The information contained in this section should be read in conjunction with our financial statements and notes thereto appearing elsewhere in this quarterly report. In addition, some of the statements in this report constitute forward-looking statements, which relate to future events or the future performance or financial condition of Ares Capital Corporation (the "Company," "ARCC," "we," "us" or "our"). The forward-looking statements contained in this report involve risks and uncertainties, including statements as to:

† our future operating results;

† our business prospects and the prospects of our portfolio companies;

† the return or impact of investments that we expect to make;

† the impact of a protracted decline in the liquidity of credit markets on our business;

† the impact of fluctuations in interest rates on our business;

† the valuation of our investments in portfolio companies, particularly those having no liquid trading market;

†          our ability to recover unrealized losses;



†          our ability to access alternative debt markets and additional
capital;

† our contractual arrangements and relationships with third parties;

† the dependence of our future success on the general economy and its impact on the industries in which we invest;

† the ability of our portfolio companies to achieve their objectives;

† our expected financings and investments;

† the adequacy of our cash resources and working capital;

† the timing and amount of dividend distributions;

† the timing of cash flows, if any, from the operations of our portfolio companies; and

† the ability of our investment adviser to locate suitable investments for us and to monitor and administer our investments.

We use words such as "anticipates," "believes," "expects," "intends," "will," "should," "may" and similar expressions to identify forward-looking statements. Our actual results could differ materially from those projected in the forward-looking statements for any reason. We have based the forward-looking statements included in this report on information available to us on the date of this report, and we assume no obligation to update any such forward-looking statements. Although we undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise, you are advised to consult any additional disclosures that we may make directly to you or through reports that we in the future may file with the SEC, including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K.

OVERVIEW

We are a specialty finance company that is a closed-end, non-diversified management investment company incorporated in Maryland. We have elected to be regulated as a business development company (a "BDC") under the Investment Company Act of 1940 (the "Investment Company Act"). We were founded on April 16, 2004 and were initially funded on June 23, 2004 and on October 8, 2004 completed our initial public offering (the "IPO").

Our investment objective is to generate both current income and capital appreciation through debt and equity investments. We invest primarily in first and second lien senior loans and mezzanine debt, which in some cases includes an equity component, and, to a lesser extent, in equity investments in private middle market companies.

We are externally managed by Ares Capital Management LLC (the "Investment Adviser"), an affiliate of Ares Management LLC, an independent international investment management firm, pursuant to an investment advisory agreement (the "Advisory Agreement"). Ares Operations LLC ("Ares Administration"), an affiliate of Ares Management LLC, provides the

administrative services necessary for us to operate.

As a BDC, we are required to comply with certain regulatory requirements. For instance, we generally have to invest at least 70% of our total assets in "qualifying assets," including securities and indebtedness of private U.S. companies, cash, cash equivalents, U.S. government securities and high-quality debt investments that mature in one year or less.

We have qualified and elected to be treated as a regulated investment company, or a RIC, under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). To continue to qualify as a RIC, we must, among other things, meet certain source-of-income and asset diversification requirements and timely distribute to our stockholders at least 90% of our investment company taxable income, as defined by the Code, for each year. Pursuant to this election, we generally will not have to pay corporate level taxes on any income that we distribute to our stockholders.

PORTFOLIO AND INVESTMENT ACTIVITY

(in millions, except number of new investment commitments, terms and
percentages)



