UNITED STATES SECURITIES AND
    EXCHANGE COMMISSION
 Washington, D.C.
    20549
  Form 10-Q
  QUARTERLY REPORT PURSUANT TO
    SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
    1934
  For the quarterly period ended March 31, 2009
  Commission File
    No. 1-31753
  CapitalSource Inc. (Exact name of
    registrant as specified in its charter)
  Delaware(State of
    Incorporation)

35-2206895(I.R.S. Employer
    Identification No.)   4445 Willard Avenue, 12th Floor
    Chevy Chase, MD 20815 (Address of Principal
    Executive Offices, Including Zip Code)
  (800) 370-9431
 (Registrants telephone
    number, including area code)
   þ o
  Regulation S-T o o
  Rule 12b-2
  Large
    accelerated
    filer þ
    Accelerated
    filer o
    Non-accelerated
    filer o
    Smaller
    reporting
    company o   Rule 12b-2 o þ




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##### 





TABLE OF
    CONTENTS
  
  PagePART I. FINANCIAL INFORMATIONItem 1.


Financial StatementsConsolidated Balance Sheets as of March 31, 2009
    (unaudited) and December 31, 2008


3Consolidated Statements of Income (unaudited) for
    the three months ended March 31, 2009 and 2008


4Consolidated Statement of Shareholders
    Equity (unaudited) for the three months ended March 31, 2009


5Consolidated Statements of Cash Flows (unaudited)
    for the three months ended March 31, 2009 and 2008


6Notes to the Unaudited Consolidated Financial Statements


7Item 2.


Managements Discussion and Analysis of
    Financial Condition and Results of Operations


45Item 3.


Quantitative and Qualitative Disclosures about
    Market Risk


71Item 4.


Controls and Procedures


72PART II. OTHER INFORMATIONItem 2.


Unregistered Sales of Equity Securities and Use
    of Proceeds


72Item 6.


Exhibits


72Signatures


73Index to Exhibits


74   2




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##### 



CapitalSource
    Inc.
  Consolidated Balance Sheets
  March 31,


December 31,2009


2008(Unaudited)


As Adjusted(Note 3)($ in thousands)ASSETSCash and cash equivalents

$
765,903


$
1,338,563Restricted cash


181,949



419,383Investment and mortgage-backed securities, available-for-sale


1,008,185



642,714Investment and mortgage-backed securities, held-to-maturity


92,320



14,389Mortgage-backed securities pledged, trading






1,489,291Mortgage-related receivables, net


1,738,382



1,801,535Commercial real estate A Participation Interest, net


1,077,968



1,396,611Loans held for sale


6,304



8,543Loans:Loans


9,292,208



9,396,751Less deferred loan fees and discounts


(164,730
)


(174,317
)Less allowance for loan losses


(445,284
)


(423,844
)Loans, net


8,682,194



8,798,590Interest receivable


88,954



117,516Direct real estate investments, net


974,890



989,716Other investments


144,308



164,583Goodwill


173,135



173,135Other assets


857,316



1,065,063Total assets

$
15,791,808


$
18,419,632LIABILITIES AND SHAREHOLDERS EQUITYLiabilities:Deposits

$
4,726,690


$
5,043,695Repurchase agreements






1,595,750Credit facilities


1,399,398



1,445,062Term debt


5,061,502



5,338,456Other borrowings


1,444,943



1,573,813Other liabilities


340,917



592,136Total liabilities


12,973,450



15,588,912Shareholders equity:Preferred stock (50,000,000 shares authorized; no shares
    outstanding)






Common stock ($0.01 par value, 1,200,000,000 shares
    authorized; 302,083,116 and 282,804,211 shares issued and
    outstanding, respectively)


3,021



2,828Additional paid-in capital


3,789,880



3,686,765Accumulated deficit


(975,216
)


(868,425
)Accumulated other comprehensive income, net


57



9,095Total CapitalSource Inc. shareholders equity


2,817,742



2,830,263Noncontrolling interests


616



457Total shareholders equity


2,818,358



2,830,720Total liabilities and shareholders equity

$
15,791,808


$
18,419,632    3




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##### 



CapitalSource
    Inc.
  Consolidated Statements of Income
  Three Months Ended March 31,2009


2008As Adjusted(Note 3)(Unaudited)($ in thousands, except per share data)Net investment income:Interest income:Loans

$
199,392


$
246,501Investment and mortgage-backed securities


20,553



57,340Other


1,742



4,484Total interest income


221,687



308,325Fee income


31,396



33,641Total interest and fee income


253,083



341,966Operating lease income


27,880



27,690Total investment income


280,963



369,656Interest expense:Deposits


38,387



Borrowings


92,648



190,472Total interest expense


131,035



190,472Net investment income


149,928



179,184Provision for loan losses


155,267



5,659Net investment (loss) income after provision for loan losses


(5,339
)


173,525Operating expenses:Compensation and benefits


35,037



31,789Depreciation of direct real estate investments


8,964



8,916Professional fees


17,420



12,934Other administrative expenses


16,858



13,870Total operating expenses


78,279



67,509Other income (expense):(Loss) gain on investments, net


(16,127
)


968Loss on derivatives


(686
)


(38,111
)Gain (loss) on residential mortgage investment portfolio


15,311



(55,377
)Loss on extinguishment of debt


(57,128
)


Other income, net of expenses


(15,497
)


(3,879
)Total other expense


(74,127
)


(96,399
)Net (loss) income before income taxes


(157,745
)


9,617Income tax (benefit) expense


(53,425
)


3,076Net (loss) income


(104,320
)


6,541Net (loss) income attributable to noncontrolling interests


(16
)


1,297Net (loss) income attributable to CapitalSource Inc.

$
(104,304
)

$
5,244Net (loss) income per share attributable to CapitalSource
    Inc.:Basic

$
(0.36
)

$
0.02Diluted

$
(0.36
)

$
0.02Average shares outstanding:Basic


290,098,800



220,085,148Diluted


290,098,800



221,493,514Dividends declared per share

$
0.01


$
0.60    4




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##### 



CapitalSource
    Inc.
 Consolidated
    Statement of Shareholders Equity  CapitalSource Inc. Shareholders EquityAccumulatedAdditional





Other





TotalCommon


Paid-In


Accumulated


Comprehensive


Noncontrolling


ShareholdersStock


Capital


Deficit


Income, Net


Interests


Equity(Unaudited)($ in thousands)Total shareholders equity as of December 31, 2008 (As
    Adjusted)

$
2,828


$
3,686,765


$
(868,425
)

$
9,095


$
457


$
2,830,720Net loss attributable to CapitalSource Inc.










(104,304
)






(16
)


(104,320
)Other comprehensive loss:Unrealized losses, net of tax














(9,038
)






(9,038
)Total comprehensive loss






















(113,358
)Issuance of noncontrolling interests


















175



175Repurchase of common stock


(4
)


(494
)














(498
)Dividends paid






(544
)


(2,487
)










(3,031
)Proceeds from issuance of common stock, net


2



20















22Exchange of convertible debt, net of tax benefit


198



98,359















98,557Stock option expense






539















539Restricted stock activity


(3
)


5,235















5,232Total shareholders equity as of March 31, 2009

$
3,021


$
3,789,880


$
(975,216
)

$
57


$
616


$
2,818,358    5




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##### 



CapitalSource
    Inc.Consolidated Statements of Cash Flows
 Three Months Ended March 31,2009


2008As Adjusted(Note 3)Unaudited($ in thousands)Operating activities:Net (loss) income attributable to CapitalSource Inc.

$
(104,304
)

$
5,244Adjustments to reconcile net (loss) income to net cash provided
    by operating activities:Stock option expense (benefit)


539



(613
)Restricted stock expense


5,933



7,127Loss on extinguishment of debt


57,128



Amortization of deferred loan fees and discounts


(23,805
)


(23,952
)Paid-in-kind
    interest on loans


(8,278
)


4,587Provision for loan losses


155,267



5,659Amortization of deferred financing fees and discounts


18,784



19,017Depreciation and amortization


8,387



9,094Benefit for deferred income taxes


(73,652
)


(6,765
)Non-cash loss on investments, net


18,828



2,779Non-cash loss on property and equipment and writedowns of real
    estate owned


14,774



2,276Unrealized loss on derivatives and foreign currencies, net


3,704



46,189Unrealized (gain) loss on residential mortgage investment
    portfolio, net


(60,570
)


12,012Net decrease in mortgage-backed securities pledged, trading


1,485,133



446,945Amortization of discount on residential mortgage investments


11



(6,464
)Accretion of discount on commercial real estate A
    participation interest


(11,018
)


Decrease in interest receivable


20,181



50,866Decrease in loans held for sale, net


12,360



64,344Decrease (increase) in other assets


329,408



(79,701
)(Decrease) increase in other liabilities


(254,560
)


155,816Cash provided by operating activities


1,594,250



714,460Investing activities:Decrease (increase) in restricted cash


237,434



(13,455
)Decrease in mortgage-related receivables, net


51,465



57,659Decrease in commercial real estate A participation
    interest, net


329,661



(Increase) decrease in loans, net


(38,506
)


8,511Sale (acquisition) of direct real estate investments


7,500



(10,440
)Acquisition of marketable securities, available for sale, net


(366,235
)


Acquisition of marketable securities, held to maturity, net


(77,931
)


Acquisition of other investments, net


(15
)


(47,798
)Acquisition of property and equipment, net


(5,439
)


(523
)Cash provided by (used in) investing activities


137,934



(6,046
)Financing activities:Payment of deferred financing fees


(6,173
)


(7,383
)Deposits accepted, net of repayments


(317,574
)


Repayments under repurchase agreements, net


(1,595,750
)


(482,171
)(Repayments) borrowings on credit facilities, net


(35,515
)


155,871Borrowings of term debt


26,000



Repayments of term debt


(303,010
)


(234,005
)(Repayments) borrowings under other borrowings, net


(69,813
)


87,641Proceeds from issuance of common stock, net of offering costs


22



Proceeds from exercise of options






322Tax expense on share-based payments






(2,876
)Payment of dividends


(3,031
)


(133,723
)Cash used in financing activities


(2,304,844
)


(616,324
)(Decrease) increase in cash and cash equivalents


(572,660
)


92,090Cash and cash equivalents as of beginning of period


1,338,563



178,699Cash and cash equivalents as of end of period

$
765,903


$
270,789Supplemental information:Noncash transactions from investing and financing activities:Proceeds from issuance of common stock, not yet received

