gas & Consumable Fuels	Senior Debt	11.5%	4/14		20.0	20.0	20.0
Infiltrator Systems, Inc.	Building Products	Senior Debt(7)	12.2%	10/13		52.2	51.5	51.5
Innova Holdings, Inc.	Energy Equipment & Services	Senior Debt(7)	12.7%	3/13		11.5	11.3	11.3
		Subordinated Debt(7)	15.0%	3/14		17.3	17.1	17.1
		Convertible Preferred Stock			14,283		17.5	29.9
							45.9	58.3
Inovis International, Inc.	Software	Senior Debt(7)	11.7%	5/10		88.0	87.2	87.2
Intergraph Corporation	Software	Senior Debt(7)	11.1%	12/14		3.0	3.0	3.0
iTradeNetwork, Inc.	IT Services	Senior Debt	12.0%	12/13		25.0	24.8	24.8
JHCI Acquisition, Inc.	Commercial Services & Supplies	Senior Debt(7)	10.7%	12/14		19.1	19.1	19.1
Jones Stephens Corp.	Building Products	Subordinated Debt(7)	13.5%	9/13-9/14		22.8	22.5	22.5
J-Pac, LLC	Health Care Equipment & Supplies	Senior Debt(7)	11.7%	1/14		24.8	24.5	24.5
KIK Custom Products, Inc.(3)	Household Products	Senior Debt	9.8%	11/14		22.5	22.5	22.5
LCW Holdings, LLC	Real Estate	Senior Debt	11.7%	10/12		33.2	32.0	32.0
		Warrant(1)			12.5%		0.9	0.9
							32.9	32.9
LJVH Holdings Inc.(3)	Beverages	Senior Debt(7)	10.6%	1/15		28.6	28.6	28.6
LN Acquisition Corp.	Machinery	Senior Debt(7)	10.9%	1/15		21.6	21.6	21.6
Logex Corporation	Road & Rail	Subordinated Debt(6)	12.2%	7/08		12.2	9.4	1.4
LTM Enterprises, Inc.	Personal Products	Senior Debt(7)	13.1%	11/11		19.1	19.1	19.1

25

AMERICAN CAPITAL, LTD.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

December 31, 2007

(in millions, except share data)

Company (4)	Industry	Investments	Interest Rate (5)	Maturity Date (5)	# of shares/ units owned	Principal/ Notional	Cost	Fair Value
MagnaCare Holdings, Inc.	Health Care Providers & Services	Subordinated Debt(7)	14.0%	1/13		14.0	13.9	13.9
Medical Billing Holdings, Inc.	Commercial Services & Supplies	Subordinated Debt(7)	15.0%	9/13		10.4	10.2	10.2
		Convertible Preferred Stock			13,199		14.6	19.6
		Common Stock(1)			3,299,582		3.3	4.5
							28.1	34.3
Mirion Technologies	Electrical Equipment	Senior Debt(7)	10.0%	5/08-11/11		120.2	119.4	121.0
		Subordinated Debt(7)	15.6%	9/09-5/12		48.9	48.5	48.5
		Convertible Preferred Stock			435,724		43.0	49.9
		Common Stock(1)			24,503		2.8	2.7
		Common Stock Warrants(1)			222,156		18.6	40.6
							232.3	262.7
Mitchell International, Inc.	IT Services	Senior Debt(7)	10.1%	3/15		5.0	5.0	5.0
MTS Group, LLC	Textiles, Apparel & Luxury Goods	Senior Debt(7)	11.1%	10/08-10/11		21.0	20.8	20.8
		Subordinated Debt(6)	16.0%	10/12		17.3	14.8	—
		Common Units(1)			558,214		0.7	—
							36.3	20.8
National Processing Company Group, Inc.	Diversified Financial Services	Senior Debt(7)	11.7%	9/14		53.0	52.8	52.8
NBD Holdings Corp.	Diversified Financial Services	Senior Subordinated Debt(7)	14.0%	8/13		44.5	44.0	44.0
		Convertible Preferred Stock(1)			84,174		9.6	9.6
		Common Stock			633,408		0.1	0.1
							53.7	53.7
Net1 Las Colinas Manager, LLC	Real Estate	Senior Debt(7)	7.7%	10/15		5.8	5.8	5.8
Nivel Holdings, LLC	Distributors	Senior Debt(7)	11.1%	10/13		63.5	62.5	62.5
NPC Holdings, Inc.	Building Products	Senior Debt(7)	11.8%	6/12		4.5	4.5	4.5
		Subordinated Debt(7)	15.0%	6/13		8.5	8.4	8.4
		Redeemable Preferred Stock(1)			7,739		5.2	4.8
		Convertible Preferred Stock(1)			7,981		0.8	—
		Preferred Stock Warrants(1)			25,523		2.5	—
		Common Stock(1)			47		—	—
							21.4	17.7
Orchard Brands Corporation	Internet & Catalog Retail	Senior Debt(7)	10.6%	4/13-4/14		289.7	286.6	286.6
		Subordinated Debt	13.6%	4/14		53.4	53.4	53.4
		Common Stock(1)			565,885		—	1.8
							340.0	341.8
Pan Am International Flight Academy, Inc.	Commercial Services & Supplies	Senior Debt(7)	9.2%	4/12-7/12		20.6	20.4	20.4
		Senior Subordinated Debt(7)	16.0%	7/13		26.9	26.6	26.6
		Convertible Preferred Stock(1)			8,234		8.2	12.8
							55.2	59.8
PHC Acquisition, Inc.	Diversified Consumer Services	Subordinated Debt(7)	14.8%	3/12-3/13		26.3	26.0	26.0
		Convertible Preferred Stock(1)			6,556		0.3	0.4
		Common Stock(1)			529,153		23.0	38.8
							49.3	65.2
Phillips & Temro Industries, Inc.	Auto Components	Senior Debt(7)	11.5%	12/10-12/11		23.8	23.7	23.7
		Subordinated Debt(7)	15.0%	12/12		16.9	16.9	16.9
							40.6	40.6
Preferred Development, LLC	Real Estate	Senior Debt(7)	7.8%	12/22		2.6	2.6	2.6

26

AMERICAN CAPITAL, LTD.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

December 31, 2007

(in millions, except share data)

Company (4)	Industry	Investments	Interest Rate (5)	Maturity Date (5)	# of shares/ units owned	Principal/ Notional	Cost	Fair Value
Ranpak Acquisition Company	Containers & Packaging	Senior Debt	10.0%	12/13-12/14		392.3	388.2	391.3
RDR Holdings, Inc.	Household Durables	Subordinated Debt(7)	15.3%	10/14-10/15		179.4	177.7	177.7
		Convertible Preferred Stock			154,142		156.2	156.2
		Common Stock(1)			1,541,415		1.5	1.5
							335.4	335.4
Rhinebridge, LLC	Diversified Financial Services	Commercial Paper(1)	5.3%	10/07		27.8	27.8	24.4
Roarke - Money Mailer, LLC	Media	Common Membership Units(1)			20,404		0.9	2.3
Safemark Acquisitions, Inc.	Commercial Services & Supplies	Senior Debt(7)	11.0%	7/09-6/10		25.6	25.4	25.4
		Subordinated Debt(7)	10.9%	6/11-6/12		13.7	13.5	13.5
		Redeemable Preferred Stock(1)			7,700		4.8	0.8
		Convertible Preferred Stock(1)			2,100		0.2	—
		Preferred Stock Warrants(1)			35,522		3.6	—
							47.5	39.7
Sanda Kan (Cayman I) Holdings Company Limited(3)	Leisure Equipment & Products	Common Stock(1)			67,973		4.6	—
Sanlo Holdings, Inc.	Electrical Equipment	Common Stock Warrants(1)			5,187		0.5	1.0
Scanner Holdings Corporation	Computers & Peripherals	Senior Debt(7)	8.4%	5/13		17.0	16.7	16.7
		Subordinated Debt(7)	14.0%	5/14		20.2	20.0	20.0
		Convertible Preferred Stock			7,764		7.8	7.8
		Common Stock(1)			78,242		0.1	0.1
							44.6	44.6
Securus Technologies, Inc.	Diversified Telecommunication Services	Common Stock(1)			12,281		0.7	—
Seroyal Holdings, L.P.(3)	Health Care Equipment & Supplies	Redeemable Preferred Partnership Units(1)			26,274		0.4	0.5
		Partnership Units(1)			95,280		0.8	1.4
							1.2	1.9
Small Smiles Holding Company, LLC	Health Care Providers & Services	Subordinated Debt(7)	15.0%	9/13-9/14		95.0	93.8	93.8
SSH Acquisition, Inc.	Commercial Services & Supplies	Senior Debt(7)	12.2%	9/12		12.5	12.3	12.3
		Subordinated Debt(7)	14.0%	9/13		19.5	19.3	19.3
		Convertible Preferred Stock			297,896		22.3	67.3
							53.9	98.9
Stein World, LLC	Household Durables	Senior Debt(6)	13.3%	10/11		8.9	8.5	8.5
		Subordinated Debt(6)	19.3%	10/12-10/13		27.4	23.0	—
							31.5	8.5
Summit Global Logistics, Inc(2)	Road & Rail	Common Stock(1)			73,290		1.0	0.2
		Common Stock Warrants(1)			19,800		—	—
							1.0	0.2
Supreme Corq Holdings, LLC	Household Products	Common Membership Warrants(1)			5,670		0.4	—
Swank Audio Visuals, L.L.C.	Commercial Services & Supplies	Senior Debt	12.2%	8/14		48.5	48.0	48.0

27

AMERICAN CAPITAL, LTD.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

December 31, 2007

(in millions, except share data)

Company (4)	Industry	Investments	Interest Rate (5)	Maturity Date (5)	# of shares/ units owned	Principal/ Notional	Cost	Fair Value
Tanenbaum-Harber Co. Holdings, Inc.	Insurance	Redeemable Preferred Stock			376		0.4	0.4
		Common Stock(1)			3,861		—	—
							0.4	0.4
Technical Concepts Holdings, LLC	Building Products	Common Membership Warrants(1)			792,149		1.7	8.1
The Tensar Corporation	Construction & Engineering	Senior Debt(7)	12.1%	4/13		82.0	81.0	81.0
		Subordinated Debt	17.5%	10/13		37.0	36.6	36.6
							117.6	117.6
TestAmerica Environmental Services, LLC	Commercial Services & Supplies	Senior Debt(7)	11.4%	12/11-12/13		26.7	26.1	26.1
		Subordinated Debt(7)	14.0%	12/14		40.8	40.3	40.3
		Preferred Unit			11,659,298		7.8	7.8
		Preferred Unit Warrants(1)			1,998,961		4.8	4.8
							79.0	79.0
ThreeSixty Sourcing, Inc.(3)	Commercial Services & Supplies	Senior Debt	13.2%	9/08		5.0	5.0	5.0
		Common Stock Warrants(1)			35		4.1	0.3
							9.1	5.3
TransFirst Holdings, Inc.	Commercial Services & Supplies	Senior Debt(7)	10.8%	6/15		50.0	49.5	49.5
triVIN, Inc.	Commercial Services & Supplies	Subordinated Debt(7)	15.0%	6/14-6/15		19.3	19.1	19.1
		Convertible Preferred Stock			24,700		25.9	30.3
		Common Stock(1)			6,319,923		6.3	7.2
							51.3	56.6
Tyden Caymen Holdings Corp.	Electronic Equipment & Instruments	Senior Debt(7)	12.7%	11/11		12.0	11.9	11.9
		Subordinated Debt(7)	13.8%	5/12		14.5	14.3	14.3
		Common Stock(1)			1,165,930		1.2	2.5
							27.4	28.7
UFG Holding Corp.	Food Products	Subordinated Debt(7)	15.0%	5/15-5/16		54.6	53.9	53.9
		Redeemable Preferred Stock(1)			20,602		12.6	4.0
		Convertible Preferred Stock(1)			25,752		2.5	—
		Common Stock(1)			25,752		10.6	—
							79.6	57.9
Unique Fabricating Incorporated	Auto Components	Senior Debt(7)	15.3%	2/10-2/12		4.7	4.6	4.6
		Subordinated Debt(7)	17.0%	2/13		7.5	7.4	7.4
		Redeemable Preferred Stock(1)			1,458		1.9	1.9
		Common Stock Warrants(1)			6,862		0.2	0.2
							14.1	14.1
US Express Leasing, Inc.	Diversified Financial Services	Senior Debt	13.2%	7/14		37.6	37.6	37.6
		Common Stock Warrants(1)			20,427		—	—
		Preferred Stock Warrants(1)			35,035		—	—
							37.6	37.6
Velocity Financial Group, Inc.	Diversified Financial Services	Convertible Preferred Stock			11,659,298		20.4	20.4
Venus Swimwear, Inc.	Internet & Catalog Retail	Senior Debt(7)	12.8%	12/12		24.9	24.5	24.5
		Subordinated Debt(6)(7)	20.0%	12/13		20.9	19.6	9.0
							44.1	33.5
VeraSun Energy Corporation(2)	Oil, Gas & Consumable Fuels	Common Stock(1)			2,397,505		27.0	33.0
Visador Holding Corp.	Building Products	Subordinated Debt(6)	15.0%	2/10		11.0	9.5	7.5
		Common Stock Warrants(1)			4,284		0.5	—
							10.0	7.5

28

AMERICAN CAPITAL, LTD.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

December 31, 2007

(in millions, except share data)

Company (4)	Industry	Investments	Interest Rate (5)	Maturity Date (5)	# of shares/ units owned	Principal/ Notional	Cost	Fair Value
WRH, Inc.	Life Sciences Tools & Services	Senior Debt(7)	10.5%	9/13		4.5	4.4	4.4
		Subordinated Debt(7)	15.0%	7/14		75.0	74.2	74.2
		Convertible Preferred Stock			2,008,575		208.4	243.9
		Common Stock(1)			502,144		49.9	57.8
							336.9	380.3
WWC Acquisitions, Inc.	Commercial Services & Supplies	Senior Debt(7)	11.5%	12/11-12/13		35.0	34.5	34.5
Zencon Holdings Corporation	Internet Software & Services	Senior Debt	10.8%	5/13		19.5	19.3	19.3
		Subordinated Debt	15.3%	5/14		20.4	20.2	20.2
		Convertible Preferred Stock			5,246,686		9.5	9.5
							49.0	49.0
ZSF/WD Fitzgerald, LLC	Real Estate	Senior Debt(7)	8.2%	9/24		1.1	1.0	1.0
ZSF/WD Hammond, LLC	Real Estate	Senior Debt(7)	8.0%	9/17-9/24		41.5	39.5	39.5
ZSF/WD Jacksonville, LLC	Real Estate	Senior Debt	8.0%	9/17-9/24		20.7	19.6	19.6
ZSF/WD Montgomery-31, LLC	Real Estate	Senior Debt	8.0%	9/17-9/24		34.4	32.8	32.8
ZSF/WD Opa Locka, LLC	Real Estate	Senior Debt	8.2%	9/24		0.4	0.3	0.3
ZSF/WD Orlando, LLC	Real Estate	Senior Debt	8.0%	9/17-9/24		21.0	19.9	19.9
CMBS AND REAL ESTATE CDO INVESTMENTS
ACAS CRE CDO 2007-1, Ltd.	Real Estate	Notes Preferred Shares	5.7%	8/07-11/31	417,086,292	345.5	200.5 22.0	153.9 19.4
							222.5	173.3
Citigroup Commercial Mortgage Securities Trust 2007-C6	Real Estate	Commercial Mortgage Pass-Through Certificates	5.4%	7/17		116.3	50.5	32.9
COBALT CMBS Commercial Mortgage Trust 2007-C3	Real Estate	Commercial Mortgage Pass-Through Certificates	5.2%	10/17		11.1	8.3	4.9
Countrywide Commercial Mortgage Trust 2007-MF1	Real Estate	Commercial Mortgage Pass-Through Certificates	6.3%	11/37-11/40		24.0	9.3	9.3
Credit Suisse Commercial Mortgage Trust 2007-C3	Real Estate	Commercial Mortgage Pass-Through Certificates	5.6%	7/17		13.2	10.4	6.4
GE Commercial Mortgage Corporation, Series 2007-C1	Real Estate	Commercial Mortgage Pass-Through Certificates	5.6%	5/17-12/19		37.0	31.0	16.8
GS Mortgage Securities Trust 2006-GG10	Real Estate	Commercial Mortgage Pass-Through Certificates	5.7%	7/17		63.7	51.2	32.2
J.P. Morgan Chase Commercial Mortgage Securities Trust 2007-LDP11	Real Estate	Commercial Mortgage Pass-Through Certificates	5.6%	7/17		142.6	63.0	50.5
ML-CFC Commercial Mortgage Trust 2007-8	Real Estate	Commercial Mortgage Pass-Through Certificates	6.2%	8/17		32.8	18.6	18.6
Wachovia Bank Commercial Mortgage Trust, Series 2007-C32	Real Estate	Commercial Mortgage Pass-Through Certificates	5.7%	10/17		131.6	57.9	41.0

29

AMERICAN CAPITAL, LTD.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

December 31, 2007

(in millions, except share data)

Company (4)	Industry	Investments	Interest Rate (5)	Maturity Date (5)	# of shares/ units owned	Principal/ Notional	Cost	Fair Value
Wachovia Bank Commercial Mortgage Trust, Series 2007-C34	Real Estate	Commercial Mortgage Pass-Through Certificates	5.3%	10/17-9/24		96.2	42.0	36.1
CLO INVESTMENTS
ACAS CLO 2007-1, Ltd.	Diversified Financial Services	Secured Notes(7)	9.6%	4/21		8.5	8.5	8.5
		Subordinated Notes				25.9	25.4	21.7
							33.9	30.2
Ares VIII CLO, Ltd.	Diversified Financial Services	Preference Shares			5,000		3.9	4.0
Ares IIIR/IVR CLO Ltd.	Diversified Financial Services	Subordinated Notes				20.0	19.4	18.4
Babson CLO Ltd. 2006-II	Diversified Financial Services	Income Notes				15.0	14.8	13.8
BALLYROCK CLO 2006-2 LTD.	Diversified Financial Services	Deferrable Notes				2.5	2.1	2.1
Cent CDO 12 Limited	Diversified Financial Services	Income Notes				26.4	24.6	23.9
Centurion CDO 8 Limited	Diversified Financial Services	Subordinated Notes				5.0	3.4	4.0
CoLTs 2005-1 Ltd.(3)	Diversified Financial Services	Preference Shares			360		6.7	4.1
CoLTs 2005-2 Ltd.(3)	Diversified Financial Services	Preference Shares			34,170,000		30.8	19.5
Eaton Vance CDO X PLC(3)	Diversified Financial Services	Secured Subordinated Income Notes				30.0	13.5	12.0
Flagship CLO V	Diversified Financial Services	Deferrable Notes				1.7	1.3	1.3
		Subordinated Securities			15,000		14.3	13.9
							15.6	15.2
Galaxy III CLO, Ltd	Diversified Financial Services	Subordinated Notes				4.0	2.6	2.9
LightPoint CLO IV, LTD	Diversified Financial Services	Income Notes				6.7	6.2	6.0
LightPoint CLO VIII, Ltd.	Diversified Financial Services	Deferrable Notes				7.0	6.6	6.6
LightPoint CLO VII, Ltd.	Diversified Financial Services	Subordinated Notes				90.0	8.5	8.8
Mayport CLO Ltd.	Diversified Financial Services	Income Notes				14.0	13.5	11.5
NYLIM Flatiron CLO 2006-1 LTD.(3)	Diversified Financial Services	Subordinated Securities			10,000		9.8	8.8
Sapphire Valley CDO I, Ltd.	Diversified Financial Services	Subordinated Notes				14.0	13.8	12.2
Vitesse CLO, Ltd.	Diversified Financial Services	Preferred Securities			15,000,000		14.2	12.9
CDO INVESTMENTS
ZAIS Investment Grade Limited IX	Diversified Financial Services	Subordinated Notes				14.5	12.9	9.0
Subtotal Non-Control/Non-Affiliate Investments (58% of total investment assets and liabilities at fair value)							6,467.2	6,351.5

30

AMERICAN CAPITAL, LTD.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

December 31, 2007

(in millions, except share data)

Company (4)	Industry	Investments	Interest Rate (5)	Maturity Date (5)	# of shares/ units owned	Principal/ Notional	Cost	Fair Value
AFFILIATE INVESTMENTS
Aptara, Inc.	IT Services	Subordinated Debt(7)	17.2%	8/09		52.7	52.3	52.3
		Redeemable Preferred Stock			13,942		14.2	14.2
		Convertible Preferred Stock(1)			2,549,410		8.8	12.9
		Preferred Stock Warrants(1)			172,382		0.9	0.9
							76.2	80.3
CCRD Operating Company, Inc.	Diversified Consumer Services	Senior Debt(7)	11.0%	6/13		142.3	141.3	141.3
		Subordinated Debt	15.0%	6/14		12.0	11.8	11.8
		Common Stock(1)			729,763		1.6	8.6
							154.7	161.7
Coghead, Inc.	Internet Software & Services	Convertible Preferred Stock(1)			5,489,656		2.6	2.6
Egenera, Inc.	Computers & Peripherals	Convertible Preferred Stock			8,046,865		25.0	25.0
HALT Medical, Inc.	Health Care Equipment & Supplies	Convertible Preferred Stock(1)			3,231,417		5.2	5.2
IS Holdings I, Inc.	Software	Senior Debt(7)	11.4%	6/14		20.0	19.8	19.8
		Redeemable Preferred Stock			2,309		2.6	2.6
		Common Stock(1)			1,165,930		—	3.0
							22.4	25.4
Marcal Paper Mills. Inc.	Household Products	Common Stock(1)			146,478		—	—
		Common Stock Warrants(1)			209,255		—	—
							—	—
Narus, Inc.	Internet Software & Services	Convertible Preferred Stock(1)			12,563,900		7.3	7.3
Nursery Supplies, Inc.	Containers & Packaging	Redeemable Preferred Stock			2,116		—	—
		Common Stock Warrants			625		—	—
							—	—
Qualitor Component Holdings, LLC	Auto Components	Subordinated Debt(7)	17.0%	12/12		32.5	32.2	32.2
		Redeemable Preferred Stock(1)			3,150,000		3.2	0.7
		Common Units(1)			350,000		0.3	—
							35.7	32.9
Radar Detection Holdings Corp.	Household Durables	Senior Debt(7)	12.1%	11/12		13.0	13.0	13.0
		Common Stock(1)			40,688		0.6	8.4
							13.6	21.4
Reef Point Systems, Inc.	Communications Equipment	Convertible Preferred Stock(1)			85,632,687		11.7	8.6
Roadrunner Dawes, Inc.	Road & Rail	Subordinated Debt(7)	16.0%	9/12		18.6	18.4	18.4
		Common Stock(1)			7,000		7.0	1.5
							25.4	19.9
Tymphany Corporation	Electronic Equipment & Instruments	Subordinated Debt	8.0%	7/10		1.2	1.2	1.2
		Convertible Preferred Stock(1)			6,306,065		10.1	0.6
							11.3	1.8
WFS Holding, Inc.	Software	Convertible Preferred Stock			20,403,772		2.6	3.6
Subtotal Affiliate Investments (3% of total investment assets and liabilities at fair value)							393.7	395.7

