AMERICAN CAPITAL STRATEGIES LTD - 10-Q Quarterly Report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarter ended March 31, 2005

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

Commission file number 814-00149

AMERICAN CAPITAL STRATEGIES, LTD.


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

2 Bethesda Metro Center

14^th Floor

Bethesda, Maryland 20814

(Address of principal executive offices)

(301) 951-6122

(Registrant’s telephone number, including area code)

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

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

The number of shares of the issuer’s common stock, $0.01 par value, outstanding as of April 20, 2005 was 92,564,316.

AMERICAN CAPITAL STRATEGIES, LTD.

TABLE OF CONTENTS


PART I.	FINANCIAL INFORMATION

Item 1.	Consolidated Financial Statements	3

	Consolidated Balance Sheets as of March 31, 2005 (unaudited) and December 31, 2004	3
	Consolidated Statements of Operations for the three months ended March 31, 2005 and 2004 (unaudited)	4
	Consolidated Schedules of Investments as of March 31, 2005 (unaudited) and December 31, 2004	5
	Consolidated Statements of Shareholders’ Equity for the three months ended March 31, 2005 and 2004 (unaudited)	27
	Consolidated Statements of Cash Flows for the three months ended March 31, 2005 and 2004 (unaudited)	28
	Consolidated Financial Highlights for the three months ended March 31, 2005 and 2004 (unaudited)	29
	Notes to Consolidated Financial Statements (unaudited)	30

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operation	41

	Portfolio Composition	41
	Results of Operations	42
	Financial Condition, Liquidity and Capital Resources	47
	Portfolio Credit Quality	49

Item 3.	Quantitative and Qualitative Disclosure About Market Risk	53

Item 4.	Controls and Procedures	54

PART II.	OTHER INFORMATION	55

Item 1.	Legal Proceedings	55
Item 2.	Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities	55
Item 3.	Defaults upon Senior Securities	55
Item 4.	Submission of Matters to a Vote of Security Holders	55
Item 5.	Other Information	55
Item 6.	Exhibits	55

Signatures		56

Item 1. Consolidated Financial Statements

AMERICAN CAPITAL STRATEGIES, LTD.

CONSOLIDATED BALANCE SHEETS

(in thousands, except per share data)


	March 31, 2005			December 31, 2004
	(unaudited)
Assets
Investments at fair value (cost of $3,564,547 and $3,236,249, respectively)
Non-Control/Non-Affiliate investments	$	1,202,665		$	1,157,406
Affiliate investments		436,219			408,529
Control investments		1,834,203			1,654,075
Government securities		99,938			—
Interest rate derivative agreements		8,135			1,678

Total investments at fair value		3,581,160			3,221,688
Cash and cash equivalents		90,117			58,367
Restricted cash		69,787			141,895
Interest receivable		29,405			22,053
Other		49,311			47,424

Total assets	$	3,819,780		$	3,491,427

Liabilities and Shareholders’ Equity
Debt	$	1,738,033		$	1,560,978
Interest rate derivative agreements		5,603			17,396
Accrued dividends payable		65,817			5,322
Other		23,172			35,305

Total liabilities		1,832,625			1,619,001

Commitments and Contingencies
Shareholders’ equity:
Undesignated preferred stock, $0.01 par value, 5,000 shares authorized, 0 issued and outstanding		—			—
Common stock, $0.01 par value, 200,000 shares authorized, 90,977 and 88,705 issued and outstanding, respectively		910			887
Capital in excess of par value		2,086,986			2,010,063
Unearned compensation		(44,790	)		(36,690	)
Notes receivable from sale of common stock		(6,825	)		(6,845	)
Distributions in excess of net realized earnings		(60,136	)		(63,032	)
Net unrealized appreciation (depreciation) of investments		11,010			(31,957	)

Total shareholders’ equity		1,987,155			1,872,426

Total liabilities and shareholders’ equity	$	3,819,780		$	3,491,427

See accompanying notes.

AMERICAN CAPITAL STRATEGIES, LTD.

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

(in thousands, except per share data)


	Three Months Ended March 31
	2005			2004
OPERATING INCOME:
Interest and dividend income
Non-Control/Non-Affiliate investments	$	36,353		$	23,102
Affiliate investments		12,516			6,253
Control investments		37,549			26,201

Total interest and dividend income		86,418			55,556

Fees
Non-Control/Non-Affiliate investments		2,604			1,556
Affiliate investments		1,833			876
Control investments		10,000			8,542

Total fee income		14,437			10,974

Total operating income		100,855			66,530

OPERATING EXPENSES:
Interest		17,346			6,045
Salaries and benefits		9,116			5,743
General and administrative		6,285			5,880
Stock-based compensation		3,196			1,368

Total operating expenses		35,943			19,036

OPERATING INCOME BEFORE INCOME TAXES		64,912			47,494

Provision for income taxes		(1,025	)		—

NET OPERATING INCOME		63,887			47,494

Net realized gain (loss) on investments
Non-Control/Non-Affiliate investments		1,888			(11,152	)
Affiliate investments		752			(3	)
Control investments		5,481			(45,434	)
Interest rate derivative periodic payments		(3,295	)		(2,258	)

Total net realized gain (loss) on investments		4,826			(58,847	)

Net unrealized appreciation (depreciation) of investments
Portfolio company investments		24,717			61,880
Interest rate derivative periodic payment accrual		(280	)		(3,687	)
Interest rate derivative agreements		18,530			(12,237	)

Total net unrealized appreciation of investments		42,967			45,956

Total net gain (loss) on investments		47,793			(12,891	)

NET INCREASE IN SHAREHOLDERS’ EQUITY RESULTING FROM OPERATIONS	$	111,680		$	34,603

NET OPERATING INCOME PER COMMON SHARE:
Basic	$	0.71		$	0.71
Diluted	$	0.70		$	0.70
NET EARNINGS PER COMMON SHARE:
Basic	$	1.25		$	0.52
Diluted	$	1.22		$	0.51
WEIGHTED AVERAGE SHARES OF COMMON STOCK OUTSTANDING:
Basic		89,534			67,126
Diluted		91,401			68,269
DIVIDENDS DECLARED PER COMMON SHARE	$	0.73		$	0.70

See accompanying notes.

AMERICAN CAPITAL STRATEGIES, LTD.

CONSOLIDATED SCHEDULE OF INVESTMENTS

March 31, 2005

(unaudited)

(in thousands, except share data)


Company(4)	Industry	Investment	Cost		Fair Value
NON-CONTROL/NON-AFFILIATE INVESTMENTS

A.H. Harris & Sons, Inc.	Distributors	Subordinated Debt (12.0%, Due 12/06) Common Stock Warrants (2,004 shares)(1)	$	9,778 534	$	9,810 1,660

				10,312		11,470
Aerus, LLC	Houshold Durables	Common Membership Warrants (250,000 units)(1)		246		—
Alemite Holdings, Inc.	Machinery	Common Stock Warrants (146,250 shares)(1)		124		1,588
BarrierSafe Solutions International, Inc.	Commercial Services & Supplies	Senior Debt (11.2%, Due 9/10) Subordinated Debt (16.0%, Due 9/11 – 9/12)		14,826 50,230		14,826 50,230

				65,056		65,056
BBB Industries, LLC	Auto Components	Senior Debt (12.2%, Due 5/11) Subordinated Debt (17.5%, Due 11/11)		19,711 5,011		19,711 5,011

				24,722		24,722
BC Natural Foods LLC	Food Products	Senior Debt (10.8%, Due 9/07) Subordinated Debt (16.9%, Due 1/08 – 7/09) Common Membership Warrants (15.2% membership interest)(1)		4,563 28,966 3,331		4,563 28,966 8,658

				36,860		42,187
Beacon Hospice, Inc.	Health Care Provider & Services	Senior Debt (10.2%, Due 2/08 – 2/11) Subordinated Debt (14.5%, Due 2/12)		8,297 9,893		8,297 9,893

				18,190		18,190
BLI Holdings Corporation	Personal Products	Subordinated Debt (16.5%, Due 10/10)(1)		17,332		7,167
Breeze Industrial Products Corporation	Auto Components	Subordinated Debt (14.4%, Due 9/12 – 8/13)		12,657		12,657
Bumble Bee Seafoods, L.P.	Food Products	Partnership Units (465 units)(1)		465		2,482
Case Logic, Inc.	Textiles, Apparel & Luxury Goods	Subordinated Debt (13.8%, Due 3/10) Common Stock Warrants (197,322 shares)(1) Common Stock (11,850 shares)(1) Preferred Stock Warrants (1,564 shares)(1) Redeemable Preferred Stock (11,850 shares)(1)		22,011 5,418 — — 441		22,095 3,812 — — 141

				27,870		26,048
CIVCO Holding, Inc.	Health Care Equipment & Supplies	Subordinated Debt (14.1%, Due 7/10 – 7/11) Common Stock (210,820 shares)(1) Common Stock Warrants (609,060 shares)(1)		25,020 2,127 2,934		25,020 3,050 8,813

				30,081		36,883
CoLTS 2005-1 Ltd.	Diversified Financial Services	Preferred Shares (360 shares)		16,314		16,314
Corporate Benefit Services of America, Inc	Commercial Services & Supplies	Subordinated Debt (16.0%, Due 7/10) Common Stock Warrants (6,828 shares)(1)		14,868 695		14,868 695

				15,563		15,563
Corrpro Companies, Inc.(2)	Construction & Engineering	Subordinated Debt (12.5%, Due 3/11) Common Stock Warrants (5,799,187 shares)(1) Redeemable Preferred Stock (2,000 shares)		11,143 3,865 1,356		11,143 3,865 1,356

				16,364		16,364

AMERICAN CAPITAL STRATEGIES, LTD.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

March 31, 2005

(unaudited)

(in thousands, except share data)


Company(4)	Industry	Investment	Cost	Fair Value
Directed Electronics, Inc.	Household Durables	Subordinated Debt (11.3%, Due 6/11 – 6/12)	73,150	73,150
Dynisco Parent, Inc.	Electronic Equipment & Instruments	Subordinated Debt (12.6%, Due 10/11) Common Stock (10,000 shares)(1) Common Stock Warrants (2,115 shares)(1)	27,245 1,000 210	27,245 1,000 210

			28,455	28,455
Erickson Construction, LLC	Building Products	Senior Debt (9.7%, Due 9/09)	35,050	35,050
Euro-Pro Operating LLC	Household Durables	Senior Debt (15.4%, Due 9/08)	39,848	39,848
Formed Fiber Technologies, Inc.	Auto Components	Subordinated Debt (15.0%, Due 8/11) Common Stock Warrants (122,397 shares)(1)	14,282 122	14,282 122

			14,404	14,404
HMS Healthcare, Inc.	Health Care Providers & Services	Subordinated Debt (14.6%, Due 7/11 – 7/12) Common Stock (263,620 shares)(1) Redeemable Preferred Stock (170,013 shares) Common Stock Warrants (96,578 shares)(1)	40,982 264 1,802 97	40,982 4,371 1,972 1,601

			43,145	48,926
Hopkins Manufacturing Corporation	Auto Components	Subordinated Debt (14.8%, Due 7/12) Redeemable Preferred Stock (5,000 shares)	29,861 5,588	29,861 5,588

			35,449	35,449
HP Evenflo Acquisition Co.	Household Durables	Senior Debt (11.3%, Due 8/10) Common Stock (250,000 shares)(1)	22,736 2,500	22,736 2,500

			25,236	25,236
Interior Specialist, Inc	Commercial Services & Supplies	Subordinated Debt (15.0%, Due 9/10)	13,117	13,117
IST Acquisitions, Inc.	Electrical Equipment	Senior Debt (10.6%, Due 5/05 – 10/11) Subordinated Debt (14.0%, Due 5/11 – 5/12) Common Stock (10,000 shares)(1) Redeemable Preferred Stock (22,000 shares) Common Stock Warrants (83,458 shares)(1)	12,777 8,621 1,000 15,389 8,346	12,777 8,621 1,000 15,389 8,346

			46,133	46,133
JAG Industries, Inc.	Metals & Mining	Subordinated Debt (0.0%, Due 10/18) (1)	1,358	61
Kelly Aerospace, Inc.	Aerospace & Defense	Subordinated Debt (13.5%, Due 2/09) Common Stock Warrants (279 shares)(1)	9,345 1,588	9,345 2,699

			10,933	12,044
Mobile Tool International, Inc.	Machinery	Subordinated Debt (9.6%, Due 4/06)(1)	1,068	115
Montana Silversmiths, Inc.	Textiles, Apparel & Luxury Goods	Senior Debt (9.2%, Due 10/06 – 10/11) Subordinated Debt (14.0%, Due 10/12)	11,025 10,938	11,025 10,938

			21,963	21,963
MP TotalCare, Inc.	Healthcare Equipment & Supplies	Senior Debt (13.2%, Due 10/10)	14,840	14,840
Nailite International, Inc.	Building Products	Subordinated Debt (14.3%, Due 4/10) Common Stock Warrants (247,368 shares)(1)	8,461 1,232	8,461 2,333

			9,693	10,794

AMERICAN CAPITAL STRATEGIES, LTD.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

March 31, 2005

(unaudited)

(in thousands, except share data)


Company(4)	Industry	Investment	Cost	Fair Value
NewQuest, Inc.	Health Care Providers & Services	Subordinated Debt (15.0%, Due 3/12)	34,568	34,568
Patriot Medical Technologies, Inc.	Commercial Services & Supplies	Common Stock Warrants (405,326 shares)(1) Convertible Preferred Stock (155,280 shares)(1)	612 1,319	— 300

			1,931	300
Pelican Products, Inc.	Containers & Packaging	Senior Debt (9.5%, Due 10/11)	14,784	14,784
Phillips & Temro Holdings LLC	Auto Components	Senior Debt (9.0%, Due 12/09 – 12/11) Subordinated Debt (15.0%, Due 12/12)	23,678 14,892	23,678 14,892

			38,570	38,570
Plastech Engineered Products, Inc.	Auto Components	Common Stock Warrants (2,145 shares)(1)	2,577	11,345
Retriever Acquisition Co.	Diversified Financial Services	Subordinated Debt (15.0%, Due 6/12)	25,776	25,776
Rocky Shoes & Boots, Inc.	Textile, Apparel & Luxury Goods	Senior Debt (10.7%, Due 1/11)	29,568	29,568
Safemark Acquisitions, Inc.	Commercial Services & Supplies	Senior Debt (10.8%, Due 6/05 – 6/10) Subordinated Debt (14.4%, Due 6/11 – 6/12) Convertible Preferred Stock (3,000 shares) Redeemable Preferred Stock (11,000 shares)	4,938 11,920 305 6,825	4,938 11,920 305 6,825
		Convertible Preferred Stock Warrants (50,175 shares)(1)	5,028	5,028

			29,016	29,016
Sanda Kan (Cayman I) Holdings Company Limited (3)	Leisure Equipment & Products	Common Stock (97,104 shares)(1)	6,582	6,203
Sanlo Holdings, Inc.	Electrical Equipment	Subordinated Debt (13.9%, Due 7/11 – 7/12) Common Stock Warrants (5,187 shares)(1)	9,908 489	9,908 489

			10,397	10,397
Schoor DePalma, Inc.	Construction & Engineering	Senior Debt (10.2%, Due 8/09 – 8/11) Common Stock (50,000 shares)(1)	31,218 500	31,218 500

			31,718	31,718
Soff-Cut Holdings, Inc.	Machinery	Senior Debt (8.7%, Due 8/09) Subordinated Debt (15.9%, Due 8/12)	9,807 12,370	9,807 12,370

			22,177	22,177
Stravina Operating Company, LLC	Personal Products	Subordinated Debt (17.4%, Due 5/10 – 8/11)(1) Common Stock (1,000 shares)(1)	28,082 1,000	16,909 —

			29,082	16,909
Supreme Corq Holdings, LLC	Household Products	Senior Debt (6.3%, Due 6/09 – 6/10) Subordinated Debt (12.0%, Due 6/12) Common Membership Warrants (3,359 units)(1)	1,502 4,587 381	1,502 4,587 381

			6,470	6,470
Technical Concepts Holdings, LLC	Building Products	Senior Debt (8.9%, Due 2/08 – 2/10) Subordinated Debt (12.3%, Due 2/11 – 2/12) Common Membership Warrants (792,149 units)(1)	15,019 13,497 1,703	15,019 13,497 1,703

			30,219	30,219

AMERICAN CAPITAL STRATEGIES, LTD.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

March 31, 2005

(unaudited)

(in thousands, except share data)