                                                                  Three Months ended
                                                      September 30, 2008      September 30, 2007
New investment commitments (1):
New portfolio companies                               $             148.3    $               34.0
Existing portfolio companies                                         34.9                    79.9
Total new investment commitments                                    183.2                   113.9
Less:
Investment commitments exited                                       179.6                   106.2
Net investment commitments                            $               3.6    $                7.7
Principal amount of investments purchased:
Senior term debt                                      $              95.5    $               75.1
Senior subordinated debt                                            117.8                    34.0
Equity and other                                                     22.6                    11.3
Total                                                 $             235.9    $              120.4
Principal amount of investments sold or repaid:
Senior term debt                                      $             134.6    $               98.8
Senior subordinated debt                                             19.5                    10.0
Equity and other                                                      6.4                       -
Total                                                 $             160.5    $              108.8
Number of new investment commitments (2)                               11                       8
Average new investment commitments amount             $              16.7    $               14.2
Weighted average term for new investment
commitments (in months)                                                75                      69
Percentage of new investment commitments at
floating rates                                                          2 %                    54 %
Percentage of new investment commitments at fixed
rates                                                                  86 %                    30 %
Weighted average yield of debt and income
producing securities funded during the period (3)                   13.03 %                 12.16 %
Weighted average yield of debt and income
producing securities sold or repaid during the
period (3)                                                           8.94 %                 11.50 %

(2) Number of new investments represents each commitment to a particular portfolio company.

(3) When we refer to the "weighted average yield" in this report, we compute it with respect to particular securities by taking the (a) annual stated interest rate or yield earned plus the net annual amortization of original issue discount and market discount earned on accruing debt included in such securities, and dividing it by (b) total debt and income producing securities at fair value included in such securities.

The Investment Adviser employs an investment rating system to categorize our investments. In addition to various risk management and monitoring tools, the Investment Adviser grades all investments on a scale of 1 to 4 no less frequently than quarterly. This system is intended to reflect the performance of the portfolio company's business, the collateral coverage of the investment and other factors considered relevant. Under this system, investments with a grade of 4 involve the least amount of risk in our portfolio. The portfolio company is performing above expectations and the trends and risk factors are generally favorable, including a potential exit. Investments graded 3 involve a level of risk that is similar to the risk at the time of origination. The portfolio company is performing as expected and the risk factors are neutral to favorable. All new investments are initially graded 3. Investments graded 2 involve a portfolio company performing below expectations and indicates that the

investment's risk has increased materially since origination. The portfolio company may be out of compliance with debt covenants, however, payments are generally not more than 120 days past due. For investments graded 2, we increase procedures to monitor the portfolio company and we will write down the fair value of the investment if it is deemed to be impaired. An investment grade of 1 indicates that the portfolio company is performing materially below expectations and that the investment risk has substantially increased since origination. Most or all of the debt covenants are out of compliance and payments are substantially delinquent. Investments graded 1 are not anticipated to be repaid in full and we will reduce the fair market value of the investment to the amount we anticipate will be recovered. The Investment Adviser employs half-point increments to reflect underlying trends in portfolio company operating or financial performance, as well as the general outlook. As of September 30, 2008, the weighted average investment grade of the investments in our portfolio was 2.9 with 3.2% of total investments at amortized cost (or 1.0% at fair value) on non-accrual status. The weighted average investment grade of the investments in our portfolio as of December 31, 2007 was 3.0. The distribution of the grades of our portfolio companies as of September 30, 2008 and December 31, 2007 is as follows (dollar amounts in thousands):

            September 30, 2008         December 31, 2007
                        Number of                 Number of
          Fair Value    Companies   Fair Value    Companies
Grade 1   $    57,828           6   $    13,927           1
Grade 2       163,106           7       115,585           6
Grade 3     1,719,116          70     1,581,811          66
Grade 4       153,644           7        62,879           3
          $ 2,093,694          90   $ 1,774,202          76

As of September 30, 2008, the weighted average yield of the debt and income producing securities in our portfolio was approximately 12.26%. As of September 30, 2008, the weighted average yield on our entire portfolio was 10.73% and the weighted average yield on our senior term debt, senior subordinated debt and income producing securities was 11.50%, 13.95% and 11.01%, respectively. Of the senior term debt, as of September 30, 2008, the weighted average yield attributable to first lien senior term debt and second lien senior term debt was 10.26% and 13.21%, respectively.

As of December 31, 2007, the weighted average yield of the debt and income producing securities in our portfolio was approximately 11.68%. As of December 31, 2007, the weighted average yield on our entire portfolio was 10.22% and the weighted average yield on our senior term debt, senior subordinated debt and income producing securities was 11.19%, 13.23% and 10.36%, respectively. Of the senior term debt, as of December 31, 2007, the weighted average yield attributable to first lien senior term debt and second lien senior term debt was 10.53% and 12.38%, respectively.