$



$
80,500Exchange of common stock for convertible debentures


61,618



Assets acquired through foreclosure


31,845



14,504Conversion of noncontrolling interests into common stock


9,038



1,508    6




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##### 



CapitalSource
    Inc.
  NOTES TO THE UNAUDITED CONSOLIDATED
    FINANCIAL STATEMENTS
  Note 1.
    Organization      
    Depository Products and Services  Savings and money
    market accounts, Individual Retirement Accounts and certificates
    of deposit insured up to the maximum amounts permitted by the
    Federal Deposit Insurance Corporation (FDIC);
    First Mortgage Loans  Loans that are secured by
    senior first mortgage on commercial real property of the client;
    Senior Secured Asset-Based Loans  Loans that are
    underwritten based on our assessment of the clients
    eligible collateral, including accounts receivable, real estate
    related receivables
    and/or
    inventory;
    Senior Secured Cash Flow Loans  Loans that are
    underwritten based on our assessment of a clients ability
    to generate cash flows sufficient to repay the loan and maintain
    or increase its enterprise value during the term of the loan,
    thereby facilitating repayment of the principal at maturity;
    Direct Real Estate Investments  Investments in
    income-producing healthcare facilities that are generally leased
    through long-term,
    triple-net
    operating leases;
    Term B, Second Lien and Mezzanine Loans  Loans,
    including subordinated mortgage loans, that come after a
    clients senior term loans in right of payment or upon
    liquidation;    Segment Data
  Note 2.
    Summary
    of Significant Accounting Policies  Unaudited
    Interim Consolidated Financial Statements Basis of
    Presentation
  Form 10-Q Regulation S-X.
 7




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##### 



CapitalSource
    Inc.
  NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Form 10-K (Form 10-K).
    Reclassifications
  Noncontrolling Interests in Consolidated
    Financial Statements  An Amendment of ARB
    No. 51
  Summary of Significant Accounting
    Policies Form 10-K.
  New
    Accounting Pronouncements
  Business
    Combinations
    FAS 157-2, Effective Date of FASB Statement No. FAS 157-2), FAS 157-2 FAS 157-4, Determining Fair Value When the Volume and Level of Activity
    for the Asset or Liability Have Significantly Decreased and
    Identifying Transactions That Are Not Orderly FAS 157-4), Fair Value
    Measurements
 8




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##### 



CapitalSource
    Inc.
  NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  FAS 157-4 FAS 157-4 FAS 157-4 FAS 157-4 FAS 157-4
  Disclosures about Derivative Instruments and Hedging
    Activities  An Amendment of FASB Statement
    No. 133 Accounting for Derivative instruments and Hedging Activities
  FAS 115-2 FAS 124-2, Recognition and Presentation of Other-Than-Temporary
    Impairments FAS 115-2 FAS 124-2), FSP FAS 115-2 FAS 124-2 other-than-temporary FAS 115-2 FAS 124-2 FAS 115-2 FAS 124-2 FSP FAS 115-2 FAS 124-2
  FAS 107-1 28-1, Interim Disclosures about Fair Value of Financial Instruments FAS 107-1 28-1), Disclosure about Fair
    Value of Financial Instruments, FAS 107-1 28-1 Interim Financial
    Reporting FAS 107-1 28-1 FAS 107-1 28-1 FAS 107-1 APB 28-1
  Note 3.
    Retrospective
    Application of Accounting for Convertible Debt Instruments with
    Cash Settlement Option  14-1, Accounting for Convertible Debt Instruments That May Be
    Settled in Cash upon Conversion (Including Partial Cash
    Settlement) 14-1), Accounting
    for Convertible Debt and Debt Issued with Stock Purchase
    Warrants 14-1 14-1 14-1
 9




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##### 



CapitalSource
    Inc.
  NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  14-1 14-1 FSP APB 14-1:
  Consolidated
    Balance Sheets
  March 31, 2009As Computed Prior to


As Reported underFSP APB 14-1


FSP APB 14-1


Effect of Change($ in thousands)Other assets

$
855,678


$
857,316


$
1,638Other borrowings


1,449,868



1,444,943



(4,925
)Additional paid-in capital


3,775,717



3,789,880



14,163Accumulated deficit


(967,616
)


(975,216
)


(7,600
)   December 31, 2008As Originally Reported


As Adjusted


Effect of Change($ in thousands)Other assets

$
1,060,332


$
1,065,063


$
4,731Other borrowings


1,560,224



1,573,813



13,589Additional paid-in capital


3,683,065



3,686,765



3,700Accumulated deficit


(855,867
)


(868,425
)


(12,558
)   Consolidated
    Statements of Income
  Three Months Ended March 31, 2009As Computed Prior to


As Reported underFSP APB 14-1


FSP APB 14-1


Effect of Change($ in thousands)Interest expense: borrowings

$
100,762


$
92,648


$
(8,114
)Income tax benefit


(56,581
)


(53,425
)


3,156Net loss


(109,278
)


(104,320
)


4,958Net loss attributable to CapitalSource Inc.


(109,262
)


(104,304
)


4,958Net loss per share attributable to CapitalSource Inc.Basic


(0.38
)


(0.36
)


0.02Diluted


(0.38
)


(0.36
)


0.02   10




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##### 



CapitalSource
    Inc.
  NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Three Months Ended March 31, 2008As Originally Reported


As Adjusted


Effect of Change($ in thousands)Interest expense: borrowings

$
188,945


$
190,472


$
1,527Net income


8,068



6,541



(1,527
)Net income attributable to CapitalSource Inc.


6,771



5,244



(1,527
)Net income per share attributable to CapitalSource Inc.Basic


0.03



0.02



(0.01
)Diluted


0.03



0.02



(0.01
)   Consolidated
    Statements of Cash Flows
  Three Months Ended March 31, 2009As Computed Prior to


As Reported underFSP APB 14-1


FSP APB 14-1


Effect of Change($ in thousands)Net loss attributable to CapitalSource Inc.

$
(109,262
)

$
(104,304
)

$
4,958Operating activities:Adjustments to reconcile net loss to net cash provided by (used
    in) operating activities, net of impact of acquisitions:Amortization of deferred financing fees and discounts

$
26,898


$
18,784


$
(8,114
)Benefit for deferred income taxes


(76,808
)


(73,652
)


3,156   Three Months Ended March 31, 2008As Originally Reported


As Adjusted


Effect of Change($ in thousands)Net income attributable to CapitalSource Inc.

$
6,771


$
5,244


$
(1,527
)Operating activities:Adjustments to reconcile net income to net cash provided by
    operating activities, net of impact of acquisitions:Amortization of deferred financing fees and discounts


17,490



19,017



1,527  11




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##### 



CapitalSource
    Inc.
  NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Note 4.
    Cash and
    Cash Equivalents and Restricted Cash    March 31,


December 31,2009


2008($ in thousands)Cash and due from banks(1)

$
124,264


$
249,610Interest-bearing deposits in other banks(2)


19,426



19,963Other short-term investments(3)


774,175



984,237Investment securities(4)


29,987



504,136Total cash and cash equivalents and restricted cash

$
947,852


$
1,757,946     (1)
    
    Represents principal and interest collections on loan assets
    held by securitization trusts or pledged to credit facilities
    and escrows for future expenses related to our direct real
    estate investments. A portion of these collections are invested
    in money market funds that invest primarily in U.S. Treasury
    securities and repurchase agreements secured by U.S. Treasury
    securities. The restricted portion of the balance was
    $14.7 million and $60.9 million as of March 31,
    2009 and December 31, 2008, respectively.Cash and due from bank accounts for CapitalSource Bank were
    $84.2 million and $132.3 million as of March 31,
    2009 and December 31, 2008, respectively. Included in this
    balance for CapitalSource Bank were $50.3 million and
    $52.1 million in deposits at the Federal Reserve Bank as of
    March 31, 2009 and December 31, 2008, respectively.
    The cash and due from bank accounts for CapitalSource Bank were
    not restricted.(2)
    
    Represents principal and interest collections on loan assets
    pledged to credit facilities. The restricted portion was
    $11.3 million and $8.4 million as of March 31,
    2009 and December 31, 2008, respectively.(3)
    
    Represents principal and interest collections on loan assets
    held by securitization trusts or pledged to credit facilities
    and also includes cash held by CapitalSource Bank. Principal and
    interest collections are invested in money market funds that
    invest primarily in U.S. Treasury securities and repurchase
    agreements secured by U.S. Treasury securities. The restricted
    portion was $155.9 million and $150.0 million as of
    March 31, 2009 and December 31, 2008, respectively.
    The CapitalSource Bank cash is invested in (i) short term
    investment grade commercial paper which is rated by at least two
    of the three major rating agencies (S&P, Moodys or
    Fitch) and has a rating of A1 (S&P), P1 (Moodys) or
    F1 (Fitch), and (ii) in money market funds that invest
    primarily in U.S. Treasury and Agency securities and repurchase
    agreements secured by the same.(4)
    
    Represents discount notes with AAA ratings totaling
    $30.0 million and $303.0 million as of March 31,
    2009 and December 31, 2008, respectively, issued by the
    Federal Home Loan Bank, Fannie Mae or Freddie Mac with a
    remaining weighted average maturity of 51 days or less and
    61 days as of March 31 2009 and December 31, 2008,
    respectively. There was no restricted portion as of
    March 31, 2009 and $200.0 million was restricted as of
    December 31, 2008.  Note 5.
    Mortgage-Related
    Receivables and Related Owner
    Trust Securitizations     12




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##### 



CapitalSource
    Inc.
  NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
          March 31,


December 31,2009


2008($ in thousands)Mortgage-related receivables whose underlying mortgage loans are
    90 or more days past due or were in the process of foreclosure(1)

$
79,888


$
51,348Percentage of mortgage-related receivables


4.51
%


2.82
%     (1)
    
    Mortgage loans 90 or more days past due are also placed on
    non-accrual status.       13




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##### 



CapitalSource
    Inc.
  NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Note 6.
    Residential
    Mortgage-Backed Securities (RMBS) and Certain
    Derivative Instruments  Investments.
    Note 7.
    Commercial
    Lending Assets and Credit Quality    Commercial
    Real Estate A Participation Interest
      A Participation Interest as of December 31, 2008

$
1,396,611Principal payments


(329,662
)Discount accretion


11,019A Participation Interest as of March 31, 2009

$
1,077,968       pari passu
 14




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##### 



CapitalSource
    Inc.
  NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Credit
    Quality
    March 31,


December 31,Loan Classification

2009


2008($ in thousands)Loans 30-89 days contractually delinquent

$
126,240


$
299,322Loans 90 or more days contractually delinquent


291,768



141,104Non-accrual loans(1)


615,070



439,547Impaired loans(2)


860,813



692,278     (1)
    
    Includes loans with aggregate principal balances of
    $115.2 million and $110.3 million as of March 31,
    2009 and December 31, 2008, respectively, which were also
    classified as loans 90 or more days contractually delinquent.
    Includes non-performing loans classified as held for sale that
    had an aggregate principal balance of $14.0 million and
    $14.5 million as of March 31, 2009 and
    December 31, 2008, respectively.(2)
    
    Includes loans with aggregate principal balances of
    $179.3 million and $128.9 million as of March 31,
    2009 and December 31, 2008, respectively, which were also
    classified as loans 90 or more days contractually delinquent,
    and loans with aggregate principal balances of
    $601.1 million and $423.4 million as of March 31,
    2009 and December 31, 2008, respectively, which were also
    classified as loans on non-accrual status. The net carrying
    values of impaired loans were $848.7 million and
    $683.1 million as of March 31, 2009 and
    December 31, 2008, respectively, prior to the application
    of allocated reserves.  and/or
     15




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##### 



CapitalSource
    Inc.
  NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Accounting by Debtors and Creditors for Troubled Debt
    Restructurings
    Three Months Ended March 31,2009


