Models for estimation of the capacities of oversaturated arterials were developed. The input variables in these models are capacities of individual intersections, offsets, and vehicle queue lengths. Models for quantification of capacity loss due to blockage caused by downstream queues are also presented. The proposed models show that when arterial capacity is determined in oversaturated conditions, it is not sufficient to consider only the capacities of critical intersections; instead, the capacities of critical subsystems must be considered. A critical subsystem is any two intersections plus the link that joins them where traffic processing capability is the lowest. This traffic processing capability, or critical subsystem capacity, determines the arterial capacity. It is a function of the capacities of the respective intersections, the offset between them, and the queue length on the link joining them. It is shown that a critical subsystem is not unique in that it may change location over the course of the study period. To minimize capacity loss, it is shown that offsets must be an explicit function of queue lengths. The practical use of the models was demonstrated for an oversaturated two-intersection system. The results show that improper setting of offsets can lead to significant capacity loss. In extreme cases all capacity in a given cycle may be lost if the offsets are not set properly.