31

AMERICAN CAPITAL, LTD.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

December 31, 2007

(in millions, except share data)

Company (4)	Industry	Investments	Interest Rate (5)	Maturity Date (5)	# of shares/ units owned	Principal/ Notional	Cost	Fair Value
CONTROL INVESTMENTS
ACAS Equity Holdings Corp.	Diversified Financial Services	Common Stock(1)			707		14.6	12.9
ACSAB, LLC	Oil, Gas & Consumable Fuels	Convertible Preferred Membership Units			30,329		—	0.6
Aeriform Corporation	Chemicals	Subordinated Debt(1)	9.3%	5/09		7.2	6.2	3.4
American Capital, LLC	Capital Markets	Senior Debt	9.8%	9/12		10.6	10.4	10.4
		Common Membership interest			100%		58.5	466.5
							68.9	476.9
American Driveline Systems, Inc.	Diversified Consumer Services	Subordinated Debt(7)	14.0%	12/14-12/15		41.1	40.5	40.5
		Redeemable Preferred Stock			403,357		25.0	25.0
		Common Stock(1)			128,681		10.8	8.2
		Common Stock Warrants(1)			204,663		17.3	28.0
							93.6	101.7
Auxi Health, Inc.	Health Care Providers & Services	Subordinated Debt(6)	14.0%	3/09		9.9	4.4	2.0
BPWest, Inc.	Energy Equipment & Services	Subordinated Debt(7)	15.0%	7/12		8.5	8.4	8.4
		Redeemable Preferred Stock			5,167		5.9	6.3
		Common Stock(1)			516,643		—	70.7
							14.3	85.4
Capital.com, Inc.	Diversified Financial Services	Common Stock(1)			8,500,100		1.5	0.4
Core Business Credit, LLC	Diversified Financial Services	Common Units(1)			33,313		3.4	3.4
		Convertible Preferred Units(1)			133,250		13.3	13.3
							16.7	16.7
Credit Opportunities Fund I, LLC	Diversified Financial Services	Common Membership Interest			100%		41.9	41.9
DanChem Technologies, Inc.	Chemicals	Senior Debt	11.3%	12/10		14.9	14.9	14.9
		Redeemable Preferred Stock(1)			9,067		7.6	4.5
		Common Stock(1)			299,403		1.8	—
		Common Stock Warrants(1)			401,622		2.2	—
							26.5	19.4
ECA Acquisition Holdings, Inc.	Health Care Equipment & Supplies	Subordinated Debt(7)	16.5%	12/14		12.5	12.4	12.4
		Common Stock(1)			583		11.1	17.6
							23.5	30.0
eLynx Holdings, Inc.	IT Services	Senior Debt(7)	12.7%	12/09-9/12		18.4	18.3	18.3
		Subordinated Debt(6)	17.8%	12/11-12/12		10.0	8.9	1.9
		Redeemable Preferred Stock(1)			21,114		8.9	—
		Common Stock(1)			11,261		1.1	—
		Common Stock Warrants(1)			131,280		13.1	—
							50.3	20.2
Endeavor Fund I, LP	Thrifts & Mortgage Finance	Common Membership Interest			100%		28.8	29.1
ETG Holdings, Inc.	Containers & Packaging	Senior Debt(6)	13.2%	5/11		11.1	9.8	8.6
		Subordinated Debt(6)	16.8%	5/12-5/13		13.6	10.9	—
		Convertible Preferred Stock(1)			233,201		11.4	—
		Preferred Stock Warrants(1)			40,000		—	—
							32.1	8.6

32

AMERICAN CAPITAL, LTD.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

December 31, 2007

(in millions, except share data)

Company (4)	Industry	Investments	Interest Rate (5)	Maturity Date (5)	# of shares/ units owned	Principal/ Notional	Cost	Fair Value
European Capital Limited(2)(3)	Diversified Financial Services	Ordinary Shares			72,305,938		921.9	839.4
European Touch, LTD. II	Commercial Services & Supplies	Senior Subordinated Debt	16.7%	12/09-12/10		11.4	11.4	11.4
		Junior Subordinated Debt(6)	20.0%	12/10		6.1	4.8	0.6
		Redeemable Preferred Stock(1)			263		0.3	—
		Common Stock(1)			1,688		0.9	—
		Common Stock Warrants(1)			7,105		3.7	—
							21.1	12.0
EXPL Pipeline Holdings LLC	Oil, Gas & Consumable Fuels	Senior Debt(7)	11.1%	1/17		41.6	41.2	41.2
		Common Membership Units(1)			58,297		44.6	56.8
							85.8	98.0
Exstream Holdings, Inc.	Software	Subordinated Debt(7)	15.0%	6/14		64.9	64.3	64.3
		Convertible Preferred Stock			2,221,090		231.8	248.2
		Common Stock(1)			555,272		55.5	62.0
							351.6	374.5
Fosbel Global Services (LUXCO) S.C.A(3)	Commercial Services & Supplies	Senior Debt(7)	9.0%	7/10-7/11		36.1	35.7	35.7
		Subordinated Debt(7)	15.0%	7/12-7/14		34.5	34.2	34.2
		Redeemable Preferred Stock(1)			18,449,456		18.4	10.0
		Convertible Preferred Stock(1)			1,519,368		3.0	—
		Common Stock(1)			108,526		0.2	—
							91.5	79.9
Fountainhead Estate Holding Corp.(3)	Internet Software & Services	Senior Debt	9.2%	10/13		37.0	37.0	37.0
		Convertible Preferred Stock(1)			59,250		59.2	41.3
							96.2	78.3
FreeConferenceroom.com, Inc.	Diversified Telecommunication Services	Senior Debt(7)	11.6%	4/11-5/11		16.8	16.6	16.6
		Subordinated Debt	15.0%	5/12		9.8	9.7	8.8
		Redeemable Preferred Stock(1)			12,373,100		12.1	—
		Common Stock(1)			5,860,400		2.3	—
		Common Stock Warrants(1)			5,015,028		—	—
							40.7	25.4
Future Food, Inc.	Food Products	Senior Debt	10.2%	7/10		16.8	16.7	16.7
		Senior Subordinated Debt	12.0%	7/11		8.0	7.6	7.6
		Junior Subordinated Debt(6)	13.0%	7/12		6.0	5.1	1.2
		Common Stock(1)			64,917		13.0	—
		Common Stock Warrants(1)			6,500		1.3	—
							43.7	25.5
FutureLogic, Inc.	Computers & Peripherals	Senior Debt(7)	12.9%	2/10-2/12		50.2	49.9	49.9
		Subordinated Debt(7)	15.0%	2/13		31.6	31.3	31.3
		Common Stock(1)			129,514		15.5	25.8
							96.7	107.0
FV Holdings Corporation	Food Products	Subordinated Debt(7)	14.5%	6/15		22.4	22.4	22.4
		Convertible Preferred Stock			292		14.3	23.6
		Common Stock(1)			125		6.1	10.1
							42.8	56.1
Halex Holdings Corp.	Construction Materials	Senior Debt(6)	11.5%	7/08-10/08		23.4	23.4	21.4
		Subordinated Debt(6)	15.9%	8/10		17.6	15.9	—
		Redeemable Preferred Stock(1)			21,464,046		28.5	—
		Common Stock(1)			30,263,219		—	—
		Common Stock Warrants(1)			18,750,000		—	—
							67.8	21.4

33

AMERICAN CAPITAL, LTD.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

December 31, 2007

(in millions, except share data)

Company (4)	Industry	Investments	Interest Rate (5)	Maturity Date (5)	# of shares/ units owned	Principal/ Notional	Cost	Fair Value
Hartstrings Holdings Corp.	Textiles, Apparel & Luxury Goods	Senior Debt	11.6%	12/10		11.5	11.2	11.2
		Convertible Preferred Stock(1)			10,196		2.9	0.6
		Common Stock(1)			14,250		4.8	—
							18.9	11.8
Hospitality Mints, Inc.	Food Products	Senior Debt(7)	12.8%	11/10		7.3	7.2	7.2
		Subordinated Debt(7)	12.4%	11/11-11/12		18.5	18.3	18.3
		Convertible Preferred Stock			55,497		12.0	21.5
		Common Stock Warrants(1)			86,817		0.1	1.8
							37.6	48.8
Imperial Supplies Holdings, Inc.	Trading Companies and Distributors	Subordinated Debt	16.0%	10/14		21.2	21.0	21.0
		Redeemable Preferred Stock			19,604		13.0	20.0
		Convertible Preferred Stock			19,604		20.5	20.5
		Common Stock			442,187		11.3	6.7
							65.8	68.2
Kingway Inca Clymer Holdings, Inc.	Building Products	Subordinated Debt(6)	12.3%	4/12		1.0	0.2	1.0
		Redeemable Preferred Stock(1)			13,709		9.6	0.5
		Common Stock(1)			7,826		—	—
							9.8	1.5
Lifoam Holdings, Inc.	Leisure Equipment & Products	Senior Debt(7)	10.4%	6/08-6/10		43.8	43.7	43.7
		Subordinated Debt(6)	14.4%	6/11-6/12		26.3	22.9	15.1
		Redeemable Preferred Stock(1)			6,160		4.2	—
		Common Stock(1)			14,000		1.4	—
		Common Stock Warrants(1)			29,304		2.9	—
							75.1	58.8
LLSC Holdings Corporation	Personal Products	Senior Debt(7)	11.1%	8/12		5.7	5.7	5.7
		Subordinated Debt	12.0%	8/13		5.5	5.5	5.5
		Convertible Preferred Stock(1)			7,496		8.1	8.1
		Common Stock(1)			833		—	—
		Common Stock Warrants(1)			675		—	—
							19.3	19.3
LVI Holdings, LLC	Commercial Services & Supplies	Senior Debt(7)	10.7%	2/10		2.8	2.8	2.8
		Subordinated Debt(7)	18.0%	2/13		10.7	10.6	10.6
							13.4	13.4
MW Acquisition Corporation	Health Care Providers & Services	Senior Subordinated Debt(7)	15.6%	2/13-2/14		24.6	24.3	24.3
		Convertible Preferred Stock			38,016		14.7	23.4
		Common Stock(1)			51,521		—	12.6
							39.0	60.3
NECCO Candy Investments, LLC	Food Products	Senior Debt	9.4%	12/12		13.1	12.8	12.8
		Common Membership Units(1)			100		0.1	0.1
							12.9	12.9
NECCO Realty Investments, LLC	Real Estate	Senior Debt	14.0%	12/17		35.9	35.1	35.1
		Common Membership Units(1)			7,000		4.9	9.6
							40.0	44.7
nSpired Holdings, Inc.	Food Products	Senior Debt	9.5%	12/08-12/09		18.6	18.6	18.8
		Redeemable Preferred Stock(1)			17,150		17.1	1.3
		Common Stock(1)			11,712,947		3.5	—
							39.2	20.1
Oceana Media Finance, LLC	Commercial Banks	Common Membership Units(1)			145,742		14.6	14.6

34

AMERICAN CAPITAL, LTD.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

December 31, 2007

(in millions, except share data)

Company (4)	Industry	Investments	Interest Rate (5)	Maturity Date (5)	# of shares/ units owned	Principal/ Notional	Cost	Fair Value
Paradigm Precision Holdings, LLC	Aerospace & Defense	Senior Debt(7)	8.7%	4/13		54.3	53.7	53.7
		Subordinated Debt(7)	15.0%	10/13		13.8	13.7	13.7
		Common Membership Units(1)			478,488		17.5	17.5
							84.9	84.9
PaR Systems, Inc.	Machinery	Subordinated Debt(7)	14.6%	2/10		3.1	3.1	3.1
		Common Stock(1)			198,921		0.6	11.3
		Common Stock Warrants(1)			17,027		—	1.0
							3.7	15.4
Pasternack Enterprises, Inc.	Electrical Equipment	Senior Subordinated Debt(7)	14.8%	12/13-12/14		29.1	28.8	28.8
		Common Stock(1)			57,597		11.3	46.5
							40.1	75.3
PHC Sharp Holdings, Inc.	Commercial Services & Supplies	Senior Debt(7)	11.2%	12/11-12/12		14.9	14.7	14.7
		Subordinated Debt(7)	15.0%	12/14		15.0	14.8	14.8
		Common Stock(1)			250,868		3.1	—
							32.6	29.5
PHI Acquisitions, Inc.	Internet & Catalog Retail	Senior Debt(7)	11.9%	6/12		10.0	9.9	9.9
		Subordinated Debt(7)	14.0%	6/13		23.3	23.0	23.0
		Redeemable Preferred Stock			36,267		32.9	32.9
		Common Stock(1)			40,295		3.8	1.6
		Common Stock Warrants(1)			116,065		11.6	16.4
							81.2	83.8
Piper Aircraft, Inc.	Aerospace & Defense	Senior Debt	9.6%	5/08-7/09		8.8	8.8	8.8
		Subordinated Debt	8.0%	7/13		0.7	0.2	0.7
		Common Stock(1)			478,797		0.1	38.1
							9.1	47.6
Precitech Holdings, Inc.	Machinery	Junior Subordinated Debt(6)	17.0%	12/12		8.1	3.4	1.3
Resort Funding Holdings, Inc.	Diversified Financial Services	Senior Debt	13.0%	4/10		10.6	10.6	10.6
		Common Stock(1)			583		20.0	17.1
							30.6	27.7
Sixnet, LLC	Electronic Equipment & Instruments	Senior Debt(7)	13.2%	6/13		36.9	36.6	36.6
		Membership Units(1)			356		4.4	9.3
							41.0	45.9
SMG Holdings, Inc.	Hotels, Restaurants & Leisure	Senior Debt	8.3%	7/14		6.0	6.0	6.0
		Subordinated Debt(7)	12.4%	6/15		114.8	113.7	113.7
		Convertible Preferred Stock			1,101,673		115.2	120.6
		Common Stock(1)			275,419		27.5	28.9
							262.4	269.2
Specialty Brands of America, Inc.	Food Products	Subordinated Debt(7)	14.0%	5/14		33.4	33.1	33.1
		Redeemable Preferred Stock			122,017		7.1	7.1
		Common Stock(1)			128,175		2.3	5.1
		Common Stock Warrants(1)			56,819		1.4	7.9
							43.9	53.2
SPL Acquisition Corp.	Pharmaceuticals	Senior Debt	11.3%	10/12-10/13		83.0	82.0	82.0
		Senior Subordinated Debt(7)	15.3%	8/14-8/15		48.3	47.7	47.7
		Convertible Preferred Stock			84,043		44.2	44.2
		Common Stock(1)			84,043		—	2.0
							173.9	175.9
Stravina Holdings, Inc.	Personal Products	Senior Debt(6)	8.7%	4/11		4.4	4.4	0.1
Sunfuel Midstream, LLC	Oil, Gas & Consumable Fuels	Common Membership Units4(1)			100,000		0.1	0.1

35

AMERICAN CAPITAL, LTD.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

December 31, 2007

(in millions, except share data)

Company (4)	Industry	Investments	Interest Rate (5)	Maturity Date (5)	# of shares/ units owned	Principal/ Notional	Cost	Fair Value
Total Return Fund, LP	Capital Markets	Common Membership Interest			100%		20.0	21.1
UFG Real Estate Holdings, LLC	Real Estate	Common Membership(1)			70		—	1.3
Unwired Holdings, Inc.	Household Durables	Senior Debt	11.9%	6/11		9.3	8.1	9.1
		Subordinated Debt(6)	15.0%	6/12-6/13		19.9	14.4	2.2
		Redeemable Preferred Stock(1)			12,740		12.7	—
		Preferred Stock Warrants(1)			39,690		—	—
		Common Stock(1)			126,001		1.2	—
		Common Stock Warrants(1)			439,205		—	—
							36.4	11.3
VP Acquisitions Holdings, Inc.	Health Care Equipment & Supplies	Subordinated Debt(7)	14.5%	10/13-10/14		19.0	18.8	18.8
		Common Stock(1)			19,780		24.7	47.2
							43.5	66.0
Warner Power, LLC	Electrical Equipment	Subordinated Debt(7)	12.6%	10/09		5.0	5.0	5.0
		Redeemable Preferred Membership Units			3,796,269		4.1	4.1
		Common Membership Units(1)			27,629		1.9	1.5
							11.0	10.6
WIS Holding Company, Inc.	Commercial Services & Supplies	Subordinated Debt(7)	14.8%	1/14-1/15		99.1	98.2	98.2
		Convertible Preferred Stock			703,406		75.9	82.9
		Common Stock(1)			175,852		17.6	20.4
							191.7	201.5
WSACS RR Holdings LLC	Real Estate	Common Membership Units(1)			1,688,398		1.7	1.7
CDO/CLO INVESTMENTS
ACAS Wachovia Investments, L.P.	Diversified Financial Services	Partnership Interest			90%		22.2	12.9
Subtotal Control Investments (38% of total investment assets and liabilities at fair value)							3,806.5	4,177.4

Counterparty (4)	Instrument	Yield (5)	Expiring(5)	# of Contracts	Notional	Cost		Fair Value
DERIVATIVE AGREEMENTS
Citibank, N.A.	Interest Rate Swaption – Pay Floating/ Receive Fixed	4.6%	4/12	1	40.0		—		1.0
BMO Financial Group	Interest Rate Swaption – Pay Floating/ Receive Fixed	5.5%	2/13	1	22.9		—		0.4
Wachovia Bank, N.A.	Interest Rate Swap – Pay Fixed/ Receive Floating	5.1%	8/19	1	8.0		—		2.2
Citibank, N.A.	Interest Rate Swap – Pay Fixed/ Receive Floating	5.2%	11/19	1	3.7		—		0.2
Subtotal Derivative Agreements (less than 1% of total investment assets and liabilities at fair value)							—		3.8
Total Investment Assets						$	10,667.4	$	10,928.4
DERIVATIVE AGREEMENTS
Citibank, N.A.	Interest Rate Swap –Pay Fixed/Receive Floating	4.8%	4/12-11/19	4	769.5		—		(21.1)
Wachovia Bank, N.A.	Interest Rate Swap –Pay Fixed/Receive Floating	4.8%	1/14-8/19	3	532.1		—		(15.4)
BMO Financial Group	Interest Rate Swap – Pay Fixed/Receive Floating	5.4%	2/13 -8/17	5	479.9		—		(22.8)
Credit Suisse International	Interest Rate Swap – Pay Fixed/Receive Floating	5.0%	9/15-6/17	2	99.4		0.8		(4.1)
UniCredit Group	Interest Rate Swap – Pay Fixed/Receive Floating	5.3%	7/17	1	66.0		—		(5.8)
WestLB AG	Interest Rate Swap –Pay Fixed/Receive Floating	5.8%	6/17	1	55.0		—		(4.5)
HSBC Bank USA, National Association	Interest Rate Swap – Pay Fixed/Receive Floating	4.7%	8/15	1	36.6		0.4		(0.9)
Fortis Financial Services LLC	Interest Rate Swap – Pay Fixed/Receive Floating	5.7%	7/17	1	22.3		—		(2.2)
BMO Financial Group	Foreign Exchange Swap– Pay Euros/Receive GBP		1/08	1	—		—		(0.4)
Citibank, N.A.	Foreign Exchange Swap– Pay Euros/Receive GBP		2/11	1	—		—		(0.2)
Total Investment Liabilities (less than 1% of total investment assets and liabilities at fair value)						$	1.20	$	(77.40)

36

AMERICAN CAPITAL, LTD.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

December 31, 2007

(in millions, except share data)

(1) Non-income producing.

(2) Publicly traded company or a consolidated subsidiary of a public company.

(3) International investment.

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

(5) Interest rates on loans and debt securities represents the weighted average annual stated interest rate, which are presented by the nature of indebtedness by a single issuer. The maturity dates on loans and debt securities represents the earliest and the latest maturity dates. Interest rates on derivative agreements represent the pay rate at period end. The expiring dates on derivative agreements represent the earliest and the latest expiration dates.

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

(7) All or a portion of the securities are pledged as collateral under various secured financing arrangements.

37

AMERICAN CAPITAL, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

(in millions, except per share data)

Note 1. Unaudited Interim Consolidated Financial Statements

Interim consolidated financial statements of American Capital, Ltd. (which is referred throughout this report as “American Capital”, the “Company”, “we”, “us” and “our”) are prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and pursuant to the requirements for reporting on Form 10-Q and Article 10 of Regulation S-X. Accordingly, certain disclosures accompanying annual financial statements prepared in accordance with GAAP are omitted. In the opinion of management, all adjustments, consisting solely of normal recurring accruals, necessary for the fair presentation of financial statements for the interim periods have been included. The current period’s results of operations are not necessarily indicative of results that ultimately may be achieved for the year. The unaudited interim consolidated financial statements and notes thereto should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2007 and our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2008 and June 30, 2008, as filed with the Securities and Exchange Commission (“SEC”).

Note 2. Organization

During the second quarter of 2008, we changed our name from American Capital Strategies, Ltd. to American Capital, Ltd. We are 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 operate so as to qualify to be taxed as a regulated investment company (“RIC”) as defined in Subtitle A, Chapter 1, under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”). As a BDC, we primarily invest in senior debt, subordinated debt and equity in the buyouts of private companies sponsored by us (“American Capital One-Stop Buyouts™”), the buyouts of private companies sponsored by other private equity firms (“American Capital One Stop Financings”) and directly to early stage and mature private and small public companies. We refer to these investments as our private finance portfolio. We also invest in structured product investments (“Structured Products”) including commercial mortgage backed securities (“CMBS”), commercial collateralized loan obligation (“CLO”) securities and collateralized debt obligation (“CDO”) securities and invest in alternative asset funds managed by us. We are also an alternative asset manager with $17 billion of capital resources under management as of September 30, 2008. We have an investment in American Capital, LLC, an alternative asset manager of third-party funds that is a wholly-owned portfolio company, and have investments in alternative asset funds that are managed by American Capital, LLC.

We are the sole shareholder of American Capital Financial Services, Inc. (“ACFS”). Through ACFS, we provide advisory, management and other services to our portfolio companies. Our primary business objectives are to increase our taxable income, net realized earnings and net asset value by making investments with attractive current yields and/or potential for equity appreciation and realized gains.

Note 3. Investment Valuation Policy

Our investments are carried at fair value in accordance with the 1940 Act and Statement of Financial Accounting Standards (“SFAS”) No. 157, Fair Value Measurements (“SFAS No. 157”). In accordance with the 1940 Act, unrestricted minority-owned publicly traded securities for which market quotations are readily available are valued at the closing market quote on the valuation date and majority-owned publicly traded securities and other privately held securities are valued as determined in good faith by our Board of Directors. For restricted securities of companies that are publicly traded, the value is based on the closing market quote on the valuation date minus a discount for the restriction. For unrestricted securities of companies that are publicly traded for which we have a majority-owned interest, the value is based on the closing market quote on the

38

AMERICAN CAPITAL, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

(in millions, except per share data)

valuation date plus a control premium if our Board of Directors determines in good faith that additional value above the closing market quote would be obtainable upon a sale or transfer of our controlling interest.

We adopted SFAS No. 157 on January 1, 2008. SFAS No. 157 provides a framework for measuring the fair value of assets and liabilities. SFAS No. 157 also provides guidance regarding a fair value hierarchy, which prioritizes information used to measure fair value and the effect of fair value measurements on earnings and provides for enhanced disclosures determined by the level within the hierarchy of information used in the valuation. SFAS No. 157 applies whenever other standards require (or permit) assets or liabilities to be measured at fair value but does not expand the use of fair value in any new circumstances.