2008($ in thousands)Balance as of beginning of period

$
423,844


$
138,930Provision for loan losses


140,818



2,971Charge offs, net of recoveries


(119,378
)


(5,156
)Balance as of end of period

$
445,284


$
136,745   Foreclosed
    Assets
     16




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##### 



CapitalSource
    Inc.
  NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Note 8.
    Investments  Investment
    and Mortgage-backed Securities, Available-for-Sale
    March 31, 2009


December 31, 2008Unrealized


Unrealized


Fair





Unrealized


Unrealized


FairCost


Gains


Losses


Value


Cost


Gains


Losses


Value($ in thousands)Agency Discount Notes

$
362,985


$
194


$



$
363,179


$
149,383


$
562


$



$
149,945Agency Callable Notes


270,047



743







270,790



312,829



2,249







315,078Agency Debt


29,325







(289
)


29,036



30,697







(383
)


30,314Agency MBS


184,499



3,328







187,827



141,213



1,023







142,236Non-Agency MBS


153,501







(1,317
)


152,184















Corporate Debt


4,994



175







5,169



4,994



147







5,141Total

$
1,005,351


$
4,440


$
(1,606
)

$
1,008,185


$
639,116


$
3,981


$
(383
)

$
642,714       March 31, 2009


December 31, 2008Less Than 12 Months


Less Than 12 MonthsGross Unrealized





Gross UnrealizedLosses


Fair Value


Losses


Fair Value($ in thousands)Agency Debt

$
(289
)

$
29,036


$
(383
)

$
30,314Non-Agency MBS


(1,317
)


152,184







Total

$
(1,606
)

$
181,220


$
(383
)

$
30,314    17




---



##### 



CapitalSource
    Inc.
  NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Investment
    and Mortgage-backed Securities, Held-to-Maturity
      Investment and Mortgage-backedSecurities, Available-for-Sale


Investment and Mortgage-backed Securities,
    Held-to-MaturityEstimated





EstimatedAmortized Cost


Fair Value


Amortized Cost


Fair Value($ in thousands)Due in one year or less

$
387,935


$
388,188


$



$
Due after one year through five years


264,416



264,986



67,291



67,291Due after five years through ten years


75,302



75,975



25,029



25,029Due after ten years


277,698



279,036







Total investment and mortgage-backed securities

$
1,005,351


$
1,008,185


$
92,320


$
92,320   Other
    Investments
    March 31,


December 31,2009


2008($ in thousands)Investments carried at cost

$
61,322


$
61,279Investments carried at fair value:Investments available-for-sale(1)


24,034



36,837Warrants


4,596



4,661Investments accounted for under the equity method


54,356



61,806Total

$
144,308


$
164,583     (1)
    
    Amount includes $0.1 million and $0.4 million of
    Non-Agency RMBS, as of March 31, 2009 and December 31,
    2008, respectively, with maturity dates greater than ten years,
    and an investment in a subordinated note of a collateralized
    loan obligation of $1.6 million and $2.4 million as of
    March 31, 2009 and December 31, 2008, respectively,
    that mature in 2020 and $22.2 million and
    $33.8 million as of March 31, 2009 and
    December 31, 2008, respectively, in corporate debt
    securities that mature in 2013, 2016 and 2018.  No. 99-20, Recognition of Interest Income on Purchased Beneficial
    Interests and Beneficial Interests that Continue to Be Held by a
    Transferor in Securitized Financial Assets.
 18




---



##### 



CapitalSource
    Inc.
  NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Note 9.
    Guarantor
    Information  Borrowings, Form 10-K,
 19




---



##### 



CapitalSource
    Inc.
  NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Consolidating
    Balance Sheet
    March 31, 2009
  CapitalSource Finance LLCCombined


Combined


OtherCapitalSource


Non-Guarantor


Guarantor


Non-Guarantor





ConsolidatedInc.


Subsidiaries


Subsidiaries


Subsidiaries


Eliminations


CapitalSource Inc.(Unaudited)($ in thousands)AssetsCash and cash equivalents

$



$
618,593


$
134,354


$
12,956


$



$
765,903Restricted cash






42,700



77,897



61,352







181,949Investment and mortgage-backed securities, available-for-sale






1,008,185















1,008,185Investment and mortgage-backed securities, held-to-maturity






92,320















92,320Mortgage-related receivables, net














1,738,382







1,738,382Mortgage-backed securities pledged, trading






















Commercial real estate A participation interest, net






1,077,968















1,077,968Loans held for sale














6,304







6,304Loans:Loans






6,021,555



327,069



2,944,532



(948
)


9,292,208Less deferred loan fees and discounts






(90,312
)


(28,142
)


(34,076
)


(12,200
)


(164,730
)Less allowance for loan losses






(186,244
)


(122,456
)


(136,584
)






(445,284
)Loans, net






5,744,999



176,471



2,773,872



(13,148
)


8,682,194Interest receivable






36,109



(5,338
)


58,158



25



88,954Direct real estate investments, net














974,890







974,890Investment in subsidiaries


4,150,259







1,488,445



1,501,192



(7,139,896
)


Intercompany note receivable


75,000



9



156,957



353,598



(585,564
)


Other investments






85,649



19,006



39,653







144,308Goodwill






173,135















173,135Other assets


36,416



73,501



257,622



644,821



(155,044
)


857,316Total assets

$
4,261,675


$
8,953,168


$
2,305,414


$
8,165,178


$
(7,893,627
)

$
15,791,808Liabilities and shareholders equityLiabilities:Deposits

$



$
4,726,690


$



$



$



$
4,726,690Repurchase agreements






















Credit facilities


855,000



450,080



79,318



15,000







1,399,398Term debt






2,029,995







3,031,507







5,061,502Other borrowings


553,560



50,000



440,022



401,361







1,444,943Other liabilities


35,339



161,134



61,874



240,213



(157,643
)


340,917Intercompany note payable






46,850



212,515



326,199



(585,564
)


Total liabilities


1,443,899



7,464,749



793,729



4,014,280



(743,207
)


12,973,450Shareholders equity:Preferred stock






















Common stock


3,021



921,000











(921,000
)


3,021Additional paid-in capital


3,789,883



(5,319
)


654,574



3,638,838



(4,288,096
)


3,789,880(Accumulated deficit) retained earnings


(975,185
)


578,671



862,243



516,874



(1,957,819
)


(975,216
)Accumulated other comprehensive income (loss), net


57



(5,933
)


(5,132
)


(5,453
)


16,518



57Total CapitalSource Inc. shareholders equity


2,817,776



1,488,419



1,511,685



4,150,259



(7,150,397
)


2,817,742Noncontrolling interests














639



(23
)


616Total shareholders equity


2,817,776



1,488,419



1,511,685



4,150,898



(7,150,420
)


2,818,358Total liabilities and shareholders equity

$
4,261,675


$
8,953,168


$
2,305,414


$
8,165,178


$
(7,893,627
)

$
15,791,808  20




---



##### 



CapitalSource
    Inc.
  NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Consolidating
    Balance Sheet
    December 31, 2008
  CapitalSource Finance LLCCombined


Combined


OtherCapitalSource


Non-Guarantor


Guarantor


Non-Guarantor





ConsolidatedInc.


Subsidiaries


Subsidiaries


Subsidiaries


Eliminations


CapitalSource Inc.($ in thousands)AssetsCash and cash equivalents

$
11


$
1,230,254


$
38,866


$
69,432


$



$
1,338,563Restricted cash






35,695



81,337



302,351







419,383Investment and mortgage-backed securities, available-for-sale






642,714















642,714Investment and mortgage-backed securities, held-to-maturity






14,389















14,389Mortgage-backed securities pledged, trading














1,489,291







1,489,291Mortgage-related receivables, net














1,801,535







1,801,535Commercial real estate A participation interest, net






1,396,611















1,396,611Loans held for sale






1,561







6,982







8,543Loans:Loans






6,040,079



398,509



2,958,169



(6
)


9,396,751Less deferred loan fees and discounts






(85,245
)


(32,950
)


(45,052
)


(11,070
)


(174,317
)Less allowance for loan losses






(55,600
)


(295,002
)


(73,242
)






(423,844
)Loans, net






5,899,234



70,557



2,839,875



(11,076
)


8,798,590Interest receivable






55,689



2,178



59,649







117,516Direct real estate investments, net














989,716







989,716Investment in subsidiaries


4,397,772







1,657,532



1,602,354



(7,657,658
)


Intercompany note receivable


75,000



9



185,765



264,000



(524,774
)


Other investments






90,200



22,334



52,049







164,583Goodwill






173,135















173,135Other assets


39,169



102,213



253,270



853,546



(183,135
)


1,065,063Total assets

$
4,511,952


$
9,641,704


$
2,311,839


$
10,330,780


$
(8,376,643
)

$
18,419,632Liabilities and shareholders equityLiabilities:Deposits

$



$
5,043,695


$



$



$



$
5,043,695Repurchase agreements














1,595,750







1,595,750Credit facilities


890,000



456,999



82,462



15,601







1,445,062Term debt






2,238,382







3,100,074







5,338,456Other borrowings


729,474







441,899



402,440







1,573,813Other liabilities


62,181



198,272



52,552



463,656



(184,525
)


592,136Intercompany note payable






46,850



122,917



355,007



(524,774
)


Total liabilities


1,681,655



7,984,198



699,830



5,932,528



(709,299
)


15,588,912Shareholders equity:Preferred stock






















Common stock


2,828



921,000











(921,000
)


2,828Additional paid-in capital


3,686,965



146,019



699,806



3,926,123



(4,772,148
)


3,686,765(Accumulated deficit) retained earnings


(868,394
)


587,837



908,731



468,063



(1,964,662
)


(868,425
)Accumulated other comprehensive income, net


8,898



2,650



3,472



3,586



(9,511
)


9,095Total CapitalSource Inc. shareholders equity


2,830,297



1,657,506



1,612,009



4,397,772



(7,667,321
)


2,830,263Noncontrolling interests














480



(23
)


457Total shareholders equity


2,830,297



1,657,506



1,612,009



4,398,252



(7,667,344
)


2,830,720Total liabilities and shareholders equity

$
4,511,952


$
9,641,704


$
2,311,839


$
10,330,780


$
(8,376,643
)

$
18,419,632  21




---



##### 



CapitalSource
    Inc.
  NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Consolidating
    Statement of Income
    Three Months Ended March 31, 2009
  CapitalSource Finance LLCCombined


Combined


OtherCapitalSource


Non-Guarantor


Guarantor


Non-Guarantor





ConsolidatedInc.