Company(4)	Industry	Investment	Cost	Fair Value
The Hilsinger Company	Health Care Equipment & Supplies	Senior Debt (10.0%, Due 5/10) Subordinated Debt (14.5%, Due 5/12)	17,127 12,642	17,127 12,642

			29,769	29,769
The Tensar Corporation	Construction & Engineering	Subordinated Debt (15.0%, Due 6/11) Common Stock (122,949 shares)(1) Common Stock Warrants (424,616 shares)(1) Redeemable Preferred Stock (53,490 shares)	24,047 246 6,054 919	24,047 2,008 6,933 919

			31,266	33,907
ThreeSixty Asia, Ltd.(3)	Commercial Services & Supplies	Senior Debt (10.7%, Due 9/08) Common equity(1)	9,229 4,093	9,229 —

			13,322	9,229
T-NETIX, Inc.	Diversified Telecommunication Services	Common Stock (17,544 shares)(1)	1,000	682
TransFirst Holdings, Inc.	Commercial Services & Supplies	Senior Debt (10.3%, Due 3/11) Subordinated Debt (15.0%, Due 4/12)	12,884 15,894	12,884 15,894

			28,778	28,778
UAV Corporation	Leisure Equipment & Products	Subordinated Debt (16.3%, Due 5/10)	14,929	14,929
Valley Proteins, Inc.	Food Products	Subordinated Debt (11.3%, Due 6/11)	9,884	9,884
Vigo Remittance Corp.	Diversified Financial Services	Common Stock Warrants (50,000 shares)(1)	1,213	3,664
Visador Holding Corporation	Building Products	Subordinated Debt (15.0%, Due 2/10) Common Stock Warrants (4,284 shares)(1)	10,022 462	10,022 462

			10,484	10,484
Warner Power, LLC	Electrical Equipment	Subordinated Debt (12.8%, Due 12/06 – 12/07) Common Membership Warrants (1,832 units)(1)	8,760 2,248	7,041 831

			11,008	7,872
Weston ACAS Holdings, Inc.	Commercial Services & Supplies	Subordinated Debt (17.3%, Due 6/10)	7,679	7,679
WIL Research Holding Company, Inc.	Pharmaceuticals & Biotechnology	Subordinated Debt (14.3%, Due 9/11) Redeemable Preferred Stock (5,000,000 shares)	15,067 5,401	15,067 5,401
		Convertible Preferred Stock (1,000,000 shares)	1,024	1,024

			21,492	21,492
Subtotal Non-Control / Non-Affiliate Investments			1,200,257	1,202,665

CONTROL INVESTMENTS
3SI Acquisition Holdings, Inc.	Electronic Equipment & Instruments	Subordinated Debt (14.8%, Due 10/10 – 11/11) Common Stock (855 shares)(1)	38,478 27,246	38,478 42,046

			65,724	80,524

AMERICAN CAPITAL STRATEGIES, LTD.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

March 31, 2005

(unaudited)

(in thousands, except share data)


Company(4)	Industry	Investment	Cost	Fair Value
ACAS Wachovia Investments, L.P.	Diversified Financial Services	Partnership Interest, 90% of Co.	27,322	27,322
Aeriform Corporation	Chemicals	Senior Debt (7.7%, Due 6/08) Senior Subordinated Debt (14.0%, Due 5/09) Junior Subordinated Debt (0.0%, Due 5/09)(1) Common Stock Warrants (2,419,483 shares)(1) Redeemable Preferred Stock (10 shares)(1)	21,705 429 34,959 4,360 119	21,705 429 1,130 — —

			61,572	23,264
American Decorative Surfaces International, Inc.	Building Products	Senior Debt (7.3%, Due 5/05) Subordinated Debt (7.0%, Due 5/11)(1) Common Stock (1 share)(1) Common Stock Warrants (94,868 shares)(1) Convertible Preferred Stock (100,000 shares)(1)	2,500 16,727 10,543 — 13,674	2,500 5,558 — — —

			43,444	8,058
ASC Industries, Inc	Auto Components	Subordinated Debt (12.4%, Due 10/10 – 10/11) Common Stock Warrants (74,888 shares)(1) Redeemable Preferred Stock (72,000 shares)	18,417 6,531 4,647	18,417 23,401 4,647

			29,595	46,465
Automatic Bar Controls, Inc.	Commercial Services & Supplies	Senior Debt (11.0%, Due 6/07) Subordinated Debt (17.1%, Due 6/09) Common Stock (595,364 shares)(1) Common Stock Warrants (15,459 shares)(1)	10,868 14,608 7,000 182	10,868 14,608 20,725 519

			32,658	46,720
Auxi Health, Inc.	Health Care Providers & Services	Senior Debt (9.7%, Due 12/07) Subordinated Debt (14.0%, Due 3/09) Subordinated Debt (14.0%, Due 3/09)(1) Common Stock Warrants (4,268,905 shares)(1) Convertible Preferred Stock (13,301,300 shares)(1)	5,251 5,442 12,455 2,599 2,732	5,251 5,479 9,257 — —

			28,479	19,987
Biddeford Real Estate Holdings, Inc.	Real Estate	Senior Debt (8.0%, Due 5/14) Common Stock (100 shares)(1)	3,000 483	3,000 476

			3,483	3,476
Bridgeport International, LLC(3)	Machinery	Senior Debt (9.3%, Due 9/07) Common Stock (2,000,000 shares)(1) Convertible Preferred Stock (5,000,000 shares)(1)	3,972 2,000 5,000	3,972 — 1,767

			10,972	5,739
Capital.com, Inc.	Diversified Financial Services	Common Stock (8,500,100 shares)(1)	1,492	400
Confluence Holdings Corp.	Leisure Equipment & Products	Senior Debt (6.5%, Due 9/07) Subordinated Debt (13.0%, Due 10/05 ) Subordinated Debt (20.2%, Due 5/10 – 12/15)(1) Redeemable Preferred Stock (7,200 shares)(1) Convertible Preferred Stock (765 shares)(1) Common Stock Warrants (7,764 shares)(1) Common Stock (1 share)(1)	14,818 7,030 5,468 6,898 3,528 — 2,700	23,170 7,030 121 — — — 546

			40,442	30,867

AMERICAN CAPITAL STRATEGIES, LTD.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

March 31, 2005

(unaudited)

(in thousands, except share data)


Company(4)	Industry	Investment	Cost	Fair Value
Consolidated Utility Services, Inc.	Commercial Services & Supplies	Subordinated Debt (15.0%, Due 5/10) Common Stock (58,906 shares)(1)	6,460 1	6,460 1
		Redeemable Preferred Stock (3,625,000 shares)(1)	3,625	3,625

			10,086	10,086
Cottman Acquisitions, Inc.	Commercial Services & Supplies	Subordinated Debt (14.3%, Due 9/11 – 9/12) Redeemable Preferred Stock (252,020 shares) Common Stock Warrants (111,965 shares)(1) Common Stock (65,000 shares)(1)	13,899 16,842 11,197 6,500	13,899 16,842 11,197 6,500

			48,438	48,438
DanChem Technologies, Inc.	Chemicals	Senior Debt (8.8%, Due 12/10) Subordinated Debt (12.0%, Due 2/09) Common Stock (427,719 shares)(1) Redeemable Preferred Stock (5,249 shares)(1) Common Stock Warrants (401,622 shares)(1)	11,929 6,226 2,500 4,155 2,221	11,929 6,226 — 4,218 718

			27,031	23,091
Dosimetry Acquisitions (U.S.), Inc.(3)	Electrical Equipment	Senior Debt (8.7%, Due 6/05 – 6/10) Subordinated Debt (15.6%, Due 6/11) Common Stock (10,000 shares)(1) Common Stock Warrants (73,333 shares)(1) Redeemable Preferred Stock (16,900 shares)	28,367 17,277 1,769 12,775 12,938	28,367 17,277 1,769 12,775 12,938

			73,126	73,126
eLynx Holdings, Inc.	IT Services	Senior Debt (9.6%, Due 12/07 – 12/09) Subordinated Debt (15.0%, Due 12/10 – 12/11) Common Stock (9,326 shares)(1) Redeemable Preferred Stock (17,488 shares) Common Stock Warrants (108,735 shares)(1)	10,189 8,438 933 7,030 10,874	10,189 8,438 933 7,030 10,874

			37,464	37,464
Escort Inc.	Household Durables	Senior Debt (14.7%, Due 7/09) Subordinated Debt (12.4%, Due 7/11 – 7/12) Redeemable Preferred Stock (90,000 shares) Common Stock Warrants (175,562 shares)(1)	5,730 17,770 5,056 8,783	5,730 17,770 5,056 42,488

			37,339	71,044
Euro-Caribe Packing Company, Inc.	Food Products	Senior Debt (7.7%, Due 5/05 – 3/08) Subordinated Debt (11.0%, Due 3/08) Common Stock Warrants (31,897 shares)(1) Convertible Preferred Stock (260,048 shares)(1)	8,465 7,695 1,110 5,732	8,503 7,704 69 1,764

			23,002	18,040
European Touch LTD. II	Commercial Services & Supplies	Senior Debt (9.0%, Due 11/06) Subordinated Debt (12.4%, Due 11/06) Common Stock (2,895 shares)(1) Redeemable Preferred Stock (450 shares) Common Stock Warrants (7,105 shares)(1)	3,271 13,580 1,500 525 3,683	3,271 13,580 4,525 525 11,862

			22,559	33,763
Flexi-Mat Holding, Inc.	Textiles, Apparel & Luxury Goods	Senior Debt (16.3%, Due 11/09) Subordinated Debt (14.9%, Due 11/10 – 11/11) Common Stock (970,583 shares)(1) Redeemable Preferred Stock (145,000 shares)	4,454 11,147 9,706 10,207	4,454 11,147 14,658 10,207

			35,514	40,466

AMERICAN CAPITAL STRATEGIES, LTD.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

March 31, 2005

(unaudited)

(in thousands, except share data)


Company(4)	Industry	Investment	Cost	Fair Value
Future Food, Inc.	Food Products	Senior Debt (10.7%, Due 7/10) Subordinated Debt (12.4%, Due 7/11 – 7/12) Common Stock (92,738 shares)(1) Common Stock Warrants (6,500 shares)(1)	9,828 12,607 18,500 1,297	9,828 12,607 18,500 1,297

			42,232	42,232
FutureLogic, Inc.	Computers & Peripherals	Senior Debt (10.4%, Due 2/10 – 2/12) Subordinated Debt (15.0%, Due 2/13) Common Stock (221,672 shares)(1)	50,096 28,654 26,685	50,096 28,654 30,567

			105,435	109,317
Global Dosimetry Solutions, Inc.	Commercial Services & Supplies	Senior Debt (11.0%, Due 11/11) Subordinated Debt (16.0%, Due 9/09 – 9/10) Common Stock (14,140 shares)(1) Redeemable Preferred Stock (16,160 shares) Common Stock Warrants (71,557 shares)(1)	3,942 17,793 1,414 11,068 7,132	3,942 17,793 1,414 11,068 7,132




			41,349	41,349
Halex Holdings, Inc.	Construction Materials	Senior Debt (10.0%, Due 7/08 – 10/08) Subordinated Debt (17.1%, Due 8/10) Common Stock (163,083 shares)(1) Redeemable Preferred Stock (1,000 shares) Convertible Preferred Stock (145,996 shares)	20,649 28,327 6,784 14,085 1,771	20,649 28,327 6,784 14,085 7,956

			71,616	77,801
Hartstrings LLC	Textiles, Apparel & Luxury Goods	Senior Debt (8.8%, Due 5/05 – 5/09) Subordinated Debt (14.5%, Due 5/10) Common Membership Warrants (41.7% membership interest)(1)	14,015 13,358 3,572	14,015 13,358 1,527

			30,945	28,900
Hospitality Mints, Inc.	Food Products	Senior Debt (10.7%, Due 11/10) Subordinated Debt (12.4%, Due 11/11 – 11/12) Convertible Preferred Stock (95,198 shares) Common Stock Warrants (86,817 shares)(1)	7,374 18,180 21,010 54	7,374 18,180 21,010 54




			46,618	46,618
Iowa Mold Tooling Co., Inc.	Machinery	Subordinated Debt (13.0%, Due 10/08) Common Stock (426,205 shares)(1) Redeemable Preferred Stock (23,803 shares)(1) Common Stock Warrants (530,000 shares)(1)	15,653 4,760 18,864 5,918	15,736 — 16,040 711

			45,195	32,487
Jones Stephens Corp.	Building Products	Subordinated Debt (16.1%, Due 10/10 – 10/11) Common Stock (8,750 shares)(1) Redeemable Preferred Stock (1,000 shares)(1) Convertible Preferred Stock (8,750 shares)(1)	21,694 3,500 7,000 3,500	21,694 8,305 7,000 8,305




			35,694	45,304
KAC Holdings, Inc.	Chemicals	Subordinated Debt (16.6%, Due 2/11 – 2/12) Common Stock (1,551,000 shares)(1) Redeemable Preferred Stock (13,950 shares)	21,813 1,550 15,283	21,813 68,258 15,283

			38,646	105,354

AMERICAN CAPITAL STRATEGIES, LTD.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

March 31, 2005

(unaudited)

(in thousands, except share data)


Company(4)	Industry	Investment	Cost	Fair Value
KIC Holdings, Inc.	Building Products	Senior Debt (12.5%, Due 9/07) Subordinated Debt (12.0%, Due 9/08) Redeemable Preferred Stock (30,087 shares)(1) Common Stock (3,761 shares)(1) Common Stock Warrants (156,613 shares)(1)	7,722 11,649 29,661 5,100 3,060	7,722 11,649 803 — —

			57,192	20,174
Life-Like Holdings, Inc.	Leisure Equipment & Products	Senior Debt (7.5%, Due 6/07 – 6/10) Subordinated Debt (14.2%, Due 6/11 – 6/12) Common Stock (20,000 shares)(1) Redeemable Preferred Stock (8,800 shares) Common Stock Warrants (41,164 shares)(1)	39,647 21,481 2,000 5,415 4,116	39,647 21,481 2,000 5,415 4,116

			72,659	72,659
Logex Corporation	Road & Rail	Senior Subordinated Debt (12.0%, Due 7/08) Junior Subordinated Debt (14.0%, Due 7/08)(1) Common Stock Warrants (137,839 shares)(1) Redeemable Preferred Stock (695 shares)(1)	19,435 4,756 7,454 3,930	19,435 4,133 — —

			35,575	23,568
LVI Holdings, LLC	Commercial Services & Supplies	Senior Debt (8.2%, Due 2/10) Subordinated Debt (18.0%, Due 2/13) Preferred Units (800 units)(1)	7,856 8,940 11,000	7,856 8,940 11,000

			27,796	27,796
MBT International, Inc.	Distributors	Subordinated Debt (11.6%, Due 7/05 – 5/09) Common Stock (1,887,834 shares)(1) Common Stock Warrants (21,314,448 shares)(1) Redeemable Preferred Stock (2,250,000 shares)(1)	16,493 1,233 5,254 1,228	16,493 — 3,190 1,228




			24,208	20,911
Network for Medical Communication & Research, LLC	Commercial Services & Supplies	Subordinated Debt (13.0%, Due 12/06) Common Membership Warrants (50,128 units)(1)	11,586 2,038	11,586 41,227

			13,624	52,813
New Piper Aircraft, Inc.	Aerospace & Defense	Senior Debt (9.0%, Due 6/06 – 8/23) Subordinated Debt (8.0%, Due 7/13) Common Stock (771,839 shares)(1)	50,551 71 95	50,578 552 921

			50,717	52,051
New Starcom Holdings, Inc.	Construction & Engineering	Subordinated Debt (12.0%, Due 12/08 – 12/09) Common Stock (100 shares)(1) Convertible Preferred Stock (32,043 shares)(1)	28,263 — 11,500	28,390 — 10,766

			39,763	39,156
nSpired Holdings, Inc.	Food Products	Senior Debt (8.3%, Due 12/08 – 12/09) Subordinated Debt (18.0%, Due 8/07) Common Stock (169,018 shares)(1) Redeemable Preferred Stock (25,500 shares)(1)	18,592 9,340 5,000 25,500	18,592 9,340 — 7,656

			58,432	35,588
Optima Bus Corporation	Machinery	Senior Debt (7.8%, Due 6/06 – 1/08) Subordinated Debt (10.0%, Due 5/11)(1) Common Stock (20,464 shares)(1) Convertible Preferred Stock (2,751,743 shares)(1) Common Stock Warrants (43,150 shares)(1)	4,260 4,751 1,896 24,625 4,041	4,260 3,938 — — —

			39,573	8,198

AMERICAN CAPITAL STRATEGIES, LTD.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