SFAS No. 157 defines fair value in terms of the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The price used to measure the fair value is not adjusted for transaction costs while the cost basis of our investments may include initial transaction costs. Under SFAS No. 157, the fair value measurement also assumes that the transaction to sell an asset occurs in the principal market for the asset or, in the absence of a principal market, the most advantageous market for the asset. The principal market is the market in which the reporting entity would sell or transfer the asset with the greatest volume and level of activity for the asset. In determining the principal market for an asset or liability under SFAS No. 157, it is assumed that the reporting entity has access to the market as of the measurement date. If no market for the asset exists or if the reporting entity does not have access to the principal market, the reporting entity should use a hypothetical market.

In October 2008, the Financial Accounting Standards Board, or the FASB, issued FASB Staff Position (“FSP”) No. 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active. FSP No. 157-3 clarifies the application of SFAS No. 157 in a market that is not active. More specifically, FSP No. 157-3 states that significant judgment should be applied to determine if observable data in a dislocated market represents forced liquidations or distressed sales and are not representative of fair value in an orderly transaction. FSP No. 157-3 also provides further guidance that the use of a reporting entity’s own assumptions about future cash flows and appropriately risk-adjusted discount rates is acceptable when relevant observable inputs are not available. In addition, FSP No. 157-3 provides guidance on the level of reliance of broker quotes or pricing services when measuring fair value in a non active market stating that less reliance should be placed on a quote that does not reflect actual market transactions and a quote that is not a binding offer. The guidance in FSP No. 157-3 is effective upon issuance for all financial statements that have not been issued and any changes in valuation techniques as a result of applying FSP No. 157-3 are accounted for as a change in accounting estimate.

The market in which we would sell our private finance investments is the mergers and acquisition (“M&A”) market. Under SFAS No. 157, we have indentified the M&A market as our principal market for portfolio companies only if we have the ability to initiate a sale of the portfolio company as of the measurement date. We determine whether we have the ability to initiate a sale of a portfolio company based on our ability to control or gain control of the board of directors of the portfolio company as of the measurement date. In evaluating if we can control or gain control of a portfolio company as of the measurement date, we include our equity securities and those securities held by entities managed by American Capital, LLC, on a fully diluted basis. For investments in securities of portfolio companies for which we do not have the ability to control or gain control as of the measurement date and for which there is no active market, our principal market under SFAS No. 157 is a hypothetical secondary market.

Accordingly, we use the M&A market as our principal market for portfolio companies that we control or can gain control as of the measurement date, and we use a hypothetical secondary market for portfolio companies

39

AMERICAN CAPITAL, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

(in millions, except per share data)

that we do not control or cannot gain control as of the measurement date. However, to the extent that an active market exists, we will consider that as our principal market. Our valuation policy considers the fact that no ready market exists for substantially all of the securities in which we invest and that fair value for our investments must typically be determined using unobservable inputs.

Enterprise Value Waterfall Methodology

For securities of portfolio companies that we have identified the M&A market as the principal market, we estimate the fair value based on the enterprise value waterfall (“Enterprise Value Waterfall”) valuation methodology. For minority equity securities, we also estimate the fair value using the Enterprise Value Waterfall valuation methodology. Prior to the adoption of SFAS No. 157, we generally used the Enterprise Value Waterfall methodology for valuing our entire private finance portfolio that was not publicly traded. Upon the adoption of SFAS No. 157, we no longer use the Enterprise Value Waterfall methodology for valuing portfolio investments that we do not control or cannot gain control as of the measurement date.

Under the Enterprise Value Waterfall valuation methodology, we estimate the enterprise value of the portfolio company and then waterfall the enterprise value over the portfolio company’s securities in order of their preference relative to one another. In using the Enterprise Value Waterfall valuation methodology, we consider the in-use valuation premise under SFAS No. 157, which assumes the debt and equity securities are sold together, and which we believe is appropriate as this would provide the maximum proceeds to the seller. In applying the Enterprise Value Waterfall valuation methodology, we also consider that in a change of control transaction, our debt securities are generally required to be repaid and that a buyer cannot assume the debt security.

To estimate the enterprise value of the portfolio company, we prepare an analysis consisting of traditional valuation methodologies including market, income and cost approaches. We weight some or all of the traditional valuation methods based on the individual circumstances of the portfolio company in order to conclude on our estimate of the enterprise value. The methodologies consist of valuation estimates based on: valuations of comparable public companies, recent sales of private and public comparable companies, discounting the forecasted cash flows of the portfolio company, estimating the liquidation or collateral value of the portfolio company’s assets, third-party valuations of the portfolio company, considering offers from third-parties to buy the company, estimating the value to potential strategic buyers and considering the value of recent investments in the equity securities of the portfolio company.

In valuing convertible debt, equity or other similar securities, we value our investment based on our pro rata share of the residual equity value available after deducting all outstanding debt from the estimated enterprise value. We value non-convertible debt securities at the face amount of the debt to the extent that the estimated enterprise value of the portfolio company exceeds the outstanding debt of the portfolio company. If the estimated enterprise value is less than the outstanding debt of the company, we reduce the value of our debt investment beginning with the junior most debt such that the enterprise value less the value of the outstanding debt is zero.

Market Yield Valuation Methodology

For securities of portfolio companies for which we have identified the hypothetical secondary market as the principal market, we determine the fair value based on the assumptions that hypothetical market participants would use to value the security in a current hypothetical sale using a market yield (“Market Yield”) valuation methodology based on an exchange valuation premise under SFAS No. 157.

40

AMERICAN CAPITAL, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

(in millions, except per share data)

For debt and redeemable preferred equity securities of our private finance portfolio for which we do not control or cannot gain control as of the measurement date, we estimate the fair value based on such factors as third-party broker quotes and our own assumptions in the absence of market observable data, including synthetic credit ratings, estimated remaining life, current market yield and interest rate spreads of similar securities as of the measurement date. We weight the use of third-party broker quotes in determining fair value based on our understanding of the level of actual transactions used by the broker to develop the quote and whether the quote was an indicative price or binding offer. We estimate the remaining life based on market data of the average life of similar debt securities. However, if we have information available to us that the debt security is expected to be repaid in the near term, we would use an estimated remaining life based on the expected repayment date. If there is a significant deterioration of the credit quality of a debt security, we may consider other factors that a hypothetical market participant would use to estimate fair value, including the proceeds that would be received in a liquidation analysis.

We also value our investments in Structured Products using the Market Yield valuation methodology. We estimate the fair value based on such factors as third-party broker quotes and our cash flow forecasts subject to assumptions a market participant would use regarding the investments’ underlying collateral including, but not limited to, assumptions of default and recovery rates, reinvestment spreads and prepayment rates. Cash flow forecasts are discounted using a market participant’s market yield assumptions that are derived from multiple sources including, but not limited to, third-party broker quotes, recent investments and securities and indices with similar structure and risk characteristics. We weight third-party broker quotes in determining fair value based on our understanding of the level of actual transactions used by the broker to develop the quote and whether the quote was an indicative price or binding offer.

Interest Rate Derivatives

For interest rate derivative 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 a quantitative and/or qualitative evaluation of both our credit risk and our counterparty’s credit risk.

Due to the uncertainty inherent in the valuation process, such estimates of fair value may differ significantly from the values that would have been used had a ready market for the securities existed, and the differences could be material. Additionally, changes in the market environment and other events that may occur over the life of the investments may cause the gains or losses ultimately realized on these investments to be different than the valuations currently assigned.

Note 4. Recent Accounting Pronouncements

In June 2008, the FASB ratified Emerging Issues Task Force (“EITF”) Issue No. 07-5, Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock (“EITF 07-5”). EITF 07-5 provides guidance on the determination of whether an instrument (or an embedded feature) is indexed to an entity’s own stock in determining whether an instrument is a derivative. To the extent a derivative instrument or embedded derivative feature is deemed indexed to an entity’s own stock, it may be exempt from the requirements of SFAS 133, “Accounting for Derivative Instruments and Hedging Activities,” as well as eligible for equity classification under EITF Issue No. 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock. EITF 07-5 provides that an entity should determine whether an

41

AMERICAN CAPITAL, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

(in millions, except per share data)

equity-linked financial instrument (or embedded feature) is indexed to its own stock first by evaluating the instrument’s contingent exercise provisions, if any, and then by evaluating the instrument’s settlement provisions. EITF 07-5 is effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2008, with early application prohibited. Management is in the process of assessing the impact on our consolidated financial statements of adopting EITF 07-5.

In June 2008, the FASB issued FSP No. EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities (“FSP EITF 03-6-1”). The objective of this FSP is to address questions that arose regarding whether unvested share-based payment awards with rights to receive dividends or dividend equivalents should be considered participating securities for the purposes of applying the two-class method of calculating earnings per share (“EPS”), pursuant to FASB Statement No. 128, Earnings per Share. In FSP EITF 03-6-1, the FASB staff concluded that unvested share-based payment awards that contain rights to receive non-forfeitable dividends or dividend equivalents (whether paid or unpaid) are participating securities, and thus, should be included in the two-class method of computing EPS. It is effective for fiscal years beginning after December 15, 2008, and interim periods within those years with early application prohibited. This FSP requires that all prior-period EPS data be adjusted retrospectively. Management is currently evaluating the impact on our consolidated financial statements of adopting FSP EITF 03-6-1.

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities (“SFAS No. 161”). The objective of SFAS No. 161 is to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity’s financial position, financial performance, and cash flows. SFAS No. 161 improves transparency about the location and amounts of derivative instruments in an entity’s financial statements; how derivative instruments and related hedged items are accounted for under SFAS No. 133; and how derivative instruments and related hedged items affect its financial position, financial performance, and cash flows. SFAS No. 161 achieves these improvements by requiring disclosure of the fair values of derivative instruments and their gains and losses in a tabular format. It also provides more information about an entity’s liquidity by requiring disclosure of derivative features that are credit risk–related. Finally, it requires cross-referencing within footnotes to enable financial statement users to locate important information about derivative instruments. SFAS No. 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. We did not early adopt SFAS No. 161. Management is currently evaluating the enhanced disclosure requirements and the impact on our consolidated financial statements of adopting SFAS No. 161.

Note 5. Investments

We fair value our investments in accordance with GAAP as determined in good faith by our Board of Directors. When available, we base the fair value of our investments on directly observable market prices or on market data derived for comparable assets. For all other investments, inputs used to measure fair value reflect management’s best estimate of assumptions that would be used by market participants in pricing the investment in a hypothetical transaction.

The levels of fair value inputs used to measure our investments are characterized in accordance with the fair value hierarchy established by SFAS No. 157. Where inputs for an asset or liability fall in more than one level in the fair value hierarchy, the investment is classified in its entirety based on the lowest level input that is significant to that investment’s fair value measurement. We use judgment and consider factors specific to the

42

AMERICAN CAPITAL, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

(in millions, except per share data)

investment in determining the significance of an input to a fair value measurement. The three levels of the fair value hierarchy and investments that fall into each of the levels are described below:

• Level 1: Level 1 inputs are unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. We use Level 1 inputs for investments in publicly traded unrestricted securities for which we do not have a controlling interest. Such investments are valued at the closing price on the measurement date. We did not value any of our investments using Level 1 inputs as of September 30, 2008.

• Level 2: Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. We did not value any of our investments using Level 2 inputs as of September 30, 2008.

• Level 3: Level 3 inputs are unobservable and cannot be corroborated by observable market data. We use Level 3 inputs for measuring the fair value of substantially all of our investments. See Note 3 for the investment valuation policies used to determine the fair value of these investments.

The following fair value hierarchy table sets forth our investment portfolio by level as of September 30, 2008 (in millions):

	Level 1		Level 2		Level 3			Total
Senior debt	$	—	$	—	$	3,098		$	3,098
Subordinated debt		—		—		2,492			2,492
Preferred equity		—		—		1,603			1,603
Common equity		—		—		1,405			1,405
Equity warrants		—		—		111			111
Structured products		—		—		386			386
Derivatives, net		—		—		(84	)		(84	)
Total investments, net	$	—	$	—	$	9,011		$	9,011

43

AMERICAN CAPITAL, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

(in millions, except per share data)

The following tables sets forth a summary of changes in the fair value of investment assets and liabilities measured using Level 3 inputs for the three and nine months ended September 30, 2008, respectively, (in millions):

	Balances, July 1, 2008			Realized Gains (Losses)(1)			Reversal of Prior Period Appreciation (Depreciation) on Realization(2)			Unrealized Appreciation (Depreciation)(2)(3)			Purchases, Sales, Issuances & Settlements, Net(4)			Transfers In & Out of Level 3		Balances, September 30, 2008
Senior debt	$	3,068		$	(10	)	$	8		$	(52	)	$	84		$	—	$	3,098
Subordinated debt		2,364			(23	)		24			(117	)		244			—		2,492
Preferred equity		1,803			89			(94	)		7			(202	)		—		1,603
Common equity		1,861			23			(25	)		(392	)		(62	)		—		1,405
Equity warrants		118			7			(5	)		(1	)		(8	)		—		111
Structured products		463			(19	)		19			(84	)		7			—		386
Derivatives, net		(75	)		(14	)		—			(9	)		14			—		(84	)
Total	$	9,602		$	53		$	(73	)	$	(648	)	$	77		$	—	$	9,011

	Balances, January 1, 2008			Realized Gains (Losses)(1)			Reversal of Prior Period Appreciation (Depreciation) on Realization(2)			Unrealized Appreciation (Depreciation)(2)(3)			Purchases, Sales, Issuances & Settlements, Net(4)			Transfers In & Out of Level 3		Balances, September 30, 2008
Senior debt	$	3,555		$	(6	)	$	12		$	(325	)	$	(138	)	$	—	$	3,098
Subordinated debt		2,334			(27	)		33			(162	)		314			—		2,492
Preferred equity		1,957			72			(85	)		(145	)		(196	)		—		1,603
Common equity		2,205			135			(158	)		(708	)		(69	)		—		1,405
Equity warrants		213			9			(7	)		(31	)		(73	)		—		111
Structured products		660			(19	)		19			(399	)		125			—		386
Derivatives, net		(73	)		(25	)		—			(10	)		24			—		(84	)
Total	$	10,851		$	139		$	(186	)	$	(1,780	)	$	(13	)	$	—	$	9,011

(1) Included in net realized gain (loss) on investments in the Consolidated Statement of Operations. Excludes $49 million and $53 million of taxes on net realized gains for the three and nine months ended September 30, 2008, respectively. Also excludes $12 million in losses on realized foreign currency transactions on American Capital borrowings that are denominated in a foreign currency for both the three and nine months ended September 30, 2008.

(2) Included in net unrealized appreciation (depreciation) of investments in the Consolidated Statement of Operations.

(3) Excludes $18 million and $9 million of unrealized appreciation related to foreign currency translation for American Capital borrowings that are denominated in a foreign currency for the three and nine months ended September 30, 2008, respectively.

(4) Includes increases in the cost basis of investments resulting from new portfolio investments, PIK interest or dividends, the amortization of discounts, premiums and closing fees and the exchange of one or more existing securities for one or more new securities as well as decreases in the cost basis of investments resulting from principal repayments or sales and the exchange of one or more existing securities for one or more new securities.

44

AMERICAN CAPITAL, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

(in millions, except per share data)

As of September 30, 2008 and December 31, 2007, loans on non-accrual status were $602 million and $338 million, respectively, calculated as the cost plus unamortized OID, and $135 million and $122 million, respectively, at fair value. As of September 30, 2008 and December 31, 2007, there were no loans, excluding loans on non-accrual status, greater than three months past due.

The composition summaries of our investment portfolio as of September 30, 2008 and December 31, 2007, at cost and fair value as a percentage of total investments, excluding derivative agreements, are shown in the following tables:

	September 30, 2008		December 31, 2007
COST
Senior debt	32.0	%	33.7	%
Subordinated debt	25.8	%	23.5	%
Preferred equity	16.3	%	18.1	%
Common equity	15.8	%	15.4	%
Structured products	8.8	%	7.9	%
Equity warrants	1.3	%	1.4	%
	100.0	%	100.0	%
	September 30, 2008		December 31, 2007
FAIR VALUE
Senior debt	34.1	%	32.5	%
Subordinated debt	27.4	%	21.4	%
Preferred equity	17.6	%	17.9	%
Common equity	15.5	%	20.2	%
Structured products	4.2	%	6.1	%
Equity warrants	1.2	%	1.9	%
	100.0	%	100.0	%

45

AMERICAN CAPITAL, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

(in millions, except per share data)

We use the Global Industry Classification Standards for classifying the industry groupings of our portfolio companies. The following tables show the portfolio composition by industry grouping at cost and at fair value as a percentage of total investments, excluding derivative agreements. Our investments in European Capital Limited, CLO and CDO securities are excluded from the table below. Our investments in ACAS CRE CDO 2007-1, Ltd. and CMBS are classified in the Real Estate category.

	September 30, 2008		December 31, 2007
COST
Commercial Services and Supplies	11.6	%	10.6	%
Real Estate	10.0	%	8.5	%
Household Durables	8.0	%	8.2	%
Internet and Catalog Retail	5.2	%	4.9	%
Diversified Consumer Services	4.1	%	4.3	%
Life Sciences Tools and Services	3.8	%	3.6	%
Food Products	3.7	%	4.4	%
Health Care Providers and Services	3.6	%	3.3	%
Health Care Equipment and Supplies	3.4	%	2.6	%
Diversified Financial Services	3.3	%	3.7	%
Hotels, Restaurants and Leisure	3.2	%	3.2	%
Auto Components	3.1	%	3.0	%
Construction and Engineering	3.0	%	3.0	%
Electrical Equipment	2.7	%	3.3	%
IT Services	2.1	%	2.0	%
Pharmaceuticals	1.9	%	1.8	%
Containers and Packaging	1.9	%	4.4	%
Building Products	1.9	%	1.9	%
Electronic Equipment and Instruments	1.9	%	1.5	%
Computers and Peripherals	1.8	%	1.8	%
Internet Software and Services	1.6	%	1.6	%
Software	1.6	%	5.3	%
Leisure Equipment and Products	1.4	%	1.4	%
Thrifts and Mortgage Finance	1.4	%	0.3	%
Aerospace and Defense	1.4	%	1.0	%
Other	12.4	%	10.4	%
	100.0	%	100.0	%

46

AMERICAN CAPITAL, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

(in millions, except per share data)

	September 30, 2008		December 31, 2007
FAIR VALUE
Commercial Services and Supplies	11.2	%	10.4	%
Household Durables	6.6	%	7.6	%
Real Estate	6.1	%	6.7	%
Life Sciences Tools and Services	5.4	%	3.9	%
Diversified Consumer Services	5.0	%	4.5	%
Internet and Catalog Retail	4.7	%	4.7	%
Health Care Equipment and Supplies	4.3	%	3.1	%
Health Care Providers and Services	4.0	%	3.6	%
Capital Markets	3.9	%	5.1	%
Electrical Equipment	3.9	%	3.8	%
Diversified Financial Services	3.3	%	3.5	%
Food Products	3.3	%	3.6	%
Construction and Engineering	3.1	%	2.9	%
Hotels, Restaurants and Leisure	3.0	%	3.1	%
Auto Components	3.0	%	2.8	%
Pharmaceuticals	2.3	%	1.8	%
Building Products	2.2	%	2.0	%
Computers and Peripherals	2.1	%	1.8	%
Software	2.0	%	5.4	%
Electronic Equipment and Instruments	2.0	%	1.4	%
Aerospace and Defense	1.8	%	1.3	%
Containers and Packaging	1.7	%	4.1	%
IT Services	1.6	%	1.7	%
Energy Equipment and Services	1.6	%	1.5	%
Other	11.9	%	9.7	%
	100.0	%	100.0	%

47

AMERICAN CAPITAL, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

(in millions, except per share data)

The following tables show the portfolio composition by geographic location at cost and at fair value as a percentage of total investments, excluding Structured Products and derivative agreements. The geographic composition is determined by the location of the corporate headquarters of the portfolio company.

	September 30, 2008		December 31, 2007
COST
Southwest	20.7	%	19.9	%
Mid-Atlantic	20.3	%	23.0	%
International	15.4	%	12.1	%
Southeast	12.2	%	13.8	%
South-Central	12.2	%	11.2	%
Northeast	11.5	%	12.7	%
North-Central	7.1	%	6.7	%
Northwest	0.6	%	0.6	%
	100.0	%	100.0	%
	September 30, 2008		December 31, 2007
FAIR VALUE
Mid-Atlantic	23.2	%	26.7	%
Southwest	22.4	%	19.1	%
South-Central	13.4	%	11.5	%
Northeast	11.6	%	12.7	%
International	10.9	%	10.4	%
Southeast	10.4	%	12.5	%
North-Central	7.6	%	6.6	%
Northwest	0.5	%	0.5	%
	100.0	%	100.0	%

48

AMERICAN CAPITAL, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

(in millions, except per share data)

Note 6. Borrowings

Our debt obligations consisted of the following as of September 30, 2008 and December 31, 2007 (in millions):

	September 30, 2008		December 31, 2007
Secured revolving credit facility, $500 million and $1,300 million commitment, respectively	$	—	$	116
Unsecured revolving credit facility, $1,409 million and $1,565 million commitment, respectively		1,389		1,350
Unsecured debt due through September 2011		167		167
Unsecured debt due August 2010		126		126
Unsecured debt due February 2011		26		27
Unsecured debt due August 2012		548		547
Unsecured debt due October 2020		75		75
TRS Facility		22		—
ACAS Business Loan Trust 2004-1 asset securitization		214		320
ACAS Business Loan Trust 2005-1 asset securitization		830		830
ACAS Business Loan Trust 2006-1 asset securitization		436		436
ACAS Business Loan Trust 2007-1 asset securitization		395		492
ACAS Business Loan Trust 2007-2 asset securitization		314		338
Total	$	4,542	$	4,824

The daily weighted average debt balance for the three months ended September 30, 2008 and 2007 was $4,339 million and $5,016 million, respectively. The daily weighted average debt balance for the nine months ended September 30, 2008 and 2007 was $4,549 million and $4,542 million, respectively. The weighted average interest rate on all of our borrowings, including amortization of deferred financing costs, for the three months ended September 30, 2008 and 2007 was 4.6% and 6.3%, respectively. The weighted average interest rate on all of our borrowings, including amortization of deferred financing costs, for the nine months ended September 30, 2008 and 2007 was 4.7% and 6.3%, respectively. We are currently in compliance with all of our debt covenants. As of September 30, 2008 and December 31, 2007, the fair value of the above borrowings was $4,095 million and $4,605 million, respectively. The fair value of fixed rate debt instruments is based upon market interest rates. The fair value of variable rate debt instruments is based upon market credit spreads.