The weighted average yield on our debt and income producing securities was higher as of September 30, 2008 compared to the weighted average yield on our debt and income producing securities as of December 31, 2007 primarily because of the addition of a higher percentage of higher yielding investments during the nine months ended September 30, 2008, partially offset by the decline in LIBOR since December 31, 2007.

RESULTS OF OPERATIONS

For the three and nine months ended September 30, 2008 and September 30, 2007

Operating results for the three and nine months ended September 30, 2008 and 2007 are as follows (in thousands):

                                              For the three months ended          For the nine months ended
                                                    September 30,                       September 30,
                                                2008              2007              2008              2007
Total investment income                    $        62,067    $      47,931    $      177,738    $      135,045
Total expenses                                      29,365           24,101            83,186            67,312
Net investment income before income
taxes                                               32,702           23,830            94,552            67,733
Income tax expense (benefit), including
excise tax                                            (118 )            (79 )            (302 )            (112 )
Net investment income                               32,820           23,909            94,854            67,845
Net realized gains (losses)                          4,580           10,886             4,796             3,363
Net unrealized gains (losses)                      (78,793 )        (11,871 )        (128,605 )           8,873
Net increase in stockholders' equity
resulting from operations                  $       (41,393 )  $      22,924    $      (28,955 )  $       80,081

Net income can vary substantially from period to period for various factors, including the recognition of realized gains and losses and unrealized appreciation and depreciation. As a result, quarterly comparisons of net income may not be meaningful.

Investment Income

For the three months ended September 30, 2008, total investment income increased $14.1 million, or 30%, over the three months ended September 30, 2007. For the three months ended September 30, 2008, total investment income consisted of $56.3 million in interest income from investments, $3.3 million in capital structuring service fees, $0.8 million in dividend income, $1.4 million in other income and $0.3 million in interest income from cash and cash equivalents. Interest income from investments increased $13.4 million, or 31%, to $56.3 million for the three months ended September 30, 2008 from $42.9 million for the comparable period in 2007. The increase in interest income from investments was primarily due to the increase in the overall size of the portfolio. The average investments, at fair value, for the quarter increased from $1.6 billion for the three months ended September 30, 2007 to $2.1 billion for the comparable period in 2008. Capital structuring service fees increased $0.6 million, or 23%, to $3.3 million for the three months ended September 30, 2008 from $2.7 million for the comparable period in 2007. The increase in capital structuring service fees was primarily due to the increase in new investment commitments for the three months ended September 30, 2008 as compared to the three months ended September 30, 2007.

For the nine months ended September 30, 2008, total investment income increased $42.7 million, or 32%, over the nine months ended September 30, 2007. For the nine months ended September 30, 2008, total investment income consisted of $151.9 million in interest income from investments, $18.6 million in capital structuring service fees, $1.9 million in dividend income, $4.1 million in other income and $1.3 million in interest income from cash and cash equivalents. Interest income from investments increased $35.4 million, or 30%, to $151.9 million for the nine months ended September 30, 2008 from $116.5 million for the comparable period in 2007. The increase in interest income from investments was primarily due to the increase in the overall size of the portfolio. The average investments, at fair value, for the period increased from $1.4 billion for the nine months ended September 30, 2007 to $2.0 billion for the comparable period in 2008. Capital structuring service fees increased $6.2 million, or 50%, to $18.6 million for the nine months ended September 30, 2008 from $12.4 million for the comparable period in 2007. The increase in capital structuring service fees was primarily due to the increase in fee percentages as a result of more favorable market conditions.