Subsidiaries


Subsidiaries


Subsidiaries


Eliminations


CapitalSource Inc.(Unaudited)($ in thousands)Net investment income:Interest income:Loans

$
649


$
127,392


$
3,442


$
69,860


$
(1,951
)

$
199,392Investment and mortgage-backed securities






9,158



182



11,213







20,553Other






1,598



22



122







1,742Total interest income


649



138,148



3,646



81,195



(1,951
)


221,687Fee income






7,457



13,992



10,454



(507
)


31,396Total interest and fee income


649



145,605



17,638



91,649



(2,458
)


253,083Operating lease income














27,880







27,880Total investment income


649



145,605



17,638



119,529



(2,458
)


280,963Interest expense:Deposits






38,387















38,387Borrowings


28,186



15,345



8,736



42,332



(1,951
)


92,648Total interest expense


28,186



53,732



8,736



42,332



(1,951
)


131,035Net investment (loss) income


(27,537
)


91,873



8,902



77,197



(507
)


149,928Provision for loan losses






16,352



72,067



66,848







155,267Net investment (loss) income after provision for loan losses


(27,537
)


75,521



(63,165
)


10,349



(507
)


(5,339
)Operating expenses:Compensation and benefits


237



13,257



21,543











35,037Depreciation of direct real estate investments














8,964







8,964Professional fees


1,474



904



12,848



2,194







17,420Other administrative expenses


10,798



12,521



14,378



3,165



(24,004
)


16,858Total operating expenses


12,509



26,682



48,769



14,323



(24,004
)


78,279Other income (expense):Loss on investments, net






(2,126
)


(1,476
)


(12,525
)






(16,127
)(Loss) gain on derivatives






(1,590
)


2,996



(885
)


(1,207
)


(686
)Gain on residential mortgage investment portfolio














15,311







15,311Loss on extinguishment of debt


(57,128
)


















(57,128
)Other income, net of expenses






11,016



4,691



(8,311
)


(22,893
)


(15,497
)Earnings in subsidiaries


(7,130
)






55,675



(47,093
)


(1,452
)


Intercompany










3,558



(3,558
)






Total other (expense) income


(64,258
)


7,300



65,444



(57,061
)


(25,552
)


(74,127
)Net (loss) income before income taxes


(104,304
)


56,139



(46,490
)


(61,035
)


(2,055
)


(157,745
)Income tax expense (benefit)






464







(53,889
)






(53,425
)Net (loss) income


(104,304
)


55,675



(46,490
)


(7,146
)


(2,055
)


(104,320
)Net loss attributable to noncontrolling interests














(16
)






(16
)Net (loss) income attributable to CapitalSource Inc.

$
(104,304
)

$
55,675


$
(46,490
)

$
(7,130
)

$
(2,055
)

$
(104,304
)  22




---



##### 



CapitalSource
    Inc.
  NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Consolidating
    Statement of Income
    Three Months Ended March 31, 2008
  CapitalSource Finance LLCCombined


Combined


OtherCapitalSource


Non-Guarantor


Guarantor


Non-Guarantor





ConsolidatedInc.


Subsidiaries


Subsidiaries


Subsidiaries


Eliminations


CapitalSource Inc.(Unaudited)($ in thousands)Net investment income:Interest income:Loans

$
1,194


$
105,883


$
10,798


$
129,821


$
(1,195
)

$
246,501Investment securities






169



227



56,944







57,340Other






704



1,312



2,468







4,484Total interest income


1,194



106,756



12,337



189,233



(1,195
)


308,325Fee income






9,076



13,648



10,938



(21
)


33,641Total interest and fee income


1,194



115,832



25,985



200,171



(1,216
)


341,966Operating lease income














27,690







27,690Total investment income


1,194



115,832



25,985



227,861



(1,216
)


369,656Interest expense:Deposits






















Borrowings


20,790



43,301



11,927



115,649



(1,195
)


190,472Total interest expense


20,790



43,301



11,927



115,649



(1,195
)


190,472Net investment (loss) income


(19,596
)


72,531



14,058



112,212



(21
)


179,184Provision for loan losses










3,157



2,502







5,659Net investment (loss) income after provision for loan losses


(19,596
)


72,531



10,901



109,710



(21
)


173,525Operating expenses:Compensation and benefits


255



2,634



28,900











31,789Depreciation of direct real estate investments














8,916







8,916Professional fees


1,527



589



9,675



1,143







12,934Other administrative expenses


9,862



1,154



10,105



1,972



(9,223
)


13,870Total operating expenses


11,644



4,377



48,680



12,031



(9,223
)


67,509Other income (expense):Gain on investments, net






488



1,088



(394
)


(214
)


968(Loss) gain on derivatives






(9,469
)


26,908



(55,550
)






(38,111
)Loss on residential mortgage investment portfolio














(55,377
)






(55,377
)Other income, net of expenses






(4,636
)


12,135



(2,155
)


(9,223
)


(3,879
)Earnings in subsidiaries


36,698







53,368



59,688



(149,754
)


Intercompany






(997
)


3,989



(2,992
)






Total other income (expense)


36,698



(14,614
)


97,488



(56,780
)


(159,191
)


(96,399
)Net income before income taxes


5,458



53,540



59,709



40,899



(149,989
)


9,617Income tax expense














3,076







3,076Net income


5,458



53,540



59,709



37,823



(149,989
)


6,541Net income attributable to noncontrolling interests






175







1,125



(3
)


1,297Net income attributable to CapitalSource Inc.

$
5,458


$
53,365


$
59,709


$
36,698


$
(149,986
)

$
5,244  23




---



##### 



CapitalSource
    Inc.
  NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Consolidating
    Statement of Cash Flows
    Three Months Ended March 31, 2009
  CapitalSource Finance LLCCombined


Combined


OtherCapitalSource


Non-Guarantor


Guarantor


Non-Guarantor





ConsolidatedInc.


Subsidiaries


Subsidiaries


Subsidiaries


Eliminations


CapitalSource Inc.(Unaudited)($ in thousands)Operating activities:Net (loss) income attributable to CapitalSource Inc.

$
(104,304
)

$
55,675


$
46,490


$
(7,130
)

$
(95,035
)

$
(104,304
)Adjustments to reconcile net income to net cash (used in)
    provided by operating activities:










Stock option expense






169



370











539Restricted stock expense






1,047



4,886











5,933Loss on extinguishment of debt


57,128



















57,128Amortization of deferred loan fees and discounts






(11,775
)


(9,581
)


(2,449
)






(23,805
)Paid-in-kind
    interest on loans






(6,492
)


3,929



(5,715
)






(8,278
)Provision for loan losses






16,352



72,064



66,851







155,267Amortization of deferred financing fees and discounts


7,811



5,071



105



5,797







18,784Depreciation and amortization






1,332



860



6,195







8,387Benefit for deferred income taxes


(19,979
)


(53,624
)


(13
)


(36
)






(73,652
)Non-cash loss on investments, net






3,399



3,093



12,336







18,828Non-cash loss (gain) on property and equipment and writedowns of
    real estate owned










16,139



(1,365
)






14,774Unrealized loss (gain) on derivatives and foreign currencies, net






3,091



748



(135
)






3,704Unrealized gain on residential mortgage investment portfolio, net














(60,570
)






(60,570
)Net decrease in mortgage-backed securities pledged, trading














1,485,133







1,485,133Amortization of discount on residential mortgage investments














11







11Accretion of discount on commercial real estate A
    participation interest






(11,018
)














(11,018
)Decrease (increase) in interest receivable






19,580



5,622



(4,996
)


(25
)


20,181Decrease (increase) in loans held for sale, net






4,955



9,372



(1,967
)






12,360Decrease (increase) in intercompany note receivable










28,808



(89,598
)


60,790



(Increase) decrease in other assets


(58
)


21,924



10,796



268,655



28,091



329,408(Decrease) increase in other liabilities


(13,744
)


(51,468
)


8,292



(224,522
)


26,882



(254,560
)Net transfers with subsidiaries


235,718



(147,382
)


19,177



(145,528
)


38,015



Cash provided by (used in) operating activities, net of impact
    of acquisitions


162,572



(149,164
)


221,157



1,300,967



58,718



1,594,250Investing activities:(Increase) decrease in restricted cash






(7,005
)


3,440



240,999







237,434Decrease in mortgage-related receivables, net














51,465







51,465Decrease in commercial real estate A participation
    interest






329,661















329,661Decrease (increase) in loans, net






140,468



(204,021
)


22,975



2,072



(38,506
)Acquisition of direct real estate investments














7,500







7,500(Acquisition) disposal of other investments, net






(890
)


(377
)


1,252







(15
)Acquisition of marketable securities, available for sale






(366,235
)














(366,235
)Acquisition of marketable securities, held-to-maturity






(77,931
)














(77,931
)(Acquisition) disposal of property and equipment, net






(4,388
)


(14,274
)


13,223







(5,439
)Cash provided by (used in) investing activities






13,680



(215,232
)


337,414



2,072



137,934Financing activities:Payment of deferred financing fees


(6,072
)


(261
)






160







(6,173
)Deposits accepted, net of repayments






(317,574
)














(317,574
)Increase (decrease) in intercompany note payable










89,598



(28,808
)


(60,790
)


Repayments of repurchase agreements, net














(1,595,750
)






(1,595,750
)(Repayments of) borrowings on credit facilities, net


(35,000
)


102



(16
)


(601
)






(35,515
)Borrowings of term debt






6,000







20,000







26,000Repayments of term debt






(214,444
)






(88,566
)






(303,010
)(Repayments of) borrowings under other borrowings


(118,502
)


50,000



(19
)


(1,292
)






(69,813
)Proceeds from issuance of common stock, net of offering costs


22



















22Proceeds from exercise of options






















Tax expense on share based payments






















Payment of dividends


(3,031
)


















(3,031
)Cash (used in) provided by financing activities


(162,583
)


(476,177
)


89,563



(1,694,857
)


(60,790
)


(2,304,844
)(Decrease) increase in cash and cash equivalents


(11
)


(611,661
)


95,488



(56,476
)






(572,660
)Cash and cash equivalents as of beginning of period


11



1,230,254



38,866



69,432







1,338,563Cash and cash equivalents as of end of period

$



$
618,593


$
134,354


$
12,956


$



$
765,903  24




---



##### 



CapitalSource
    Inc.
  NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Consolidating
    Statement of Cash Flows
    Three Months Ended March 31, 2008
  CapitalSource Finance LLCCombined


Combined


OtherCapitalSource


Non-Guarantor


Guarantor


Non-Guarantor





ConsolidatedInc.


Subsidiaries


Subsidiaries


Subsidiaries


Eliminations


CapitalSource Inc.(Unaudited)($ in thousands)Operating activities:Net income attributable to CapitalSource Inc.