Secured Revolving Credit Facility

In September 2008, we amended our secured revolving credit facility, administered by Wachovia Capital Markets, LLC, to extend it for an additional year to September 2009. In connection with the renewal, we reduced the facility commitment size from $1,300 million to $500 million. As amended, our ability to make draws under the facility expires one business day before the termination date in September 2009. If the facility is not extended before the termination date, any principal amounts then outstanding will be due and payable at that time. Interest on borrowings under this facility is paid monthly and is generally charged at one-month LIBOR plus a spread of 2.50%, an increase over the previous spread of 1.125%. In addition, the unused commitment fee increased from 0.125% to 0.50% per annum. In connection with the amendment, the minimum tangible net worth covenant was decreased during the quarter to $4.5 billion plus 40% of new issuances of equity and debt converted into equity after the third quarter of 2008. The facility contains covenants that, among other things, require us to maintain a minimum net worth and restrict the loans securing the facility to certain dollar amounts, concentrations in industries,

49

AMERICAN CAPITAL, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

(in millions, except per share data)

certain loan grade classifications, certain security interests and interest payment terms. It is also a termination event under the facility if our senior unsecured issuer or debt rating is downgraded below BB by any rating agency.

Unsecured Revolving Credit Facility

In September 2008, we amended our unsecured revolving credit facility administered by an affiliate of Wachovia Capital Markets, LLC. In connection with the amendment, the commitment size of the facility was reduced from $1,565 million to $1,409 million and will be reduced further to $1,252 million on December 31, 2009. The maturity date was also amended from May 2012 to March 2011. Interest on borrowings under this facility is charged at either (i) the applicable index rate and the applicable percentage at such time based on our corporate rating, or (ii) for borrowings denominated in U.S. dollars, the greater of the prime rate in effect on such day and the federal funds effective rate in effect on such day plus 0.50%, and for borrowings denominated in an alternative currency, the applicable base rate, in each case, plus the applicable percentage at such time based on our corporate rating. As a result of the amendment, our current applicable spread over the applicable index rates increased from 0.90% to 3.25% and the current applicable spread over the applicable base rates increased from 0% to 2.25%. We are also charged an unused commitment fee based on our corporate rating. As a result of the amendment, the current applicable unused commitment fee for the facility also increased from 0.125% to 0.50% per annum. In connection with the amendment, the minimum tangible net worth covenant was decreased to $4.5 billion plus 40% of new issuances of equity and debt converted into equity after the third quarter of 2008. The agreement also contains various other covenants, including maintaining an asset coverage ratio equal to or greater than 1.55 to 1.00 and an unsecured debt rating equal to or greater than BB.

Note 7. Earnings Per Share

The following table sets forth the computation of basic and diluted earnings per share (“EPS”) for the three and nine months ended September 30, 2008 and 2007 (in millions, except per share data):

	Three Months Ended September 30,					Nine Months Ended September 30,
	2008			2007		2008			2007
Numerator for basic and diluted net operating income per share	$	153		$	153	$	449		$	420
Numerator for basic and diluted (loss) earnings per share	$	(548	)	$	21	$	(1,431	)	$	943
Denominator for basic weighted average shares		208.1			186.8		202.6			168.3
Employee stock options and bonus awards		—			2.3		—			2.9
Shares issuable under forward sale agreements		—			0.2		—			0.2
Denominator for diluted weighted average shares		208.1			189.3		202.6			171.4
Basic net operating income per common share	$	0.74		$	0.82	$	2.22		$	2.50
Diluted net operating income per common share	$	0.74		$	0.81	$	2.22		$	2.45
Basic net (loss) earnings per common share	$	(2.63	)	$	0.11	$	(7.06	)	$	5.60
Diluted net (loss) earnings per common share	$	(2.63	)	$	0.11	$	(7.06	)	$	5.50

In computing diluted EPS, only potential common shares that are dilutive, those that reduce earnings per share or increase loss per share, are included. The effect of stock options, unvested employee stock awards and shares issued under forward sales agreements is not included if the result would be anti-dilutive, such as when a net loss is reported. The “control number” for determining whether including potential common shares in the diluted EPS computation would be anti-dilutive is net (loss) earnings. As a result, if there is a net loss, diluted EPS is computed using the same number of weighted average shares as used in computing basic EPS, even if we

50

AMERICAN CAPITAL, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

(in millions, except per share data)

have positive net operating income. Therefore, basic EPS and diluted EPS are computed using the same number of weighted average shares for the three and nine months ended September 30, 2008 as we incurred a net loss for those periods.

Note 8. Segment Data

Reportable segments are identified based on our organizational structure and the business activities from which we earn income. We have determined that we have two primary lines of business: 1) Investing and 2) Asset Management/Advisory.

We derive the majority of our operating income and net operating income from our Investing segment, which primarily invests in senior and subordinated debt and equity of middle market companies with attractive current yields and/or potential for equity appreciation and realized gains.

Our Asset Management/Advisory segment provides management services to both our portfolio company investments and alternative asset funds. Our Asset Management/Advisory segment includes financial advisory services provided to our portfolio companies and includes both management fees for providing advice and analysis to our portfolio companies, which can be recurring in nature, and transaction structuring and financing fees for structuring, financing and executing middle market transactions, which may not be recurring in nature. These services are primarily provided by our consolidated operating subsidiary, ACFS. Our Asset Management/Advisory segment also includes our alternative asset fund management business, which may be conducted through consolidated operating subsidiaries or wholly-owned portfolio companies. As of September 30, 2008, all of our alternative asset fund management services in our Asset Management/Advisory segment are conducted through our wholly-owned portfolio company, American Capital, LLC. To the extent American Capital, LLC declares regular quarterly dividends of its quarterly net operating income to us, such dividends would be included in our Asset Management/Advisory segment as dividend income. The results for our Asset Management/Advisory segment also include the realized gain (loss) and unrealized appreciation (depreciation) of such wholly-owned portfolio companies.

51

AMERICAN CAPITAL, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

(in millions, except per share data)

The following tables present segment data for the three and nine months ended September 30, 2008 (in millions):

	Three Months Ended September 30, 2008
	Investing			Asset Management/ Advisory			Consolidated
Interest and dividend income	$	251		$	—		$	251
Fee and other income		2			25			27
Total operating income		253			25			278
Interest		50			—			50
Salaries, benefits and stock-based compensation		27			25			52
General and administrative		11			10			21
Total operating expenses		88			35			123
Operating income (loss) before income taxes		165			(10	)		155
Provision for income taxes		(2	)		—			(2	)
Net operating income (loss)		163			(10	)		153
Net realized loss on investments		(3	)		—			(3	)
Net unrealized depreciation of investments		(696	)		(2	)		(698	)
Net decrease in net assets resulting from operations	$	(536	)	$	(12	)	$	(548	)
Total assets	$	9,484		$	362		$	9,846

	Nine Months Ended September 30, 2008
	Investing			Asset Management/ Advisory			Consolidated
Interest and dividend income	$	730		$	18		$	748
Fee and other income		9			76			85
Total operating income		739			94			833
Interest		161			—			161
Salaries, benefits and stock-based compensation		79			86			165
General and administrative		34			30			64
Total operating expenses		274			116			390
Operating income (loss) before income taxes		465			(22	)		443
(Provision) benefit for income taxes		(6	)		12			6
Net operating income (loss)		459			(10	)		449
Net realized gain on investments		79			—			79
Net unrealized depreciation of investments		(1,801	)		(158	)		(1,959	)
Net decrease in net assets resulting from operations	$	(1,263	)	$	(168	)	$	(1,431	)
Total assets	$	9,484		$	362		$	9,846

52

AMERICAN CAPITAL, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

(in millions, except per share data)

The following tables present segment data for the three and nine months ended September 30, 2007 (in millions):

	Three Months Ended September 30, 2007
	Investing			Asset Management/ Advisory			Consolidated
Interest and dividend income	$	259		$	9		$	268
Fee and other income		7			35			42
Total operating income		266			44			310
Interest		79			—			79
Salaries, benefits and stock-based compensation		22			37			59
General and administrative		12			13			25
Total operating expenses		113			50			163
Operating income (loss) before income taxes		153			(6	)		147
Benefit for income taxes		—			6			6
Net operating income		153			—			153
Net realized gain on investments		71			—			71
Net unrealized depreciation of investments		(203	)		—			(203	)
Net increase in net assets resulting from operations	$	21		$	—		$	21
Total assets	$	11,405		$	64		$	11,469

	Nine Months Ended September 30, 2007
	Investing			Asset Management/ Advisory		Consolidated
Interest and dividend income	$	684		$	38	$	722
Fee and other income		13			151		164
Total operating income		697			189		886
Interest		214			—		214
Salaries, benefits and stock-based compensation		57			120		177
General and administrative		33			39		72
Total operating expenses		304			159		463
Operating income before income taxes		393			30		423
(Provision) benefit for income taxes		(6	)		3		(3	)
Net operating income		387			33		420
Net realized gain on investments		170			—		170
Net unrealized (depreciation) appreciation of investments		(140	)		493		353
Net increase in net assets resulting from operations	$	417		$	526	$	943
Total assets	$	11,405		$	64	$	11,469

53

AMERICAN CAPITAL, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

(in millions, except per share data)

Note 9. Commitments

As of September 30, 2008, we had commitments under loan and financing agreements to fund up to $992 million to 60 portfolio companies. These commitments are primarily composed of working capital revolving credit facilities, acquisition credit facilities and subscription agreements. The commitments are generally subject to the borrowers meeting certain criteria and may not be currently available to them. The terms of the borrowings and financings subject to commitment are comparable to the terms of other debt and equity securities in our portfolio.

Note 10. Income Taxes

We operate to qualify as a RIC under Subchapter M of the Code. In order to qualify as a RIC, we must annually distribute in a timely manner to our shareholders at least 90% of our taxable ordinary income of our investment company based on our tax fiscal year. Ordinary income includes net short-term capital gains but excludes net long-term capital gains. A RIC is not subject to federal income tax on the portion of its ordinary income and long-term capital gains that are distributed to its shareholders, including “deemed distributions” discussed below. As permitted by the Code, a RIC can designate dividends paid in the subsequent tax year as dividends of current year ordinary income and net long-term gains if those dividends are both declared by the extended due date of the RIC’s federal income tax return and paid to shareholders by the last day of the subsequent tax year. We have distributed or intend to distribute sufficient dividends to eliminate taxable income for our completed tax fiscal years. If we fail to satisfy the 90% distribution requirement or otherwise fail to qualify as a RIC in any tax year, we would be subject to tax in such year on all of our taxable income, regardless of whether we made any distributions to our shareholders. We have a tax fiscal year that ends on September 30.

In addition, a RIC may elect to retain its long-term capital gains by designating them as a “deemed distribution” to its shareholders and paying a federal tax of 35% on the long-term capital gains for the benefit of its shareholders. Shareholders would then report their share of the retained capital gains on their income tax returns as if it had been received and report a tax credit for the tax paid on their behalf by the RIC. Shareholders then add the amount of the “deemed distribution,” net of such tax, to the basis of their shares.

We designated dividends paid in our tax year ended September 30, 2008 as dividends of our ordinary income and long-term capital gains from our prior tax year ended September 30, 2007. Accordingly, dividends declared by June 16, 2008, the extended due date of our return, and paid by September 30, 2008, were comprised of a portion of our ordinary income and all of our long-term capital gain income from the tax year ended September 30, 2007.

For the tax year ended September 30, 2008, we had net long-term capital gains of $155 million. We elected to retain such capital gains by treating them as a “deemed distribution” and paying the federal tax on behalf of our shareholders of $54 million in October 2008, which is included in net realized gains (losses) on the accompanying consolidated statements of operations.

As of September 30, 2008, we had undistributed ordinary income of $518 million. We paid a dividend of $218 million on October 14, 2008 reducing our undistributed ordinary income to $300 million. In order for this undistributed ordinary income to be considered distributed for our tax year ended September 30, 2008, it will need to be declared as a dividend by June 15, 2009 and paid by September 30, 2009. As of September 30, 2008, we did not have any undistributed long-term capital gains since they are treated as being distributed through the “deemed distribution”.

54

AMERICAN CAPITAL, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

(in millions, except per share data)

As a RIC, we are also subject to a nondeductible federal excise tax of 4% if we do 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 year ended December 31, 2007 and the one-year period ending October 31, 2007, we did not distribute at least 98% of our ordinary income and capital gains and paid the 4% excise tax. For the calendar year ended December 31, 2008, we do not expect to distribute at least 98% of our ordinary income and therefore we expect to pay the 4% excise tax for that period. Through September 30, 2008, we distributed all of our capital gains through the “deemed distribution” and therefore did not accrue any excise tax on our long-term capital gains as of September 30, 2008. In the prior quarter, we had not expected to distribute all of our capital gains for the period ended October 31, 2008 and therefore we accrued an excise tax that was reversed in the third quarter of 2008. For the three months ended September 30, 2008 and 2007, we accrued $2 million and $0 million, respectively, and for the nine months ended September 30, 2008 and 2007, we accrued $6 million and $6 million, respectively, of excise tax attributable to undistributed ordinary income, which is included in our provision for income taxes on the accompanying consolidated statements of operations. For both the three and nine months ended September 30, 2007, we accrued $4 million of excise tax attributable to undistributed capital gains, which is included in net realized gain on the accompanying consolidated statements of operations. For the three and nine months ended September 30, 2008, we recorded a tax benefit of $5 million and $1 million, respectively, for the reversal of excise tax accrued on undistributed capital gains as the amounts were distributed as of September 30, 2008 as a “deemed distribution”, which are included in net realized gains on the accompanying consolidated statements of operations. Prior to the third quarter of 2008, our intent was to distribute long-term capital gains.

We did not have any uncertain tax positions that met the recognition or measurement criteria of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes- an interpretation of FASB Statement No. 109, as of December 31, 2007 or September 30, 2008. We did not have any unrecognized tax benefits as of December 31, 2007 or September 30, 2008.

Although we file federal and state tax returns, our major tax jurisdiction is federal for American Capital and ACFS. The 2004, 2005 and 2006 federal tax years for American Capital and ACFS remain subject to examination by the IRS.

Note 11. Shareholders’ Equity

Our common stock activity for the nine months ended September 30, 2008 and 2007 was as follows (in millions):

	September 30,
	2008		2007
Common stock outstanding at beginning of period	195.9		147.6
Issuance of common stock	12.7		39.0
Issuance of common stock under stock option plans	0.2		0.8
Issuance of common stock under dividend reinvestment plan	—		0.8
Deconsolidation of stock held in ECFS deferred compensation trusts	—		0.7
Purchase of treasury stock	(0.2	)	—
Purchase of common stock held in deferred compensation trusts, net	(1.4	)	(1.1	)
Common stock outstanding at end of period	207.2		187.8

55

AMERICAN CAPITAL, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

(in millions, except per share data)

Equity Offerings

For the nine months ended September 30, 2008 and 2007, we completed several public offerings of our common stock in which shares were sold either directly by us or by forward purchasers in connection with forward sale agreements (“FSA”). As of September 30, 2008, all of the FSA have been fully settled. The following table summarizes the total shares sold directly by us, including shares sold pursuant to underwriters’ over-allotment options and through FSA, and the proceeds we received, excluding underwriting fees and issuance costs, for the public offerings of our common stock for the nine months ended September 30, 2008 and 2007 (in millions):

	Shares Sold	Proceeds, Net of Underwriters’ Discount		Average Price
Issuances under November 2007 FSA	4.0	$	142	$	35.61
March 2008 public offering	8.7		302		34.77
Total for the nine months ended September 30, 2008	12.7	$	444	$	34.96
September 2007 public offering	0.9	$	34	$	37.63
Issuances under June 2007 FSA	2.9		126		43.16
June 2007 public offering	17.4		748		43.02
June 2007 direct offering	0.2		11		46.47
Issuances under March 2007 FSA	6.0		259		43.17
Issuances under January 2007 FSA	2.0		88		43.84
March 2007 public offering	4.4		187		43.03
January 2007 public offering	5.2		231		44.11
Total for the nine months ended September 30, 2007	39.0	$	1,684	$	43.14

In March 2008, we completed a public offering in which 8.7 million shares of our common stock were sold at a public offering price of $36.41 per share. Upon completion of the offering we received proceeds, net of the underwriters’ discount, of $302 million in exchange for the 8.7 million common shares. In addition, we granted the underwriters an over-allotment option to purchase up to an additional 1.3 million shares of our common stock. The over-allotment option expired without being exercised by the underwriters.

Stock Buy-Back Plan

In January 2008, we announced that our Board of Directors authorized a stock buy-back program, which allowed for the repurchase of up to a maximum of $500 million of our common stock at prices below our net asset value per share as reported in our then most recently published financial statements. In November 2008, our Board of Directors terminated the stock buy-back program. During the three months ended March 31, 2008, we purchased a total 0.2 million shares of our common stock in the open market for $6 million at an average price of $31.20 per share under this program. We did not make any purchases under this program during the three months ended June 30, 2008 and September 30, 2008.

Note 12. Subsequent Events

On November 10, 2008, American Capital and European Capital entered into an implementation agreement regarding our proposal to acquire all of the ordinary shares of European Capital held by other investors by means of a scheme of arrangement provided for under Guernsey company law. Terms of the agreement call for each

56

AMERICAN CAPITAL, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

(in millions, except per share data)

European Capital shareholder to receive 0.333 American Capital shares of common stock for every one ordinary share of European Capital. Based on the closing price of American Capital common stock on November 7, 2008, this represents total consideration of $158 million for 32.3% of European Capital outstanding ordinary shares not already owned by us, or a price of $4.59 per ordinary share of European Capital. This implies a total market capitalization of $490 million and a total enterprise value of $2.0 billion. We currently own 67.7% of European Capital. The proposed acquisition is subject to approval by a special majority of the shareholders of European Capital other than American Capital, and Guernsey court approval and other normal closing requirements. In addition, our shareholders will be asked to approve the issuance of our common stock in connection with the transaction. The proposed acquisition is expected to close in the first quarter of 2009. The implementation agreement provides that prior to the closing of the transaction, European Capital will not declare additional dividends without the prior approval of us. In the event that any dividends are declared by either us or European Capital with a record date after the date of this announcement and prior to effective date, an appropriate adjustment will be made to the consideration payable to European Capital shareholders pursuant to the agreement.

57

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

Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is designed to provide a reader of American Capital’s financial statements with a narrative from the perspective of management. Our MD&A is presented in four sections:

• Executive Overview

• Results of Operations

• Financial Condition, Liquidity and Capital Resources

• Forward-Looking Statements

EXECUTIVE OVERVIEW

We are the only private equity fund and alternative asset management company that is a member of the S&P 500. We primarily invest in senior debt, subordinated debt and equity in the buyouts of private companies sponsored by us (“American Capital One-Stop Buyouts™”) and buyouts of private companies sponsored by other private equity firms (“American Capital One Stop Financings”) and provide capital directly to early stage and mature private and small public companies. In addition, we also invest in structured product investments including CMBS, CLO and CDO securities (“Structured Products”) and invest in alternative asset funds managed by us. We are also an alternative asset manager with $17 billion of capital resources under management as of September 30, 2008.

Our primary business objectives are to increase our taxable income, net realized earnings and net asset value by investing in private equity, private debt, private real estate investments, early, middle and late stage technology investments, special situations, credit opportunities, alternative asset funds managed by us and structured finance investments with attractive current yields and/or potential for equity appreciation and realized gains.

Recent Global Financial Crisis

There have been traumatic developments in the capital markets worldwide over the past eighteen months. These developments began with credit problems in residential real estate, which led to a lack of liquidity and dramatic depreciation of residential real estate, and by extension, residential mortgage backed securities. The problems soon extended to disruptions in the markets and value of other structured finance products, including CMBS, CLO’s and short term structured investment vehicles. It is worth noting that of the various classes of collateral for these structured products, only residential real estate has experienced significant credit and default problems to date. Nevertheless, the markets for virtually all structured products experienced significant valuation and liquidity issues.

These developments caused a series of failures to befall a large number of financial institutions, which participated in the origination or underwriting of structured products or that invested in them. Public companies have had to depreciate their assets as trading values of structured finance products and other credit assets declined. At the end of the first quarter of 2008, The Bear Stearns Companies, Inc. collapsed and was sold at a low price to JP Morgan Chase & Co., with a large amount of Federal government assistance. This was followed by almost weekly revelations from September through October 2008 of illiquid and teetering financial institutions, government assistance and rapid mergers including Lehman Brothers Holdings, Inc., Washington Mutual, Inc., Federal National Mortgage Association (Fannie Mae), Federal Home Loan Mortgage Corporation (Freddie Mac), American International Group, Inc., Merrill Lynch & Co., Inc. and Wachovia Corporation. During this period, there were also runs on deposits at several major banks, as well as runs on money market funds.

58

These developments have caused large and small corporations the world over to have significant difficulty borrowing on a short and long term basis and in raising capital. This has adversely affected aspects of businesses that rely on borrowed funds and new capital to grow and fund operations.

The Federal government has responded to this financial crisis in unprecedented ways in an effort to infuse liquidity back into the capital markets. The Federal government adopted the Emergency Economic Stabilization Act, which gives the U.S. Treasury the power to purchase up to $700 billion of troubled assets from financial institutions. It is intended that financial institutions will use the cash from these sales for their normal lending and investing activities, and that by the Federal government purchasing these assets, downward pressure on the financial markets will be eased and financial assets in general will begin to appreciate. The Federal government and European governments have also curtailed the ability of investors to short certain stocks and to eliminate naked shorting of stocks. To reinforce confidence in money market funds, the Federal government has announced that they will temporarily guarantee money market funds from losses and have expanded their emergency lending to allow commercial banks to finance purchased asset-backed securities from money market funds. In addition, the Federal government began purchasing short-term debt obligations issued by Fannie Mae and Freddie Mac. Also, the Federal Reserve and European central banks have reacted by lowering their target short-term interest rates several times.

We have been significantly impacted by these developments, as has virtually every financial institution in the world. The global financial crisis has impacted our ability to currently access the debt and equity capital markets, has resulted in significant depreciation of our investment portfolio and may impact our ability to continue to realize current portfolio investments in the near term. However, we believe we have been impacted less than many financial institutions due to the overall high quality and good performance of our portfolio investments and our low leveraged balance sheet. As a business development company (“BDC”), we are limited to a 1:1 debt to equity ratio, and as of September 30, 2008, our debt to equity ratio was 0.9:1. Also, our debt maturing in the next twelve months is only $160 million. We continued to generate liquidity through the sales and repayments of portfolio investments generating over $1.9 billion of realizations of portfolio investments in the first nine months of 2008 and nearly $3.4 billion in the past twelve months. However, although we currently have investments in various stages of the sales process, the increasing liquidity crisis could make it difficult for us to continue to generate significant liquidity through sales of portfolio investments. We also believe that the liquidity crisis will likely limit our ability to raise public equity and public and privately sourced debt through the remainder of 2008 and possibly into 2009. Our remaining 2008 business plan continues to assume no new capital raises and the reinvestment of capital only as we experience liquidity through realizations from exits and repayments.

The deterioration in the credit markets has created general market volatility and illiquidity, resulting in significant declines in the market values of a broad range of debt and equity investments. We were not immune to the impacts of these market dynamics as our results for the first, second and third quarters of 2008 clearly indicate through the recording of net unrealized depreciation of $997 million, $264 million and $698 million, respectively, in our investment portfolio. The majority of the depreciation during the first nine months of 2008 was due to declining trading prices and continued widening of investment spreads as well as our adoption of Statement of Financial Accounting Standards (“SFAS”) No. 157, Fair Value Measurements, or SFAS No. 157, on January 1, 2008, a new accounting standard that provides a framework for measuring the fair value of assets and liabilities. These factors had a greater impact on the unrealized depreciation of our investments during these periods than the credit quality of our investment portfolio. In general, the credit quality of our investment portfolio remains good considering that we may likely be in a recession.