March 31, 2005

(unaudited)

(in thousands, except share data)


Company(4)	Industry	Investment	Cost	Fair Value
PaR Systems, Inc.	Machinery	Subordinated Debt (12.9%, Due 2/10) Common Stock (341,222 shares)(1)	4,632 1,089	4,632 1,854

			5,721	6,486
Pasternack Enterprises, Inc.	Electrical Equipment	Senior Debt (9.7%, Due 12/09 – 6/11) Subordinated Debt (15.5%, Due 12/12) Common Stock (98,799 shares)(1)	40,513 21,915 20,562	40,513 21,915 20,562

			82,990	82,990
Precitech, Inc.	Machinery	Senior Debt (9.8%, Due 12/09 – 12/10) Senior Subordinated Debt (16.0%, Due 12/11)	4,955 2,020	4,955 2,020
		Junior Subordinated Debt (17.0%, Due 12/12)(1)	5,076	1,095
		Redeemable Preferred Stock (35,807 shares)(1) Common Stock (22,040 shares)(1) Common Stock Warrants (22,783)(1)	7,186 2,204 2,278	— — —

			23,719	8,070
Roadrunner Freight Systems, Inc.	Road & Rail	Subordinated Debt (15.5%, Due 7/09 – 7/10) Common Stock (309,361 shares)(1) Common Stock Warrants (65,000 shares)(1)	4,392 13,550 2,840	4,392 33,705 6,474

			20,782	44,571
Specialty Brands of America, Inc.	Food Products	Senior Debt (8.7%, Due 12/05 – 12/09) Subordinated Debt (15.4%, Due 9/08 – 12/11) Redeemable Preferred Stock (209,303 shares) Common Stock (33,916 shares)(1) Common Stock Warrants (97,464 shares)(1)	11,844 16,040 13,345 3,392 9,746	11,844 16,040 13,345 3,392 9,746

			54,367	54,367
S-Tran Holdings, Inc.	Road & Rail	Subordinated Debt (12.5%, Due 12/09)(1) Common Stock (4,735,000 shares)(1) Common Stock Warrants (465,000 shares)(1)	6,288 19,076 2,869	6,288 97 —

			28,233	6,385
Unique Fabricating Inc.	Auto Components	Senior Debt (10.2%, Due 2/10 – 2/12) Subordinated Debt (14.9%, Due 2/13) Redeemable Preferred Stock (2,500 shares) Common Stock Warrants (6,350 shares)(1)	5,770 6,610 2,218 330	5,770 6,610 2,218 330




			14,928	14,928
Weber Nickel Technologies, Ltd.(3)	Machinery	Subordinated Debt (17.7%, Due 2/06 – 9/12) Common Stock (44,834 shares)(1) Redeemable Preferred Stock (14,796 shares)	15,911 1,171 12,307	15,911 1,171 12,307

			29,389	29,389
WWC Acquisitions, Inc	Commercial Services & Supplies	Senior Debt (9.6%, Due 12/07 – 12/11) Subordinated Debt (14.2%, Due 12/12 – 12/13) Common Stock (4,826,476 shares)(1)	11,760 21,781 21,237	11,760 21,781 22,860

			54,778	56,401
Subtotal Control Investments			1,851,918	1,834,203

AMERICAN CAPITAL STRATEGIES, LTD.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

March 31, 2005

(unaudited)

(in thousands, except share data)


Company(4)	Industry	Investment	Cost	Fair Value

AFFILIATE INVESTMENTS

Bankruptcy Management Solutions, Inc.	Commercial Services & Supplies	Senior Debt (9.7%, Due 12/09 – 12/10) Subordinated Debt (15.5%, Due 12/12) Common Stock (281,534 shares)(1) Common Stock Warrants (101,226 shares)(1)	28,755 26,845 — —	28,755 26,845 4,407 1,584

			55,600	61,591
Chronic Care Solutions, Inc.	Health Care Equipment & Supplies	Subordinated Debt (14.4%, Due 11/11) Common Stock (447,285 shares)(1) Convertible Preferred Stock (447,285 shares) Common Stock Warrants (132,957 shares)(1)	68,228 45 10,943 1,676	68,228 2,821 13,765 1,708

			80,892	86,522
Continental Structural Plastics, Inc.	Auto Components	Subordinated Debt (14.0%, Due 2/13) Common Stock (3,000 shares)(1) Redeemable Preferred Stock (2,700 shares)	10,855 300 2,719	10,855 300 2,719

			13,874	13,874
Edge Products, LLC	Auto Components	Senior Debt (7.9%, Due 3/10) Subordinated Debt (12.4%, Due 3/13) Common Membership Units (7,620 units)(1) Common Membership Warrants (13,780 units)(1)	12,275 13,298 1,749 62	12,275 13,298 1,749 62

			27,384	27,384
FMI Holdco I, LLC	Road & Rail	Senior Debt (10.1%, Due 4/05 – 4/08) Subordinated Debt (13.0%, Due 4/10) Common units (589,373 units)(1) Preferred units (273,224 units)(1)	18,173 12,471 2,683 1,567	18,173 12,471 1,306 1,300

			34,894	33,250
Marcal Paper Mills, Inc.	Household Products	Senior Debt (16.1%, Due 12/06) Subordinated Debt (20.5%, Due 12/09) Common Stock Warrants(1) Common Stock (209,254 shares)(1)	22,705 23,394 5,001 —	22,705 23,394 8,791 2,854

			51,100	57,744
Money Mailer, LLC	Media	Common Membership Interest (6% membership interest)(1)	1,500	2,974
Nivel Holdings, LLC	Distributors	Subordinated Debt (14.6%, Due 2/11 – 2/12) Preferred Units (900 units)(1) Common Units (100,000 units)(1) Common Membership Warrants (41,360 units)(1)	8,567 900 100 41	8,567 900 336 139

			9,608	9,942
Northwest Coatings, LLC	Containers & Packaging	Senior Debt (11.2%, Due 2/08 – 3/08) Subordinated Debt (15.0%, Due 11/10) Common Units (380,828 units)(1) Redeemable Preferred Units (3,291,265 units)(1)	11,004 10,160 333 3,138	11,004 10,160 — 2,775

			24,635	23,939
PaR Nuclear Holding Company	Machinery	Common Stock (341,222 shares)(1)	1,052	5,192

AMERICAN CAPITAL STRATEGIES, LTD.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

March 31, 2005

(unaudited)

(in thousands, except share data)


Company(4)	Industry	Investment	Cost		Fair Value
Qualitor Component Holdings, LLC.	Auto Components	Subordinated Debt (15.0%, Due 12/12) Common Units (500,000 units)(1) Preferred Units (4,500,000 units)(1)		27,804 500 4,500		27,804 500 4,500

				32,804		32,804
Riddell Holdings, LLC	Leisure Equipment & Products	Common Units (3,044,491 units)(1)		3,044		4,893
Seroyal Holdings, L.P.(3)	Health Care Equipment & Supplies	Senior Debt (13.9%, Due 12/10) Subordinated Debt (14.5%, Due 12/11) Partnership Units (144,552 units)(1) Preferred Partnership Units (57,143 units)(1)		8,698 8,499 1,253 754		8,698 8,499 1,253 754

				19,204		19,204
The Hygenic Corporation	Health Care Equipment & Supplies	Subordinated Debt (15.5%, Due 1/12) Common Stock (200,000 shares)(1) Redeemable Preferred Stock (9,000 shares)		10,562 1,000 9,840		10,562 4,408 9,840

				21,402		24,810
Trinity Hospice, Inc.	Health Care Providers & Services	Senior Debt (11.0%, Due 12/05 – 6/07) Common Stock (131,399 shares)(1) Redeemable Preferred Stock (131,399 shares)(1)		16,094 13 3,973		16,094 — 641

				20,080		16,735
WFS Holding, Inc.	Software	Subordinated Debt (14.0%, Due 2/12) Convertible Preferred Stock (35,000,000 shares)(1)		11,861 3,500		11,861 3,500

				15,361		15,361
Subtotal Affiliate Investments				412,434		436,219
GOVERNMENT SECURITIES
	U.S. Treasury Bill	2.5%, Due 4/7/2005		99,938		99,938
INTEREST RATE DERIVATIVE AGREEMENTS
	Interest Rate Swap – Pay Fixed/ Receive Floating	15 Contracts Notional Amounts Totaling $647,060		—		7,402
	Interest Rate Swaption – Pay Floating/Receive Fixed	2 Contracts Notional Amounts Totaling $7,093		—		122
	Interest Rate Caps	5 Contracts Notional Amounts Totaling $27,849		—		611

Subtotal Interest Rate Derivative Agreements				—		8,135
Total Investment Assets			$	3,564,547	$	3,581,160
INTEREST RATE DERIVATIVE AGREEMENTS
	Interest Rate Swap – Pay Fixed/ Receive Floating	21 Contracts Notional Amounts Totaling $384,075	$	—	$	(5,356	)
	Interest Rate Swap – Pay Floating/ Receive Floating	6 Contracts Notional Amounts Totaling $118,769		—		(247	)
Total Investment Liabilities			$	—	$	(5,603	)

(1)	Non-income producing.

(2)	Public company.

(3)	Foreign 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.

See accompanying notes.

AMERICAN CAPITAL STRATEGIES, LTD.

CONSOLIDATED SCHEDULE OF INVESTMENTS

December 31, 2004

(in thousands, except share data)


Company(4)	Industry	Investment	Cost		Fair Value
NON-CONTROL/NON-AFFILIATE INVESTMENTS

A.H. Harris & Sons, Inc.	Distributors	Subordinated Debt (12.0%, Due 12/06) Common Stock Warrants (2,004 shares)(1)	$	9,749 534	$	9,786 1,660

				10,283		11,446
Aerus, LLC	Household Durables	Common Membership Warrants (250,000 units)(1)		246		—
Alemite Holdings, Inc.	Machinery	Common Stock Warrants (146,250 shares)(1)		124		951
BarrierSafe Solutions International, Inc.	Commercial Services & Supplies	Senior Debt (10.8%, Due 9/10) Subordinated Debt (16.0%, Due 9/11 – 9/12)		14,820 49,840		14,820 49,840

				64,660		64,660
BBB Industries, LLC	Auto Components	Senior Debt (10.4%, Due 11/09 – 5/11) Subordinated Debt (17.5%, Due 11/11)		26,070 4,939		26,070 4,939

				31,009		31,009
BC Natural Foods LLC	Food Products	Senior Debt (10.4%, Due 9/07) Subordinated Debt (16.5%, Due 1/08 – 7/09) Common Membership Warrants (15.2% membership interest)(1)		4,786 28,490 3,331		4,786 28,490 8,658

				36,607		41,934
BLI Holdings Corp.	Personal Products	Subordinated Debt (16.5%, Due 10/10)(1)		17,326		3,342
Breeze Industrial Products Corporation	Auto Components	Subordinated Debt (14.4%, Due 9/12 – 8/13)		12,494		12,494
Bumble Bee Seafoods, L.P.	Food Products	Partnership Units (465 units)(1)		465		2,487
CamelBak Products, LLC	Leisure Equipment & Products	Subordinated Debt (14.8%, Due 11/10)		38,797		38,797
Case Logic, Inc.	Textiles, Apparel & Luxury Goods	Subordinated Debt (13.8%, Due 3/10) Common Stock Warrants (197,322 shares)(1) Common Stock (11,850 shares)(1) Redeemable Preferred Stock (11,850 shares)(1)		21,575 5,418 — 441		21,666 3,812 — 141

				27,434		25,619
CIVCO Holding, Inc.	Health Care Equipment & Supplies	Subordinated Debt (14.1%, Due 7/10 – 7/11) Common Stock (210,820 shares)(1) Common Stock Warrants (609,060 shares)(1)		24,413 2,127 2,934		24,413 1,491 4,307

				29,474		30,211
Corporate Benefit Services of America, Inc	Commercial Services & Supplies	Subordinated Debt (16.0%, Due 7/10) Common Stock Warrants (6,828 shares)(1)		14,774 695		14,774 695

				15,469		15,469
Corrpro Companies, Inc.(2)	Construction & Engineering	Subordinated Debt (12.5%, Due 3/11) Common Stock Warrants (5,799,187 shares)(1) Redeemable Preferred Stock (2,000 shares)		11,076 3,865 1,282		11,076 3,865 1,282

				16,223		16,223
Directed Electronics, Inc.	Household Durables	Subordinated Debt (11.1%, Due 6/11 – 6/12)		73,128		73,128
Dynisco Parent, Inc.	Electronic Equipment & Instruments	Subordinated Debt (12.6%, Due 10/11) Common Stock (10,000 shares)(1) Common Stock Warrants (2,115 shares)(1)		27,119 1,000 210		27,119 1,000 210

				28,329		28,329

AMERICAN CAPITAL STRATEGIES, LTD.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

December 31, 2004

(in thousands, except share data)


Company(4)	Industry	Investment	Cost	Fair Value
Erickson Construction, LLC	Building Products	Senior Debt (9.3%, Due 9/09)	39,527	39,527
Euro-Pro Operating LLC	Household Durables	Senior Debt (15.0%, Due 9/08)	39,840	39,840
Formed Fiber Technologies, Inc.	Auto Components	Subordinated Debt (15.0%, Due 8/11) Common Stock Warrants (122,397 shares)(1)	14,169 122	14,169 122

			14,291	14,291
HMS Healthcare, Inc.	Health Care Providers & Services	Subordinated Debt (14.6%, Due 7/11 – 7/12) Common Stock (263,620 shares)(1) Redeemable Preferred Stock (263,620 shares) Common Stock Warrants (96,578 shares)(1)	40,386 264 2,839 97	40,386 2,474 2,839 906

			43,586	46,605
Hopkins Manufacturing Corporation	Auto Components	Subordinated Debt (14.8%, Due 7/12) Redeemable Preferred Stock (5,000 shares)	29,592 5,375	29,592 5,375

			34,967	34,967
HP Evenflo Acquisition Co.	Household Products	Senior Debt (10.7%, Due 8/10) Common Stock (250,000 shares)(1)	22,727 2,500	22,727 2,500

			25,227	25,227
Interior Specialist, Inc	Commercial Services & Supplies	Subordinated Debt (15.0%, Due 9/10)	13,047	13,047
IST Acquisitions, Inc.	Electrical Equipment	Senior Debt (9.6%, Due 5/05 – 10/11) Subordinated Debt (14.0%, Due 5/11 – 5/12) Common Stock (10,000 shares)(1) Redeemable Preferred Stock (22,000 shares) Common Stock Warrants (83,458 shares)(1)	15,031 8,572 1,000 14,924 8,346	15,031 8,572 1,000 14,924 8,346

			47,873	47,873
JAG Industries, Inc.	Metals & Mining	Subordinated Debt (0.0%, Due 10/18)(1)	1,358	61
Kelly Aerospace, Inc.	Aerospace & Defense	Subordinated Debt (13.5%, Due 2/09) Common Stock Warrants (250 shares)(1)	9,286 1,588	9,286 2,219

			10,874	11,505
Mobile Tool International, Inc.	Machinery	Subordinated Debt (9.2%, Due 4/06)(1)	1,068	115
Montana Silversmiths, Inc.	Textiles, Apparel & Luxury Goods	Senior Debt (8.8%, Due 10/06 – 10/11) Subordinated Debt (14.0%, Due 10/12)	11,027 10,880	11,027 10,880

			21,907	21,907
MP TotalCare, Inc.	Healthcare Equipment & Supplies	Senior Debt (12.8%, Due 10/10)	14,835	14,835
Nailite International, Inc.	Building Products	Subordinated Debt (14.3%, Due 4/10) Common Stock Warrants (247,368 shares)(1)	8,400 1,232	8,400 2,333

			9,632	10,733
Patriot Medical Technologies, Inc.	Commercial Services & Supplies	Common Stock Warrants (405,326 shares)(1) Convertible Preferred Stock (155,280 shares)(1)	612 1,319	— 300

			1,931	300
Pelican Products, Inc.	Containers & Packaging	Senior Debt (9.5%, Due 10/11)	14,778	14,778
Phillips & Temro Holdings LLC	Auto Components	Senior Debt (8.8%, Due 12/09 – 12/11) Subordinated Debt (15.0%, Due 11/09 – 12/12)	23,461 14,775	23,461 14,775

			38,236	38,236

AMERICAN CAPITAL STRATEGIES, LTD.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

December 31, 2004

(in thousands, except share data)