$
5,458


$
53,365


$
59,709


$
36,698


$
(149,986
)

$
5,244Adjustments to reconcile net income to net cash (used in)
    provided by operating activities:Stock option expense






(181
)


(432
)










(613
)Restricted stock expense






690



6,437











7,127Amortization of deferred loan fees and discounts






(9,500
)


(7,582
)


(6,870
)






(23,952
)Paid-in-kind
    interest on loans






3,560



(2,662
)


3,689







4,587Provision for loan losses










3,158



2,501







5,659Amortization of deferred financing fees and discounts


8,178



5,108



124



5,607







19,017Depreciation and amortization






133



968



7,993







9,094Benefit for deferred income taxes














(6,765
)






(6,765
)Non-cash loss on investments, net






1,861



906



12







2,779Non-cash loss on property and equipment and writedowns of real
    estate owned






52



1,481



743







2,276Unrealized loss (gain) on derivatives and foreign currencies, net






17,525



(19,279
)


47,943







46,189Unrealized loss on residential mortgage investment portfolio, net














12,012







12,012Net decrease in mortgage-backed securities pledged, trading














446,945







446,945Amortization of discount on residential mortgage investments














(6,464
)






(6,464
)Decrease (increase) in interest receivable






31,309



(18,993
)


38,550







50,866Decrease (increase) in loans held for sale, net






64,348







(4
)






64,344(Increase) decrease in intercompany note receivable










(45,130
)


42,591



2,539



(Increase) decrease in other assets


(488
)


2,170



22,386



(102,465
)


(1,304
)


(79,701
)(Decrease) increase in other liabilities


(10,073
)


94,228



(40,023
)


110,380



1,304



155,816Net transfers with subsidiaries


(182,886
)


(227,002
)


192,596



67,033



150,259



Cash (used in) provided by operating activities


(179,811
)


37,666



153,664



700,129



2,812



714,460Investing activities:Decrease (increase) in restricted cash






7,152



64,734



(85,341
)






(13,455
)Decrease in mortgage-related receivables, net














57,659







57,659Decrease (increase) in loans, net






107,067



(136,729
)


39,213



(1,040
)


8,511Sale of direct real estate investments














(10,440
)






(10,440
)Disposal (acquisition) of other investments, net






838



3,135



(51,985
)


214



(47,798
)Disposal (acquisition) of property and equipment, net






234



(757
)










(523
)Cash provided by (used in) provided by investing activities






115,291



(69,617
)


(50,894
)


(826
)


(6,046
)Financing activities:Payment of deferred financing fees


(4,788
)


(1,143
)


(242
)


(1,210
)






(7,383
)(Decrease) increase in intercompany note payable










(42,591
)


45,130



(2,539
)


Repayments of repurchase agreements, net






(12,674
)






(469,497
)






(482,171
)Borrowings on (repayments of) credit facilities, net


229,763



(78,010
)


54,279



(50,161
)






155,871Borrowings of term debt






(553
)










553



Repayments of term debt






(83,398
)


(16
)


(150,591
)






(234,005
)Borrowings under other borrowings


87,641



















87,641Proceeds from exercise of options


322



















322Tax expense on share based payments














(2,876
)






(2,876
)Payment of dividends


(132,569
)










(1,154
)






(133,723
)Cash provided by (used in) financing activities


180,369



(175,778
)


11,430



(630,359
)


(1,986
)


(616,324
)Increase (decrease) in cash and cash equivalents


558



(22,821
)


95,477



18,876







92,090Cash and cash equivalents as of beginning of period






151,511



19,005



8,183







178,699Cash and cash equivalents as of end of period

$
558


$
128,690


$
114,482


$
27,059


$



$
270,789  25




---



##### 



CapitalSource
    Inc.
  NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Note 10.
    Direct
    Real Estate Investments  triple-net
  March 31,


December 31,2009


2008($ in thousands)Land

$
105,777


$
106,797Buildings


905,357



910,413Furniture and equipment


51,114



51,814Accumulated depreciation


(87,358
)


(79,308
)Total

$
974,890


$
989,716   Note 11.
    Deposits        March 31,


December 31,2009


2008($ in thousands)Interest-bearing deposits:Money market

$
269,920


$
279,577Savings


476,660



471,014Certificates of deposit


3,965,455



4,259,153Brokered certificates of deposit


14,655



33,951Total interest-bearing deposits

$
4,726,690


$
5,043,695     Maturing by March 31,2010

$
3,947,6102011


11,9182012


16,5242013


3,7002014


358Total

$
3,980,110  26




---



##### 



CapitalSource
    Inc.
  NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Savings and money market deposit accounts

$
3,287Certificates of deposit


34,827Brokered certificates of deposit


388Fees for early withdrawal


(115
)Total interest expense

$
38,387   Note 12.
    Borrowings  Borrowings Form 10-K.
    Repurchase
    Agreements
    Credit
    Facilities
      Borrowings Form 10-K.
     27




---



##### 



CapitalSource
    Inc.
  NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      Term
    Debt
    Other
    Borrowings
    March 31,


December 31,2009


2008($ in thousands)Convertible debt, net(1)

$
553,560


$
729,474Subordinated debt


436,941



438,799Mortgage debt


329,019



330,311FHLB Advances


50,000



Notes payable


75,423



75,229Total

$
1,444,943


$
1,573,813     (1)
    
    Amounts presented are net of debt discount of $26.4 million
    and $30.6 million as of March 31, 2009 and
    December 31, 2008, respectively.  Convertible
    Debt
     28




---



##### 



CapitalSource
    Inc.
  NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Retrospective
    Application of Accounting for Convertible Debt Instruments with
    Cash Settlement Option, 14-1
  March 31, 2009


December 31, 2008($ in thousands)Convertible debt principal

$
580,000


$
760,120Less:Debt discount


26,440



30,646Net carrying value

$
553,560


$
729,474Equity components recorded in additional paid-in capital

$
101,220


$
101,220     Conversion Price


Number of Shares3.5% Senior Convertible Debentures due 2034

$
21.11



400,0424.0% Senior Subordinated Convertible Debentures due 2034


21.11



15,230,3097.25% Senior Subordinated Convertible Debentures due 2037


27.09



9,226,975     Three Months EndedMarch 31,2009


2008($ in thousands)Interest expense recognized on:Contractual interest coupon

$
8,323


$
8,690Amortization of deferred financing fees


517



541Amortization of debt discount


4,297



4,468Total interest expense recognized

$
13,137


$
13,699Effective interest rate on the liability component:3.5% Senior Convertible Debentures due 2034


7.25
%


7.25
%4.0% Senior Subordinated Convertible Debentures due 2034


7.68
%


7.68
%7.25% Senior Subordinated Convertible Debentures due 2037


7.79
%


7.79
%   14-1
  Subordinated
    Debt
   29




---



##### 



CapitalSource
    Inc.
  NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Mortgage
    Debt
  one-year
  FHLB
    Advances
    Notes
    Payable
    Debt
    Covenants
  and/or
  12-month Credit Facilities
     30




---



##### 



CapitalSource
    Inc.
  NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      Note 13.
    Shareholders
    Equity  Common
    Stock Shares Outstanding
    Outstanding as of December 31, 2008


282,804,211Issuance of common stock


19,498,450Share repurchase


(400,000
)Restricted stock and other stock grants, net


180,455Outstanding as of March 31, 2009


302,083,116   Dividend
    Reinvestment and Stock Purchase Plan
    Share
    Repurchase Plan
    Equity
    Offerings
   31




---



##### 



CapitalSource
    Inc.
  NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Note 14.
    Income
    Taxes            Note 15.
    Comprehensive
    (Loss) Income    Three Months EndedMarch 31,2009


2008($ in thousands)Net (loss) income

$
(104,320
)

$
6,541Unrealized gain (loss) on available-for-sale securities, net of
    tax


488



(4,303
)Unrealized (loss) gain on foreign currency translation, net of
    tax


(9,506
)


9,762Loss on cash flow hedges, net of tax


(20
)


(754
)Comprehensive (loss) income


(113,358
)


11,246Comprehensive (loss) income attributable to noncontrolling
    interest


(16
)


1,297Comprehensive (loss) income attributable to CapitalSource
    Inc.

$
(113,342
)

$
9,949  32




---



##### 



CapitalSource
    Inc.
  NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    March 31,


December 31,2009


2008($ in thousands)Unrealized gain on available-for-sale securities, net of tax

$
7,956


$
7,468Unrealized (loss) gain on foreign currency translation, net of
    tax


(8,049
)


1,457Unrealized gain on cash flow hedge, net of tax


150



170Accumulated other comprehensive income, net

$
57


$
9,095   Note 16.
    Net
    (Loss) Income Per Share Attributable to CapitalSource
    Inc.    Three Months Ended March 31,2009


2008($ in thousands, except share data)Basic net (loss) income per share attributable to
    CapitalSource Inc.:Net (loss) income attributable to CapitalSource Inc.

$
(104,304
)

$
5,244Average shares  basic


290,098,800



220,085,148Basic net (loss) income per share attributable to CapitalSource
    Inc.

$
(0.36
)

$
0.02Diluted net (loss) income per share attributable to
    CapitalSource Inc.:Net (loss) income attributable to CapitalSource Inc.

$
(104,304
)

$
5,244Average shares  basic


290,098,800



220,085,148Effect of dilutive securities:Option shares






93,502Unvested restricted stock






1,227,632Stock units






87,232Average shares  diluted


290,098,800



221,493,514Diluted net (loss) income per share attributable to
    CapitalSource Inc.

$
(0.36
)

$
0.02     Three Months EndedMarch 31,2009


2008Stock units


2,207,528



Stock options


7,170,754



8,727,748Non-managing member units






1,979,078Shares subject to a written call option


7,253,392



7,401,420Unvested restricted stock


2,979,427



    33




---



##### 



CapitalSource
    Inc.
  NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      3.5% Senior Convertible Debentures due 2034

$
22.481.25% Senior Convertible Debentures due 2034


21.504.0% Senior Subordinated Convertible Debentures due 2034


22.481.625% Senior Subordinated Convertible Debentures due 2034


21.507.25% Senior Subordinated Convertible Debentures due 2037


27.09   Note 17.
    Bank
    Regulatory Capital      March 31, 2009


December 31, 2008Actual


Minimum Required


Actual


Minimum RequiredAmount


Ratio


Amount


Ratio


Amount


Ratio


Amount


Ratio($ in thousands)Tier-1 Leverage Capital

$
743,065



12.87
%

$
288,628



5.00
%

$
794,622



13.38
%

$
296,876



5.00
%Risk-Based Capital:Tier-1


743,065



15.99



278,825



6.00



794,622



16.30



292,489



6.00Total


801,339



17.24



697,063



15.00



850,318



17.44



731,222



15.00     Note 18.
    Commitments
    and Contingencies  Guarantors Accounting and
    Disclosure Requirements for Guarantees, Including Indirect
    Guarantees of Indebtedness of Others.
 34




---



##### 



CapitalSource
    Inc.
  NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      Accounting for Conditional Asset Retirement
    Obligations  An Interpretation of FASB
    No. 143
    Note 19.
    Derivative
    Instruments           35




---



##### 



CapitalSource
    Inc.
  NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Residential Mortgage-Backed Securities and
    Certain Derivative Instruments,
      Asset Derivatives


Liability DerivativesLocation


Fair Value


Location


Fair Value($ in thousands)Interest rate contracts


Other assets


$
49,704



Other liabilities


$
(121,846
)Foreign exchange contracts


Other assets



1,213



Other liabilities



Total





$
50,917






$
(121,846
)     Gain (Loss)Recognized inLocation

Income($ in thousands)Interest rate contracts

Loss on derivatives

$
(2,948
)Interest rate contracts

Gain (loss) on residential mortgage investment portfolio


862Foreign exchange contracts

Loss on derivatives


2,263Total



$
177   Note 20.
    Fair
    Value Measurements   36




---



##### 



CapitalSource
    Inc.
  NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Fair
    Value Determination
      Assets
    and Liabilities
  Investment
    and Mortgage-backed Securities, Available-for-Sale
    Loans
    Held for Sale
    Loans
    Held for Investment
   37