The industry-wide reduction in available senior and mezzanine debt capital due to the liquidity crisis has resulted in more favorable pricing on debt, which has driven up gross returns and led to a favorable investing environment for us. We have experienced a widening of expected returns on our new debt investments in the past twelve months. Our ability to offer a staple financing package to buyers of our American Capital One-Stop Buyouts^TM investments also allows us to increase our investment spreads in this environment, while at the same time we are moving up the balance sheet in more senior investments.

59

For the three months ended September 30, 2008, we reported net operating income of $153 million, or $0.74 per diluted share, net realized earnings of $150 million, or $0.72 per diluted share and a net loss of $548 million, or $2.63 per diluted share. The net loss for the third quarter of 2008 was driven largely by the $698 million of net unrealized depreciation. For the nine months ended September 30, 2008, we reported net operating income of $449 million, or $2.22 per diluted share, net realized earnings of $528 million, or $2.61 per diluted share and a net loss of $1,431 million, or $7.06 per diluted share. The net loss for the nine months ended September 30, 2008 was driven largely by the $1,959 million of net unrealized depreciation.

Dividends

We have revised our dividend policy to manage our capital base proactively in the current volatile markets. We have retained our 2008 net long-term capital gains and will retain future net long-term capital gains and treat them as “deemed distributions”. We do not expect to pay further dividends for the remainder of 2008. Our Board of Directors will evaluate the declaration of our quarterly dividend after our financial results are determined each quarter, so that we may more precisely assess our taxable income, cash flow and changes in fair value to better manage our tangible net worth in the current volatile markets.

As of September 30, 2008, which is our tax year end, we had undistributed ordinary income of $518 million. We paid a dividend of $218 million on October 14, 2008 reducing our undistributed ordinary income to $300 million. We expect to pay this undistributed ordinary income as a dividend to our shareholders by September 30, 2009 in order to avoid paying income taxes on our taxable income.

For our tax year ended September 30, 2008, we had net long-term capital gains of $155 million. We elected to retain these long-term capital gains and treat them as a “deemed distribution” to our shareholders by paying a 35% Federal tax, or $54 million, on behalf of our shareholders. Shareholders report their share of the retained capital gains on their 2008 income tax returns as if it had been received and report a tax credit for the tax paid on their behalf by us. Shareholders then add the amount of the “deemed distribution”, net of such tax, to the basis of their shares.

American Capital Investing Activities

We provide investment capital to middle market companies, which we generally consider to be companies with sales between $10 million and $750 million. We primarily invest in senior debt, subordinated debt and equity in the buyouts of private companies sponsored by us, the buyouts of private companies sponsored by other private equity firms and directly to early stage and mature private and small public companies. Currently, we may invest up to $800 million in a single middle market transaction in North America. We also invest in Structured Products and in alternative asset funds managed by us. For summary financial information of our investment portfolio by segment and geographic area, see Note 5 to the interim consolidated financial statements in Part I, Item I of this Quarterly Report on Form 10-Q.

We seek to be a long-term partner with our portfolio companies. As a long-term partner, we will invest capital in a portfolio company subsequent to our initial investment if we believe that it can achieve appropriate returns for our investment. Add-on financings fund (i) strategic acquisitions by 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.

60

The total value of our investment portfolio was $9,097 million and $10,928 million as of September 30, 2008 and December 31, 2007, respectively. During the nine months ended September 30, 2008 and 2007, we originated investments in 60 and 131 portfolio companies, respectively. Our new investment amounts represent the gross committed capital on the origination date. The type and aggregate dollar amount of our new investments during the three and nine months ended September 30, 2008 and 2007 were as follows (in millions):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2008		2007		2008		2007
Investments in Managed Funds	$	—	$	229	$	525	$	471
Financing for Private Equity Buyouts		348		231		457		1,188
Direct Investments		20		74		183		633
American Capital Sponsored Buyouts		—		586		303		2,503
Structured Products		3		183		151		525
Add-On Financing for Growth		2		53		358		75
Add-On Financing for Recapitalizations		—		26		101		298
Add-On Financing for Acquisitions		30		11		96		273
Add-On Financing for Working Capital in Distressed Situations		40		8		96		25
Total	$	443	$	1,401	$	2,270	$	5,991

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

	Three Months Ended September 30,				Nine Months Ended September 30,
	2008		2007		2008		2007
Principal Prepayments	$	153	$	309	$	658	$	938
Senior Loan Syndications		48		648		343		1,298
Scheduled Principal Amortization		24		18		69		53
Payment of Accrued PIK Interest and Dividends and OID		24		11		60		45
Sale of CMBS Securities		—		402		—		402
Sale of Equity Investments		271		110		800		315
Total	$	520	$	1,498	$	1,930	$	3,051

Public Manager of Funds of Alternative Assets

We are a leading global alternative asset manager of third-party funds. In addition to managing American Capital’s assets and providing management services to portfolio companies of American Capital, we also manage European Capital Limited (“European Capital”), AGNC, American Capital Equity I, LLC (“ACE I”), American Capital Equity II, LLC (“ACE II”), ACAS CLO 2007-1, Ltd. (“ACAS CLO-1”) and American Capital CRE CDO 2007-1, Ltd. (“ACAS CRE CDO”). We may manage third-party funds either through a consolidated operating subsidiary or through a wholly-owned portfolio company. We refer to the asset management business throughout this report to include the asset management activities conducted by both consolidated operating subsidiaries and wholly-owned alternative asset fund management portfolio companies. As of September 30, 2008, all of our third-party alternative asset fund management services were conducted through our wholly-owned portfolio company, American Capital, LLC.

As of September 30, 2008, our assets under management totaled $16 billion, including $6 billion under management in the third-party funds named above. As of September 30, 2008, our capital resources under management totaled $17 billion, including $7 billion under management in the third-party funds named above.

61

Through our asset management business, American Capital, LLC generally earns base management fees based on the size of the funds and incentive income based on the performance of the funds it manages. In addition, we may invest directly into our alternative asset funds and earn investment income from our direct investments in those funds. We intend to grow our existing funds, while continuing to create innovative products to meet the increasing demand of sophisticated investors for superior risk-adjusted investment returns.

The following table sets forth certain information with respect to our funds under management as of September 30, 2008:

	American Capital	European Capital	AGNC	ACE I	ACE II	ACAS CLO-1	ACAS CRE CDO
Fund type	Public Alternative Asset Manager and Fund	Public Fund - London Stock Exchange	Public REIT Fund - The NASDAQ Global Market	Private Fund	Private Fund	Private Fund	Private Fund
Established	1986	2005	2008	2006	2007	2006	2007
Assets under management	$9.8 Billion(1)	$3.2 Billion(2)	$1.7 Billion	$0.7 Billion	$0.4 Billion	$0.4 Billion	$0.1 Billion
Investment types	Senior and Subordinated Debt, Equity, Structured Products	Senior and Subordinated Debt and Equity	Agency Securities	Equity	Equity	Senior Debt	CMBS
Equity capital type	Permanent	Permanent	Permanent	Finite Life	Finite Life	Finite Life	Finite Life

(1) Includes our investment in third-party funds that we manage.

(2) As of June 30, 2008.

European Capital is a publicly traded fund, which is not registered under U.S. securities law, and invests in and sponsors management and employee buyouts, invests in private equity buyouts and provides capital directly to private and mid-sized public companies primarily in Europe. European Capital was established in Guernsey in 2005. On May 10, 2007, European Capital closed on an IPO of ordinary shares. The ordinary shares were admitted to the Official List of the U.K. Financial Services Authority and to trading on the main market of the London Stock Exchange under the ticker symbol “ECAS.” American Capital, LLC earns an annual base management fee of 2% of European Capital’s assets and receives 20% of the net profits of European Capital, subject to certain hurdles.

AGNC is a publicly traded mortgage real estate investment trust, or REIT, that invests exclusively in single-family residential mortgage pass-through securities and collateralized mortgage obligations, or CMOs, on a leveraged basis. These investments consist of securities issued and guaranteed by government-sponsored entities such as Fannie Mae and Freddie Mac or by a U.S. Government agency such as the Government National Mortgage Association. On May 20, 2008, AGNC successfully completed its IPO of 10 million shares of common stock for net proceeds, net of the underwriters’ discount and estimated expenses, of $186 million. In a private placement concurrent with the AGNC IPO, we purchased 5 million shares of AGNC common stock at the IPO price of $20.00 per share, for proceeds of $100 million. AGNC’s net proceeds from the IPO and the concurrent private placement were $286 million. The shares are traded on The NASDAQ Global Market under the symbol “AGNC.” American Capital, LLC earns an annual base management fee of 1.25% of AGNC’s shareholders’ equity.

ACE I is a private equity fund established in 2006 with $1 billion of equity commitments from third-party investors. ACE I purchased 30% of our equity investments in 96 portfolio companies in 2006 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 American Capital 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 equity commitments are recallable for additional co-investments with American Capital once they have been distributed

62

to the third-party ACE I investors. As of September 30, 2008, there were $90 million of recallable distributions available for add-on investments. American Capital, LLC manages ACE I in exchange for a 2% annual base management fee on the net cost basis of ACE I’s assets and 10% to 30% of the net profits of ACE I, subject to certain hurdles.

ACE II is a private equity fund established in 2007 with $585 million of equity commitments from third-party investors. ACE II purchased 17% of our equity investments in 80 portfolio companies in 2007 for an aggregate purchase price of $488 million. The remaining $97 million commitments will be used to fund add-on investments in the 80 portfolio companies. In addition, 10%, or $58.5 million, of the $585 million of equity commitments are recallable for additional co-investments with American Capital once they have been distributed to the third-party ACE II investors. As of September 30, 2008, ACE II had $90 million and $59 million of unfunded equity commitments and recallable distributions available for add-on investments, respectively. American Capital, LLC manages ACE II in exchange for a 2% annual base management fee on the net cost basis of ACE II’s assets and 10% to 30% of the net profits of ACE II, subject to certain hurdles.

In April 2007, ACAS CLO-1 completed a $400 million securitization of broadly syndicated and middle market senior loans. We purchased 55% of the BB rated notes and 70% of the non-rated subordinated notes in ACAS CLO-1 for a total purchase price of $33 million. American Capital, LLC earns an annual 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.

ACAS CRE CDO was established in 2007 as a commercial real estate collateralized debt obligation trust that holds investments in subordinated tranches of CMBS trusts. We own investment grade and non-investment grade notes and preferred shares of ACAS CRE CDO. American Capital, LLC serves as the collateral manager for ACAS CRE CDO in exchange for an annual senior management fee of 7.5 basis points and a subordinate management fee of 7.5 basis points.

Summary of Critical Accounting Policies

The preparation of our financial condition and results of operations requires us to make judgments and estimates that may have a significant impact upon our financial results. We believe that of our significant accounting policies, the following require estimates and assumptions that require complex, subjective judgments by management, which can materially impact reported results: Valuation of Investments; Interest and Dividend Income Recognition; Stock-based Compensation; and Derivative Financial Instruments. Our accounting policy for the Valuation of Investments was modified during the first and third quarters of 2008 and is presented below. The remaining critical accounting policies are more fully described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2007.

Valuation of Investments

Our investments are carried at fair value in accordance with the 1940 Act and SFAS No. 157. In accordance with the 1940 Act, unrestricted minority-owned publicly traded securities for which market quotations are readily available are valued at the closing market quote on the valuation date and majority-owned publicly traded securities and other privately held securities are valued as determined in good faith by our Board of Directors. For securities of companies that are publicly traded for which we have a majority-owned interest, the value is based on the closing market quote on the valuation date plus a control premium if our Board of Directors determines in good faith that additional value above the closing market quote would be obtainable upon a sale or transfer of our controlling interest.

We adopted SFAS No. 157 on January 1, 2008. SFAS No. 157 provides a framework for measuring the fair value of assets and liabilities. SFAS No. 157 also provides guidance regarding a fair value hierarchy, which

63

prioritizes information used to measure fair value and the effect of fair value measurements on earnings and provides for enhanced disclosures determined by the level within the hierarchy of information used in the valuation. SFAS No. 157 applies whenever other standards require (or permit) assets or liabilities to be measured at fair value but does not expand the use of fair value in any new circumstances.

SFAS No. 157 defines fair value in terms of the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The price used to measure the fair value is not adjusted for transaction costs while the cost basis of our investments may include initial transaction costs. Under SFAS No. 157, the fair value measurement also assumes that the transaction to sell an asset occurs in the principal market for the asset or, in the absence of a principal market, the most advantageous market for the asset. The principal market is the market in which the reporting entity would sell or transfer the asset with the greatest volume and level of activity for the asset. In determining the principal market for an asset or liability under SFAS No. 157, it is assumed that the reporting entity has access to the market as of the measurement date. If no market for the asset exists or if the reporting entity does not have access to the principal market, the reporting entity should use a hypothetical market.

In October 2008, the Financial Accounting Standards Board, or the FASB, issued FASB Staff Position (“FSP”) No. 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active. FSP No. 157-3 clarifies the application of SFAS No. 157 in a market that is not active. More specifically, FSP No. 157-3 states that significant judgment should be applied to determine if observable data in a dislocated market represents forced liquidations or distressed sales and are not representative of fair value in an orderly transaction. FSP No. 157-3 also provides further guidance that the use of a reporting entity’s own assumptions about future cash flows and appropriately risk-adjusted discount rates is acceptable when relevant observable inputs are not available. In addition, FSP No. 157-3 provides guidance on the level of reliance of broker quotes or pricing services when measuring fair value in a non active market stating that less reliance should be placed on a quote that does not reflect actual market transactions and a quote that is not a binding offer. The guidance in FSP No. 157-3 is effective upon issuance for all financial statements that have not been issued and any changes in valuation techniques as a result of applying FSP No. 157-3 are accounted for as a change in accounting estimate.

The market in which we would sell our private finance investments is the mergers and acquisition (“M&A”) market. Under SFAS No. 157, we have indentified the M&A market as our principal market for portfolio companies only if we have the ability to initiate a sale of the portfolio company as of the measurement date. We decide whether we have the ability to initiate a sale of a portfolio company based on our ability to control or gain control of the board of directors of the portfolio company as of the measurement date. In evaluating if we can control or gain control of a portfolio company as of the measurement date, we include our equity securities and those securities held by entities managed by American Capital, LLC, on a fully diluted basis. For investments in securities of portfolio companies for which we do not have the ability to control or gain control as of the measurement date and for which there is no active market, our principal market under SFAS No. 157 is a hypothetical secondary market. The determination of the principal market used to estimate the fair value of each of our investments can have a material impact on our estimate of the fair value of our investments.

The levels of fair value inputs used to measure our investments are characterized in accordance with the fair value hierarchy established by SFAS No. 157. Where inputs for an asset or liability fall into more than one level in the fair value hierarchy, the investment is classified in its entirety based on the lowest level input that is significant to that investment’s fair value measurement. We use judgment and consider factors specific to the investment in determining the significance of an input to a fair value measurement. The three levels of the fair value hierarchy and investments that fall into each of the levels are described below:

• Level 1: Level 1 inputs are unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. We use Level 1 inputs for investments in publicly traded unrestricted securities for which we do not have a controlling interest. Such investments are valued at the closing price on the measurement date. We did not value any of our investments using Level 1 inputs as of September 30, 2008.

64

• Level 2: Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. We did not value any of our investments using Level 2 inputs as of September 30, 2008.

• Level 3: Level 3 inputs are unobservable and cannot be corroborated by observable market data. We use Level 3 inputs for measuring the fair value of substantially all of our investments as follows:

- For investments in securities of companies that are publicly traded for which we have a controlling interest, the fair value of the investment is based on the closing price of the security on the measurement date adjusted for the fair value of a control premium, if any, based on the value above the closing market quote that would be obtainable upon a sale of our controlling interest. A control premium incorporated into the valuation would be considered a Level 3 input if it has a significant impact on the determination of fair value.

- For securities of portfolio companies for which we have identified the M&A market as the principal market, we estimate the fair value based on the enterprise value waterfall (“Enterprise Value Waterfall”) valuation methodology. Under the Enterprise Value Waterfall valuation methodology, we estimate the enterprise fair value of the portfolio company and then waterfall the enterprise value over the portfolio company’s securities in order of their preference relative to one another. For minority equity securities, we also estimate the fair value using the Enterprise Value Waterfall valuation methodology. To estimate the enterprise value of the portfolio company, we prepare an analysis consisting of traditional valuation methodologies including market, income and cost approaches. We weight some or all of the traditional valuation methods based on the individual circumstances of the portfolio company in order to conclude on our estimate of the enterprise value. The methodologies consist of valuation estimates based on: valuations of comparable public companies, recent sales of private and public comparable companies, discounting the forecasted cash flows of the portfolio company, estimating the liquidation or collateral value of the portfolio company’s assets, third-party valuations of the portfolio company, considering offers from third-parties to buy the company, estimating the value to potential strategic buyers and considering the value of recent investments in the equity securities of the portfolio company. To determine the enterprise value of a portfolio company, we analyze its historical and projected financial results. This financial and other information is generally obtained from our portfolio companies, and may represent unaudited, projected or proforma financial information. The assumptions incorporated in the valuation methodologies used to estimate the enterprise value consists primarily of unobservable Level 3 inputs, including management assumptions based on judgment. A change in these assumptions could have a material impact on the determination of fair value.

- For securities of portfolio companies for which we have identified the hypothetical secondary market as the principal market, we determine the fair value based on the assumptions that a hypothetical market participant would use to value the security in a current hypothetical sale using a market yield (“Market Yield”) valuation methodology. In applying the Market Yield valuation methodology, we estimate the fair value based on such factors as third-party broker quotes and market participant assumptions including synthetic credit ratings, estimated remaining life, current market yield and interest rate spreads of similar securities as of the measurement date. The assumptions used to estimate the fair value in a hypothetical secondary market are considered primarily Level 3 inputs. We weight third-party broker quotes in determining fair value based on our understanding of the level of actual transactions used by the broker to develop the quote and whether the quote was an indicative price or binding offer. In estimating the remaining life, we generally use an average life based on market data of the average life of similar debt securities. However, if we have information available to us that the debt security is expected to be repaid in the near term, we would use an estimated life based on the expected repayment date. The average life used to estimate the fair value of our debt securities is generally shorter than the legal maturity of the loans as our loans have historically been prepaid prior to the maturity date. The current interest rate spreads used to estimate the fair value of our debt securities is based on our experience of

65

current interest rate spreads on similar securities. A change in the unobservable inputs and assumptions that we use to estimate the fair value of our debt securities could have a material impact on the determination of fair value.

- We value our investments in Structured Products using the Market Yield valuation methodology. We estimate the fair value based on such factors as third-party broker quotes and our cash flow forecasts subject to our assumptions a market participant would use regarding the investments’ underlying collateral including, but not limited to, assumptions of default and recovery rates, reinvestment spreads and prepayment rates. Cash flow forecasts are discounted using a market participant’s market yield assumptions which are derived from multiple sources including, but not limited to, third-party broker quotes, recent investments and securities with similar structure and risk characteristics. We weight the use of third-party broker quotes in determining fair value based on our understanding of the level of actual transactions used by the broker to develop the quote and whether the quote was an indicative price or binding offer. The cash flow forecasts and market yields used to discount the cash flows incorporate a significant amount of Level 3 inputs. A change in our default and recovery rate assumptions in the cash flow forecasts or a change in the market yield assumptions could have a material impact on the determination of fair value.

- We value derivative instruments based on fair value information from both the derivative counterparty as adjusted for nonperformance risk considerations and third-party pricing services. We corroborate the fair value by analyzing the estimated net present value of the future cash flows using relevant market forward interest rate yield curves in effect at the end of the period as adjusted for quantitative and qualitative nonperformance risk considerations.

Due to the uncertainty inherent in the valuation process, such estimates of fair value may differ significantly from the values that would have been used had a ready market for the securities existed, and the differences could be material. Additionally, changes in the market environment and other events that may occur over the life of the investments may cause the gains or losses ultimately realized on these investments to be different than the valuations currently assigned.

See Notes 3 and 5 to the interim consolidated financial statements in Part I, Item I of this Quarterly Report on Form 10-Q for further information regarding the classification of our investment portfolio by Levels 1, 2 and 3 as of September 30, 2008.

RESULTS OF OPERATIONS

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 and prepayment fees earned from investing in debt and equity securities and the fees we earn from portfolio company management, asset management, financing and transaction structuring activities, less our operating expenses and provision for income taxes.

• The second element is “Net realized (loss) gain 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 settlements of derivatives.

• The third element is “Net unrealized (depreciation) appreciation of investments,” which is the net change in the estimated fair value of our investments and the estimated fair value of the future payment streams of our interest rate derivatives, at the end of the period compared with their estimated fair values at the beginning of the period or their stated costs, as appropriate. In addition, our net unrealized (depreciation) appreciation of investments includes the foreign currency translation from converting assets and liabilities denominated in a foreign currency to the U.S. dollar.

66

The consolidated operating results for the three and nine months ended September 30, 2008 and 2007 were as follows (in millions):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2008			2007			2008			2007
Operating income	$	278		$	310		$	833		$	886
Operating expenses		123			163			390			463
Operating income before income taxes		155			147			443			423
(Provision) benefit for income taxes		(2	)		6			6			(3	)
Net operating income		153			153			449			420
Net realized (loss) gain on investments		(3	)		71			79			170
Net realized earnings		150			224			528			590
Net unrealized (depreciation) appreciation of investments		(698	)		(203	)		(1,959	)		353
Net (decrease) increase in net assets resulting from operations	$	(548	)	$	21		$	(1,431	)	$	943

Net Operating Income

Operating Income

We have two primary lines of business: Investing and Asset Management/Advisory. We derive the majority of our operating income from our Investing segment, which primarily invests in senior and subordinated debt and equity of middle market companies with attractive current yields and/or potential for equity appreciation and realized gains.

Our Asset Management/Advisory segment provides management services to both our portfolio company investments and third-party alternative asset funds. Our Asset Management/Advisory segment includes financial advisory services provided to our portfolio company investments and includes both management fees for middle market portfolio company management for providing advice and analysis to our middle market portfolio companies, 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. These services are primarily provided by our consolidated operating subsidiary, American Capital Financial Services, Inc. (“ACFS”). Our Asset Management/Advisory Segment also includes our third-party alternative asset fund management business. As of September 30, 2008, all of our third-party alternative asset fund management services in our Asset Management/Advisory segment are conducted through our wholly-owned portfolio company, American Capital, LLC. To the extent American Capital, LLC declares regular quarterly dividends of its undistributed cumulative net operating income to us, such dividends would be included in our Asset Management/Advisory segment as dividend income.