Company(4)	Industry	Investment	Cost	Fair Value
Plastech Engineered Products, Inc.	Auto Components	Common Stock Warrants (2,145 shares)(1)	2,577	14,501
Retriever Acquisition Co.	Diversified Financial Services	Subordinated Debt (15.0%, Due 6/12)	25,578	25,578
Safemark Acquisitions, Inc.	Commercial Services & Supplies	Senior Debt (10.6%, Due 6/05 – 6/10) Subordinated Debt (14.4%, Due 6/11 – 6/12) Convertible Preferred Stock (3,000 shares) Redeemable Preferred Stock (11,000 shares) Convertible Preferred Stock Warrants (50,175 shares)(1)	4,731 11,855 303 6,594 5,028	4,731 11,855 303 6,594 5,028

			28,511	28,511
Sanda Kan (Cayman I) Holdings Company Limited(3)	Leisure Equipment & Products	Common Stock (97,104 shares)(1)	6,582	6,203
Sanlo Holdings, Inc.	Electrical Equipment	Subordinated Debt (13.9%, Due 7/11 – 7/12) Common Stock Warrants (5,187 shares)(1)	9,916 489	9,916 489

			10,405	10,405
Schoor DePalma, Inc.	Construction & Engineering	Senior Debt (9.7%, Due 8/09 – 8/11) Common Stock (50,000 shares)(1)	31,406 500	31,406 500

			31,906	31,906
Soff-Cut Holdings, Inc.	Machinery	Senior Debt (8.2%, Due 8/09) Subordinated Debt (15.9%, Due 8/12)	9,799 12,258	9,799 12,258

			22,057	22,057
Stravina Operating Company, LLC	Personal Products	Senior Subordinated Debt (17.0%, Due 5/10) Junior Subordinated Debt (18.5%, Due 8/11)(1) Common Stock (1,000 shares)(1)	20,259 7,820 1,000	20,259 7,643 —

			29,079	27,902
Supreme Corq Holdings, LLC	Household Products	Senior Debt (5.9%, Due 6/09 – 6/10) Subordinated Debt (12.0%, Due 6/12) Common Membership Warrants (3,359 units)(1)	2,095 4,577 381	2,095 4,577 381

			7,053	7,053
Technical Concepts Holdings, LLC	Building Products	Senior Debt (8.3%, Due 2/08 – 2/10) Subordinated Debt (12.3%, Due 2/11 – 2/12) Common Membership Warrants (792,149 units)(1)	15,563 13,460 1,703	15,563 13,460 1,703

			30,726	30,726
The Hilsinger Company	Health Care Equipment & Supplies	Senior Debt (9.6%, Due 5/10) Subordinated Debt (14.5%, Due 5/12)	17,145 12,540	17,145 12,540

			29,685	29,685
The Lion Brewery, Inc.	Beverages	Subordinated Debt (9.8%, Due 1/09) Common Stock Warrants (540,000 shares)(1)	6,169 675	6,215 4,381

			6,844	10,596
The Tensar Corporation	Construction & Engineering	Subordinated Debt (15.0%, Due 6/11) Common Stock (122,301 shares)(1) Common Stock Warrants (403,770 shares)(1) Redeemable Preferred Stock (53,490 shares)	23,680 243 6,006 904	23,680 1,351 4,459 904

			30,833	30,394

AMERICAN CAPITAL STRATEGIES, LTD.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

December 31, 2004

(in thousands, except share data)


Company(4)	Industry	Investment	Cost	Fair Value
ThreeSixty Asia, Ltd.(3)	Commercial Services & Supplies	Senior Debt (10.3%, Due 9/08) Common equity(1)	9,229 4,093	9,229 —

			13,322	9,229
T-NETIX, Inc.	Diversified Telecommunication Services	Common Stock (17,544 shares)(1)	1,000	1,000
TransFirst Holdings, Inc.	Commercial Services & Supplies	Senior Debt (9.6%, Due 3/11) Subordinated Debt (15.0%, Due 4/12)	12,881 15,772	12,881 15,772

			28,653	28,653
UAV Corporation	Leisure Equipment & Products	Subordinated Debt (16.3%, Due 5/10)	14,746	14,746
Valley Proteins, Inc.	Food Products	Subordinated Debt (11.3%, Due 6/11)	9,881	9,881
Vigo Remittance Corp.	Diversified Financial Services	Common Stock Warrants (50,000 shares)(1)	1,213	1,396
Visador Holding Corporation	Building Products	Subordinated Debt (15.0%, Due 2/10) Common Stock Warrants (4,284 shares)(1)	9,958 462	9,958 462

			10,420	10,420
Warner Power, LLC	Electrical Equipment	Subordinated Debt (12.8%, Due 12/06 – 12/07) Common Membership Warrants (1,832 units)(1)	8,670 2,246	6,891 892

			10,916	7,783
Weston ACAS Holdings, Inc.	Commercial Services & Supplies	Subordinated Debt (17.3%, Due 6/10)	7,678	7,678
WIL Research Holding Company, Inc.	Pharmaceuticals & Biotechnology	Subordinated Debt (14.3%, Due 9/11) Redeemable Preferred Stock (5,000,000 shares) Convertible Preferred Stock (1,000,000 shares)	14,941 5,204 1,012	14,941 5,204 1,012

			21,157	21,157
Subtotal Non-Control / Non-Affiliate Investments			1,155,867	1,157,406

CONTROL INVESTMENTS

3SI Acquisition Holdings, Inc.	Electronic Equipment & Instruments	Senior Debt (12.3%, Due 3/10) Subordinated Debt (16.0%, Due 11/10 – 11/11) Common Stock (855 shares)(1)	8,901 29,311 27,246	8,901 29,311 42,046

			65,458	80,258
ACAS Wachovia Investments, L.P.	Diversified Financial Services	Partnership Interest, 90% of Co.	26,617	26,617
ACS PTI, Inc.	Auto Components	Common Stock (1,000 shares)(1)	348	2,239
Aeriform Corporation	Chemicals	Senior Debt (7.8%, Due 6/08) Senior Subordinated Debt (14.0%, Due 5/09) Junior Subordinated Debt (0.0%, Due 5/09)(1) Common Stock Warrants (2,419,483 shares)(1) Redeemable Preferred Stock (10 shares)(1)	21,704 429 34,959 4,360 118	21,704 429 1,130 — —

			61,570	23,263
American Decorative Surfaces International, Inc.	Building Products	Senior Debt (6.7%, Due 5/05) Subordinated Debt (7.0%, Due 5/11 – 5/12)(1) Common Stock (1 share)(1) Common Stock Warrants (94,868 shares)(1) Convertible Preferred Stock (100,000 shares)(1)	1,000 16,727 10,543 — 13,674	1,000 7,661 — — —

			41,944	8,661

AMERICAN CAPITAL STRATEGIES, LTD.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

December 31, 2004

(in thousands, except share data)


Company(4)	Industry	Investment	Cost	Fair Value
ASC Industries, Inc	Auto Components	Subordinated Debt (12.4%, Due 10/10 – 10/11) Common Stock Warrants (74,888 shares)(1) Redeemable Preferred Stock (72,000 shares)	18,336 6,531 4,500	18,336 23,401 4,500

			29,367	46,237
Automatic Bar Controls, Inc.	Commercial Services & Supplies	Senior Debt (10.5%, Due 6/07) Subordinated Debt (17.1%, Due 6/09) Common Stock (595,364 shares)(1) Common Stock Warrants (15,459 shares)(1)	11,031 14,524 7,000 182	11,031 14,524 20,725 519

			32,737	46,799
Auxi Health, Inc.	Health Care Providers & Services	Senior Debt (9.3%, Due 12/07) Subordinated Debt (14.0%, Due 3/09) Subordinated Debt (14.0%, Due 3/09)(1) Common Stock Warrants (4,268,905 shares)(1) Convertible Preferred Stock (13,301,300 shares)(1)	5,251 5,409 12,452 2,599 2,732	5,251 5,409 4,037 — —

			28,443	14,697
Biddeford Real Estate Holdings, Inc.	Real Estate	Senior Debt (8.0%, Due 5/14) Common Stock (100 shares)(1)	2,824 483	2,824 476

			3,307	3,300
Bridgeport International, LLC(3)	Machinery	Senior Debt (8.3%, Due 9/07) Common Stock (2,000,000 shares)(1) Convertible Preferred Stock (5,000,000 shares)(1)	8,812 2,000 5,000	8,812 — 1,767

			15,812	10,579
Capital.com, Inc.	Diversified Financial Services	Common Stock (8,500,100 shares)(1)	1,492	400
Confluence Holdings Corp.	Leisure Equipment & Products	Senior Debt (6.2%, Due 9/07) Subordinated Debt (19.1%, Due 10/05 – 12/15) Redeemable Preferred Stock (7,200 shares)(1) Convertible Preferred Stock (765 shares)(1) Common Stock Warrants (7,764 shares)(1) Common Stock (1 share)(1)	9,966 12,426 6,896 3,529 — 2,700	18,320 5,466 — — — 546

			35,517	24,332
Consolidated Utility Services, Inc.	Commercial Services & Supplies	Subordinated Debt (15.0%, Due 5/10) Common Stock (39,406 shares) (1) Redeemable Preferred Stock (2,425,000 shares)	2,965 — 2,425	2,965 — 2,425

			5,390	5,390
Cottman Acquisitions, Inc.	Commercial Services & Supplies	Subordinated Debt (14.3%, Due 9/11 – 9/12) Redeemable Preferred Stock (252,020 shares) Common Stock Warrants (111,965 shares)(1) Common Stock (65,000 shares)(1)	13,810 16,307 11,197 6,500	13,810 16,307 11,197 6,500

			47,814	47,814
Cycle Gear, Inc.	Specialty Retail	Senior Debt (10.1%, Due 9/05) Subordinated Debt (11.0%, Due 9/06) Common Stock Warrants (104,439 shares)(1) Redeemable Preferred Stock (57,361 shares)	145 12,535 973 3,082	145 12,574 4,112 3,082

			16,735	19,913

AMERICAN CAPITAL STRATEGIES, LTD.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

December 31, 2004

(in thousands, except share data)


Company(4)	Industry	Investment	Cost	Fair Value
DanChem Technologies, Inc.	Chemicals	Senior Debt (8.4%, Due 2/08 – 12/10) Subordinated Debt (12.0%, Due 2/09) Common Stock (427,719 shares)(1) Redeemable Preferred Stock (5,249 shares)(1) Common Stock Warrants (401,622 shares)(1)	11,929 6,191 2,500 4,155 2,221	11,929 6,191 348 4,155 1,706

			26,996	24,329
Dosimetry Acquisitions (U.S.), Inc.(3)	Electrical Equipment	Senior Debt (8.3%, Due 6/05 – 6/10) Subordinated Debt (15.1%, Due 6/11) Common Stock (10,000 shares)(1) Common Stock Warrants (73,333 shares)(1) Redeemable Preferred Stock (16,900 shares)	30,530 17,131 1,769 12,775 12,510	30,530 17,131 1,769 12,775 12,510

			74,715	74,715
eLynx Holdings, Inc.	IT Services	Senior Debt (9.3%, Due 12/07 – 12/09) Subordinated Debt (15.0%, Due 12/10 – 12/11) Common Stock (9,326 shares)(1) Redeemable Preferred Stock (17,488 shares) Common Stock Warrants (108,735 shares)(1)	10,175 8,382 933 6,676 10,874	10,175 8,382 933 6,676 10,874

			37,040	37,040
Escort Inc.	Household Durables	Senior Debt (14.2%, Due 7/09) Subordinated Debt (12.4%, Due 7/11 – 7/12) Redeemable Preferred Stock (90,000 shares) Common Stock Warrants (175,562 shares)(1)	5,728 17,688 4,868 8,783	5,728 17,688 4,868 37,697

			37,067	65,981
Euro-Caribe Packing Company, Inc.	Food Products	Senior Debt (7.3%, Due 5/05 – 3/08) Subordinated Debt (11.0%, Due 3/08) Common Stock Warrants (31,897 shares)(1) Convertible Preferred Stock (258,618 shares)(1)	8,582 7,686 1,110 4,302	8,622 7,697 69 334

			21,680	16,722
European Touch LTD. II	Commercial Services & Supplies	Senior Debt (9.0%, Due 11/06) Subordinated Debt (12.4%, Due 11/06) Common Stock (2,895 shares)(1) Redeemable Preferred Stock (450 shares) Common Stock Warrants (7,105 shares)(1)	3,418 13,181 1,500 515 3,683	3,418 13,181 4,525 515 11,862

			22,297	33,501
Flexi-Mat Holding, Inc.	Textiles, Apparel & Luxury Goods	Senior Debt (15.7%, Due 11/09) Subordinated Debt (14.9%, Due 11/10 – 11/11) Common Stock (970,583 shares)(1) Redeemable Preferred Stock (145,000 shares)	4,452 11,070 9,706 9,886	4,452 11,070 14,658 9,886

			35,114	40,066
Future Food, Inc.	Food Products	Senior Debt (10.2%, Due 7/10) Subordinated Debt (12.4%, Due 7/11 – 7/12) Common Stock (92,738 shares)(1) Common Stock Warrants (6,500 shares)(1)	9,849 12,577 18,500 1,297	9,849 12,577 18,500 1,297

			42,223	42,223
Global Dosimetry Solutions, Inc.	Commercial Services & Supplies	Senior Debt (10.6%, Due 11/11) Subordinated Debt (16.0%, Due 9/09 – 9/10) Common Stock (14,140 shares)(1) Redeemable Preferred Stock (16,160 shares) Common Stock Warrants (71,557 shares)(1)	3,941 17,680 1,414 10,711 7,132	3,941 17,680 1,414 10,711 7,132




			40,878	40,878

AMERICAN CAPITAL STRATEGIES, LTD.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

December 31, 2004

(in thousands, except share data)


Company(4)	Industry	Investment	Cost	Fair Value
Halex Holdings, Inc.	Construction Materials	Senior Debt (10.6%, Due 7/08 - 10/08) Subordinated Debt (17.1%, Due 8/10) Common Stock (163,083 shares)(1) Redeemable Preferred Stock (1,000 shares) Convertible Preferred Stock (145,996 shares)	15,925 28,035 6,784 13,931 1,771	15,925 28,035 6,784 13,931 7,956

			66,446	72,631
Hartstrings LLC	Textiles, Apparel & Luxury Goods	Senior Debt (8.4%, Due 5/05) Subordinated Debt (14.5%, Due 5/10) Common Membership Warrants (41.7% membership interest)(1)	11,180 13,257 3,572	11,180 13,257 1,527

			28,009	25,964
Hospitality Mints, Inc.	Food Products	Senior Debt (10.2%, Due 11/10) Subordinated Debt (12.4%, Due 11/11 – 11/12) Convertible Preferred Stock (95,198 shares) Common Stock Warrants (86,817 shares)(1)	7,383 18,173 20,586 54	7,383 18,173 20,586 54

			46,196	46,196
Iowa Mold Tooling Co., Inc.	Machinery	Subordinated Debt (13.0%, Due 10/08) Common Stock (426,205 shares)(1) Redeemable Preferred Stock (23,803 shares)(1) Common Stock Warrants (530,000 shares)(1)	15,604 4,760 18,864 5,918	15,694 — 16,040 711

			45,146	32,445
Jones Stephens Corp.	Building Products	Subordinated Debt (16.1%, Due 10/10 – 10/11) Common Stock (8,750 shares)(1) Redeemable Preferred Stock (1,000 shares)(1) Convertible Preferred Stock (8,750 shares)(1)	21,522 3,500 7,000 3,500	21,522 8,305 7,000 8,305

			35,522	45,132
KAC Holdings, Inc.	Chemicals	Subordinated Debt (16.6%, Due 2/11 – 2/12) Common Stock (1,551,000 shares)(1) Redeemable Preferred Stock (13,950 shares)	21,574 1,550 14,981	21,574 53,499 14,981

			38,105	90,054
KIC Holdings, Inc.	Building Products	Senior Debt (12.5%, Due 9/07) Subordinated Debt (12.0%, Due 9/08) Redeemable Preferred Stock (30,087 shares)(1) Common Stock (3,761 shares)(1) Common Stock Warrants (156,613 shares)(1)	5,494 11,649 29,661 5,100 3,060	5,494 11,649 3,338 — 446

			54,964	20,927
Life-Like Holdings, Inc.	Leisure Equipment & Products	Senior Debt (7.1%, Due 6/07 – 6/10) Subordinated Debt (14.2%, Due 6/11 – 6/12) Common Stock (20,000 shares)(1) Redeemable Preferred Stock (8,800 shares) Common Stock Warrants (41,164 shares)(1)	33,947 21,352 2,000 5,231 4,116	33,947 21,352 2,000 5,231 4,116