---



##### 



CapitalSource
    Inc.
  NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Direct
    Real Estate Investments, net
    Other
    Investments
      Warrants
    Derivative
    Assets and Liabilities
   38




---



##### 



CapitalSource
    Inc.
  NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Foreclosed
    Assets
    Assets
    and Liabilities Carried at Fair Value on a Recurring
    Basis
    Fair Value


Quoted Prices in


Significant Other


SignificantMeasurement as of


Active Markets for


Observable


UnobservableMarch 31, 2009


Identical Assets (Level 1)


Inputs (Level 2)


Inputs (Level 3)($ in thousands)AssetsInvestment and mortgage-backed securities, available-for-sale

$
1,008,185


$



$
1,008,185


$
Investments carried at fair value:Other investments available-for-sale


24,034







118



23,916Warrants


4,596











4,596Other assets held at fair value:Derivative assets


50,865







50,865



Total assets

$
1,087,680


$



$
1,059,168


$
28,512LiabilitiesOther liabilities held at fair value:Derivative liabilities

$
121,846


$



$
121,846


$
     Fair Value


Quoted Prices in


Significant Other


SignificantMeasurement as of


Active Markets for


Observable


UnobservableDecember 31, 2008


Identical Assets (Level 1)


Inputs (Level 2)


Inputs (Level 3)($ in thousands)AssetsInvestment and mortgage-backed securities, available-for-sale

$
642,714


$



$
642,714


$
Mortgage-backed securities pledged, trading


1,489,291







1,489,291



Investments carried at fair value:Other investments available-for-sale


36,837







213



36,624Warrants


4,661











4,661Other assets held at fair value:Derivative assets


206,979







206,979



Total assets

$
2,380,482


$



$
2,339,197


$
41,285LiabilitiesOther liabilities held at fair value:Derivative liabilities

$
342,784


$



$
342,784


$
  39




---



##### 



CapitalSource
    Inc.
  NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Realized and UnrealizedLosses





Purchases,Total


Sales,Included in


Realized


Issuances,Balance as of





Other


and


and


Transfers


Balance as of


UnrealizedJanuary 1,


Included in


Comprehensive


Unrealized


Settlements,


In (Out)


March 31,


Losses2009


Income


Income, Net


Losses


net


of Level 3


2009


(1)($ in thousands)AssetsInvestments carried at fair value:Other investments available-for- sale

$
36,624


$
(12,254
)

$
(89
)

$
(12,343
)

$
(365
)

$



$
23,916


$
(12,254
)Warrants


4,661



(65
)






(65
)










4,596



(65
)Total assets

$
41,285


$
(12,319
)

$
(89
)

$
(12,408
)

$
(365
)

$



$
28,512


$
(12,319
)LiabilitiesOther liabilities held at fair value:Derivative liabilities

$



$



$



$



$



$



$



$
     (1)
    
    Represents unrealized losses relating to assets/liabilities held
    as of March 31, 2009.    Realized and UnrealizedGains (Losses)TotalRealized


Purchases,Included in


and


Sales,





Balance as


UnrealizedBalance as of





Other


Unrealized


Issuances and


Transfers


of


(Losses)January 1,


Included in


Comprehensive


(Losses)


Settlements,


In (Out)


March 31,


Gains2008


Income


Income, net


Gains


Net


of Level 3


2008


(1)($ in thousands)AssetsInvestments carried at fair value:Other investments available-for-sale

$
13,106


$
1,234


$
(7,109
)

$
(5,875
)

$
47,853


$



$
55,084


$
(6,923
)Warrants


8,994



939



(16
)


923











9,917



923Total assets

$
22,100


$
2,173


$
(7,125
)

$
(4,952
)

$
47,853


$



$
65,001


$
(6,000
)LiabilitiesOther liabilities held at fair value:Derivative liabilities

$
(5,074
)

$
(8,209
)

$



$
(8,209
)

$



$



$
(13,283
)

$
(8,209
)     (1)
    
    Represents unrealized (losses) gains relating to
    assets/liabilities held as of March 31, 2008.    Gain(Loss) onInterest


(Loss) Gain on


Residential Mortgage


Loss onIncome


Investments, net


Investment Portfolio


Derivatives($ in thousands)Total gains (losses) included in earnings for the period

$
352


$
(12,671
)

$



$
Unrealized gains (losses) relating to assets still held at
    reporting date


352



(12,671
)






  40




---



##### 



CapitalSource
    Inc.
  NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Gain(Loss) onInterest


(Loss) Gain on


Residential Mortgage


Loss onIncome


Investments, net


Investment Portfolio


Derivatives($ in thousands)Total gains (losses) included in earnings for the period

$
2,067


$
766


$
(660
)

$
(8,209
)Unrealized gains (losses) relating to assets still held at
    reporting date


1,019



766



(660
)


(8,209
)   Assets
    Carried at Fair Value on a Nonrecurring Basis
    Fair Value


Quoted Prices in








Total NetMeasurement for the


Active Markets


Significant Other


Significant


Losses for theQuarter Ended


for Identical


Observable Inputs


Unobservable


Quarter EndedMarch 31, 2009


Assets (Level 1)


(Level 2)


Inputs (Level 3)


March 31, 2009($ in thousands)AssetsLoans held for sale

$
8,500


$



$
8,500


$



$
(21
)Loans held for investment(1)


324,292











324,292



(129,272
)Investments carried at cost


3,515











3,515



(1,672
)Investments accounted for under the equity method


1,312











1,312



(1,113
)Direct real estate investments, net


4,847











4,847



(42
)Foreclosed assets


86,839











86,839



(20,813
)Total assets

$
429,305


$



$
8,500


$
420,805


$
(152,933
)     (1)
    
    Represents impaired loans held for investment measured at fair
    value of the loans collateral less transaction costs.
    Transaction costs were not significant during the period.    Fair Value


Quoted Prices in








Total NetMeasurement for the


Active Markets


Significant Other


Significant


Losses for theQuarter Ended


for Identical


Observable Inputs


Unobservable


Quarter EndedMarch 31, 2008


Assets (Level 1)


(Level 2)


Inputs (Level 3)


March 31, 2008($ in thousands)AssetsLoans held for investment(1)

$
95,952


$



$



$
95,952


$
(4,730
)Investments carried at cost


2,984











2,984



(1,974
)Total assets

$
98,936


$



$



$
98,936


$
(6,704
)     (1)
    
    Represents impaired loans held for investment measured at fair
    value of the loans collateral less transaction costs.
    Transaction costs were not significant during the period. 41




---



##### 



CapitalSource
    Inc.
  NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   Note 21.
    Segment
    Data      Three Months Ended March 31, 2009OtherCapitalSource


Commercial


Healthcare


Intercompany


ConsolidatedBank(1)


Finance


Net Lease


Eliminations


Total($ in thousands)Total interest and fee income

$
77,424


$
178,460


$
85


$
(2,886
)

$
253,083Operating lease income










27,880







27,880Interest expense(2)


38,413



89,263



5,757



(2,398
)


131,035Provision for loan losses


24,991



130,276











155,267Operating expenses(3)


23,740



56,144



11,587



(13,192
)


78,279Other income (expense)


9,561



(71,765
)


1,365



(13,288
)


(74,127
)Net (loss) income before income taxes


(159
)


(168,988
)


11,986



(584
)


(157,745
)Income tax (benefit) expense


(65
)


(58,023
)


4,663







(53,425
)Net (loss) income


(94
)


(110,965
)


7,323



(584
)


(104,320
)Net loss attributable to noncontrolling interests






(16
)










(16
)Net (loss) income attributable to CapitalSource Inc.

$
(94
)

$
(110,949
)

$
7,323


$
(584
)

$
(104,304
)Total assets as of March 31, 2009

$
5,834,056


$
9,193,641


$
1,043,680


$
(279,569
)

$
15,791,808   42




---



##### 



CapitalSource
    Inc.
  NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Three Months Ended March 31, 2008OtherCapitalSource


Commercial


Healthcare


Intercompany


ConsolidatedBank(1)


Finance


Net Lease


Eliminations


Total($ in thousands)Total interest and fee income

$



$
343,899


$
493


$
(2,426
)

$
341,966Operating lease income










27,690







27,690Interest expense(2)






182,102



10,796



(2,426
)


190,472Provision for loan losses






5,659











5,659Operating expenses(3)






56,336



11,173







67,509Other expense






(96,399
)










(96,399
)Net income before income taxes






3,403



6,214







9,617Income tax expense






3,076











3,076Net income






327



6,214







6,541Net (loss) income attributable to noncontrolling interests






(117
)


1,414







1,297Net income attributable to CapitalSource Inc

$



$
444


$
4,800


$



$
5,244Total assets as of December 31, 2008

$
6,137,197


$
11,526,255


$
1,059,031


$
(302,851
)

$
18,419,632     (1)
    
    CapitalSource Bank segment reflects activities of CapitalSource
    Bank, which commenced operations on July 25, 2008.(2)
    
    Interest expense in our Healthcare Net Lease segment includes
    interest on its secured credit facility and mortgage debt as
    well as an allocation of interest on its allocated intercompany
    debt.(3)
    
    Operating expenses of our Healthcare Net Lease segment include
    depreciation of direct real estate investments, professional
    fees, an allocation of overhead expenses (including compensation
    and benefits) and other direct expenses.  Summary of Significant Accounting Policies.
  Intercompany
    Eliminations
    Note 22.
    Subsequent
    Events  Funding
    VII Facility
   43




---



##### 



CapitalSource
    Inc.
  NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      
    Provides that it is an event of default if conditional
    prepayments are not made;
    Provides for an amortization period of up to two years upon
    termination of the revolving period as compared to one year,
    subject to the satisfaction of certain conditions;
    Modifies the program fee charged on borrowings under the
    facility to a range of 3.0% to 4.5%, depending on the amount of
    advances outstanding;
    Reduces to 50% the overall maximum advance rate for new loans
    pledged under the facility following April 20, 2009;
    Increases the maximum permitted portfolio and pool charged-off
    ratios that would be a termination event under the facility from
    4% to 10% and 3% to 15% respectively; and
    Provides additional limitations to removing assets from the
    facility.  2007-A
  2007-A
    Term Debt Securitization
  2007-A 2007-A,
  2007-A
 44




---



##### 



ITEM 2.
    MANAGEMENTS
    DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
    OPERATIONS  CAUTIONARY
    NOTE REGARDING FORWARD-LOOKING STATEMENTS
  Form 10-Q, Form 10-Q Form 10-K (Form 10-K) Form 10-Q
    Form 10-Q Form 10-K.
  Overview
    and Highlights
   45




---



##### 



triple-net
    Bank
    Holding Company Application
   46




---



##### 



Revocation
    of REIT Status
    Consolidated
    Results of Operations
  Explanation
    of Reporting Metrics
  Interest Income.
  Fee Income.
  Operating Lease Income.
  Interest Expense.
  Provision for Loan Losses. mortgage-related
  Other Income.
 47




---



##### 



Operating Expenses.
  Income Taxes.
  Operating
    Results for the Three Months Ended March 31,
    2009
    
    CapitalSource Bank operations;
    Increased provision for loan losses;
    Decreased balance of our commercial lending portfolio;
    Gains and losses on our residential mortgage investment
    portfolio;
    Losses on derivatives and other investments in our Other
    Commercial Finance segment;
    Increased operating expenses; and
    Changes in lending and borrowing spreads.    Three Months EndedMarch 31,2009


2008


$ Change


% Change($ in thousands)Interest income

$
221,687


$
308,325


$
(86,638
)


(28
)%Fee income


31,396



33,641



(2,245
)


(7
)Operating lease income


27,880



27,690



190



1Interest expense


131,035



190,472



(59,437
)


(31
)Provision for loan losses


155,267



5,659



149,608



2,644Depreciation of direct real estate investments


8,964



8,916



48



1Other operating expenses


69,315



58,593



10,722



18Other expense


(74,127
)


(96,399
)


22,272



23Income tax (benefit) expense


(53,425
)


3,076



(56,501
)


(1,837
)Net (loss) income


(104,320
)


6,541



(110,861
)


(1,695
)Net (loss) income attributable to noncontrolling interests


(16
)


1,297



(1,313
)


(101
)Net (loss) income attributable to CapitalSource Inc.