Operating Expenses

For the three months ended September 30, 2008, total expenses increased $5.3 million, or 22%, over the three months ended September 30, 2007. Base management fees increased $1.8 million, or 29%, to $8.0 million for the three months ended September 30, 2008 from $6.2 million for the comparable period in 2007, primarily due to the increase in the size of the portfolio. Incentive management fees related to pre-incentive fee net investment income increased $2.2 million, or 38%, to $8.2 million for the three months ended September 30, 2008 from $6.0 million for the comparable period in 2007, primarily due to the increase in the size of the portfolio and the related increase in net investment income. Payment of $8.2 million in incentive management fees for the three months ended September 30, 2008 will be deferred pursuant to the Advisory Agreement. Interest expense and credit facility fees increased $0.2 million, or 2%, to $9.5 million for the three months ended September 30, 2008 from $9.4 million for the comparable period in 2007, primarily due to the increase in the average outstanding borrowings offset by the lower average cost of debt. The average cost of debt for the three months ended September 30, 2008 was 3.74% compared to the average cost of debt of 6.04% for the comparable period in 2007 due to the significant decrease in LIBOR over the period. There were $882.5 million in average outstanding borrowings during the three months ended September 30, 2008 compared to average outstanding borrowings of $559.1 million in the comparable period in 2007.

For the nine months ended September 30, 2008, total expenses increased $15.9 million, or 24%, over the nine months ended September 30, 2007. Base management fees increased $5.7 million, or 33%, to $22.8 million for the nine months ended September 30, 2008 from $17.1 million for the comparable period in 2007, primarily due to the increase in the size of the portfolio. Incentive management fees related to pre-incentive fee net investment income increased $6.8 million, or 40%, to $23.7 million for the nine months ended September 30, 2008 from $16.9 million for the comparable period in 2007, primarily due to the increase in the size of the portfolio and the related increase in net investment income. Interest expense and credit facility fees increased $1.1 million, or 4%, to $26.6 million for the nine months ended September 30, 2008 from $25.5 million for the comparable period in 2007, primarily due to the increase in the average outstanding borrowings offset by the lower average cost of debt. There were $794.1 million in average outstanding borrowings during the nine months ended September 30, 2008 compared to average outstanding borrowings of $520.5 million in the comparable period in 2007. The average cost of debt for the nine months ended September 30, 2008 was 3.71% compared to the average cost of debt of 6.03% for the comparable period in 2007 due to the significant decrease in LIBOR over the period.

Income Tax Expense, Including Excise Tax

The Company has qualified and elected and intends to continue to qualify for the tax treatment applicable to RICs under Subchapter M of the Code, and, among other things, has made and intends to continue to make the requisite distributions to its stockholders which will generally relieve the Company from federal income taxes.

Depending on the level of taxable income earned in a tax year, we may choose to carry forward taxable income in excess

of current year dividend distributions into the next tax year and pay a 4% excise tax on such income, as required. To the extent that the Company determines that its estimated current year annual taxable income will be in excess of estimated current year dividend distributions, the Company accrues excise tax, if any, on estimated excess taxable income as taxable income is earned. For the three months ended September 30, 2008, the Company recorded a $0.1 million benefit for Federal excise tax. For the nine months ended September 30, 2008, the Company recorded a benefit of $0.4 million for Federal excise tax. For the three and nine months ended September 30, 2007, the Company recorded a benefit of approximately $0.1 million.

Certain of our wholly owned subsidiaries are subject to federal and state income taxes. For the three and nine months ended September 30, 2008, we recorded tax provisions of approximately $0.1 million for these subsidiaries. For the three and nine months ended September 30, 2007, we recognized tax benefits of approximately $0.1 million for these subsidiaries.