			66,646	66,646
Logex Corporation	Road & Rail	Subordinated Debt (12.4%, Due 7/08) Common Stock Warrants (137,839 shares)(1) Redeemable Preferred Stock (695 shares)(1)	23,444 7,454 3,930	22,821 — —

			34,828	22,821

AMERICAN CAPITAL STRATEGIES, LTD.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

December 31, 2004

(in thousands, except share data)


Company(4)	Industry	Investment	Cost	Fair Value
MBT International, Inc.	Distributors	Subordinated Debt (11.7%, Due 7/05 – 5/09) Common Stock (1,887,834 shares)(1) Common Stock Warrants (21,314,448 shares)(1) Redeemable Preferred Stock (2,250,000 shares)(1)	16,246 1,233 5,254 1,228	16,246 — 3,350 —

			23,961	19,596
Network for Medical Communication & Research, LLC	Commercial Services & Supplies	Subordinated Debt (13.0%, Due 12/06) Common Membership Warrants (50,128 units)(1)	11,876 2,038	11,876 46,419

			13,914	58,295
New Piper Aircraft, Inc.	Aerospace & Defense	Senior Debt (9.0%, Due 6/06 – 8/23) Subordinated Debt (8.0%, Due 7/13) Common Stock (771,839 shares)(1)	58,493 60 95	58,524 541 2,234

			58,648	61,299
New Starcom Holdings, Inc.	Construction & Engineering	Subordinated Debt (12.0%, Due 12/08 – 12/09) Common Stock (100 shares)(1) Convertible Preferred Stock (32,043 shares)(1)	28,411 — 11,500	28,543 — 7,910

			39,911	36,453
nSpired Holdings, Inc.	Food Products	Senior Debt (7.4%, Due 12/08 – 12/09) Subordinated Debt (18.0%, Due 8/07) Common Stock (169,018 shares)(1) Redeemable Preferred Stock (25,500 shares)(1)	19,359 9,263 5,000 25,500	19,359 9,263 — 17,784

			59,122	46,406
Optima Bus Corporation	Machinery	Senior Debt (7.3%, Due 6/06 – 1/08) Subordinated Debt (10.0%, Due 5/11) (1) Common Stock (20,464 shares)(1) Convertible Preferred Stock (2,751,743 shares)(1) Common Stock Warrants (43,150 shares)(1)	3,734 5,103 1,896 24,625 4,041	3,734 4,313 — — —

			39,399	8,047
PaR Systems, Inc.	Machinery	Subordinated Debt (12.9%, Due 2/10) Common Stock (341,222 shares)(1)	4,632 1,089	4,632 1,854

			5,721	6,486
Pasternack Enterprises, Inc.	Electrical Equipment	Senior Debt (9.5%, Due 12/09 – 6/11) Subordinated Debt (15.5%, Due 12/12) Common Stock (98,799 shares)(1)	40,263 21,690 20,562	40,263 21,690 20,562

			82,515	82,515
Precitech, Inc.	Machinery	Senior Debt (9.3%, Due 12/09 – 12/10) Subordinated Debt (16.8%, Due 12/11 – 12/12) Redeemable Preferred Stock (35,807 shares)(1) Common Stock (22,040 shares)(1) Common Stock Warrants (22,783)(1)	4,553 7,073 7,186 2,204 2,278	4,553 3,092 — — —

			23,294	7,645
Roadrunner Freight Systems, Inc.	Road & Rail	Subordinated Debt (15.5%, Due 7/09 – 7/10) Common Stock (309,361 shares)(1) Common Stock Warrants (65,000 shares)(1)	4,334 13,550 2,840	4,334 23,035 4,602

			20,724	31,971

AMERICAN CAPITAL STRATEGIES, LTD.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

December 31, 2004

(in thousands, except share data)


Company(4)	Industry	Investment	Cost	Fair Value
Specialty Brands of America, Inc.	Food Products	Senior Debt (8.2%, Due 12/05 – 12/09) Subordinated Debt (15.4%, Due 9/08 – 12/11) Redeemable Preferred Stock (209,303 shares) Common Stock (33,916 shares)(1) Common Stock Warrants (97,464 shares)(1)	11,340 15,942 12,892 3,392 9,746	11,340 15,942 12,892 3,392 9,746

			53,312	53,312
S-Tran Holdings, Inc.	Road & Rail	Subordinated Debt (12.5%, Due 12/09) (1) Common Stock (4,735,000 shares)(1) Common Stock Warrants (465,000 shares)(1)	4,996 19,076 2,869	4,996 97 —

			26,941	5,093
Weber Nickel Technologies, Ltd. (3)	Machinery	Subordinated Debt (16.7%, Due 9/12) Common Stock (44,834 shares)(1) Redeemable Preferred Stock (14,796 shares)	10,760 1,171 12,070	10,760 1,171 12,070

			24,001	24,001
WWC Acquisitions, Inc	Commercial Services & Supplies	Senior Debt (9.4%, Due 12/07 – 12/11) Subordinated Debt (14.2%, Due 12/12 – 12/13) Common Stock (4,826,476 shares)(1)	11,268 21,681 21,237	11,268 21,681 21,237

			54,186	54,186
Subtotal Control Investments			1,692,072	1,654,075

AFFILIATE INVESTMENTS

Bankruptcy Management Solutions, Inc.	Commercial Services & Supplies	Senior Debt (8.1%, Due 12/09 – 12/10) Subordinated Debt (15.5%, Due 12/12) Common Stock (281,534 shares)(1) Common Stock Warrants (48 shares)(1)	47,242 26,595 — —	47,242 26,595 4,407 1,584

			73,837	79,828
Chronic Care Solutions, Inc.	Health Care Equipment & Supplies	Subordinated Debt (14.3%, Due 11/11) Common Stock (447,285 shares)(1) Convertible Preferred Stock (447,285 shares) Common Stock Warrants (132,957 shares)(1)	67,608 45 10,737 1,674	67,608 2,821 13,559 1,708

			80,064	85,696
FMI Holdco I, LLC	Road & Rail	Senior Debt (9.8%, Due 4/05 – 4/08) Subordinated Debt (13.0%, Due 4/10) Common units (589,373 units)(1) Preferred units (273,224 units)(1)	18,183 12,435 2,683 1,567	18,183 12,435 1,306 1,300

			34,868	33,224
Futurelogic Group, Inc.	Computers & Peripherals	Senior Debt (10.4%, Due 12/07) Subordinated Debt (13.9%, Due 12/10 – 6/11) Common Stock (20,000 shares)(1) Common Stock Warrants (10,425 shares)(1)	13,811 13,604 20 —	13,811 13,604 2,565 1,337

			27,435	31,317
Marcal Paper Mills, Inc.	Household Products	Senior Debt (15.8%, Due 12/06) Subordinated Debt (20.5%, Due 12/09) Common Stock Warrants (1) Common Stock (209,254 shares)(1)	22,837 22,786 5,001 —	22,837 22,786 4,773 —

			50,624	50,396

AMERICAN CAPITAL STRATEGIES, LTD.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

December 31, 2004

(in thousands, except share data)


Company(4)	Industry	Investment	Cost	Fair Value
Money Mailer, LLC	Media	Common Membership Interest (6% membership interest)(1)	1,500	2,262
Nivel Holdings, LLC	Distributors	Subordinated Debt (14.6%, Due 2/11 – 2/12) Preferred Units (900 units)(1) Common Units (100,000 units)(1) Common Membership Warrants (41,360 units)(1)	8,507 900 100 41	8,507 900 100 41

			9,548	9,548
NWCC Acquisition, LLC	Containers & Packaging	Subordinated Debt (15.0%, Due 11/10) Common Units (320,924 units)(1) Redeemable Preferred Units (2,763,846 units)(1)	9,743 291 2,764	9,743 24 2,335

			12,798	12,102
PaR Nuclear Holding Company	Machinery	Common Stock (341,222 shares)(1)	1,052	5,192
Qualitor Component Holdings, LLC.	Auto Components	Subordinated Debt (15.0%, Due 12/12) Common Units (500,000 units)(1) Preferred Units (4,500,000 units)(1)	27,604 500 4,510	27,604 500 4,510

			32,614	32,614
Riddell Holdings, LLC	Leisure Equipment & Products	Common Units (3,044,491 units)(1)	3,044	4,501
Seroyal Holdings, L.P.(3)	Health Care Equipment & Supplies	Senior Debt (13.4%, Due 12/10) Subordinated Debt (14.5%, Due 12/11) Partnership Units (144,552 units)(1) Preferred Partnership Units (57,143 units)(1)	8,805 8,431 1,253 754	8,805 8,431 1,253 754

			19,243	19,243
The Hygenic Corporation	Health Care Equipment & Supplies	Subordinated Debt (15.5%, Due 1/12) Common Stock (200,000 shares)(1) Redeemable Preferred Stock (9,000 shares)	10,468 1,000 9,660	10,468 1,000 9,660

			21,128	21,128
Trinity Hospice, Inc.	Health Care Providers & Services	Senior Debt (11.0%, Due 12/05 – 6/07) Common Stock (131,399 shares)(1) Redeemable Preferred Stock (131,399 shares)	16,088 13 4,454	16,088 936 4,454

			20,555	21,478
Subtotal Affiliate Investments			388,310	408,529

AMERICAN CAPITAL STRATEGIES, LTD.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

December 31, 2004

(in thousands, except share data)


Company(4)	Industry	Investment	Cost		Fair Value
INTEREST RATE DERIVATIVE AGREEMENTS
	Interest Rate Swap – Pay Fixed/ Receive Floating	4 Contracts Notional Amounts Totaling $217,000		—		1,011
	Interest Rate Swaption – Pay Floating/Receive Fixed	2 Contracts Notional Amounts Totaling $7,093		—		200
	Interest Rate Caps	5 Contracts Notional Amounts Totaling $28,703		—		467

Subtotal Interest Rate Derivative Agreements				—		1,678
Total Investment Assets			$	3,236,249	$	3,221,688
INTEREST RATE DERIVATIVE AGREEMENTS
	Interest Rate Swap – Pay Fixed/ Receive Floating	30 Contracts Notional Amounts Totaling $802,956	$	—	$	(17,008	)
	Interest Rate Swap – Pay Floating/ Receive Floating	7 Contracts Notional Amounts Totaling $135,103		—		(388	)
Total Investment Liabilities			$	—	$	(17,396	)

(1)	Non-income producing.

(2)	Public company.

(3)	Foreign 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.

See accompanying notes.

AMERICAN CAPITAL STRATEGIES, LTD.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(unaudited)

(in thousands)


	Preferred Stock		Common Stock			Capital in Excess of Par Value		Unearned Compensation			Notes Receivable From Sale of Common Stock			Distributions in Excess of Net Realized Earnings			Net Unrealized Appreciation (Depreciation) of Investments			Total Shareholders’ Equity
	Preferred Stock		Shares	Amount		Capital in Excess of Par Value		Unearned Compensation			Notes Receivable From Sale of Common Stock			Distributions in Excess of Net Realized Earnings			Net Unrealized Appreciation (Depreciation) of Investments			Total Shareholders’ Equity
Balance at December 31, 2003	$	—	65,949	$	659	$	1,360,181	$	(21,286	)	$	(8,783	)	$	(23,685	)	$	(131,171	)	$	1,175,915
Issuance of common stock		—	2,174		22		68,012		—			—			—			—			68,034
Issuance of common stock under stock option plans		—	1,099		11		26,870		—			—			—			—			26,881
Issuance of common stock under the Dividend Reinvestment Plan		—	11		—		367		—			—			—			—			367
Repayments of notes receivable from sale of common stock		—	—		—		—		—			372			—			—			372
Stock-based compensation		—	—		—		5,423		(4,055	)		—			—			—			1,368
Net increase in shareholders’ equity resulting from operations		—	—		—		—		—			—			(11,353	)		45,956			34,603
Distributions		—	—		—		—		—			—			(46,745	)		—			(46,745	)

Balance at March 31, 2004	$	—	69,233	$	692	$	1,460,853	$	(25,341	)	$	(8,411	)	$	(81,783	)	$	(85,215	)	$	1,260,795

Balance at December 31, 2004	$	—	88,705	$	887	$	2,010,063	$	(36,690	)	$	(6,845	)	$	(63,032	)	$	(31,957	)	$	1,872,426
Issuance of common stock		—	1,700		17		50,560		—			—			—			—			50,577
Issuance of common stock under stock option plans		—	565		6		14,839		—			—			—			—			14,845
Issuance of common stock under the Dividend Reinvestment Plan		—	7		—		228		—			—			—			—			228
Repayments of notes receivable from sale of common stock		—	—		—		—		—			20			—			—			20
Stock-based compensation		—	—		—		11,296		(8,100	)		—			—			—			3,196
Net increase in shareholders’ equity resulting from operations		—	—		—		—		—			—			68,713			42,967			111,680
Distributions		—	—		—		—		—			—			(65,817	)		—			(65,817	)

Balance at March 31, 2005	$	—	90,977	$	910	$	2,086,986	$	(44,790	)	$	(6,825	)	$	(60,136	)	$	11,010		$	1,987,155

See accompanying notes.

AMERICAN CAPITAL STRATEGIES, LTD.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(in thousands)


	Three Months Ended March 31, 2005			Three Months Ended March 31, 2004
Operating activities:
Net increase in shareholders’ equity resulting from operations	$	111,680		$	34,603
Adjustments to reconcile net increase in shareholders’ equity resulting from operations to net cash provided by operating activities:
Net unrealized appreciation of investments		(42,967	)		(45,956	)
Net realized (gain) loss on investments		(4,826	)		58,847
Accretion of loan discounts		(3,129	)		(3,051	)
Increase in accrued payment-in-kind dividends and interest		(16,763	)		(8,982	)
Collection of loan origination fee discounts		4,258			1,989
Amortization of deferred finance costs and debt discount		1,883			1,737
Stock-based compensation		3,196			1,368
Depreciation of property and equipment		401			323
Increase in interest receivable		(6,977	)		(3,080	)
Decrease in other assets		2,437			1,134
Decrease in other liabilities		(14,406	)		(12,457	)

Net cash provided by operating activities		34,787			26,475

Investing activities:
Purchases of investments		(393,645	)		(242,739	)
Principal repayments		124,166			73,664
Proceeds from sale of senior debt investments		47,305			—
Collection of payment-in-kind notes		2,658			1,059
Collection of accreted loan discounts		978			2,604
Collection of payment-in-kind dividends		799			—
Proceeds from sale of equity investments		11,331			586
Purchase of government securities		(99,938	)		—
Interest rate derivative periodic payments		(3,295	)		(2,258	)
Capital expenditures of property and equipment		(646	)		(471	)
Repayments of employee notes receivable issued in exchange for common stock		20			372

Net cash used in investing activities		(310,267	)		(167,183	)

Financing activities:
Drawings on (repayments of) revolving credit facilities, net		147,611			126,349
Repayments of notes payable		(84,528	)		(111,418	)
Proceeds from (repayments of) repurchase agreements, net		113,938			42,495
Increase in deferred financing costs		(2,227	)		(1,225	)
Decrease in debt service escrows		72,108			40,584
Issuance of common stock		65,422			94,915
Distributions paid		(5,094	)		(50,335	)

Net cash provided by financing activities		307,230			141,365

Net increase in cash and cash equivalents		31,750			657
Cash and cash equivalents at beginning of period		58,367			8,020

Cash and cash equivalents at end of period	$	90,117		$	8,677

Non-cash financing activities:
Issuance of common stock in conjunction with dividend reinvestment	$	228		$	367

See accompanying notes.

AMERICAN CAPITAL STRATEGIES, LTD.

CONSOLIDATED FINANCIAL HIGHLIGHTS

(unaudited)

(in thousands, except per share data)


	Three Months Ended March 31, 2005			Three Months Ended March 31, 2004
Per Share Data:
Net asset value at beginning of the period	$	21.11		$	17.83

Net operating income(1)		0.71			0.71
Net realized gain (loss) on investments(1)		0.06			(0.88	)
Net unrealized appreciation on investments(1)		0.48			0.69

Net increase in shareholders’ equity resulting from operations(1)		1.25			0.52
Issuance of common stock		0.19			0.53
Effect of antidilution		0.02			0.03
Distribution of net investment income		(0.73	)		(0.70	)

Net asset value at end of period	$	21.84		$	18.21

Ratio/Supplemental Data:
Per share market value at end of period	$	31.41		$	33.24
Total (loss) return(2)		(3.5	)%		14.2	%
Shares outstanding at end of period		90,977			69,233
Net assets at end of period	$	1,987,155		$	1,260,795
Average net assets	$	1,929,791		$	1,218,355
Average debt outstanding	$	1,572,900		$	817,700
Average debt per common share(1)	$	17.57		$	12.18
Ratio of operating expenses, net of interest expense, to average net assets(3)		1.02	%		1.07	%
Ratio of interest expense to average net assets		0.90	%		0.50	%

Ratio of operating expenses to average net assets(3)		1.92	%		1.57	%
Ratio of net operating income to average net assets		3.31	%		3.90	%

(1)	Weighted average basic per share data.