The following is a summary of our operating income by segment for the three and nine months ended September 30, 2008 and 2007 (in millions):

	Three Months Ended September 30, 2008						Three Months Ended September 30, 2007
	Investing		Asset Management/ Advisory		Consolidated		Investing		Asset Management/ Advisory		Consolidated
Interest and dividend income	$	251	$	—	$	251	$	259	$	9	$	268
Fee and other income		2		25		27		7		35		42
Total operating income	$	253	$	25	$	278	$	266	$	44	$	310

67

	Nine Months Ended September 30, 2008						Nine Months Ended September 30, 2007
	Investing		Asset Management/ Advisory		Consolidated		Investing		Asset Management/ Advisory		Consolidated
Interest and dividend income	$	730	$	18	$	748	$	684	$	38	$	722
Fee and other income		9		76		85		13		151		164
Total operating income	$	739	$	94	$	833	$	697	$	189	$	886

Investing Segment

Operating income from our Investing segment consisted of the following for the three and nine months ended September 30, 2008 and 2007 (in millions):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2008		2007		2008		2007
Interest income on debt securities	$	181	$	199	$	551	$	541
Dividend income on equity securities		69		57		172		136
Interest income on bank deposits		1		3		7		7
Interest and dividend income		251		259		730		684
Prepayment fees		2		5		5		8
Other fees		—		2		4		5
Fee and other income		2		7		9		13
Total operating income	$	253	$	266	$	739	$	697

Interest income on debt securities decreased by $18 million, or 9%, and increased by $10 million, or 2%, for the three and nine months ended September 30, 2008, respectively, over the comparable periods in 2007 primarily due to a decline in the weighted average effective interest rate on our debt investments and an increase in non-accrual loans, partially offset by an increase in our debt investments. Dividend income on equity securities increased by $12 million, or 21%, and $36 million, or 26%, for the three and nine months ended September 30, 2008, respectively, over the comparable periods in 2007 primarily due to an increase in our equity investments. The following table summarizes selected data for our debt and equity investments, at cost, for the three and nine months ended September 30, 2008 and 2007 (dollars in millions):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2008			2007			2008			2007
Effective interest rate on debt investments(1)		10.6	%		12.1	%		11.0	%		11.9	%
Debt investments(1)	$	6,816		$	6,540		$	6,671		$	6,044
Average monthly one-month LIBOR		3.0	%		5.4	%		2.8	%		5.3	%
Non-accrual loans at face as of period end	$	602		$	309		$	602		$	309
Non-accrual loans at fair value as of period end	$	135		$	85		$	135		$	85
Effective yield on equity investments(1)(2)		7.0	%		5.8	%		5.8	%		5.6	%
Equity investments(1)(2)	$	3,924		$	3,982		$	3,987		$	3,274
Effective interest rate on debt and equity(1)(2)		9.3	%		9.7	%		9.0	%		9.7	%
Debt and equity investments(1)(2)	$	10,740		$	10,522		$	10,658		$	9,318

(1) Monthly weighted average.

(2) Excludes our equity investments in alternative asset fund management portfolio companies.

68

The monthly weighted average effective interest rate on debt investments, including CMBS, decreased 150 basis points to 10.6% and 90 basis points to 11.0% for the three and nine months ended September 30, 2008, respectively. This is primarily due to a decrease in LIBOR from the prior year resulting in lower interest income on our variable rate loans. As of September 30, 2008 and 2007, 49% and 41%, respectively, of our debt investments were variable rate loans. The decrease in the monthly weighted average effective interest rate is also due to an increase in non-accrual loans, partially offset by an increase in the interest spreads on new investments originated in the last twelve months.

The monthly weighted average effective yield on equity investments increased 120 basis points to 7.0% and increased 20 basis points to 5.8% for the three and nine months ended September 30, 2008, respectively. The comparisons to the prior year are impacted by an increase in dividend income in 2008 from direct equity investments in our alternative asset funds. We recorded dividend income on our equity investment in European Capital of $17 million and $51 million for the three and nine months ended September 30, 2008, respectively, compared to $13 million and $37 million for the three and nine months ended September 30, 2007, respectively. We also recorded dividend income of $5 million and $7 million on our equity investment in AGNC and $12 million and $21 million on our investment in Endeavor Fund I, LP for the three and nine months ended September 30, 2008, respectively, compared to no dividend income in 2007.

Asset Management/Advisory Segment

Operating income from our Asset Management/Advisory segment consisted of the following for the three and nine months ended September 30, 2008 and 2007 (in millions):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2008		2007		2008		2007
Dividend income	$	—	$	9	$	18	$	38
Loan financing fees		8		4		19		31
Equity financing fees		—		11		4		40
Transaction structuring fees		1		5		4		24
Fund asset management fees and reimbursements		8		5		22		27
Portfolio company advisory and administrative fees		5		8		17		21
Other		3		2		10		8
Fee and other income		25		35		76		151
Total operating income	$	25	$	44	$	94	$	189

Dividend Income

Each quarter, American Capital, LLC declares a dividend from its undistributed cumulative net operating income to us. The net operating income of American Capital, LLC is comprised of the base management fees, profit sharing (called carried interest or incentive fee) and transaction fees it earns less the operating expenses it incurs for providing fund management services. For the nine months ended September 30, 2008, American Capital, LLC declared dividends of $18 million compared to dividends of $38 million for the nine months ended September 30, 2007. The decrease in dividend income is attributable primarily to a decrease in American Capital, LLC’s net operating income in 2008. The decrease in net operating income is due mostly to lower transaction fees from lower investment volume of its private equity funds under management, mostly European Capital, and lower management fees due to a decrease in assets under management attributable to higher unrealized depreciation on the asset portfolio of European Capital.

Fee and Other Income

Loan financing fees for the three and nine months ended September 30, 2008 increased $4 million, or 100%, and decreased $12 million, or 39%, respectively, over the comparable periods in 2007. The increase in loan

69

financing fees for the three months ended September 30, 2008 was attributable to an increase in the fee collected as a percentage of the loan origination in 2008 as compared to the prior period, partially offset by a decrease in loan originations in 2008. The decrease in loan financing fees for the nine months ended September 30, 2008 was attributable to a decrease in loan originations, partially offset by an increase in the fee collected as a percentage of the loan originations in 2008 as compared to the prior period. The loan originations during the three and nine months ended September 30, 2008 decreased by $193 million and $2,116 million, respectively, over the comparable periods in 2007. The loan financing fees were 1.9% and 0.6% of loan originations for the three months ended September 30, 2008 and 2007, respectively, and 1.2% and 0.8% for the nine months ended September 30, 2008 and 2007, respectively. Loan fees received that are representative of additional yield are recorded as OID and accreted into interest income using the effective interest method and not included in fee income.

Equity financing fees for the three and nine months ended September 30, 2008 decreased $11 million, or 100%, and decreased $36 million, or 90%, respectively, over the comparable periods in 2007. Transaction structuring fees for the three and nine months ended September 30, 2008 decreased $4 million, or 80%, and decreased $20 million, or 83%, respectively, over the comparable periods in 2007. Equity financing fees and transaction structuring fees were significantly lower in 2008 due primarily to reduced volume of American Capital sponsored buyouts.

Prior to the second quarter of 2007, European Capital Financial Services (Guernsey) Limited (“ECFS”) was a consolidated operating subsidiary that earned alternative asset management fees and expense reimbursement revenues. The alternative asset management fees and expense reimbursements revenue earned by ECFS during the nine months ended September 30, 2007 was $15 million. There were no alternative asset management fees and expense reimbursements revenue recorded by us related to ECFS during the three months ended September 30, 2007 or for the three and nine months ended September 30, 2008 as it was deconsolidated in the second quarter of 2007.

Operating Expenses

Operating expenses decreased $40 million, or 25%, and $73 million, or 16%, for the three and nine months ended September 30, 2008, respectively, over the comparable periods in 2007. The comparisons of our operating expenses between the nine months ended September 30, 2008 and 2007 are impacted by the deconsolidation of ECFS in the second quarter of 2007. Our operating leverage was 1.5% and 1.9% for the three months ended September 30, 2008 and 2007, and 1.6% and 1.8% for the nine months ended September 30, 2008 and 2007, respectively. Operating leverage is our operating expenses plus those of ECFS post-deconsolidation, excluding stock-based compensation and interest expense, divided by our total assets under management at period end. Operating expenses consisted of the following for the three and nine months ended September 30, 2008 and 2007 (in millions):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2008		2007		2008		2007
Interest	$	50	$	79	$	161	$	214
Salaries, benefits and stock-based compensation		52		59		165		177
General and administrative		21		25		64		72
Total operating expenses	$	123	$	163	$	390	$	463

Interest Expense

Interest expense for the three and nine months ended September 30, 2008 decreased $29 million, or 37%, and $53 million, or 25%, respectively, over the comparable periods in 2007. The decrease in interest expense for the three months ended September 30, 2008 was due to a decrease in the weighted average borrowings together

70

with a decrease in weighted average interest rate due primarily to a decline in LIBOR. The decrease in interest expense for the nine months ended September 30, 2008 was attributable to a decrease in weighted average interest rate due primarily to a decline in LIBOR. Our weighted average borrowings were $4,339 million and $5,016 million for the three months ended September 30, 2008 and 2007, respectively. Our weighted average borrowings were $4,549 million and $4,542 million for the nine months ended September 30, 2008 and 2007, respectively. The weighted average interest rate on all of our borrowings for the three months ended September 30, 2008 and 2007 was 4.6% and 6.3%, respectively. The weighted average interest rate on all of our borrowings for the nine months ended September 30, 2008 and 2007 was 4.7% and 6.3%, respectively.

Salaries, Benefits and Stock-based Compensation

Salaries, benefits and stock-based compensation consisted of the following for the three and nine months ended September 30, 2008 and 2007 (in millions):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2008		2007		2008		2007
Salaries	$	29	$	38	$	88	$	114
Benefits		3		4		14		14
Stock-based compensation		20		17		63		49
Total salaries, benefits and stock-based compensation	$	52	$	59	$	165	$	177

Salaries, benefits and stock-based compensation decreased $7 million, or 12%, to $52 million and decreased $12 million, or 7%, to $165 million in the three and nine months ended September 30, 2008, respectively, over the comparable periods in 2007. The decrease is primarily due to lower incentive compensation in 2008 from not meeting operating performance criteria and the deconsolidation of ECFS, partially offset by annual salary increases. In response to the changing investment environment, in the second quarter of 2008 as part of a reorganization, we consolidated some of our offices and eliminated over 80 positions.

General and Administrative Expenses

General and administrative expenses decreased $4 million, or 16%, to $21 million, and decreased $8 million, or 11%, to $64 million, in the three and nine months ended September 30, 2008, respectively, over the comparable periods in 2007. The decrease is primarily due to lower employee recruiting expense and the deconsolidation of ECFS.

Provision for Income Taxes

We operate to qualify as a RIC under Subchapter M of the Code. In order to qualify as a RIC, we must annually distribute in a timely manner to our shareholders at least 90% of our taxable ordinary income based on our tax year. Taxable ordinary income includes net short-term capital gains but excludes net long-term capital gains. A RIC is not subject to federal income tax on the portion of its ordinary taxable income and long-term capital gains that are distributed to its shareholders, including “deemed distributions” discussed below. As permitted by the Code, a RIC can designate dividends paid in the subsequent tax year as dividends of current year ordinary taxable income and net long-term gains if those dividends are both declared by the extended due date of the RIC’s federal income tax return and paid to shareholders by the last day of the subsequent tax year. We have distributed or intend to distribute sufficient dividends to eliminate taxable income for our completed tax fiscal years. If we fail to satisfy the 90% distribution requirement or otherwise fail to qualify as a RIC in any tax year, we would be subject to tax in such year on all of our taxable income, regardless of whether we made any distributions to our shareholders. We have a tax year that ends on September 30.

71

In addition, a RIC may elect to retain its long-term capital gains by designating them as a “deemed distribution” to its shareholders and paying a federal tax of 35% on the long-term capital gains for the benefit of its shareholders. Shareholders would then report their share of the retained long-term capital gains on their income tax returns as if it had been received and report a tax credit for the tax paid on their behalf by the RIC. Shareholders then add the amount of the “deemed distribution,” net of such tax, to the basis of their shares.

We designated dividends paid in our tax year ended September 30, 2008 as dividends of our ordinary taxable income and long-term capital gains from our prior tax year ended September 30, 2007. Accordingly, dividends declared by June 16, 2008, the extended due date of our return, and paid by September 30, 2008, were comprised of a portion of our ordinary taxable income and all of our long-term capital gains from the tax year ended September 30, 2007.

For the tax year ended September 30, 2008, we had net long-term capital gains of $155 million. We elected to retain such capital gains by treating them as a “deemed distribution” and paying the federal tax on behalf of our shareholders of $54 million in October 2008, which is included in net realized gains (losses) on the accompanying consolidated statements of operations.

As of September 30, 2008, we had undistributed ordinary taxable income of $518 million. We paid a dividend of $218 million on October 14, 2008 reducing our undistributed ordinary taxable income to $300 million. In order for this undistributed ordinary taxable income to be considered distributed for our tax year ended September 30, 2008, it will need to be declared as a dividend by June 15, 2009 and paid by September 30, 2009. As of September 30, 2008, we did not have any undistributed long-term capital gains since they are treated as being distributed through the “deemed distribution”.

As a RIC, we are also subject to a nondeductible federal excise tax of 4% if we do not distribute at least 98% of our ordinary taxable 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 year ended December 31, 2007 and the one-year period ending October 31, 2007, we did not distribute at least 98% of our ordinary income and capital gains and paid the 4% excise tax. For the calendar year ended December 31, 2008, we do not expect to distribute at least 98% of our ordinary income and therefore we expect to pay the 4% excise tax for that period. Through September 30, 2008, we distributed all of our long-term capital gains through the “deemed distribution” and therefore did not accrue any excise tax on our long-term capital gains as of September 30, 2008. In the prior quarter, we had not expected to distribute all of our long-term capital gains for the period ended October 31, 2008 and therefore we accrued an excise tax that was reversed in the third quarter of 2008. For the three months ended September 30, 2008 and 2007, we accrued $2 million and $0 million, respectively, and for the nine months ended September 30, 2008 and 2007, we accrued $6 million and $6 million, respectively, of excise tax attributable to undistributed ordinary income, which is included in our provision for income taxes on the accompanying consolidated statements of operations. For both the three and nine months ended September 30, 2007, we accrued $4 million of excise tax attributable to undistributed capital gains, which is included in net realized gain on the accompanying consolidated statements of operations. For the three and nine months ended September 30, 2008, we recorded a tax benefit of $5 million and $1 million, respectively, for the reversal of excise tax accrued on undistributed capital gains as the amounts were distributed as of September 30, 2008 as a “deemed distribution”, which are included in net realized gains on the accompanying consolidated statements of operations. Prior to the third quarter of 2008, our intent was to distribute long-term capital gains.

Our consolidated taxable operating subsidiary, ACFS, is subject to corporate level federal and state income tax. For the three and nine months ended September 30, 2008, we recorded a tax benefit of $0 million and $13 million, respectively, compared to a tax provision of $6 million and $4 million for the three and nine months ended September 30, 2007, respectively. For the nine months ended September 30, 2008, ACFS had an operating loss due to significantly reduced fee income primarily as a result of lower new investment originations in 2008.

72

Net Realized (Loss) Gain on Investments

Our net realized (loss) gain on investments for the three and nine months ended September 30, 2008 and 2007 consisted of the following (in millions):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2008			2007			2008			2007
Contec Holdings, Ltd.	$	57		$	—		$	57		$	—
SSH Acquisition, Inc.		36			—			36			—
PaR Systems, Inc.		19			—			19			—
BPWest, Inc.		—			—			69			—
Pasternack Enterprises, Inc.		—			—			33			—
Exstream Holdings, Inc.		—			—			18			—
PHC Acquisition, Inc.		—			—			16			—
Technical Concepts, LLC		—			—			11			—
ACSAB, LLC		—			43			—			43
SAV Holdings, Inc.		—			43			—			43
EAG Acquisition, LLC		—			—			—			50
The Hygenic Corporation		—			—			—			22
Ranpak, Inc.		—			—			—			19
Other, net		21			12			28			46
Total gross realized portfolio gain		133			98			287			223
Stein World, LLC		(32	)		—			(32	)		—
ZAIS Investment Grade Limited IX		(12	)		—			(12	)		—
Safemark Acquisitions, Inc.		—			—			(12	)		—
Danchem Technologies, Inc.		(1	)		—			(12	)		—
NPC Holdings, Inc.		—			—			(11	)		—
nSpired Natural Foods, Inc.		—			—			(10	)		—
Sale of 22 CMBS investments		—			(22	)		—			(22	)
Logex Corporation		—			—			—			(21	)
Other, net		(15	)		(6	)		(34	)		(23	)
Total gross realized portfolio loss		(60	)		(28	)		(123	)		(66	)
Total net realized portfolio gain		73			70			164			157
Interest rate derivative periodic (payments) receipts, net		(9	)		6			(18	)		10
Interest rate derivative termination (payments) receipts, net		(5	)		(1	)		(7	)		7
Foreign currency transactions		(13	)		—			(7	)		—
Taxes on net realized gains		(49	)		(4	)		(53	)		(4	)
Total net realized (loss) gain	$	(3	)	$	71		$	79		$	170

A summary of each realized gain or loss of $15 million or more during the nine months ended September 30, 2008 and 2007 is included below:

In the third quarter of 2008, we received full repayment of our remaining $88 million subordinated debt investment in Contec Holdings, Ltd. and sold all of our equity interests for $165 million in proceeds realizing a total gain of $57 million offset by a reversal of unrealized appreciation of $58 million. We provided $135 million in subordinated debt financing to the purchasers.

In the third quarter of 2008, we received full repayment of our remaining $32 million subordinated debt investment in SSH Acquisition, Inc. and sold all of our equity interests for $59 million in proceeds realizing a

73

total gain of $36 million offset by a reversal of unrealized appreciation of $40 million. The gain that we recognized included escrowed proceeds that we expect to receive of $6 million. We provided $141 million in senior and subordinated debt financing to the purchasers.

In the third quarter of 2008, we sold all of our equity interests in PaR Systems, Inc. for $20 million in proceeds realizing a total gain of $19 million offset by a reversal of unrealized appreciation of $20 million. The gain that we recognized included escrowed proceeds that we expect to receive of $1 million. We provided $5 million in senior debt financing to the purchasers.

In the third quarter of 2008, all of the operating assets of Stein World, LLC were sold pursuant to a sale foreclosure initiated by the lenders senior to us. We did not receive any proceeds from the sale and wrote off our debt investments during the third quarter of 2008 realizing a loss of $32 million offset by a reversal of unrealized depreciation of $32 million.

In the second quarter of 2008, we received full repayment of our remaining $9 million subordinated debt investment in BPWest, Inc. and sold all of our equity interests for $75 million in proceeds realizing a total gain of $69 million offset by a reversal of unrealized appreciation of $71 million. The gain that we recognized included escrowed proceeds that we expect to receive of $4 million.

In the second quarter of 2008, we received full repayment of our remaining $27 million subordinated debt investment in PHC Acquisition, Inc. and sold equity interests for $32 million in proceeds realizing a total gain of $16 million offset by a reversal of unrealized appreciation of $20 million. We retained a 5.8% common equity interest in the acquiring portfolio company, Primrose Holding Corporation. The gain that we recognized included escrowed proceeds that we expect to receive of $4 million.

In the first quarter of 2008, we received full repayment of our remaining $29 million subordinated debt investment in Pasternack Enterprises, Inc. and sold all of our equity interests for $44 million in proceeds realizing a total gain of $33 million offset by a reversal of unrealized appreciation of $35 million. The gain that we recognized included escrowed proceeds that we expect to receive of $2 million.

In the first quarter of 2008, we received full repayment of our remaining $65 million subordinated debt investment in Exstream Holdings, Inc. and sold our equity interests for $306 million in proceeds realizing a total gain of $18 million offset by a reversal of unrealized appreciation of $23 million. The gain that we recognized included escrowed proceeds that we expect to receive of $8 million.

Our portfolio company ACSAB, LLC (“ACSAB”) held an investment in ASAlliances Biofuels, LLC (“ASAlliances”). During the third quarter of 2007, ASAlliances was sold to VeraSun Energy Corporation (“VeraSun”) (NYSE: VSE) for cash and stock consideration. ACSAB distributed to us our share of its sale proceeds, after tax, consisting of cash, stock of VeraSun and an escrow holding additional stock of VeraSun with a total value of $73 million. The value of the VeraSun stock on the date of the sale was $32 million and the expected proceeds of the escrow were $12 million. As part of the sale transaction, we also received full repayment of our $48 million subordinated debt investment in ASAlliances. We recorded a total realized gain on the transaction of $43 million offset by a reversal of unrealized appreciation of $55 million.

In the third quarter of 2007, we received full repayment of our remaining $29 million senior and subordinated debt investments in SAV Holdings, Inc. and sold all of our equity interests for $66 million in proceeds realizing a total gain of $43 million offset by a reversal of unrealized appreciation of $49 million. The gain that we recognized included escrowed proceeds that we expect to receive of $6 million.

In the third quarter of 2007, we sold our investments in 121 subordinated tranches of bonds in 22 CMBS trusts to ACAS CRE CDO, a new commercial real estate collateralized debt obligation trust. Our cost basis in the CMBS bonds sold to ACAS CRE CDO was $642 million with a principal balance of $1.2 billion. Third-party investors in ACAS CRE CDO purchased AAA through A- bonds for a total purchase price of $411 million with a

74

principal balance of $412 million. We purchased investment grade and non-investment grade notes and preferred shares of ACAS CRE CDO for a total purchase price of $215 million with a principal balance of $763 million. In accordance with SFAS No. 140, the securities that we purchased are considered to be beneficial interests in the sold CMBS bonds that are retained by us. The beneficial interests that continue to be held by us were measured at the date of transfer by allocating the previous carrying amount of the sold CMBS bonds between the ACAS CRE CDO notes sold to third-parties and the ACAS CRE CDO notes and preferred shares that we continue to hold based on their relative fair values. American Capital, LLC serves as the collateral manager for ACAS CRE CDO in exchange for an annual senior management fee of 7.5 basis points and a subordinate fee of 7.5 basis points. In accordance with SFAS No. 140, the fair value of the collateral management agreement estimated to be $2 million was included as additional sale proceeds and treated as being contributed to American Capital, LLC increasing our cost basis in that portfolio investment. We recorded a net realized loss of $22 million in the third quarter of 2007 related to this transaction offset by a reversal of unrealized depreciation of $17 million.

In the second quarter of 2007, a then newly formed holding company, EAG Limited, closed on an initial public offering and began trading on the London Stock Exchange. As part of the offering, we sold all of our shares in our portfolio company, EAG Acquisition, LLC, for proceeds of $55 million and received full repayment of our $104 million senior and subordinated debt investment. We realized a total gain of $50 million offset by a reversal of unrealized appreciation of $26 million.

In the second quarter of 2007, we received full repayment of our remaining $18 million senior debt investment in The Hygenic Corporation and sold all of our equity interests for $22 million in proceeds realizing a total gain of $22 million offset by a reversal of unrealized appreciation of $22 million. The gain that we recognized included escrowed proceeds that we expect to receive of $1 million.

In the second quarter of 2007, our portfolio company Ranpak, Inc. recapitalized its balance sheet that included a partial redemption of its redeemable preferred stock. As part of the recapitalization, we received $71 million in proceeds for the partial redemption of our preferred stock investment in Ranpak Inc, including the full repayment of related accrued dividends, realizing a gain of $19 million.

In the second quarter of 2007, the operating assets of Logex Corporation were sold pursuant to an asset purchase and sale agreement. We received cash proceeds from the sale of the operating assets as partial payment on our subordinated debt investments and expect to receive additional payments on our subordinated debt investments from sale proceeds held in escrow. We deemed our equity investments and subordinated debt investments that will not be repaid with any of the sale proceeds held in escrow as worthless and wrote off the securities realizing a loss of $21 million offset by a reversal of unrealized depreciation of $21 million.