Net Unrealized Gains/Losses

For the three months ended September 30, 2008, the Company had net unrealized losses of $78.8 million, which primarily consisted of $88.3 million of unrealized depreciation from investments less $10.3 million of unrealized appreciation from investments. The most significant changes in unrealized depreciation consisted of $10.0 million for the investment in DSI Renal, Inc. ("DSI"), $10.0 million for the investment in Firstlight Financial Corporation ("Firstlight"), $8.6 million for the investment in Courtside Acquisition Corp. ("Courtside"), $7.4 million for the investment in Best Brands Corporation ("Best Brands"), $6.8 million for the investment in Wear Me Apparel, LLC ("Wear Me"), $4.8 million for the investment in Capella Healthcare, Inc. ("Capella"), $4.0 million for the investment in Things Remembered, Inc., $4.0 million for the investment in Reflexite Corporation ("Reflexite") to partially reduce previously recognized unrealized appreciation, $3.6 million for the investment in Apple & Eve, LLC ("Apple"), $3.2 million for the investment in HB&G Building Products ("HB&G") and $3.2 million for the investment in MPBP Holdings, Inc. ("MPBP"). The most significant changes in unrealized appreciation consisted of $2.8 million for the investment in Waste Pro USA, Inc. ("Waste Pro"), $2.8 million for the investment in Hudson Group, Inc. ("Hudson") and $1.6 million for the investment in Industrial Container Services, LLC ("ICS").

For the three months ended September 30, 2007, the Company's investments had net unrealized losses of $11.9 million, which primarily related to the reversal of prior period unrealized appreciation of $5.6 million from the investment in The GSI Group, Inc. ("GSI") and the $12.8 million unrealized depreciation of several investments offset by $7.1 million of unrealized appreciation of certain other investments. The most significant changes in unrealized depreciation were $5.6 million for the investment in Primis Marketing Group, Inc. and Primis Holdings, LLC (together, "Primis"), $3.0 million for the investment in Wear Me, $2.1 million for the investment in Universal Trailer Corporation ("UTC"), and $0.9 million for the investment in Abingdon Investments Limited, offset by unrealized appreciation of $3.0 million for the investment in Varel Holdings, Inc. ("Varel"), $2.1 million for the investment in Waste Pro and $1.5 million for the investment in MR Processing Holding Corp ("MR").

For the nine months ended September 30, 2008, the Company had net unrealized losses of $128.6 million, which primarily consisted of $167.3 million of unrealized depreciation from investments less $39.6 million of unrealized appreciation from investments. The most significant changes in unrealized depreciation consisted of $25.7 million for the investment in Courtside, $15.0 million for the investment in Firstlight, $14.0 million for the investment in Reflexite to partially reduce previously recognized unrealized appreciation, $11.2 million for the investment in Wear Me, $10.5 million for the investment in MPBP, $10.2 million for the investment in DSI, $8.2 million for the investment in Making Memories Wholesale, Inc., $7.4 million for the investment in Best Brands, $6.0 million for the investment in Primis, $5.9 million for the investment in Apple, $5.2 million for the investment in HB&G and $4.8 million for the investment in Capella. The most significant changes in unrealized appreciation consisted of $7.3 million for the investment in Reflexite, $5.0 million for the investment in R3 Education, Inc., $2.9 million for the investment in ICS, $2.8 million for the investment in Waste Pro, $2.8 million for the investment in Hudson and $2.7 million for the investment in Instituto de Banca y Comercio, Inc.

For the nine months ended September 30, 2007, the Company's investments had net unrealized gains of $8.9 million, which consisted of $27.8 million of unrealized appreciation as well as $1.2 million for the reversal of prior period unrealized depreciation, offset by $20.1 million of unrealized depreciation. The most significant changes in unrealized appreciation were $7.2 million for the investment in Reflexite, $4.0 million for the investment in Waste Pro, $3.6 million for the investment in Daily Candy, Inc., $3.0 million for the investment in Varel, $1.7 million for the investment in ICS and $1.5 million for the investment in MR, offset by unrealized depreciation of $5.7 million for the investment in UTC, $5.6 million for the investment in Primis, $3.0 million for the investment in Diversified Collection Services, Inc. and $3.0 million for the investment in Wear Me.

Net Realized Gains/Losses

During the three months ended September 30, 2008, the Company had $168.0 million of sales and repayments resulting in $4.6 million of net realized gains. The most significant realized gains for the three months ended September 30, 2008 were $2.5 million for the investment in Daily Candy, Inc. and $2.0 million for the investment in Waste Pro. During the three months ended

September 30, 2007, the Company had $124.5 million of sales and repayments resulting in $10.9 million of net realized gains. The most significant realized gains during the three months ended September 30, 2007 were the $6.2 million . . .