(104,304
)


5,244



(109,548
)


(2,089
)  48




---



##### 



Three Months Ended March 31,2009


2008Weighted


Net


Average


Weighted


Net


AverageAverage


Investment


Yield/


Average


Investment


Yield/Balance


Income


Cost


Balance


Income


Cost($ in thousands)Interest earning assets:Interest income





$
221,687



6.17
%





$
308,325



7.59
%Fee income






31,396



0.87







33,641



0.83Total interest earning assets(1)

$
14,579,500



253,083



7.04


$
16,302,258



341,966



8.42Total direct real estate investments


1,068,949



27,880



10.58



1,067,296



27,690



10.41Total income earning assets


15,648,449



280,963



7.28



17,369,554



369,656



8.54Total interest bearing liabilities(2)


13,568,772



131,035



3.92



14,753,537



190,472



5.18Net finance spread





$
149,928



3.36
%





$
179,184



3.36
%Net finance margin










3.89
%










4.14
%     (1)
    
    Interest earning assets include cash and cash equivalents,
    restricted cash, investment and mortgage-backed securities,
    mortgage-related receivables, RMBS, loans, the A
    Participation Interest and investments in debt securities.(2)
    
    Interest bearing liabilities include deposits, FHLB advances,
    repurchase agreements, secured and unsecured credit facilities,
    term debt, convertible debt and subordinated debt.  Operating
    Expenses
    Income
    Taxes
    Comparison
    of the Three Months Ended March 31, 2009 and
    2008
   49




---



##### 



CapitalSource
    Bank Segment
    Interest income

$
72,867Fee income


4,557Interest expense


38,413Provision for loan losses


24,991Operating expenses


23,740Other income


9,561Income tax benefit


(65
)Net loss attributable to CapitalSource Inc.


(94
)   Interest
    Income
    Fee
    Income
    Interest
    Expense
   50




---



##### 



Net
    Finance Margin
    Three Months Ended March 31, 2009Weighted


Net


AverageAverage


Investment


Yield/Balance


Income


Cost($ in thousands)Interest earning assets:Interest income





$
72,867



5.03
%Fee income






4,557



0.31Total interest earning assets(1)

$
5,872,004



77,424



5.34Total interest bearing liabilities(2)


4,928,789



38,413



3.16Net finance spread





$
39,011



2.18
%Net finance margin










2.69
%     (1)
    
    Interest earning assets include cash and cash equivalents,
    investment and mortgage-backed securities, A
    Participation Interest and loans.(2)
    
    Interest bearing liabilities include deposits and borrowings.  Provision
    for Loan Losses
    Operating
    Expenses
   51




---



##### 



Other
    Income
    Other
    Commercial Finance Segment
    Three Months EndedMarch 31,2009


2008


$ Change


% Change($ in thousands)Interest income

$
151,133


$
310,269


$
(159,136
)


(51
)%Fee income


27,327



33,630



(6,303
)


(19
)Interest expense


89,263



182,102



(92,839
)


(51
)Provision for loan losses


130,276



5,659



124,617



2,202Operating expenses


56,144



56,336



(192
)


(1
)Other expense


(71,765
)


(96,399
)


24,634



26Income tax (benefit) expense


(58,023
)


3,076



(61,099
)


(1,986
)Net (loss) income


(110,965
)


327



(111,292
)


(34,034
)Net loss attributable to noncontrolling interests


(16
)


(117
)


101



86Net (loss) income attributable to CapitalSource Inc


(110,949
)


444



(111,393
)


(25,089
)   Interest
    Income
    Fee
    Income
   52




---



##### 



Interest
    Expense
    Net
    Finance Margin
      Three Months Ended March 31,2009


2008Weighted


Net


Average


Weighted


Net


AverageAverage


Investment


Yield/


Average


Investment


Yield/Balance


Income


Cost


Balance


Income


Cost($ in thousands)Interest earning assets:Interest income





$
151,133



7.05
%





$
310,269



7.65
%Fee income






27,327



1.27







33,630



0.83Total interest earning assets(1)

$
8,692,688



178,460



8.32


$
16,266,962



343,899



8.48Total interest bearing liabilities(2)


8,310,324



89,263



4.36



14,141,069



182,102



5.17Net finance spread





$
89,197



3.96
%





$
161,797



3.31
%Net finance margin










4.16
%










3.99
%     (1)
    
    Interest earning assets include cash and cash equivalents,
    restricted cash, mortgage-related receivables, loans and
    investments in debt securities.(2)
    
    Interest bearing liabilities include repurchase agreements,
    secured and unsecured credit facilities, term debt, convertible
    debt and subordinated debt.  Provision
    for Loan Losses
   53




---



##### 



Operating
    Expenses
    Other
    Expense
      Healthcare
    Net Lease Segment
    Three Months EndedMarch 31,2009


2008


$ Change


% Change($ in thousands)Interest income

$
85


$
482


$
(397
)


(82
)%Fee income






11



(11
)


(100
)Operating lease income


27,880



27,690



190



1Interest expense


5,757



10,796



(5,039
)


(47
)Depreciation of direct real estate investments


8,964



8,916



48



1Other operating expenses


2,623



2,257



366



16Other income


1,365







1,365



N/AIncome tax expense


4,663







4,663



N/ANet income


7,323



6,214



1,109



18Net income attributable to noncontrolling interests






1,414



(1,414
)


(100
)Net income attributable to CapitalSource Inc.


7,323



4,800



2,523



53   Operating
    Lease Income
    Interest
    Expense
   54




---



##### 



Net
    Finance Margin
    Depreciation
    of Direct Real Estate Investments
    Operating
    Expenses
    Noncontrolling
    Interest Expense
    Financial
    Condition
  CapitalSource
    Bank Segment
  Portfolio
    Composition
    March 31,


December 31,2009


2008($ in thousands)Investment and mortgage-backed securities, available-for-sale

$
1,008,185


$
642,714Investment and mortgage-backed securities, held-to-maturity


92,320



14,389A Participation Interest, net(1)


1,079,945



1,400,333Loans(1)


2,929,405



2,713,377FHLB stock


20,195



20,195Total

$
5,130,050


$
4,791,008Deposits

$
4,726,690


$
5,043,695FHLB advances


50,000



Total

$
4,776,690


$
5,043,695     (1)
    
    Includes related interest receivable. 55




---



##### 



Investment
    and Mortgage-backed Securities, Available-for-Sale
  Investments
  Investment
    and Mortgage-backed Securities, Held-to-Maturity
    Commercial
    Real Estate A Participation Interest
  Commercial Lending
    Assets and Credit Quality,
  CapitalSource
    Bank Segment Loan Portfolio Composition
      March 31, 2009


December 31, 2008($ in thousands)Composition of CapitalSource Bank loan portfolio by loan
    type:Commercial

$
1,903,202



65
%

$
1,813,414



67
%Real estate


727,212



25



595,751



22Real estate  construction


298,991



10



304,212



11Total

$
2,929,405



100
%

$
2,713,377



100
%  56




---



##### 



Due in


Due inOne Year


One to


Due Afteror Less


Five Years


Five Years


Total($ in thousands)Scheduled maturities by loan type:Commercial

$
236,392


$
1,352,908


$
313,902


$
1,903,202Real estate


150,156



564,880



12,176



727,212Real estate  construction


143,011



155,980







298,991Total

$
529,559


$
2,073,768


$
326,078


$
2,929,405       Loan TypeReal EstateLoan Index:

Commercial


Real Estate


Construction


Total


Percentage($ in thousands, except percentages)1-Month LIBOR

$
357,783


$
695,960


$
298,991


$
1,352,734



46
%3-Month LIBOR


111,514











111,514



4Prime


590,463



9,464







599,927



20Canadian Prime


18,631











18,631



1Blended


822,643











822,643



28Total adjustable rate loans


1,901,034



705,424



298,991



2,905,449



99Fixed rate loans


2,169



21,787







23,956



1Total loans

$
1,903,203


$
727,211


$
298,991


$
2,929,405



100
%   Credit
    Quality and Allowance for Loan Losses
    March 31,


December 31,CapitalSource Bank Loan Asset Classification

2009


2008($ in thousands)Loans 30-89 days contractually delinquent

$



$
Loans 90 or more days contractually delinquent






Non-accrual loans


15,624



Impaired loans


15,626



   Accounting by Creditors for
    Impairment of a Loan
 57




---



##### 



and/or
    Accounting for Debtors and Creditors for Troubled Debt
    Restructurings.
    FHLB
    Stock
    Deposits
      March 31, 2009


December 31, 2008Weighted





WeightedAverage





AverageBalance


Rate


Balance


Rate($ in thousands)Deposit type:Money market deposit accounts

$
269,920



1.50
%

$
279,577



2.26
%Savings accounts


476,660



1.61



471,014



2.89Certificates of deposit


3,965,455



3.08



4,259,153



3.55Brokered certificates of deposit


14,655



6.02



33,951



5.70Total deposits

$
4,726,690



2.85


$
5,043,695



3.42   58




---



##### 



March 31, 2009WeightedAverageBalance


Rate($ in thousands)Remaining maturity:0-3 months

$
1,809,182



3.34
%4-6 months


1,396,052



2.647-9 months


585,091



3.5810-12 months


157,285



2.13Longer than 12 months


32,500



4.43Total deposits

$
3,980,110



3.09   FHLB
    Advances
      March 31, 2009WeightedAverageBalance


Rate($ in thousands)Remaining maturity:Less than 1 year

$
10,000



1.13
%1 to 2 years


14,000



1.572 to 3 years


13,000



2.113 to 4 years


3,000



2.604 to 5 years


10,000



2.92Total

$
50,000



1.95   Other
    Commercial Finance Segment
  Portfolio
    Composition
    March 31,


December 31,2009


2008($ in thousands)Loans(1)

$
6,443,580


$
6,781,496Mortgage-related receivables(2)


1,738,382



1,801,535Other investments


144,308



164,583Total

$
8,326,270


$
8,747,614     (1)
    