(2)

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

(3)	Includes provision for income taxes.

See accompanying notes.

AMERICAN CAPITAL STRATEGIES, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

(in thousands, except per share data)

Note 1. Unaudited Interim Financial Statements

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

Note 2. Organization

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

We are the parent and sole shareholder of American Capital Financial Services, Inc. (“ACFS”) and through ACFS provide financial advisory services to businesses, principally our portfolio companies. We are headquartered in Bethesda, Maryland, and have offices in New York, San Francisco, Los Angeles, Philadelphia, Chicago, and Dallas. Substantially all of our investments and business activities result from portfolio companies operating primarily in the United States.

Note 3. Investments

Investments are carried at fair value, as determined in good faith by our Board of Directors. Unrestricted securities that are publicly traded are valued at the closing price on the valuation date. For debt and equity securities of companies that are not publicly traded, or for which we have various degrees of trading restrictions, we prepare an analysis consisting of traditional valuation methodologies to estimate the enterprise value of the portfolio company issuing the securities. The methodologies consist of valuation estimates based on: valuations of comparable public companies, recent sales of comparable companies, discounting the forecasted cash flows of the portfolio company, the liquidation or collateral value of the portfolio company’s assets, third party valuations of the portfolio company, third party sale offers and the value of recent investments in the equity securities of the portfolio company. We weight some or all of the above valuation methods in order to conclude on our estimate of value. In valuing convertible debt, equity or other securities, we value our equity investment based on our pro rata share of the residual equity value available after deducting all outstanding debt from the estimated enterprise value. We value non-convertible debt securities at cost plus amortized original issue discount (“OID”) to the extent that the estimated enterprise value of the portfolio company exceeds the outstanding debt of the portfolio company. If the estimated enterprise value is less than the outstanding debt of the company, we reduce the value of our debt investment beginning with the junior most debt such that the enterprise value less the value of the outstanding debt is zero. If there is sufficient enterprise value to cover the face amount of a debt security that has

AMERICAN CAPITAL STRATEGIES, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

(in thousands, except per share data)

been discounted due to the detachable equity warrants received with that security, that detachable equity warrant will be valued such that the sum of the discounted debt security and the detachable equity warrant equal the face value of the debt security.

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

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

Investments consist of securities issued by publicly- and privately-held companies and government securities, which have been valued at $3,573,025, excluding interest rate derivative agreements, as of March 31, 2005. These securities consist of senior debt, subordinated debt with equity warrants, preferred equity securities and common equity securities. Our debt securities are payable in installments with final maturities generally from 5 to 10 years and are generally collateralized by assets of the borrower. We also make investments in securities that do not produce current income. These investments typically consist of equity warrants, common equity, and preferred equity and are identified in the accompanying consolidated schedule of investments. At March 31, 2005, loans with a total principal balance of $108,555 were on non-accrual status. At March 31, 2005, loans, excluding loans on non-accrual status, with a principal balance of $11,251 were greater than three months past due. At December 31, 2004, loans with a total principal balance of $87,324 were on non-accrual status. At December 31, 2004, loans, excluding loans on non-accrual status, with a principal balance of $14,985 were greater than three months past due.

Interest income is recorded on the accrual basis to the extent that such amounts are expected to be collected. OID is accreted into interest income using the effective interest method. OID initially represents the value of detachable equity warrants obtained in conjunction with the acquisition of debt securities and loan origination fees that represent yield enhancement. Dividend income is recognized on the ex-dividend date for common equity securities and on an accrual basis for preferred equity securities to the extent that such amounts are expected to be collected. In determining the amount of dividend income to recognize, if any, from cash distributions on common equity securities, we will assess many factors including a portfolio company’s cumulative undistributed income and operating cash flow. Cash distributions from common equity securities received in excess of such undistributed amount are recorded first as a reduction of our investment and then as a realized gain on investment. We stop accruing interest or dividends on our investments when it is determined that the interest or dividend is not collectible. We assess the collectibility of the interest and dividends based on many factors including the portfolio company’s ability to service our loan based on current and projected cash flows as well as the current valuation of the enterprise. For investments with payment-in-kind (“PIK”) interest and dividends, we base income and dividend accruals on the valuation of the PIK notes or securities received from

AMERICAN CAPITAL STRATEGIES, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

(in thousands, except per share data)

the borrower. If the portfolio company valuation indicates a value of the PIK notes or securities that is not sufficient to cover the contractual interest or dividend, we will not accrue interest or dividend income on the notes or securities.

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


	March 31, 2005		December 31, 2004
COST
Senior debt	25.7	%	25.9	%
Subordinated debt	45.7	%	47.7	%
Preferred equity	11.9	%	12.4	%
Equity warrants	5.2	%	5.8	%
Common equity	8.7	%	8.2	%
Government securities	2.8	%	0.0	%

	March 31, 2005		December 31,2004
FAIR VALUE
Senior debt	25.8	%	26.3	%
Subordinated debt	43.2	%	45.5	%
Preferred equity	8.8	%	9.4	%
Equity warrants	7.8	%	8.5	%
Common equity	11.6	%	10.3	%
Government securities	2.8	%	0.0	%

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


	March 31, 2005		December 31, 2004
COST
Commercial Services & Supplies	13.9	%	14.3	%
Food Products	7.8	%	8.3	%
Auto Components	7.1	%	6.1	%
Electrical Equipment	6.5	%	7.0	%
Building Products	6.4	%	6.9	%
Healthcare Equipment & Supplies	5.7	%	6.0	%
Machinery	5.2	%	5.5	%
Household Durables	4.3	%	4.6	%
Textiles, Apparel & Luxury Goods	4.2	%	3.5	%
Healthcare Providers & Services	4.2	%	2.9	%
Leisure Equipment & Products	4.0	%	5.1	%
Chemicals	3.7	%	3.9	%
Road & Rail	3.4	%	3.6	%
Construction & Engineering	3.4	%	3.7	%
Computers & Peripherals	3.0	%	0.8	%

AMERICAN CAPITAL STRATEGIES, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

(in thousands, except per share data)


	March 31, 2005		December 31, 2004
Electronic Equipment & Instruments	2.7	%	2.9	%
Household Products	2.4	%	2.6	%
Diversified Financial Services	2.1	%	1.7	%
Construction Materials	2.1	%	2.1	%
Aerospace & Defense	1.8	%	2.1	%
Personal Products	1.3	%	1.4	%
Distributors	1.3	%	1.4	%
Containers & Packaging	1.1	%	0.9	%
IT Services	1.1	%	1.1	%
Pharmaceuticals & Biotechnology	0.6	%	0.7	%
Specialty Retail	0.0	%	0.5	%
Other	0.7	%	0.4	%

	March 31, 2005		December 31, 2004
FAIR VALUE
Commercial Services & Supplies	15.8	%	16.6	%
Auto Components	7.8	%	7.0	%
Food Products	7.2	%	8.0	%
Electrical Equipment	6.4	%	6.9	%
Healthcare Equipment & Supplies	6.1	%	6.2	%
Household Durables	5.3	%	5.5	%
Building Products	4.6	%	5.1	%
Chemicals	4.4	%	4.3	%
Textiles, Apparel & Luxury Goods	4.2	%	3.5	%
Healthcare Providers & Services	4.0	%	2.6	%
Leisure Equipment & Products	3.7	%	4.8	%
Construction & Engineering	3.5	%	3.6	%
Machinery	3.4	%	3.6	%
Computers & Peripherals	3.2	%	1.0	%
Electronic Equipment & Instruments	3.1	%	3.4	%
Road & Rail	3.1	%	2.9	%
Household Products	2.6	%	2.6	%
Construction Materials	2.2	%	2.3	%
Diversified Financial Services	2.1	%	1.7	%
Aerospace & Defense	1.9	%	2.3	%
Distributors	1.2	%	1.3	%
Containers & Packaging	1.1	%	0.8	%
IT Services	1.1	%	1.2	%
Personal Products	0.7	%	1.0	%
Pharmaceuticals & Biotechnology	0.6	%	0.7	%
Specialty Retail	0.0	%	0.6	%
Beverages	0.0	%	0.3	%
Media	0.1	%	0.1	%
Other	0.6	%	0.1	%

AMERICAN CAPITAL STRATEGIES, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

(in thousands, except per share data)

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


	March 31, 2005		December 31, 2004
COST
Mid-Atlantic	21.3	%	20.3	%
Southwest	28.1	%	28.2	%
Southeast	14.5	%	14.2	%
North-Central	12.9	%	12.8	%
South-Central	8.9	%	9.6	%
Northwest	0.8	%	0.9	%
Northeast	9.1	%	9.2	%
Foreign	4.4	%	4.8	%

	March 31, 2005		December 31, 2004
FAIR VALUE
Mid-Atlantic	23.1	%	21.8	%
Southwest	27.7	%	28.4	%
Southeast	14.7	%	14.5	%
North-Central	14.2	%	13.5	%
South-Central	6.9	%	7.8	%
Northwest	0.8	%	0.9	%
Northeast	8.6	%	8.6	%
Foreign	4.0	%	4.5	%

Note 4. Borrowings

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


Debt	March 31, 2005		December 31, 2004
Revolving debt-funding facility, $1,000,000 commitment	$	754,959	$	623,348
Revolving debt-funding facility, $100,000 commitment		16,000		—
Revolving debt-funding facility, $125,000 commitment		—		—
Unsecured debt		167,000		167,000
Repurchase agreements		44,847		28,847
Repurchase agreements due April 7, 2005		97,938		—
ACAS Business Loan Trust 2002-1 asset securitization		200		2,291
ACAS Business Loan Trust 2002-2 asset securitization		27,321		44,590
ACAS Business Loan Trust 2003-1 asset securitization		64,027		110,895
ACAS Business Loan Trust 2003-2 asset securitization		155,741		174,007
ACAS Business Loan Trust 2004-1 asset securitization		410,000		410,000

Total	$	1,738,033	$	1,560,978

The weighted average debt balance for the three months ended March 31, 2005 and 2004 was $1,572,900 and $817,700, respectively. The weighted average interest rate on all of our borrowings, including amortization of deferred financing costs, for the three months ended March 31, 2005 and 2004 was 4.41% and 2.96%, respectively. We believe that we are currently in compliance with all of our debt covenants.

AMERICAN CAPITAL STRATEGIES, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

(in thousands, except per share data)

As of December 31, 2004, through ACS Funding Trust I, an affiliated statutory trust, we had a revolving debt-funding facility with a maximum availability of $850,000. On January 28, 2005, an existing lender in the facility increased its commitment by $150,000 increasing the total maximum availability to $1,000,000.

As of December 31, 2004, we had a $70,000 secured revolving credit facility with a syndication of lenders. On February 17, 2005, we revised the terms of the existing credit facility pursuant to an Amended and Restated Credit Agreement. In connection with the amendment, the maximum availability of borrowing under the credit facility was increased from $70,000 to $100,000 and the facility was converted into an unsecured revolving line of credit. The facility may be expanded through new or additional commitments up to $150,000 in accordance with the terms and conditions of the agreement and expires in February 2006 unless extended for an additional 364-day period with the consent of the lenders. Interest on borrowings under the facility is charged at either (i) a one-month LIBOR plus 225 basis points or (ii) the greater of the lender prime rate or the federal funds rate plus 100 basis points.

On March 29, 2005, we entered into repurchase agreements with Wachovia Capital Markets, LLC for $97,938, which were settled on April 7, 2005. The repurchase agreements were recorded at cost and were fully collateralized by United States Treasury Bills with a fair value of $99,938. The interest rate on the repurchase agreement was 2.60%.

Note 5. Stock Options

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

AMERICAN CAPITAL STRATEGIES, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

(in thousands, except per share data)

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


	Three Months Ended March 31,
	2005			2004
Net operating income
As reported	$	63,887		$	47,494
Stock-based employee compensation		(345	)		(1,148	)

Pro forma	$	63,542		$	46,346

Net operating income per common share
Basic as reported	$	0.71		$	0.71

Basic pro forma	$	0.71		$	0.69

Diluted as reported	$	0.70		$	0.70

Diluted pro forma	$	0.70		$	0.68

Net increase in shareholders’ equity resulting from operations
As reported	$	111,680		$	34,603
Stock-based employee compensation		(345	)		(1,148	)

Pro forma	$	111,335		$	33,455

Net increase in shareholders’ equity resulting from operations per common share
Basic as reported	$	1.25		$	0.52

Basic pro forma	$	1.24		$	0.50

Diluted as reported	$	1.22		$	0.51

Diluted pro forma	$	1.22		$	0.49

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

On April 15, 2005, the Securities and Exchange Commission issued a final rule to amend the adoption date of FASB Statement No. 123(R), “Share-Based Payment” to be no later than the beginning of the first fiscal year beginning after June 15, 2005.

AMERICAN CAPITAL STRATEGIES, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

(in thousands, except per share data)

Note 6. Earnings Per Share

The following table sets forth the computation of basic and diluted earnings per share for the three months ended March 31, 2005 and 2004:


	Three Months Ended March 31,
	2005		2004
Numerator for basic and diluted net operating income per share	$	63,887	$	47,494

Numerator for basic and diluted earnings per share	$	111,680	$	34,603

Denominator for basic weighted average shares		89,534		67,126
Employee stock options		857		1,141
Shares issuable under forward sale agreements		1,010		—
Contingently issuable shares*		—		2

Denominator for diluted weighted average shares		91,401		68,269

Basic net operating income per common share	$	0.71	$	0.71
Diluted net operating income per common share	$	0.70	$	0.70
Basic earnings per common share	$	1.25	$	0.52
Diluted earnings per common share	$	1.22	$	0.51

*	Contingently issuable shares are unvested shares outstanding that secure employee stock option loans.

Note 7. Segment Data

Our reportable segments are our investing operations as a business development company (“ACAS”) and the financial advisory operations of its wholly owned subsidiary, ACFS.

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


	ACAS		ACFS			Consolidated
Interest and dividend income	$	86,417	$	1		$	86,418
Fee income		1,560		12,877			14,437

Total operating income		87,977		12,878			100,855

Interest		17,346		—			17,346
Salaries and benefits		2,913		6,203			9,116
General and administrative		3,284		3,001			6,285
Stock-based compensation		1,000		2,196			3,196

Total operating expenses		24,543		11,400			35,943

Operating income before income taxes		63,434		1,478			64,912

Provision for income taxes		—		(1,025	)		(1,025	)

Net operating income		63,434		453			63,887

Net realized gain on investments		4,826		—			4,826
Net unrealized appreciation of investments		42,967		—			42,967

Net increase in shareholders’ equity resulting from operations	$	111,227	$	453		$	111,680

AMERICAN CAPITAL STRATEGIES, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

(in thousands, except per share data)

The following table presents segment data for the three months ended March 31, 2004:


	ACAS			ACFS		Consolidated
Interest and dividend income	$	55,556		$	—	$	55,556
Fee income		877			10,097		10,974

Total operating income		56,433			10,097		66,530

Interest		6,045			—		6,045
Salaries and benefits		1,268			4,475		5,743
General and administrative		3,405			2,475		5,880
Stock-based compensation		278			1,090		1,368

Total operating expenses		10,996			8,040		19,036

Net operating income		45,437			2,057		47,494

Net realized loss on investments		(58,847	)		—		(58,847	)
Net unrealized appreciation of investments		45,956			—		45,956

Net increase in shareholders’ equity resulting from operations	$	32,546		$	2,057	$	34,603

Note 8. Commitments

As of March 31, 2005, we had commitments under loan agreements to fund up to $144,447 to 35 portfolio companies. These commitments are primarily composed of working capital credit facilities and acquisition credit facilities. The commitments are subject to the borrowers meeting certain criteria. The terms of the borrowings subject to commitment are comparable to the terms of other debt securities in our portfolio.

As of March 31, 2005, we had a guarantee of $912 for one portfolio company. We entered into a performance guarantee to ensure the portfolio company’s performance under contracts as required by the portfolio company’s customers. We would be required to perform under the guarantee if the portfolio company were unable to meet specific requirements under the related contracts. The performance guarantee will expire upon the performance of the portfolio company. Fundings under the guarantee by us would generally constitute a subordinated debt liability of the portfolio company. As of March 31, 2005 the guarantee had a fair value of $0 in accordance with FASB Interpretation No. 45 “Guarantor’s Accounting and Disclosure Requirements For Guarantees, Including Indirect Guarantees of Indebtedness of Others.”

