FOR IMMEDIATE RELEASE:
October 31, 2006

Contact
John Erickson, Chief Financial Officer (301) 951-6122
Tom McHale, Senior Vice President, Finance (301) 951-6122

American Capital Increases Q4 2006 Dividend 11% to $0.88 Per Share; Reports $1.14 in Realized Earnings Per Basic Share in Q3 2006

Bethesda, MD – October 31, 2006 – American Capital Strategies Ltd. (Nasdaq: ACAS) its fourth quarter 2006 dividend and its results for the third quarter of 2006.

FOURTH QUARTER 2006 DIVIDEND DECLARATION
American Capital’s Board of Directors has declared a fourth quarter 2006 regular dividend of $0.88 per share to record holders as of December 6, 2006, payable on January 18, 2007.  This is an 11% increase over the fourth quarter 2005 regular dividend of $0.79 per share.  Dividends declared in 2006 total $3.33 per share compared to $3.08 per share in 2005, an 8% increase.  American Capital has paid a total of $1.3 billion in dividends and paid or declared dividends of $22.44 per share since its August 1997 IPO at $15.00 per share.

THIRD QUARTER 2006 RESULTS
In addition, American Capital announced today its results for the quarter ended September 30, 2006. Realized earnings (earnings less unrealized appreciation and depreciation) for the quarter increased 96% to $162 million, compared to $82 million for third quarter of 2005.  On a basic per share basis, realized earnings increased 41% to $1.14 per share compared to $0.81 per share for the third quarter of 2005.

Net operating income (earnings less appreciation, depreciation, gains and loss (“NOI”)) for the quarter increased 28% to $110 million compared to $86 million for third quarter of 2005.  On a basic per share basis, NOI decreased 7% to $0.78 per share compared to $0.84 per share in the third quarter of 2005. 

For the quarter, the net increase in net assets resulting from operations (earnings) was $132 million, or $0.93 per basic share, compared to $94 million, or $0.92 per basic share, in the third quarter of 2005.

Third quarter 2006 dividends were $0.83 per share, a 6% growth over third quarter 2005 dividends of $0.78 per share.  American Capital’s realized earnings of $1.14 per basic share were 137% greater than the third quarter 2006 dividend per share. American Capital’s net asset value per share at September 30, 2006 was $27.96, a $3.59 or 15% growth over the December 31, 2005 net asset value per share of $24.37, and $4.62 or 20% growth over the September 30, 2005 net asset value per share of $23.34.

"The third quarter results were extremely strong with realized earnings of $1.14 per share," said Malon Wilkus, American Capital Chairman, President and CEO.  "We have increased our regular quarterly dividend for the fourth quarter to $0.88 per share, exceeding our previous guidance by $0.04 per share.  This increase reflects a number of positive factors, including outstanding portfolio performance, the impact of our growing asset management business including European Capital and American Capital Equity I, and our assessment of the future performance of our realized earnings and, ultimately, our taxable income.  We plan to release dividend guidance for 2007 in February.  We expect that the creation of the $1 billion American Capital Equity I will be accretive to our 2007 NOI by more than $0.25 per basic share."

In the third quarter of 2006, American Capital invested $1.2 billion of capital and received $811 million of proceeds from amortization and exits of portfolio investments.  In the third quarter of 2006, American Capital recorded $46 million in portfolio net realized gains and $5 million in net realized gains attributable to interest rate derivatives.  In the third quarter of 2006, net unrealized depreciation totaled $30 million, consisting of gross appreciation of $136 million from 37 portfolio companies, $123 million of gross depreciation from 28 portfolio companies, $15 million of net unrealized depreciation resulting from the recognition of net realized gains, $15 million of net unrealized appreciation associated with the translation of foreign currency denominated investments and $42 million of net depreciation on interest rate derivatives.  Interest rate derivatives are required by American Capital’s loan agreements and asset securitizations to lock in interest rate spreads and reduce interest rate risks.  They appreciate or depreciate based on relative market interest rates and remaining term to maturity.
 
“We received more than $800 million in capital back during the third quarter,” said Ira Wagner, Chief Operating Officer.  “We received $594 million in principal payments and loan sales as well as $217 million in proceeds from the sale of portfolio company equity investments, which resulted in net realized gains of $46 million.  To date, we have enjoyed $410 million of net appreciation, depreciation, gains and losses from our 2001 – 2006 static pools, including $241 million of net gains and $170 million of net unrealized appreciation.  Thirty-one percent of all the capital we’ve invested since our 1997 IPO has been exited or repaid.  These net gains and appreciation and the overall volume of exits and repayments confirm the quality of our investments.  We have built the finest institution for investing in the capital of private companies and we continue to see excellent opportunities.”