We record the accrual of the periodic interest settlements of interest rate swaps in net unrealized appreciation (depreciation) of investments and subsequently record the amount as a realized gain (loss) on investments on the interest settlement date. We generally pay a fixed rate and receive a floating rate based on LIBOR under our interest rate swap agreements. For the three and nine months ended September 30, 2008, we recorded a net realized loss of $9 million and $18 million, respectively, compared to a net realized gain of $6 million and $10 million, respectively, for the three and nine months ended September 30, 2007 from the settlement of the periodic interest payments under our interest rate swap agreements. The unfavorable periodic interest settlements in 2008 as compared to 2007 are due primarily from the decrease in LIBOR rates in 2008 as compared to 2007.

Cash payments received or paid for the termination of an interest rate derivative agreement are recorded as a realized gain or loss upon termination. Interest rate swap agreements were terminated prior to their maturity resulting in net cash settlement payments of $5 million and $7 million for the three and nine months ended September 30, 2008 compared to net cash settlement payments of $1 million for the three months ended September 30, 2007 and net cash settlement receipts of $7 million for the nine months ended September 30, 2007.

75

For our tax year ended September 30, 2008, we had net long-term capital gains of $155 million. We elected to retain such capital gains and pay a federal tax on behalf our shareholders of $54 million, which is in included in our net realized gain (loss) for the three and nine months ended September 30, 2008. Refer to Note 10 to the interim consolidated financial statements in Part I, Item I of this Quarterly Report on Form 10-Q.

Unrealized Appreciation (Depreciation) of Investments

The net unrealized appreciation (depreciation) of investments is based on valuations approved by our Board of Directors. The following table itemizes the change in net unrealized appreciation (depreciation) of investments for the three and nine months ended September 30, 2008 and 2007 (in millions):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2008			2007			2008			2007
Gross unrealized appreciation of private finance portfolio investments	$	184		$	161		$	285		$	428
Gross unrealized depreciation of private finance portfolio investments		(334	)		(170	)		(840	)		(370	)
Impact of adopting SFAS No. 157		(33	)		—			(247	)		—
Net unrealized (depreciation) appreciation of private finance portfolio investments		(183	)		(9	)		(802	)		58
Net unrealized depreciation of managed funds(1)(2)		(262	)		(50	)		(391	)		(55	)
Net unrealized (depreciation) appreciation of American Capital, LLC(1)		(2	)		—			(159	)		493
Net unrealized depreciation of Structured Products		(85	)		(37	)		(400	)		(55	)
Reversal of prior period net unrealized appreciation upon realization		(67	)		(101	)		(180	)		(124	)
Net unrealized (depreciation) appreciation of portfolio company investments		(599	)		(197	)		(1,932	)		317
Foreign currency translation		(90	)		49			(17	)		61
Derivative agreements		(9	)		(55	)		(10	)		(25	)
Net unrealized (depreciation) appreciation of investments	$	(698	)	$	(203	)	$	(1,959	)	$	353

(1) Excludes foreign currency translation.

(2) Includes European Capital and AGNC for the period ended September 30, 2008 and European Capital only for the period ended September 30, 2007.

Private Finance

Our private finance portfolio investments consist of loans and equity securities primarily to privately-held middle market companies. There is generally no publicly available information about these companies and there generally does not exist a primary or secondary market for the trading of these privately issued securities. 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.

During the three and nine months ended September 30, 2008, we recorded $183 million and $802 million, respectively, of net unrealized depreciation on our private finance portfolio investments, including $33 million and $247 million, respectively, of net unrealized depreciation as a result of the change in our accounting methodologies from the adoption of SFAS No. 157. The remaining $150 million and $555 million of net unrealized depreciation on our private finance portfolio investments during the three and nine months ended September 30, 2008, respectively, was driven primarily by declines in trading multiples of comparable public companies and cash flows of certain portfolio companies.

As discussed in Notes 3 and 5 to our interim consolidated financial statements in Part I, Item I of this Quarterly Report on Form 10-Q, we adopted SFAS No. 157 on January 1, 2008. As a result of the adoption of

76

SFAS No. 157, we were required to modify our valuation methodologies for certain of our private finance investments. The effect on our year-to-date 2008 earnings from the adoption of SFAS No. 157 was $247 million of unrealized depreciation as follows:

• Market Yield Analysis—prior to the adoption of SFAS No. 157, we generally determined the fair value of our private finance portfolio investments by using the Enterprise Value Waterfall valuation methodology. This valuation approach results in the determination of a fair value of our investments based on a change of control in an M&A transaction or a recapitalization of the enterprise based on the value of the enterprise. However, upon the adoption of SFAS No. 157, for investments in debt and redeemable preferred equity securities of portfolio companies for which we do not have the ability to initiate a sale of the portfolio company as of the measurement date and for which there is no active market, we are required under SFAS No. 157 to use a hypothetical secondary market as our principal market. We determine the fair value based on the assumptions that hypothetical market participants would use to value the security in a current hypothetical sale using the Market Yield valuation methodology. During the three and nine months ended September 30, 2008, we recorded $33 million and $199 million, respectively, of net unrealized depreciation as a result of using a Market Yield valuation methodology to determine the fair value of these investments instead of the Enterprise Value Waterfall valuation methodology. We intend to hold these private finance portfolio investments until settlement or maturity which would generally be on a change of control event such as a sale or recapitalization of the company. In general, we would not exit these investments in a secondary market where the sale proceeds would be based on a market yield. Accordingly, we do not expect to realize this $199 million of cumulative net unrealized depreciation if we hold the investments to settlement or maturity, and there are no significant unanticipated impairments.

• Transaction Costs—SFAS No. 157 defines fair value in terms of the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (the “exit price”) and excludes transaction costs. Prior to the adoption of SFAS No. 157, our valuation policy for investments recently originated or acquired was to generally consider our entry price (which is the initial cost of the investment including transaction costs) in determining our initial fair value. During the nine months ended September 30, 2008, we recorded $48 million of net unrealized depreciation related to recently originated equity investments in our private finance portfolio as a result of using the exit price instead of the entry price in determining their fair values and thereby excluding initial transaction costs in our determination of fair value.

American Capital, LLC

American Capital, LLC, a wholly-owned portfolio company of American Capital formed in the second quarter of 2007, is a holding company of wholly-owned third-party fund managers. During the three and nine months ended September 30, 2008, we recognized $2 million and $159 million, respectively, of unrealized depreciation on our investment in American Capital, LLC. This decline was primarily driven by a decrease in the trading multiples of comparable asset management companies and a decline in its projected management fees due to lower transaction fees and a decline in the growth rate of assets under management. The lower transaction fees are due to lower investment originations of the current alternative asset funds under its management. The decline in projected assets under management of American Capital, LLC was due in part to additional unrealized depreciation as a result of changes to accounting valuation policies upon the adoption of SFAS No. 157 by the third-party alternative asset funds managed by American Capital, LLC.

Managed Funds

Included in our investments in managed funds is our 68% controlling majority-owned interest in European Capital, a company publicly traded on the London Stock Exchange under the ticker symbol “ECAS”. As outlined in our accounting policy and in accordance with the 1940 Act for determining fair value, for securities of companies that are publicly traded for which we have a majority-owned interest, the value is based on the market quote on the valuation date plus a control premium if our Board of Directors determines in good faith that

77

additional value above the market quote would be obtainable upon transfer of control. As of September 30, 2008 and December 31, 2007, European Capital’s market quote was €3.65 and €6.98 per share, respectively. As of September 30, 2008 and December 31, 2007, the fair value of our controlling majority-owned equity interest in European Capital was determined to be €4.30 and €7.88 per share, respectively, which was based on the market quote plus a control premium of 18% and 13%, respectively. The $367 million of unrealized depreciation in our investment in European Capital during the nine months ended September 30, 2008 was driven primarily by a decrease in the market quote from December 31, 2007 to September 30, 2008. Including the impact of foreign currency translation, our equity investment in European Capital was valued at $449 million and $839 million as of September 30, 2008 and December 31, 2007, respectively. A control premium was applied to the market quote as it was determined in good faith by our Board of Directors that additional value above the market quote would be obtainable upon the sale of our controlling interest in European Capital. The purchaser of the majority-owned controlling interest in European Capital would have the ability to realize the net asset value and take advantage of synergies and other benefits that would result from control over European Capital.

Also included in our investments in managed funds is our equity investment in AGNC. The shares are traded on The NASDAQ Global Market under the symbol “AGNC.” As of September 30, 2008, AGNC’s closing market quote was $17.32 per share. As of September 30, 2008, our shares of AGNC common stock were subject to an underwriters’ lock-up agreement that expires in May 2009. Therefore, a discount of approximately 12% was applied to the closing value of our AGNC common stock holdings as of September 30, 2008 to determine its fair value of $76 million.

Structured Products

American Capital also has investments in Structured Products such as investment and non-investment grade tranches of CMBS, CLO and CDO securities. During the three and nine months ended September 30, 2008, we recorded $85 million and $400 million of net unrealized depreciation, respectively, on our Structured Products investments. Our CMBS portfolio, which includes a commercial real estate CDO, experienced $55 million and $281 million of net unrealized depreciation and our commercial CLO and CDO portfolios experienced $30 million and $119 million of net unrealized depreciation during the three and nine months ended September 30, 2008, respectively. We value our Structured Products investments using the Market Yield valuation methodology. We estimate fair value based on third-party broker quotes and our cash flow forecasts subject to our assumptions a market participant would use regarding the investments’ underlying collateral including, but not limited to, assumptions of default and recovery rates, reinvestment spreads and prepayment rates. Cash flow forecasts are discounted using a market participant’s market yield assumptions that are derived from multiple sources including, but not limited to, third-party broker quotes, recent investments and securities and indices with similar structure and risk characteristics. We weight the use of third-party broker quotes in determining fair value based on our understanding of the level of actual transactions used by the broker to develop the quote and whether the quote was an indicative price or binding offer. We considered that the current market for our Structured Products investments would be considered an inactive market and that the information used by the third-party brokers to develop the quotes were generally not based on actual transactions. We attempted to obtain multiple third-party broker quotes for all of Structured Products investments. We were generally able to receive third-party broker quotes for a significant majority of our Structured Products investments; however we generally received a limited number of third-party broker quotes per investment. The third-party broker quotes that we were able to obtain were provided as a source of indicative prices and were not binding offers. We evaluated the reasonableness of the broker quotes based on our knowledge of recent secondary offerings of similar securities reviewed by us, and to the extent possible, based on our knowledge of actual trades of similar securities. The reliance on broker quotes in determining the fair value of our Structured Products investments is specific to the facts and circumstances of each individual investment, but generally we weighted the use of broker quotes in determining the fair value of our Structured Products investments less than 50%. The $85 million and $400 million of net unrealized depreciation during the three and nine months ended September 30, 2008, respectively, and the accumulated net unrealized depreciation as of September 30, 2008 of $563 million is driven primarily by dramatic widening of the investments spreads caused by the liquidity crisis in the market. The liquidity crisis has

78

driven investors’ expected returns higher on Structured Products investments. In general, there is not a liquid market for our non-investment grade Structured Products investments. However, there have been a few trades of securities of similar Structured Products investments in what is considered to be an illiquid distressed market during 2008, which has had the effect of decreasing the values of the overall Structured Products market. Our unrealized depreciation has generally not been driven by actual credit quality of the underlying loan pools as the investments have generally performed as underwritten to date.

We expect that we will hold these Structured Products investments until settlement or maturity. Based on our September 30, 2008 assumptions of future default and recovery rates, reinvestment spreads and prepayment rates, we anticipate that we will realize upon the settlement or maturity approximately $535 million more in proceeds than the fair value as of September 30, 2008. The primary difference between the fair value as of September 30, 2008 and the anticipated proceeds at maturity is that the current market yields used to value these securities do not have an impact on our anticipated proceeds at settlement or maturity if our current assumptions of the future credit quality and cash flows prove accurate.

Our CMBS bonds are secured by diverse pools of high quality commercial mortgage loans. We also have an investment in ACAS CRE CDO, which is a commercial real estate CDO secured by CMBS bonds. As of September 30, 2008, our total investment in CMBS bonds and ACAS CRE CDO at fair value was $273 million, or 3% of our total investments. Our direct CMBS bonds and the CMBS bonds held by ACAS CRE CDO are secured by approximately $113 billion of commercial mortgage loans, although senior creditors typically have claims against those loans that are superior to our interests. Our investments in these securities have generally performed in accordance with our original underwriting assumptions and through September 30, 2008, we have experienced minimal losses of underlying commercial mortgage loan collateral of the CMBS bonds.

Our commercial CLO securities are generally secured by diverse pools of high quality commercial corporate loans and have minimal exposure to residential mortgage loans. Certain of our commercial CLO investments are in a joint venture portfolio company. As of September 30, 2008, our investment in commercial CLO securities at fair value was $112 million, or only 1% of our total investments. Our commercial CLO securities are secured by approximately $12 billion of primarily commercial corporate loans, although senior creditors typically have claims against those loans that are superior to our interests. Our investments in these securities have generally performed in accordance with our original underwriting assumptions.

Our CDO securities are generally secured by diverse pools of bonds of other securitizations including commercial loans, CMBS and residential mortgage backed securities. As of September 30, 2008, our total investment in CDO securities at fair value was only $1 million, or less than 1% of our total investments.

Foreign Currency Translation

We have a limited amount of 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 U.S. dollars. During the three and nine months ended September 30, 2008, the foreign currency translation adjustment recorded in our interim consolidated statements of operations as unrealized depreciation was $90 million and $17 million, respectively, primarily as a result of the Euro depreciating against the U.S. dollar.

Interest Rate Derivative Agreements

For interest rate derivative 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

79

fair value would represent an amount we would receive from a third-party to assume our obligation under an interest rate derivative agreement. They generally appreciate or depreciate primarily based on relative market interest rates and their remaining term to maturity. The change in fair value is recorded as unrealized appreciation (depreciation) of derivative agreements. The decrease in the fair value of our interest rate derivative agreements during the three and nine months ended September 30, 2008 is primarily due to a decrease in the forward interest rate yield curve.

Fair Value Compared to Realizable Value

We invest primarily in Level 3 assets, generally with the intention to hold the assets to settlement or maturity. We anticipate holding the debt investments in our private finance portfolio until maturity or until they are repaid through a change of control of the portfolio company; however we cannot estimate either the future sale date or the time period before the debt investments may be prepaid before their maturity date. We also intend to hold our Structured Products investments until maturity, which could be in excess of ten years. The current lack of liquidity in the financial markets has caused investment spreads between the cost of funds and investment income to widen dramatically on our investments, which in most cases results in current fair values for many Level 3 assets that are materially lower than the values we anticipate realizing on settlement or maturity (“Realizable Value”). This is especially true regarding fair value estimates on investments with longer expected settlement or maturity dates. The current market yields used to value these investments should not have an impact on the amount of proceeds we would expect to receive upon settlement or maturity.

For example, at the end of the third quarter of 2008, we held an investment in a commercial real estate collateralized debt obligation (ACAS CRE CDO) that has been depreciated $172 million inception to date, including $126 million in the nine months ended September 30, 2008. This investment is currently producing approximately $6 million per quarter of cash flow, but its current fair value determined in accordance with GAAP is $47 million; however, we anticipate realizing $198 million of our investment on settlement or maturity based on our assumptions as of September 30, 2008 of future credit losses, which includes a recession, over the life of the investment. We believe the valuations of investments such as these are significantly impacted by both the lack of demand for such products and the lack of liquidity in the current market to finance the acquisition of these investments, thereby decreasing leveraged returns and prices that market participants are willing to pay for these securities. As such, there are material differences between the current GAAP fair value of several classes of our Level 3 assets compared to the value we anticipate we will realize on settlement or maturity if our current assumptions of future credit quality and cash flows are accurate.

We noted that in March 2008, the staff of the SEC’s Division of Corporation Finance published a letter that it had sent to a number of public companies regarding the disclosures in their periodic reports of the impact of SFAS No. 157. In the letter, companies are asked to consider disclosing for Level 3 assets “… whether you believe the fair values diverge materially from the amounts you currently anticipate realizing on settlement or maturity. If so, disclose why and provide the basis for your views.” Because we believe many of these GAAP fair values diverge materially from the Realizable Value, we are providing pro forma information on the Realizable Value of our assets in comparison to the fair value determined under GAAP.

As of September 30, 2008, we expect that our Realizable Value will exceed our fair value determined in accordance with GAAP as of September 30, 2008 by approximately $731 million.

80

As of September 30, 2008, all of our portfolio investments are valued using Level 3 inputs. The following table summarizes the current GAAP cost basis and fair value of our investments as of September 30, 2008 compared to the Realizable Value (in millions):

Asset Class	GAAP Cost Basis		GAAP Fair Value			Realizable Value(1)			Difference Between Realizable Value and GAAP Fair Value
Private Finance	$	8,419	$	7,528		$	7,727		$	199
Managed Funds		1,357		863			863			—
Structured Products		949		386			921			535
American Capital, LLC		69		318			318			—
Derivatives, net		1		(84	)		(87	)		(3	)
Total	$	10,795	$	9,011		$	9,742		$	731

(1) Use of Non-GAAP Information—Realizable Value is a non-GAAP financial measure which management uses in its internal analysis of results, and believes may be informative to investors gauging the quality of our assets and financial performance from a long-term perspective, identifying trends in our results and providing meaningful period-to-period comparisons. Realizable Value is defined as the future value that American Capital anticipates realizing on the settlement or maturity of its investments. As of the measurement date, it does not represent current GAAP fair value or net present value and is based on assumptions as of the measurement date. Accordingly, changes to expectations of future cash flows as a result of events subsequent to the measurement date are not reflected in the Realizable Value as of the measurement date. American Capital believes that this non-GAAP financial measure provides information useful to investors because American Capital generally intends to hold its assets to settlement or maturity, and there may be material differences between the GAAP fair values of its investments and the amounts American Capital expects to realize on settlement or maturity. This is primarily because the current lack of liquidity in the financial markets has caused investment spreads between the cost of funds and investment income to widen significantly on investments, resulting in current fair values under SFAS No. 157 that are materially lower than what American Capital currently anticipates realizing on settlement or maturity. American Capital believes that providing investors with Realizable Value in addition to the related GAAP fair value gives investors greater transparency to the information used by management in its financial operational decision-making. Although American Capital believes that this non-GAAP financial measure enhances investors’ understanding of its business and performance, Realizable Value should not be considered as an alternative to GAAP basis financial measures. A reconciliation of non-GAAP Realizable Value to GAAP fair value is set forth above.

Third-Party Valuation of Portfolio Investments

Our Board of Directors is ultimately responsible for determining the fair value of our portfolio investments on a quarterly basis in good faith. In that regard, the Board of Directors retains independent third-party valuation firms to assist it by having the third-party valuation firms regularly perform certain procedures that the Board of Directors identifies and requests the respective third-party firms to perform on a predetermined selection of the Board of Director’s fair value determinations (the “Procedures”). The Board of Directors may also obtain valuation assistance from such firms on other portfolio investments. Representatives from the valuation firms also attend our quarterly valuation meetings and provide their respective quarterly reports to the Audit and Compliance Committee of the Board of Directors. Each quarter, the third-party valuation firms will perform Procedures on our determination of the aggregate fair value of approximately one fourth of our investments in companies that have both been portfolio companies for at least one year and that have a fair value in excess of $25 million, in accordance with our valuation procedures.

Our Board of Directors engaged two valuation firms, Houlihan Lokey Howard & Zukin Financial Advisors Inc. (“Houlihan Lokey”) and Duff & Phelps, LLC (“Duff & Phelps”) to perform Procedures on our fair value determinations for the third quarter of 2008. Houlihan Lokey and Duff & Phelps are both leading international

81

valuation firms. For the quarter ended September 30, 2008, Houlihan Lokey performed its Procedures on valuations of a total of nine portfolio investments with a fair value of $1.0 billion. This value is approximately 11% of the fair value of our total investments as of September 30, 2008. Duff & Phelps also performed its Procedures on valuations of an additional 14 portfolio investments, with a fair value of $0.6 billion as of the period end. This value is approximately 7% of the fair value of our total investments as of September 30, 2008. For the last four quarters, third-party valuation firms performed Procedures on an aggregate of 85 portfolio companies totaling $5.9 billion in fair value as of their respective valuation dates, in accordance with our valuation procedures. For those portfolio investments on which each valuation firm has performed Procedures during each applicable period, using the scope of review set forth by our Board of Directors and in accordance with our valuation procedures, the Board of Directors has made a fair value determination for such investments that is within each valuation firm’s aggregate range of fair value for the investments. Additionally, in connection with its review, Duff & Phelps also concluded that the aggregate range of fair value determined by the Board of Directors for the investments on which it performed Procedures was not unreasonable. For the quarter ended September 30, 2008, the predetermined selection of portfolio investments to be reviewed by the valuation firms would have included as part of the normal predetermined selection process our investments in European Capital and American Capital, LLC, whose wholly-owned subsidiary is the investment advisor to European Capital. In light of the proposed acquisition of European Capital pursuant to the implementation agreement, those two portfolio investments were not included in the selection by the Board of Directors of portfolio investments reviewed for the quarter ended September 30, 2008.

Return on Shareholders’ Equity

The following table summarizes our returns on shareholders’ equity for the latest twelve months (“LTM”) ended September 30, 2008 and 2007 and for the three months ended September 30, 2008 and 2007 annualized:

	Period Ended September 30,
	2008		2007
LTM net operating income return on average equity at cost	9.6	%	11.1	%
LTM realized earnings return on average equity at cost	11.6	%	15.8	%
LTM (loss) earnings return on average equity	(28.5	)%	24.0	%
Current quarter net operating income return on average equity at cost annualized	9.1	%	10.6	%
Current quarter realized earnings return on average equity at cost annualized	8.9	%	15.5	%
Current quarter (loss) earnings return on average equity annualized	(41.1	)%	1.3	%

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

As of September 30, 2008, we had $320 million in cash and cash equivalents and $109 million of restricted cash. On October 14, 2008, we paid $218 million in a cash dividend for our shareholders of record on October 6, 2008. Our restricted cash consists primarily of collections of interest and principal payments on assets that are securitized. In accordance with the terms of the related securitized debt agreements, those funds are generally distributed each quarter to pay interest and principal on the securitized debt and are not available for our general operations. As of September 30, 2008, we had $505 million of availability under our revolving credit facilities (excluding standby letters of credit of $15 million). As discussed below, our ability to draw on these facilities though is limited due to the restrictions on leverage for BDCs under the 1940 Act. As of September 30, 2008, we had commitments under loan and financing agreements to fund up to $992 million to 60 portfolio companies. During the first nine months of 2008, we principally funded our investments as follows:

• Draws on revolving credit facilities;

• Proceeds from the issuance of common stock from an equity offering and under a forward sale agreement; and

• Repayments of loans, sales of equity investments and syndications of senior loans.