Note 9. Shareholders’ Equity

In March 2005, we completed a public offering in which 8,700 shares of our common stock, excluding an underwriters’ over-allotment of 1,300 shares, were sold at a public offering price of $31.50 per share. Of those shares, 700 were offered directly by us and 8,000 were sold by third parties in connection with agreements to purchase common stock from us for future delivery dates pursuant to forward sale agreements (the “2005 Forward Sale Agreements”). Upon completion of the offering, we received proceeds, net of the underwriters’ discount and closing costs, of $21,080 in exchange for 700 common shares.

The remaining 8,000 shares of common stock were borrowed from third party market sources by counterparties, or forward purchasers, of the 2005 Forward Sale Agreements who then sold the shares to the

AMERICAN CAPITAL STRATEGIES, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

(in thousands, except per share data)

public. Pursuant to the 2005 Forward Sale Agreements, we must sell to the forward purchasers 8,000 shares of our common stock generally at such times as we elect over a one-year period. The 2005 Forward Sale Agreements provide for settlement on a settlement date or dates to be specified at our discretion within the duration of the 2005 Forward Sale Agreements through a termination date of March 29, 2006. On a settlement date, we will issue shares of our common stock to the forward purchaser at the then applicable forward sale price. The forward sale price was initially $30.11 per share, which was the public offering price of shares of our common stock less the underwriting discount. The 2005 Forward Sale Agreements provide that the initial forward sale price per share will be subject to daily adjustment based on a floating interest factor equal to the federal funds rate, less a spread, and will be subject to decrease by $0.75, $0.77, $0.78, $0.04 and $0.78 per share on each of May 11, 2005, August 10, 2005, November 10, 2005, December 27, 2005 and February 10, 2006, respectively. The forward sale price will also be subject to decrease if the cost to the forward purchasers of borrowing our common stock exceeds a specified amount.

As of March 31, 2005, there are 8,000 shares available under the 2005 Forward Sale Agreements at a forward sale price of $30.12 per share. In addition, there are 5,250 shares available under forward sale agreements entered into in 2004 at a forward sale price of $28.88 as of March 31, 2005.

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

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

Note 10. Interest Rate Derivatives

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

AMERICAN CAPITAL STRATEGIES, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

(in thousands, except per share data)

Our derivatives are considered economic hedges that do not qualify for hedge accounting under FASB Statement No. 133, “Accounting for Derivative Instruments and Hedging Activities.” In 2004, the Securities and Exchange Commission prescribed new guidance on its interpretations of FASB Statement No. 133 for public investment companies related to the income statement classification of periodic interest rate derivative settlements. In prior periods, we recorded the payments and accrual of periodic interest settlements of interest rate derivative agreements in interest income. Under the new accounting method, we record the accrual of the periodic interest settlements of interest rate derivatives in net unrealized appreciation (depreciation) of investments and subsequently record the amount as a realized gain (loss) on investments on the interest settlement date. We adopted the new accounting method prospectively in 2004. The adoption of this new accounting method did not have any impact on our net increase in shareholders’ equity resulting from operations.

We have restated the amounts for the three months ended March 31, 2004, as previously reported, due to the adoption of the new accounting method discussed above. For the three months ended March 31, 2004 we reclassed ($5,945) from interest income to realized gain (loss) on investments and net unrealized appreciation (depreciation).

Item 2.

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

All statements contained herein that are not historical facts including, but not limited to, statements regarding anticipated activity are forward looking in nature and involve a number of risks and uncertainties. Actual results may differ materially. Among the factors that could cause actual results to differ materially are the following: (i) changes in the economic conditions in which we operate negatively impacting our financial resources; (ii) certain of our competitors have substantially greater financial resources than us reducing the number of suitable investment opportunities offered to us or reducing the yield necessary to consummate the investment; (iii) there is uncertainty regarding the value of our privately held securities that require our good faith estimate of fair value for which a change in estimate could affect our net asset value; (iv) our investments in securities of privately held companies may be illiquid which could affect our ability to realize a gain; (v) our portfolio companies could default on their loans or provide no returns on our investments which could affect our operating results; (vi) we are dependent on external financing to grow our business; (vii) our ability to retain key management personnel; (viii) an economic downturn or recession could impair our portfolio companies and therefore harm our operating results; (ix) our borrowing arrangements impose certain restrictions; (x) changes in interest rates may affect our cost of capital and net operating income; (xi) we cannot incur additional indebtedness unless we maintain an asset coverage of at least 200%, which may affect returns to our shareholders; (xii) we may fail to continue to qualify for our pass-through treatment as a regulated investment company which could have an affect on shareholder return; (xiii) our common stock price may be volatile; (xiv) we may fail to be compliant with the Sarbanes-Oxley Act of 2002; and (xv) general business and economic conditions and other risk factors described in our reports filed from time to time with the Securities and Exchange Commission. We caution readers not to place undue reliance on any such forward-looking statements, which statements are made pursuant to the Private Securities Litigation Reform Act of 1995 and, as such, speak only as of the date made.

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

Portfolio Composition

We are a publicly-traded buyout and mezzanine fund that provides investment capital to middle market companies. We invest in senior and subordinated debt and equity of companies in need of capital for buyouts, growth, acquisitions and recapitalizations. Our ability to fund the entire capital structure is an advantage in completing many middle market transactions. Our wholly-owned operating subsidiary, American Capital Financial Services, Inc., or ACFS, provides financial advisory services to our portfolio companies. The total portfolio value of investments was $3,575,557 and $3,204,292, including interest rate derivative agreements and government securities, at March 31, 2005 and December 31, 2004, respectively. During the three months ended March 31, 2005 we made investments totaling $405,800, including $35,800 in funds committed but undrawn under credit facilities at the date of the investment. During the three months ended March 31, 2004 we made investments totaling $238,600, including $6,400 in funds committed but undrawn under credit facilities at the date of the investment. The weighted average effective interest rate on debt securities, excluding government securities, was 13.0% and 12.9% at March 31, 2005 and December 31, 2004, respectively.

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

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

complete business or specific lines of a business that are related to the portfolio company’s business, (ii) recapitalization at the portfolio company, (iii) growth at the portfolio company such as product development or plant expansions, or (iv) working capital for portfolio companies, sometimes in distressed situations, that need capital to fund operating costs, debt service, or growth in receivables or inventory.

Our investments during the three months ended March 31, 2005 and 2004 were as follows:


	Three Months Ended March 31, 2005		Three Months Ended March 31, 2004
American Capital Sponsored Buyouts	$	137,900	$	116,700
Financing for Private Equity Buyouts		129,700		100,400
Direct Investments		76,600		—
Add-On Financing for Acquisitions		29,100		5,900
Add-On Financing for Recapitalization		2,400		1,800
Add-On Financing for Direct Investments		3,100		—
Add-On Financing for Growth		5,000		4,600
Add-On Financing for Working Capital		22,000		9,200

Total	$	405,800	$	238,600

Results of Operations

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

The consolidated operating results for the three months ended March 31, 2005 and 2004 follows:


	Three Months Ended March 31, 2005			Three Months Ended March 31, 2004
Operating income	$	100,855		$	66,530
Operating expenses		35,943			19,036

Operating income before income taxes		64,912			47,494

Provision for income taxes		(1,025	)		—

Net operating income		63,887			47,494

Net realized gain (loss) on investments		4,826			(58,847	)
Net unrealized appreciation of investments		42,967			45,956

Net increase in shareholders’ equity resulting from operations	$	111,680		$	34,603

Operating Income

Total operating income is comprised of two components: interest and dividend income and fee income. For the three months ended March 31, 2005, total operating income increased $34,325, or 52%, over the three months ended March 31, 2004. Interest and dividend income consisted of the following for the three months ended March 31, 2005 and 2004:


	Three Months Ended March 31, 2005		Three Months Ended March 31, 2004
Interest income on debt securities	$	78,872	$	51,749
Interest income on bank deposits and employee loans		659		165
Dividend income on equity securities		6,887		3,642

Total interest and dividend income	$	86,418	$	55,556

Interest income on debt securities increased by $27,123, or 52%, for the three months ended March 31, 2005 from $51,749 for the comparable period in 2004, primarily due to an increase in our debt investments. Our daily weighted average debt investments at cost increased from $1,547,600 in the three month period ended March 31, 2004 to $2,467,200 in the comparable period in 2005 resulting from new loan originations net of loan repayments during the last twelve months ended March 31, 2005. The daily weighted average interest rate on debt investments decreased from 13.4% in the three month period ended March 31, 2004 to 13.0% in the comparable period in 2005 due primarily to an increase in the total senior loans as a percentage of our total loan portfolio; our senior loans generally yield lower rates than our higher yielding subordinated loans. This is partially offset by an increase in interest rates on our variable rate based loans as the weighted average monthly prime lending rate increased from 4.00% in three month period ended March 31, 2004 to 5.50% in the comparable period in 2005 and the average monthly LIBOR rate increased from 1.10% in the three month period ended March 31, 2004 to 2.73% in the comparable period in 2005. The non-accruing loans increased from $66,578 in the three month period ended March 31, 2004 to $108,555 in the comparable period in 2005.

We attempt to match-fund our liabilities and assets by financing floating rate assets with floating rate liabilities and fixed rate assets with fixed rate liabilities or equity. We enter into interest rate basis swap agreements to match the interest rate basis of our assets and liabilities, thereby locking in the spread between our asset yield and the cost of our borrowings, and to fulfill our obligations under the terms of our revolving debt funding facilities and asset securitizations. However, our derivatives are considered economic hedges that do not qualify for hedge accounting under FASB Statement No. 133. The interest rate cost of our interest rate derivative agreements are not recorded in interest income. We record the accrual of the periodic interest settlements of interest rate derivatives in net unrealized appreciation (depreciation) of investments and subsequently record the amount as a realized gain (loss) on investments on the interest settlement date. In 2005, our senior loan investments as a percentage of our total loan portfolio have increased. Typically, our senior loan investments are variable rate based loans which would not necessitate the use of interest rate basis swap agreements thereby reducing our overall swap costs.

Dividend income on equity securities increased by $3,245 to $6,887 for the three months ended March 31, 2005 from $3,642 for the comparable period in 2004 due primarily to an increase in preferred stock investments. We have grown our investments in equity securities to a fair value of $1,004,637 as of March 31, 2005, a 77% increase over the prior year. Although these investments do not produce a significant amount of current income, we expect to experience future net realized gains from these equity investments if they continue to appreciate in value. Our daily weighted average total debt and equity investments at cost increased from $1,962,200 in the three months ended March 31, 2004 to $3,347,600 in the comparable period in 2005. The daily weighted average yield on total debt and equity investments decreased to 10.4% for the three months ended March 31, 2005 from 11.3% for the comparable period in 2004. This decrease is primarily due to the decrease in the weighted average interest rate on debt securities as discussed above and an increase in our investments in equity securities that generally yield lower current income but that we expect could generate higher future capital appreciation thereby increasing our overall return.

Fee income consisted of the following for the three months ended March 31, 2005 and 2004:


	Three Months Ended March 31, 2005		Three Months Ended March 31, 2004
Transaction structuring fees	$	2,820	$	3,197
Loan financing fees		2,414		2,138
Equity financing fees		1,665		2,167
Financial advisory fees		2,915		1,643
Prepayment fees		902		547
Other structuring fees		947		—
Other fees		2,774		1,282

Total fee income	$	14,437	$	10,974

Fee income increased by $3,463, or 32%, to $14,437 for the three months ended March 31, 2005 from $10,974 in the comparable period in 2004. For the three months ended March 31, 2005, we recorded $2,820 in transaction structuring fees for two buyout investments totaling $137,900 of American Capital financing. For the three months ended March 31, 2004, we recorded $3,197 in transaction structuring fees for two buyout investments totaling $116,700 of American Capital financing. The transaction structuring fees were 2.0% and 2.7% of buyout investments in 2005 and 2004, respectively. Loan financing fees for the three months ended March 31, 2005 increased $276, or 13%, over the comparable period in 2004. The increase in loan financing fees was attributable to an increase in new debt investments from $168,400 in 2004 to $334,800 in 2005, partially offset by an increase in the portion of fees deferred as a discount that are representative of additional yield in 2005. The loan financing fees were 0.7% and 1.3% of loan originations in 2005 and 2004, respectively. Financial advisory fees for the three months ended March 31, 2005 increased $1,272, or 77%, over the comparable period in 2004. The increase in financial advisory fees is attributable primarily to the increase in the number of portfolio companies under management. The prepayment fees of $902 for the three months ended March 31, 2005 are the result of the prepayment by two portfolio companies of loans totaling $50,800 compared to prepayment fees of $547 for the three months ended March 31, 2004 as the result of the prepayment by three portfolio companies of loans totaling $28,800.

Operating Expenses

Operating expenses for the three months ended March 31, 2005 increased $16,907, or 89%, over the comparable period in 2004.

Interest expense increased from $6,045 for the three months ended March 31, 2004 to $17,346 in the comparable period in 2005 due to an increase in our weighted average borrowings and an increase in our weighed average interest rate. Our weighted average borrowings increased from $817,700 in the three months ended March 31, 2004 to $1,572,900 in the comparable period in 2005. Our weighted average interest rate on outstanding borrowings, including amortization of deferred financing costs, increased from 2.96% during the three months ended March 31, 2004 to 4.41% during the comparable period in 2005. The increase in the weighted average interest rate is primarily due to an increase in the average monthly LIBOR rate from 1.10% in 2004 to 2.73% in 2005.

Salaries and benefits expense increased 59% from $5,743 in the three months ended March 31, 2004 to $9,116 in the comparable period in 2005. The increase is due primarily to an increase in employees from 137 at March 31, 2004 to 200 at March 31, 2005 and annual salary rate increases. The increase in number of employees is due to our growth.

General and administrative expenses increased 7% from $5,880 in the three months ended March 31, 2004 to $6,285 in the comparable period in 2005. The increase is due primarily to additional overhead attributable to the increase in the number of employees.

Stock-based compensation was $3,196 for three months ended March 31, 2005 compared to $1,368 for the comparable period in 2004. In 2003, we adopted FASB Statement No. 123 to account for stock-based

compensation plans for all stock options granted in 2003 and forward as permitted under FASB Statement No. 148. Accordingly, stock-based compensation is higher in 2005 since it includes the pro-rata vested expense for stock options granted over the past 27 months compared to the pro-rata vested expense for stock options granted over the past 15 months. In addition, the weighted average fair value for dividend adjusted option grants has been increasing. For example, the weighted average fair value of dividend adjusted options grants was $14.04 per option in the first quarter of 2005, $12.07 per option in fiscal year 2004 and $10.30 per option in fiscal year 2003. The increases in the weighted average fair values per option are due primarily to increases in the average market price of our common stock on the dates of grant.

Provision for Income Taxes

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

Our consolidated operating subsidiary, American Capital Financial Services, Inc., or ACFS, is subject to corporate level Federal and state income tax. For the three months ended March 31, 2005, we recorded a tax provision of $1,025 attributable to ACFS. For the three months ended March 31, 2004, we did not record a tax provision for ACFS primarily due to a net operating loss carry-forward that was fully utilized in 2004.

Net Realized Gains (Losses) on Investments

Our net realized gains (losses) for the three months ended March 31, 2005 and 2004 consisted of the following:


	Three Months Ended March 31, 2005			Three Months Ended March 31, 2004
Cycle Gear, Inc.	$	3,706		$	—
The Lion Brewery, Inc.		1,896			—
ACS PTI, Inc.		1,891			—
TransCore Holdings, Inc.		—			1,668
Other, net		1,404			1,347

Total gross realized portfolio company gains		8,897			3,015

Chromas Technologies Corp.		—			(31,992	)
Academy Events Services, LLC		—			(14,167	)
Sunvest Industries, Inc.		—			(13,442	)
Other, net		(776	)		(3	)

Total gross realized portfolio company losses		(776	)		(59,604	)

Total net realized portfolio company gains (losses)		8,121			(56,589	)
Interest rate derivative periodic payments		(3,295	)		(2,258	)

Total net realized gains (losses)	$	4,826		$	(58,847	)

In the first quarter of 2005, we received full repayment of our remaining $13,142 senior and subordinated debt investments in Cycle Gear, Inc. and sold all of our equity investments in Cycle Gear consisting of our redeemable preferred stock and common stock warrants for $7,332 in proceeds realizing a total gain of $3,706 offset by a reversal of unrealized appreciation of $3,138.