The weighted average effective interest rate on American Capital's total investments in debt securities as of September 30, 2006 was 12.6%.  At September 30, 2006, the weighted average loan grade of American Capital's loan portfolio was 3.1 on a scale of 1 to 4, with 4 being the highest quality, compared to 3.1 as of September 30, 2005.  As of September 30, 2006, loans totaling $164 million, with a fair value of $63 million, were on non-accrual.  Delinquent and non-accruing loans to 11 portfolio companies totaled $184 million, or 4% of total loans, at September 30, 2006, compared to $181 million, or 5% of total loans, at September 30, 2005.  The $63 million fair value of non-accrual loans represented 1% of total loans at fair value, at September 30, 2006, compared to $44 million fair value of non-accrual loans representing 1% of total loans at fair value, at September 30, 2005.

“We continue to find new ways to raise capital,” said Chief Financial Officer John Erickson.  “We issued $212 million of equity in two direct placements to institutional investors in the third quarter.  These transactions are not as expensive as broadly distributed public offerings, and do not require the marketing period of typical equity offerings.  Now that we have reached $6 billion of market capitalization, we are more attractive to large-cap institutional investors.  On October 1, 2006, we established American Capital Equity I, a $1 billion equity fund as part of our asset management strategy.  A wholly-owned taxable affiliate of American Capital will be paid 2% of the assets of the fund annually as a management fee and receive up to 30% of its profits in return for managing American Capital Equity I.  This transaction allowed us to access for the first time a set of global institutional investors with significant funds and expertise dedicated to private equity.  Our sale of $670 million of equity investments to American Capital Equity I and its $330 million of untapped capital commitments for additional equity investments provide additional sources of capital to fund our business and increase our flexibility in determining how and when we raise capital.”
 
In the third quarter of 2006, American Capital portfolio company European Capital, with $2.1 billion of capital resources, managed by a wholly-owned taxable subsidiary of American Capital, made investments in 10 portfolio companies, totaling $560 million.  Since inception in September of last year, it has invested in 31 portfolio companies totaling $1.2 billion.  European Capital is expected to declare its first dividend in the fourth quarter of 2006.

Since its August 1997 IPO through the third quarter of 2006, American Capital has earned an 18% compounded annual return, including interest, dividends, fees and net gains, on 149 exits and prepayments of senior debt, subordinated debt and equity investments, totaling $3.6 billion of invested capital.  These exits and prepayments represent 31% of all amounts invested by American Capital since its August 1997 IPO.  Proceeds from these exits and prepayments exceeded the associated prior quarter valuation of the investments by $78 million in aggregate, or 2%.  Twenty percent of these exits and prepayments were from portfolio companies that had at one time been either a loan grade 1 or 2 in American Capital's four point loan grading system, with 1 being the lowest loan grade.  Since its IPO through the third quarter of 2006, $134 million of American Capital’s Payment in Kind (“PIK”) interest and dividends and accreted Original Interest Discount (“OID”) have been repaid, representing 35% of all PIK and OID recorded.

“We substantially exited Aeriform, Iowa Mold Tooling and Optima during the third quarter,” said Gordon O’Brien, Senior Vice President in charge of the 29 person Operations Team.  “These companies had performed below our expectations at various times during our ownership and the Operations Team assisted them in improving their performance.  Their cumulative net realized and net unrealized gains were $97 million above their lowest fair values, which demonstrates our ability to help a company manage through difficult times and as a result recover significant value that would otherwise be lost.

THIRD PARTY VALUATION OF PORTFOLIO INVESTMENTS
American Capital’s Board of Directors is responsible for determining the fair value of American Capital’s portfolio investments on a quarterly basis.  In that regard in the third quarter of 2003, the board retained Houlihan Lokey Howard & Zukin Financial Advisors Inc. ("Houlihan Lokey") to assist it by having Houlihan Lokey regularly review a designated percentage of our fair value determinations.  Houlihan Lokey is a leading valuation firm in the U.S., engaged in approximately 1,000 valuation assignments per year for clients worldwide.  Each quarter, Houlihan Lokey reviews American Capital’s determination of the fair value of approximately 25% of its portfolio company investments that have been portfolio companies for at least one year and that have a fair value in excess of $10 million.  In the third quarter of 2006, Houlihan Lokey reviewed valuations of 30 portfolio company investments having an aggregate $1.7 billion in fair value as of the period end.  Over the last four quarters, Houlihan Lokey has reviewed 99 portfolio companies totaling $4.4 billion in fair value as of their respective valuation dates.  In addition, Houlihan Lokey representatives attend American Capital’s quarterly valuation meetings and provide periodic reports and recommendations to the Audit and Compliance Committee of the Board of Directors.

For those portfolio company investments that Houlihan Lokey has reviewed during each applicable period since its engagement, using the scope of review set forth by American Capital’s Board of Directors, the Board has made a fair value determination that is within the aggregate range of fair value for such investments as determined by Houlihan Lokey.

In addition to its standard scope, American Capital engaged Houlihan Lokey to review the value of ASAlliances Biofuels, LLC.  As of September 30, 2006, the fair value of this investment as determined by American Capital's Board is within the range of fair value for the investment as determined by Houlihan Lokey.

Financial highlights for the quarter are as follows:

AMERICAN CAPITAL STRATEGIES, LTD.

CONSOLIDATED BALANCE SHEETS

As of September 30, 2006, December 31, 2005 and September 30, 2005

(in thousands, except per share data)