82

The crisis in the global credit markets during the past year, and more specifically subsequent to September 30, 2008, has adversely affected all industry sectors. We believe that the market disruption may continue to adversely affect financial services companies with respect to the valuation of their investment portfolios, tighter lending standards and reduced access to capital. We also believe that the economy has entered into a recession. A recession may lead to a further decline in earnings and/or decline in valuation multiples for our portfolio companies. Also, the liquidity crisis could further widen the investment spreads on structured products and certain of our private finance portfolio investments causing a decrease in the fair value of these investments. Although we cannot predict future market conditions, we believe that the financing resources currently available to us as well as our continuing ability to generate operating cash flows and sell existing portfolio investments will provide us with adequate liquidity to execute our current business strategy including the payment of the minimum amount of dividends to maintain our qualification as a RIC. Additionally, our remaining 2008 business plan has been developed with certain assumptions, such as no new capital raises and the reinvestment of capital only as we experience liquidity through realizations from exits and repayments.

Our ability to draw on our revolving credit facilities can be reduced under certain circumstances, including a reduction in our tangible net worth below specified minimum thresholds, a decrease in our corporate unsecured debt rating below a specified level and a decrease in our asset coverage ratios below a specified threshold. In September 2008, we amended both our secured and unsecured revolving credit facilities which included a reduction of our minimum tangible net worth covenants. However, if we experience future net decreases in shareholders’ equity from operations, our tangible net worth could decrease below the minimum thresholds required in our revolving credit facilities or our ability to borrow may be limited due to the restrictions on leverage for BDCs under the 1940 Act. A breach of these covenants could have material adverse consequences, such as a rating agency downgrade and/or acceleration of the debt outstanding under our revolving and unsecured term debt facilities. Also, certain of our borrowing facilities include a cross-default provision under which a payment or covenant default in another facility could cause a default in that facility. It is likely that we would not have the liquidity to repay accelerated debt in the above circumstances.

As a BDC, our asset coverage, as defined in the 1940 Act, must be at least 200% after each issuance of senior securities. As of September 30, 2008 and December 31, 2007, our asset coverage was 211% and 234%, respectively. We are also required to distribute annually 90% or more of our ordinary taxable income to qualify as a RIC under Subchapter M of the Code. As permitted by the Code, we can designate dividends paid in our subsequent tax year ending September 30, 2009 as dividends of our or taxable income for our tax year ending September 30, 2008 if those dividends are both declared by the extended due date of our federal income tax return and paid to our shareholders by the last day of our subsequent tax year. As of September 30, 2008, we had undistributed ordinary income of $518 million. We paid a dividend of $218 million on October 14, 2008 reducing our undistributed ordinary income to $300 million. In order for this undistributed ordinary income to be considered distributed for our tax year ended September 30, 2008 and therefore not incur any income tax liability, it will need to be declared as a dividend by June 15, 2009 and paid by September 30, 2009. In order to maintain our qualification as a RIC, we are required to distribute at least 90% of our annual ordinary taxable income. For our tax year ended September 30, 2008, we would be required to distribute at least $225 million of our $300 million of our remaining undistributed ordinary income by September 30, 2009 in order to continue maintain our qualification as a RIC. If we were to only distribute the minimum 90% of our 2008 ordinary taxable income by September 30, 2009, we would be subject to income tax on the 10% undistributed ordinary taxable income. If we did not meet these future minimum distribution requirements, we would be subject to income taxes on our entire taxable income for 2008, regardless of our distributions already made. Further, in order to continue to maintain our qualification as a RIC for our tax year ending September 30, 2009, we will be required to distribute at least 90% of the ordinary taxable income by declaring it by June 15, 2010 and paying it by September 30, 2010.

We have revised our dividend policy to manage our capital base proactively in the current volatile markets. We have retained our 2008 net long-term capital gains and will retain future net long-term capital gains and treat them as “deemed distributions”. We do not expect to pay further dividends for the remainder of 2008. Our Board

83

of Directors will evaluate the declaration of our quarterly dividend after our financial results are determined each quarter, so that we may more precisely assess our taxable income, cash flow and changes in fair value to better manage our tangible net worth in the current volatile markets.

We are also generally not able to issue and sell our common stock at a price below our net asset value per share, exclusive of any distributing commission or discount without shareholder approval. As of September 30, 2008, our net asset value per share was $24.43 per share and our closing market price was $25.51 per share. We do not have shareholder approval to issue or sell shares below our net asset value per share. To the extent that our common stock continues to trade at a market price below our net asset value per share, we will be precluded from raising equity capital through public offerings of our common stock. The asset coverage requirement of a BDC under the 1940 Act also effectively limits our ratio of debt to equity to 1:1. To the extent that we are unable to raise capital through the issuance of equity, our ability to raise capital through the issuance of debt may also be inhibited to the extent of our regulatory debt to equity ratio limits.

Equity Capital Raising Activities

For the nine months ended September 30, 2008 and 2007, we completed several public offerings of our common stock in which shares were sold either directly by us or by forward purchasers in connection with forward sale agreements (“FSA”). As of September 30, 2008, all of the FSA have been fully settled. The following table summarizes the total shares sold directly by us, including shares sold pursuant to underwriters’ over-allotment options and through FSA, and the proceeds we received, excluding underwriting fees and issuance costs, for the public offerings of our common stock for the nine months ended September 30, 2008 and 2007 (in millions):

	Shares Sold	Proceeds, Net of Underwriters’ Discount		Average Price
Issuances under November 2007 FSA	4.0	$	142	$	35.61
March 2008 public offering	8.7		302		34.77
Total for the nine months ended September 30, 2008	12.7	$	444	$	34.96
September 2007 public offering	0.9	$	34	$	37.63
Issuances under June 2007 FSA	2.9		126		43.16
June 2007 public offering	17.4		748		43.02
June 2007 direct offering	0.2		11		46.47
Issuances under March 2007 FSA	6.0		259		43.17
Issuances under January 2007 FSA	2.0		88		43.84
March 2007 public offering	4.4		187		43.03
January 2007 public offering	5.2		231		44.11
Total for the nine months ended September 30, 2007	39.0	$	1,684	$	43.14

In March 2008, we completed a public offering in which 8.7 million shares of our common stock were sold at a public offering price of $36.41 per share. Upon completion of the offering we received proceeds, net of the underwriters’ discount, of $302 million in exchange for the 8.7 million common shares. In addition, we granted the underwriters an over-allotment option to purchase up to an additional 1.3 million common shares. The over-allotment option expired without being exercised by the underwriters.

Stock Buy-Back Plan

In January 2008, we announced that our Board of Directors authorized a stock buy-back program, which allows for the repurchase of up to a maximum of $500 million of our common stock at prices below our net asset value per share as reported in our then most recently published financial statements. In November 2008, our

84

Board of Directors terminated the stock buy-back program. During the three months ended March 31, 2008, we purchased a total 0.2 million shares of our common stock in the open market for $6 million at an average price of $31.20 per share under this program. We did not make any purchases under this program during the third quarter of 2008.

Debt Capital Raising Activities

Our debt obligations consisted of the following (in millions):

	September 30, 2008		December 31, 2007
Secured revolving credit facility, $500 million and $1,300 million commitment, respectively	$	—	$	116
Unsecured revolving credit facility, $1,409 million and $1,565 million commitment, respectively		1,389		1,350
Unsecured debt due through September 2011		167		167
Unsecured debt due August 2010		126		126
Unsecured debt due February 2011		26		27
Unsecured debt due August 2012		548		547
Unsecured debt due October 2020		75		75
TRS Facility		22		—
ACAS Business Loan Trust 2004-1 asset securitization		214		320
ACAS Business Loan Trust 2005-1 asset securitization		830		830
ACAS Business Loan Trust 2006-1 asset securitization		436		436
ACAS Business Loan Trust 2007-1 asset securitization		395		492
ACAS Business Loan Trust 2007-2 asset securitization		314		338
Total	$	4,542	$	4,824

The daily weighted average debt balance for the three months ended September 30, 2008 and 2007 was $4,339 million and $5,016 million, respectively. The daily weighted average debt balance for the nine months ended September 30, 2008 and 2007 was $4,549 million and $4,542 million, respectively. The weighted average interest rate on all of our borrowings, including amortization of deferred financing costs, for the three months ended September 30, 2008 and 2007 was 4.6% and 6.3%, respectively. The weighted average interest rate on all of our borrowings, including amortization of deferred financing costs, for the nine months ended September 30, 2008 and 2007 was 4.7% and 6.3%, respectively.

Secured Revolving Credit Facility

In September 2008, we amended our secured revolving credit facility, administered by Wachovia Capital Markets, LLC, to extend it for an additional year to September 2009. In connection with the renewal, we reduced the facility commitment size from $1,300 million to $500 million. As amended, our ability to make draws under the facility expires one business day before the termination date in September 2009. If the facility is not extended before the termination date, any principal amounts then outstanding will be due and payable at that time. Interest on borrowings under this facility is paid monthly and is generally charged at one-month LIBOR plus a spread of 2.50%, an increase over the previous spread of 1.125%. In addition, the unused commitment fee increased from 0.125% to 0.50% per annum. In connection with the amendment, the minimum tangible net worth covenant was decreased during the quarter to $4.5 billion plus 40% of new issuances of equity and debt converted into equity after the third quarter of 2008. The facility contains covenants that, among other things, require us to maintain a minimum tangible net worth and restrict the loans securing the facility to certain dollar amounts, concentrations in industries, certain loan grade classifications, certain security interests and interest payment terms. It is also a termination event under the facility if our senior unsecured issuer or debt rating is downgraded below BB by any rating agency.

85

Unsecured Revolving Credit Facility

In September 2008, we amended our unsecured revolving credit facility administered by an affiliate of Wachovia Capital Markets, LLC. In connection with the amendment, the commitment size of the facility was reduced from $1,565 million to $1,409 million and will be reduced further to $1,252 million on December 31, 2009. The maturity date was also amended from May 2012 to March 2011. Interest on borrowings under this facility is charged at either (i) the applicable index rate and the applicable percentage at such time based on our corporate rating, or (ii) for borrowings denominated in U.S. dollars, the greater of the prime rate in effect on such day and the federal funds effective rate in effect on such day plus 0.50%, and for borrowings denominated in an alternative currency, the applicable base rate, in each case, plus the applicable percentage at such time based on our corporate rating. As a result of the amendment, our current applicable spread over the applicable index rates increased from 0.90% to 3.25% and the current applicable spread over the applicable base rates increased from 0% to 2.25%. We are also charged an unused commitment fee based on our corporate rating. As a result of the amendment, the current applicable unused commitment fee for the facility also increased from 0.125% to 0.50% per annum. In connection with the amendment, the minimum tangible net worth covenant was decreased to $4.5 billion plus 40% of new issuances of equity and debt converted into equity after the third quarter of 2008. The agreement also contains various other covenants, including maintaining an asset coverage ratio equal to or greater than 1.55 to 1.00 and an unsecured debt rating equal to or greater than BB.

Portfolio Credit Quality

We stop accruing interest on our investments when it is determined that interest is no longer collectible. Our valuation analysis serves as a critical piece of data in this determination. A significant change in the portfolio company valuation assigned by us could have an effect on the amount of our loans on non-accrual status. As of September 30, 2008, loans on non-accrual status for 27 portfolio companies were $602 million, calculated as the cost plus unamortized OID, and had a fair value of $135 million.

As of September 30, 2008 and December 31, 2007, loans on accrual status, past due loans and loans on non-accrual status were as follows (dollars in millions):

	Number of Portfolio Companies	September 30, 2008			Number of Portfolio Companies	December 31, 2007
Current	120	$	5,680		131	$	5,708
One Month Past Due			4				150
Two Months Past Due			—				—
Three Months Past Due			76				—
Greater than Three Months Past Due			—				—
Loans on Non-accrual Status			602				338
Subtotal	27		682		22		488
Total Loans at Face	147	$	6,362		153	$	6,196
Total Loans at Fair Value	147	$	5,591		153	$	5,889
Past Due and Non-accural Loans as a Percent of Total Loans			10.7	%			7.9	%
Non-accrual Loans as a Percent of Total Loans at Fair Value			2.4	%			2.1	%

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

During the second quarter of 2008, we recapitalized three portfolio companies by exchanging our debt security for a preferred equity security that had a cost basis of $30 million and a fair value of $2 million.

During the first quarter of 2008, we recapitalized one portfolio company by exchanging our debt security for a preferred equity security that had a cost basis of $39 million and a fair value of $1 million.

86

Credit Statistics

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

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

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

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

We generally require our portfolio companies to provide annual audited and monthly or quarterly unaudited financial statements. Using these financial statements, we calculate the statistics described above. Buyout and mezzanine funds typically adjust EBITDA due to the nature of change of control transactions. Such adjustments are intended to normalize and restate EBITDA to reflect the pro forma results of a company in a change of control transaction. For purposes of analyzing the financial performance of our portfolio companies, we make certain adjustments to EBITDA to reflect the pro forma results of a company consistent with a change of control transaction in addition to adjusting EBITDA for significant non-recurring, unusual or infrequent items. Adjustments to EBITDA may include anticipated cost savings resulting from a merger or restructuring, costs related to new product development, compensation to previous owners, non-recurring revenues or expenses, and other acquisition or restructuring related items.

87

We track our portfolio investments on a static pool basis, including based on the statistics described above. A static pool consists of the investments made during a given year. The static pool classification is based on the year the initial investment was made. Subsequent add-on investments are included in the static pool year of the original investment. The Pre-1999 static pool consists of the investments made from the time of our IPO through the year ended December 31, 1998. The following table contains a summary of portfolio statistics as of and for the periods ended September 30, 2008:

Portfolio Statistics(1) ($ in millions, unaudited)	Static Pool																																	Pre-1999 - 2008 Aggregate			2003 - 2008 Aggregate
	Pre-1999			1999			2000			2001			2002			2003			2004			2005			2006			2007			2008
Internal Rate of Return-All Investments(2)		6.8	%		9.2	%		8.0	%		18.6	%		8.8	%		21.8	%		15.8	%		12.2	%		14.5	%		5.6	%		-11.3	%		12.1	%		13.2	%
Internal Rate of Return-All Investments(3)		6.8	%		9.2	%		8.0	%		18.6	%		8.8	%		21.8	%		15.1	%		12.2	%		12.3	%		-5.4	%		-19.0	%		10.1	%		10.3	%
Internal Rate of Return-Equity Investments Only(3)(4)(5)		19.1	%		-15.3	%		12.1	%		46.9	%		15.0	%		30.9	%		28.3	%		10.4	%		22.3	%		5.1	%		-54.5	%		15.1	%		15.6	%
Original Investments and Commitments	$	400		$	380		$	285		$	375		$	958		$	1,432		$	2,266		$	4,272		$	5,096		$	7,261		$	1,011		$	23,736		$	21,338
Total Exits and Prepayments of Original Investments	$	337		$	352		$	285		$	319		$	701		$	1,083		$	1,641		$	2,005		$	2,616		$	1,846		$	15		$	11,200		$	9,206
Total Interest, Dividends and Fees Collected	$	155		$	145		$	105		$	148		$	307		$	363		$	531		$	813		$	706		$	527		$	57		$	3,857		$	2,997
Total Net Realized (Loss) Gain on Investments	$	(67	)	$	(51	)	$	(39	)	$	25		$	(50	)	$	142		$	159		$	319		$	146		$	(13	)	$	6		$	577		$	759
Current Cost of Investments	$	56		$	25		$	—		$	54		$	233		$	312		$	611		$	2,245		$	2,131		$	4,171		$	952		$	10,790		$	10,422
Current Fair Value of Investments	$	35		$	18		$	—		$	12		$	168		$	382		$	463		$	1,981		$	1,921		$	3,313		$	802		$	9,095		$	8,862
Current Fair Value of Investments as a % of Total Investments at Fair Value		0.4	%		0.2	%		0.0	%		0.1	%		1.9	%		4.2	%		5.1	%		21.8	%		21.1	%		36.4	%		8.8	%		100.0	%		97.4	%
Net Unrealized Appreciation/(Depreciation)	$	(21	)	$	(7	)	$	—		$	(42	)	$	(65	)	$	70		$	(148	)	$	(264	)	$	(210	)	$	(858	)	$	(150	)	$	(1,695	)	$	(1,560	)
Non-Accruing Loans at Face	$	14		$	5		$	—		$	41		$	57		$	14		$	39		$	47		$	155		$	199		$	31		$	602		$	485
Non-Accruing Loans at Fair Value	$	5		$	1		$	—		$	5		$	10		$	2		$	10		$	21		$	59		$	18		$	4		$	135		$	114
Equity Interest at Fair Value(4)	$	29		$	12		$	—		$	4		$	20		$	159		$	81		$	978		$	618		$	1,070		$	147		$	3,118		$	3,053
Debt to EBITDA(6)(7)(8)		NM			2.1			—			NM			6.0			4.8			6.1			4.7			5.8			6.8			5.5			6.0			6.0
Interest Coverage(6)(8)		NM			5.0			—			NM			1.5			1.6			1.7			2.2			1.9			1.9			1.9			1.9			1.9
Debt Service Coverage(6)(8)		NM			4.2			—			NM			1.0			1.6			1.3			1.5			1.5			1.7			1.7			1.6			1.6
Average Age of Companies(8)		65 yrs			58 yrs			—			22 yrs			42 yrs			39 yrs			39 yrs			27 yrs			26 yrs			26 yrs			26 yrs			28 yrs			28 yrs
Diluted Ownership Percentage(4)		55	%		54	%		0	%		60	%		37	%		52	%		32	%		55	%		32	%		47	%		30	%		43	%		43	%
Average Sales(8)(9)	$	199		$	31		$	—		$	66		$	66		$	185		$	118		$	122		$	136		$	211		$	188		$	168		$	171
Average EBITDA(8)(10)	$	12		$	5		$	—		$	1		$	14		$	34		$	25		$	25		$	28		$	40		$	42		$	33		$	34
Average EBITDA Margin		6.0	%		16.1	%		0	%		1.5	%		21.2	%		18.4	%		21.2	%		20.5	%		20.6	%		19.0	%		22.3	%		19.6	%		19.9	%
Total Sales(8)(9)	$	331		$	35		$	—		$	361		$	275		$	1,374		$	1,558		$	2,774		$	4,768		$	9,687		$	8,121		$	29,284		$	28,282
Total EBITDA(8)(10)	$	18		$	6		$	—		$	11		$	35		$	192		$	255		$	394		$	863		$	1,619		$	1,593		$	4,986		$	4,916
% of Senior Loans(8)(11)		87	%		0	%		0	%		0	%		66	%		61	%		58	%		66	%		43	%		63	%		33	%		55	%		55	%
% of Loans with Lien(8)(11)		100	%		100	%		0	%		100	%		100	%		100	%		91	%		91	%		91	%		94	%		55	%		89	%		88	%

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

(2) Assumes investments are exited at Realizable Value based on anticipated proceeds to be received upon settlement or maturity.

(3) Assumes investments are exited at current GAAP fair value.

(4) Excludes investments in commercial mortgage backed securities and collateralized debt obligations.

(5) Excludes equity investments that are the result of conversions of debt and warrants received with the issuance of debt.

(6) These amounts do not include investments in which the Company owns only equity.

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

(8) Excludes investments in commercial mortgage backed securities, collateralized debt obligations, ACAS CRE CDO 2007-1, Ltd., European Capital Limited and American Capital Agency Corp.

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

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

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

(12) Excludes investments in American Capital, LLC and our managed funds.

88

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 net asset value; (iv) our investments in securities of privately-held companies may be illiquid which could affect our ability to realize a gain; (v) our portfolio companies could default on their loans or provide no returns on our investments which could affect our operating results; (vi) we are dependent on external financing to grow our business; (vii) our ability to retain key management personnel; (viii) an economic downturn or recession could impair our portfolio companies and therefore harm our operating results; (ix) our borrowing arrangements impose certain restrictions; (x) changes in interest rates may affect our cost of capital and net operating income; (xi) we cannot incur additional indebtedness unless we maintain an asset coverage of at least 200%, which may affect returns to our shareholder; (xii) we may fail to continue to qualify for our pass-through treatment as a RIC, which could have an affect on shareholder return; (xiii) our common stock price may be volatile; (xiv) our strategy of becoming an asset manager of funds of private assets may not be successful and therefore have a negative impact on our results of operations; and (xv) 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.

Item 3. Quantitative and Qualitative Disclosure About Market Risk

In the context of Item 3, market risk refers to the risk of loss arising from adverse changes in financial and derivative instrument market rates and prices, such as fluctuations in interest rates and currency exchange rates. For a discussion of sensitivity analysis related to these types of market risks, refer to Part II, Item 7A, Quantitative and Qualitative Disclosures About Market Risk, in American Capital’s Annual Report on Form 10-K for the year ended December 31, 2007. The Company believes that there have been no material changes in these market risks since December 31, 2007.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

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

American Capital, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2008. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective.

89

Changes in Internal Control over Financial Reporting

There have been no significant changes in our internal controls over financial reporting or in other factors that could significantly affect the internal controls over financial reporting during the third quarter of 2008.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

The risk factors in our Annual Report on Form 10-K for the year ended December 31, 2007 have not materially changed.

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

None.

Item 3. Defaults Upon Senior Securities

None.

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

None.

Item 5. Other Information

None.

90

Item 6. Exhibits

(a) Exhibits

*3.1.	American Capital Strategies, Ltd. Third Amended and Restated Certificate of Incorporation, incorporated herein by reference to Exhibit II to the Definitive Proxy Statement for the 2008 Annual Meeting (File No. 814-00149), filed on April 9, 2008.
*3.2.	American Capital Strategies, Ltd. Second Amended and Restated Bylaws, as amended, incorporated herein by reference to Exhibit 3.2 of Form 10-Q dated August 11, 2008.
*4.1.	Instruments defining the rights of holders of securities: See Article IV of our Third Amended and Restated Certificate of Incorporation, incorporated herein by reference to Exhibit II to the Definitive Proxy Statement for the 2008 Annual Meeting (File No. 814-00149), filed on April 9, 2008.
*4.2.	Instruments defining the rights of holders of securities: See Section I of our Second Amended and Restated Bylaws, as amended, incorporated herein by reference to Exhibit 3.2 of Form 10-Q dated August 11, 2008.
10.1.	Amendment No. 6, dated September 8, 2008, to Third Amended and Restated Loan Funding and Servicing Agreement by and among American Capital, Ltd., as the servicer, ACS Funding Trust I, as the borrower, Wachovia Capital Markets, LLC, as the deal agent, the Lenders and Lender Agents party thereto and Wells Fargo Bank, National Association, as the backup servicer and as the collateral custodian.
*10.2.	Second Amendment to Credit Agreement, by and among American Capital, Ltd. as the borrower and each of the banks and other financial institutions identified as Lenders therein, dated September 29, 2008, incorporated herein by reference to Exhibit 10.1 of Form 8-K dated October 3, 2008.
31.	Certification of CEO and CFO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.	Certification of CEO and CFO Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

* Previously filed in whole or in part.

91

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

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

Date: November 10, 2008

92

INDEX TO EXHIBITS

Exhibit No.	Description
10.1.	Amendment No. 6, dated September 8, 2008, to Third Amended and Restated Loan Funding and Servicing Agreement by and among American Capital, Ltd., as the servicer, ACS Funding Trust I, as the borrower, Wachovia Capital Markets, LLC, as the deal agent, the Lenders and Lender Agents party thereto and Wells Fargo Bank, National Association, as the backup servicer and as the collateral custodian.
31.	Certification of CEO and CFO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.	Certification of CEO and CFO Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

93