In the first quarter of 2005, we received full repayment of our $6,600 subordinated debt investment in The Lion Brewery, Inc. and sold all of our equity investments in Lion Brewery consisting of common stock warrants for $2,160 in proceeds realizing a total gain of $1,896 offset by a reversal of unrealized appreciation of $3,706.

In the fourth quarter of 2004, ACS PTI, Inc. sold its sole investment consisting of an equity interest in Phillips Temro Holdings, LLC. In the first quarter of 2005, ACS PTI distributed its remaining cash to us of $2,239 and was subsequently dissolved. We recognized a gain of $1,891 offset by a reversal of unrealized appreciation of $1,891.

In the first quarter of 2004, we realized a gain of $1,668 from the realization of unamortized OID from the prepayment of debt by TransCore Holdings, Inc.

In the first quarter of 2004, Chromas Technologies Corp. entered into an asset purchase agreement whereby substantially all of the assets were sold to and certain of the liabilities were assumed by a purchaser. The net cash proceeds were used to repay a portion of our outstanding loans. As part of the asset purchase agreement, Chromas was entitled to receive an additional deferred payment one year from the closing date. All of Chromas’ remaining assets including its right to receive the deferred payment were conveyed to us. Our remaining subordinated debt and equity investments in Chromas were deemed worthless and we recognized a realized loss of $31,992 offset by the reversal of unrealized depreciation of $29,767.

In the first quarter of 2004, Academy Event Services, LLC filed for Chapter 11 bankruptcy and the court conducted an auction for the sale of all of its assets during the quarter. We did not receive any proceeds from the auction sale held through the bankruptcy proceedings. Our subordinated debt and equity investments were deemed worthless and we recognized a realized loss of $14,167 offset by the reversal of unrealized depreciation of $7,813.

Sunvest Industries, Inc. was a holding company with two wholly-owned operating subsidiaries – Dyna-Fab LLC and Advanced Fabrication Technology LLC (AFT). In the fourth quarter of 2003, Dyna-Fab entered into an asset purchase agreement whereby substantially all of the assets of Dyna-Fab were sold. In the first quarter of 2004, AFT entered into an asset purchase agreement whereby substantially all of the assets of AFT were sold. In the first quarter of 2004, we foreclosed on Sunvest’s and its subsidiaries’ remaining assets including any rights to future payments under the asset purchase agreements. The remaining senior and subordinated debt and equity investments in Sunvest were deemed worthless and we recognized a realized loss of $13,442 offset by the reversal of unrealized depreciation of $14,052 in 2004.

Unrealized Appreciation and Depreciation of Investments

The net unrealized depreciation and appreciation of investments is based on portfolio asset valuations determined by management and approved by our board of directors. The following table itemizes the change in net unrealized appreciation (depreciation) of investments for the three months ended March 31, 2005 and 2004:


	Number of Companies	Three Months Ended March 31, 2005			Number of Companies	Three Months Ended March 31, 2004
Gross unrealized appreciation of portfolio company investments	20	$	75,343		18	$	48,854
Gross unrealized depreciation of portfolio company investments	11		(41,891	)	13		(38,606	)
Reversal of prior period unrealized (appreciation) depreciation upon a realization	3		(8,735	)	3		51,632

Net unrealized appreciation of portfolio company investments	34		24,717		34		61,880
Interest rate derivative periodic payment accrual	—		(280	)	—		(3,687	)
Interest rate derivative agreements	—		18,530		—		(12,237	)

Net unrealized appreciation of investments	34	$	42,967		34	$	45,956

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

As part of our quarterly process of valuing our investment portfolio, we engaged Houlihan Lokey Howard & Zukin Financial Advisors, Inc. beginning in the third quarter of 2003 to review independently the determination of fair value of American Capital’s portfolio company investments. Houlihan Lokey is the premier valuation firm in the U.S., engaged in approximately 800 valuation assignments per year for clients worldwide.

In the last twelve months ended March 31, 2005, Houlihan Lokey reviewed 100% of our portfolio investments that have been a portfolio company for at least one year. As part of its engagement, Houlihan Lokey will review quarterly approximately 25% of our portfolio companies that have been a portfolio company for at least one year. In addition, Houlihan Lokey representatives attend American Capital’s quarterly valuation meetings and provide periodic reports and recommendations to our audit and compliance committee with respect to our valuation models and policies and procedures.

For the first quarter of 2005, Houlihan Lokey reviewed our valuations of 24 portfolio companies having $634,708 in aggregate fair value as reflected in our financial statements as of March 31, 2005. Using methods and techniques that are customary for the industry and that Houlihan Lokey considers appropriate under the circumstances, Houlihan Lokey determined that the aggregate fair value assigned to the portfolio company investments by American Capital was within their reasonable range of aggregate value for such companies. Over the last four quarters, Houlihan Lokey has reviewed 84 portfolio companies totaling approximately $2,114,000 in fair value as of their respective valuation dates. Houlihan Lokey came to the same determination on different sets of portfolio companies for the previous four quarters.

Financial Condition, Liquidity, and Capital Resources

At March 31, 2005, we had $90,117 in cash and cash equivalents and $69,787 in restricted cash. Our restricted cash consists primarily of escrows of interest and principal payments collected on assets that are securitized. In accordance with the terms of the related securitized debt agreements, those funds are generally distributed each month to pay interest and principal on the securitized debt. As of March 31, 2005, we had availability of $454,041 under our revolving debt funding facilities and $392,567 under our equity forward sale agreements. During the three months ended March 31, 2005, we principally funded investments using draws on the revolving debt funding facilities, proceeds from repurchase agreements, proceeds from repayments and sales of loans and equity offerings.

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

We believe that we are currently in compliance with the requirements to qualify as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended, and to qualify as a business development company under the Investment Company Act of 1940, as amended. As a business development

company, our asset coverage, as defined in the Investment Company Act of 1940, must be at least 200% after each issuance of senior securities. As of March 31, 2005 and December 31, 2004, our asset coverage was 214% and 220%, respectively.

Equity Capital Raising Activities

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

However, the dilutive impact of the shares issuable under the forward sale agreements is included in our diluted weighted average shares under the treasury stock method based on the forward sale price deemed to be most advantageous to the counterparties.

Debt Capital Raising Activities

As of December 31, 2004, we had a $70,000 secured revolving credit facility with a syndication of lenders. On February 17, 2005, we revised the terms of the existing credit facility pursuant to an Amended and Restated Credit Agreement. In connection with the amendment, the maximum availability of borrowing under the credit facility was increased from $70,000 to $100,000 and facility was converted into an unsecured revolving line of credit. The facility may be expanded through new or additional commitments up to $150,000 in accordance with the terms and conditions of the agreement and expires in February 2006 unless extended for an additional 364-day period with the consent of the lenders. Interest on borrowings under the facility is charged at either (i) a one-month LIBOR plus 225 basis points or (ii) the greater of the lender prime rate or the federal funds rate plus 100 basis points.

Portfolio Credit Quality

Loan Grading and Performance

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

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

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


	March 31, 2005								December 31, 2004
Grade	Investments at Fair Value		Percentage of Total Portfolio		Loans at Fair Value		Percentage of Total Loan Portfolio		Investments at Fair Value		Percentage of Total Portfolio		Loans at Fair Value		Percentage of Total Loan Portfolio
4	$	752,316	22.2	%	$	385,337	15.6	%	$	666,534	21.1	%	$	326,531	14.1	%
3		2,296,790	67.8	%		1,761,698	71.4	%		2,088,051	66.2	%		1,624,966	70.3	%
2		259,317	7.6	%		240,206	9.7	%		326,454	10.4	%		288,008	12.5	%
1		81,305	2.4	%		81,209	3.3	%		70,922	2.3	%		70,825	3.1	%

	$	3,389,728	100.0	%	$	2,468,450	100	%	$	3,151,961	100.0	%	$	2,310,330	100	%

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

In the first quarter of 2005, five portfolio companies were upgraded from a loan grade 3 to a loan grade 4 and two portfolio companies were upgraded from a loan grade 2 to a loan grade 3 while one portfolio company was downgraded from a loan grade 4 to a loan grade 3 and one portfolio company was downgraded from a loan grade 4 to a loan grade 2.

We stop accruing interest on investments when it is determined that interest is no longer collectible. Our valuation analysis serves as a critical piece of data in this determination. A significant change in the portfolio company valuation determined by us could have an effect on the amount of our loans on non-accrual status. At March 31, 2005, loans with ten portfolio companies with a face amount of $108,555 and a fair value of $53,476 were on non-accrual status. Loans with three of the ten portfolio companies are grade 2 loans and loans with seven of the ten portfolio companies are grade 1 loans. These loans include a total of $94,838 with PIK interest features. At December 31, 2004, loans with ten portfolio companies with a face amount of $87,324 and a fair value of $37,292 were on non-accrual status. Loans with three of the ten portfolio companies are grade 2 loans and loans with seven of the ten portfolio companies are grade 1 loans. These loans include a total of $74,522 with PIK interest features.

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


	Number of Portfolio Companies	March 31, 2005			Number of Portfolio Companies	December 31, 2004
Current	98	$	2,508,004		90	$	2,304,954

One Month Past Due			—				61,200
Two Months Past Due			—				—
Three Months Past Due			—				—
Greater than Three Months Past Due			11,251				14,985
Loans on Non-accrual Status			108,555				87,324

Subtotal	10		119,806		13		163,509

Total	108	$	2,627,810		103	$	2,468,463

Past Due and Non-accruing Loans as a Percent of Total Loans			4.6	%			6.6	%

The loan balances above reflect the full face value of the loan. We believe that debt service collection is probable for our loans that are past due.

Credit Statistics

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

•

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

•

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

•

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

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

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


Portfolio Statistics(1)	Static Pool
($ in millions, unaudited):	Pre-1999			1999			2000			2001			2002			2003			2004			2005			Aggregate
Original Investments and Commitments	$	350		$	369		$	285		$	367		$	861		$	1,004		$	1,622		$	236		$	5,094
Total Exits and Prepayments of Original Investments	$	119		$	134		$	201		$	196		$	234		$	340		$	239		$	23		$	1,486
Total Interest, Dividends and Fees Collected	$	114		$	121		$	74		$	121		$	159		$	164		$	130		$	6		$	889
Total Net Realized (Loss) Gain on Investments(2)	$	(2	)	$	26		$	(85	)	$	47		$	—		$	16		$	1		$	—		$	3
Internal Rate of Return(3)		8.7	%		5.7	%		(1.4	)%		24.9	%		17.5	%		25.9	%		27.9	%		73.7	%		15.1	%
Current Cost of Investments	$	196		$	225		$	105		$	161		$	629		$	626		$	1,325		$	198		$	3,465
Current Fair Value of Investments(2)	$	148		$	111		$	92		$	163		$	658		$	701		$	1,402		$	198		$	3,473
Net Unrealized Appreciation/(Depreciation)(2)	$	(48	)	$	(114	)	$	(13	)	$	2		$	29		$	75		$	77		$	—		$	8
Non-Accruing Loans at Face	$	12		$	23		$	—		$	23		$	51		$	—		$	—		$	—		$	109
Equity Interest at Fair Value	$	14		$	9		$	31		$	43		$	221		$	248		$	401		$	38		$	1,005
Debt to EBITDA(4)(5)		8.5			8.7			4.8			4.9			5.0			4.5			4.4			3.6			4.8
Interest Coverage(4)		1.5			1.5			2.3			1.9			2.4			2.1			2.6			3.5			2.4
Debt Service Coverage(4)		1.3			1.4			1.5			1.5			1.6			1.4			1.9			2.2			1.7
Loan Grade(4)		2.3			1.7			3.0			3.0			3.2			3.2			3.2			3.0			3.1
Average Age of Companies		42 yrs			50 yrs			29 yrs			48 yrs			31 yrs			25 yrs			39 yrs			25 yrs			34 yrs
Ownership Percentage		85	%		77	%		34	%		46	%		51	%		42	%		43	%		17	%		45	%
Average Sales(6)	$	87		$	76		$	99		$	212		$	76		$	94		$	83		$	171		$	95
Average EBITDA(7)	$	5		$	5		$	22		$	23		$	11		$	16		$	17		$	20		$	16
Total Sales(6)	$	393		$	583		$	305		$	1,992		$	1,265		$	2,732		$	3,642		$	1,171		$	12,083
Total EBITDA(7)	$	28		$	30		$	65		$	238		$	167		$	408		$	717		$	140		$	1,793
% of Senior Loans(8)		64	%		34	%		0	%		29	%		41	%		36	%		36	%		40	%		37	%
% of Loans with Lien(8)		68	%		50	%		43	%		80	%		82	%		90	%		75	%		65	%		76	%

(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 are excluded.

(2)	Excludes net realized losses, fair value and unrealized depreciation on interest rate derivative agreements.

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

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

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

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

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

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

Item 3. Quantitative and Qualitative Disclosure About Market Risk

Because we fund a portion of our investments with borrowings, our net increase in shareholders’ equity from operations is affected by the spread between the rate at which we invest and the rate at which we borrow. We attempt to match-fund our liabilities and assets by financing floating rate assets with floating rate liabilities and fixed rate assets with fixed rate liabilities or equity. We enter into interest rate basis swap agreements to match the interest rate basis of our assets and liabilities, thereby locking in the spread between our asset yield and the cost of our borrowings, and to fulfill our obligations under the terms of our revolving debt funding facilities and asset securitizations. However, our derivatives are considered economic hedges that do not qualify for hedge accounting under FASB Statement No. 133, “Accounting for Derivative Instruments and Hedging Activities.” See footnote 10 to our consolidated financial statements for additional information on the accounting treatment of our interest rate derivative agreements.

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

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

As of March 31, 2005, our interest rate derivative agreements have a remaining weighted average term of approximately 4.6 years. The following table presents the notional principal amounts of interest rate derivative agreements by class:


	March 31, 2005
Type of Interest Rate Derivative Agreements	Company Pays	Company Receives	Number of Contracts	Notional Value
Interest rate swaps – Pay fixed, receive LIBOR floating	4.07%(1)	LIBOR	36	$	1,031,135
Interest rate swaps – Pay prime floating, receive LIBOR floating	Prime	LIBOR + 2.73%(1)	6		118,769
Interest rate swaptions – Pay LIBOR floating, receive fixed	LIBOR	4.38%(1)	2		7,093
Interest rate caps			5		27,849

Total			49	$	1,184,846


	December 31, 2004
Type of Interest Rate Derivative Agreements	Company Pays	Company Receives	Number of Contracts	Notional Value
Interest rate swaps – Pay fixed, receive LIBOR floating	4.07%(1)	LIBOR	34	$	1,019,956
Interest rate swaps – Pay prime floating, receive LIBOR floating	Prime	LIBOR + 2.73%(1)	7		135,103
Interest rate swaptions – Pay LIBOR floating, receive fixed	LIBOR	4.38%(1)	2		7,093
Interest rate caps			5		28,703

Total			48	$	1,190,855

(1)	Weighted average.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

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

American Capital, including our chief executive officer and chief financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2005. Based on the foregoing, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective.

Changes in Internal Control over Financial Reporting

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

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

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

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

Not Applicable.

Item 3. Defaults Upon Senior Securities

Not Applicable.

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

Not Applicable.

Item 5. Other Information

Not Applicable.

Item 6. Exhibits

(a) Exhibits


Exhibit Number		Description

10.1		Third Amendment to Loan Funding and Servicing Agreement, dated April 20, 2005, by and among ACS Funding Trust II, American Capital Strategies, Ltd., Fairway Finance Company, LLC, Harris Nesbitt Corp. and Wells Fargo Bank, National Association.

10.2		Amendment No. 4 to Second Amended and Restated Loan Funding and Servicing Agreement, dated April 21, 2005, by and among ACS Funding Trust I, American Capital Strategies, Ltd., Variable Funding Capital Corporation, Wachovia Capital Markets, LLC, JPMorgan Chase Bank, N.A., Citigroup Global Markets Realty Corp., YC SUSI Trust, Bank Of America, National Association, and acknowledged and agreed to by Wachovia Bank, National Association.

10.3		First Amendment to Amended and Restated Credit Agreement, dated April 29, 2005, by and among American Capital Strategies, Ltd., Branch Banking and Trust Company, Bayerische Hypo-Und Vereinsbank AG, LaSalle Bank National Association, Fifth Third Bank and Hibernia National Bank.

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

SIGNATURES

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


AMERICAN CAPITAL STRATEGIES, LTD.

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

Date: May 10, 2005