    Includes related interest receivable and loans held-for-sale.(2)
    
    Represents secured receivables that are backed by
    adjustable-rate residential prime mortgage loans. 59




---



##### 



Other
    Commercial Finance Segment Loan Portfolio Composition
      March 31, 2009





December 31, 2008($ in thousands)Composition of Other Commercial Finance loan portfolio by loan
    type:Commercial

$
4,266,862



66
%

$
4,573,586



67
%Real estate


1,471,432



23



1,525,916



23Real estate  construction


705,286



11



681,994



10Total

$
6,443,580



100
%

$
6,781,496



100
%     Due in


Due inOne Year


One to


Due Afteror Less


Five Years


Five Years


Total($ in thousands)Scheduled maturities by loan type:Commercial

$
897,345


$
2,978,801


$
390,716


$
4,266,862Real estate


371,269



1,012,493



87,670



1,471,432Real estate  construction


451,201



254,085







705,286Total

$
1,719,815


$
4,245,379


$
478,386


$
6,443,580     Loan TypeReal EstateCommercial


Real Estate


Construction


Total


Percentage($ in thousands, except percentages)Loan Index:1-Month LIBOR

$
515,289


$
1,122,397


$
609,520


$
2,247,206



35
%2-Month LIBOR


29,020











29,020



13-Month LIBOR


143,645



3,130







146,775



26-Month LIBOR


4,966











4,966



1-Month
    EURIBOR


60,910











60,910



13-Month
    EURIBOR


18,569











18,569



Prime


1,568,164



161,901



6,901



1,736,966



27Blended


1,735,255







27,918



1,763,173



27Total adjustable rate loans


4,075,818



1,287,428



644,339



6,007,585



93Fixed rate loans


191,044



184,004



60,947



435,995



7Total loans

$
4,266,862


$
1,471,432


$
705,286


$
6,443,580



100
%  60




---



##### 



Credit
    Quality and Allowance for Loan Losses
    March 31,


December 31,Other Commercial Finance Loan Asset Classification

2009


2008($ in thousands)Loan 30-89 days contractually delinquent

$
126,240


$
299,322Loans 90 or more days contractually delinquent


291,768



141,104Non-accrual loans(1)


599,445



439,547Impaired loans(2)


845,187



692,278     (1)
    
    Includes loans with aggregate principal balances of
    $115.2 million and $110.3 million as of March 31,
    2009 and December 31, 2008, respectively, which were also
    classified as loans 90 or more days contractually delinquent.
    Includes non-performing loans classified as held for sale that
    have an aggregate principal balance of $14.0 million and
    $14.5 million as of March 31, 2009 and
    December 31, 2008, respectively.(2)
    
    Includes loans with aggregate principal balances of
    $179.3 million and $128.9 million as of March 31,
    2009 and December 31, 2008, respectively, which were also
    classified as loans 90 or more days contractually delinquent,
    and loans with aggregate principal balances of
    $585.4 million and $423.4 million as of March 31,
    2009 and December 31, 2008, respectively, which were also
    classified as loans on non-accrual status. The net carrying
    values of impaired loans were $833.1 million and
    $683.1 million as of March 31, 2009 and
    December 31, 2008, respectively, prior to the application
    of allocated reserves.  and/or
  Accounting for Debtors and Creditors
    for Troubled Debt Restructurings
   61




---



##### 



Mortgage-related
    Receivables
  Mortgage-Related
    Receivables and Related Owner Trust Securitizations
  Other
    Investments
      Healthcare
    Net Lease Segment
  Direct
    Real Estate Investments
  triple-net triple-net
  Liquidity
    and Capital Resources
  de novo
   62




---



##### 



Risk Factors Cautionary
    Note Regarding Forward Looking Statements Form 10-K
  CapitalSource Bank Liquidity 
          Parent Company
    Liquidity 
 63




---



##### 



2006-A
        and/or
   64




---



##### 



and/or
  Cash
    and Cash Equivalents and Restricted Cash
  Cash and Cash Equivalents and
    Restricted Cash,
    Deposits
  Deposits,
  Borrowings
  Borrowings Form 10-K Borrowings
    MaximumFacility


Amount


UnusedFunding Source

Amount


Outstanding


Capacity(1)($ in thousands)Credit facilities(2)

$
1,822,256


$
1,399,398


$
422,858Term debt


5,136,909



5,061,502



75,407Other borrowings


2,315,094



1,444,943



870,151Total

$
9,274,259


$
7,905,843


$
1,368,416  65




---



##### 



(1)
    
    Excludes issued and outstanding letters of credit totaling
    $53.0 million as of March 31, 2009.(2)
    
    Unused capacity is limited by the amount of letters of credit
    outstanding under such facilities and the amount of eligible
    collateral that we have available to pledge in order to utilize
    such unused capacity. We have limited available collateral to
    pledge to use this unused capacity. However, such unused
    capacity may become available to us to the extent we have
    additional eligible collateral in the future.    Repurchase
    Agreements
    Credit
    Facilities
    Committed


PrincipalCapacity


Outstanding($ in thousands)Credit Facilities:CS Funding III secured credit facility scheduled to mature
    April 29, 2009(1)

$
100,000


$
80,500CS Funding VII secured credit facility scheduled to mature
    March 31, 2010(2)


285,000



184,000CS Funding VIII secured credit facility scheduled to mature
    July 19, 2010


26,631



26,631CSE QRS Funding I secured credit facility scheduled to mature
    April 24, 2010(3)


250,000



15,000CS Europe secured credit facility scheduled to mature
    September 23, 2009(4)


165,625



158,949CS Inc secured credit facility scheduled to mature
    March 13, 2010(5)


995,000



934,318Total credit facilities

$
1,822,256


$
1,399,398     (1)
    
    In April 2009, we extended the maturity to May 29, 2009,
    and reduced the committed capacity to $90.0 million.(2)
    
    On termination or maturity of the credit facility, amounts due
    under the credit facility may, in the absence of a default, be
    repaid from proceeds from amortization of the collateral pool.
    In April 2009, we reduced the facility commitment to
    $235.0 million, amended the facility to extend final
    maturity through April 17, 2012 and increased the interest
    rate to between 3.0% and 4.5% depending on outstanding principal
    balance.(3)
    
    In April 2009, the facility entered its one year amortization
    period, reducing committed capacity to equal principal
    outstanding.(4)
    
    CS Europe is a 125 million multi-currency facility
    allowing for principal to be drawn in US Dollars
    (USD), Euro or British Pound Sterling
    (GBP), and the amounts presented were translated to
    USD using the applicable spot rates on March 31, 2009.(5)
    
    In May 2009, we reduced the committed capacity to
    $970.0 million.  Term
    Debt
   66




---



##### 



Owner
    Trust Term Debt
  Mortgage-Related Receivables and Related Owner
    Trust Securitizations Borrowings Form 10-K.
  Convertible
    Debt
  Borrowings Borrowings Form 10-K.
  Subordinated
    Debt
  Borrowings Borrowings Form 10-K.
  Mortgage
    Debt
  Borrowings Borrowings Form 10-K.
  FHLB
    Advances
    Notes
    Payable
    Debt
    Covenants
   67




---



##### 



and/or
  Borrowings
      Equity
  Borrowings Borrowings, Form 10-K.
    Commitments,
    Guarantees & Contingencies
  Commitments and Contingencies Form 10-K.
  Commitments and Contingencies Form 10-K.
   68




---



##### 



Commitments and Contingencies
        Credit
    Risk Management
  agreed-upon
    CapitalSource
    Bank and Other Commercial Finance Segments
     69




---



##### 



Concentrations
    of Credit Risk
    Market
    Risk Management
  and/or
  Derivative Instruments, Form 10-K.
  Interest
    Rate Risk Management
    12-month
  Rate Change(Basis Points)−100

$
11,160−50


12,720+ 50


(22,080
)+ 100


(43,800
)      70




---



##### 



Amount


Percentage ofOutstanding(1)


Total Portfolio($ in thousands)Loans with contractual interest rates:Exceeding the interest rate floor

$
4,683,666



50
%At the interest rate floor


8,889



Below the interest rate floor


28,463



Loans with no interest rate floor


4,651,966



50Total

$
9,372,984



100
%     (1)
    
    Includes related interest receivable.        Critical
    Accounting Estimates
  Managements Discussion and Analysis of Financial
    Condition and Results of Operations Summary of Significant Accounting Policies Critical Accounting
    Estimates Managements Discussion and
    Analysis of Financial Condition and Results of Operations Form 10-K
  ITEM 3.
    QUANTITATIVE
    AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK  Managements Discussion and
    Analysis of Financial Condition and Results of Operations Market Risk Management Form 10-Q Form 10-K. Derivative Instruments Credit Risk Form 10-K.
 71




---



##### 



ITEM 4.
    CONTROLS
    AND PROCEDURES  Rule 13a-15
 PART II.
    OTHER INFORMATION  ITEM 2.
    UNREGISTERED
    SALES OF EQUITY SECURITIES AND USE OF PROCEEDS    Maximum Numberof Shares (orTotal Number of


ApproximateShares Purchased


Dollar Value)Total Number


Average


as Part of Publicly


that Mayof Shares


Price Paid


Announced Plans


Yet be PurchasedPurchased(1)


per Share


or Programs


Under the PlansJanuary 1  January 31, 2009


77,526


$
4.01







February 1  February 28, 2009


111,510



2.39







March 1  March 31, 2009


61,088



1.10







Total


250,124


$
2.58




(2)

$
25,000,000
(2)     (1)
    
    Represents the number of shares acquired as payment by employees
    of applicable statutory minimum withholding taxes owed upon
    vesting of restricted stock granted under our Third Amended and
    Restated Equity Incentive Plan.(2)
    
    In March 2009, our Board of Directors authorized us to
    repurchase up to $25.0 million of our common stock through
    open market purchases or privately negotiated transactions from
    time to time for a period of up to two years. The amount and
    timing of any repurchases will depend on market conditions and
    other factors and repurchases may be suspended or discontinued
    at any time. On March 31, 2009, we repurchased
    400,000 shares of our common stock under the share
    repurchase plan, at an average price of $1.21 per share for a
    total purchase price of $484,000. These purchases were settled
    in April 2009. For accounting purposes, we recorded the share
    repurchase transaction as of March 31, 2009. All shares
    repurchased under the share repurchase plan were retired upon
    settlement. There is no assurance that we will repurchase any
    additional shares.  ITEM 6.
    EXHIBITS     72




---



##### 



Signatures      Date: May 11, 2009

/s/  JOHN
    K. DELANEYJohn
    K. Delaney
    Chairman of the Board and Chief Executive Officer
    (Principal Executive Officer)Date: May 11, 2009

/s/  DONALD
    F. COLEDonald
    F. Cole
    Chief Financial Officer
    (Principal Financial Officer)Date: May 11, 2009

/s/  BRYAN
    D. SMITHBryan
    D. Smith
    Chief Accounting Officer
    (Principal Accounting Officer)  73




---



##### 



INDEX TO
    EXHIBITS  ExhibitNo

Description3
.1

Second Amended and Restated Certificate of Incorporation
    (composite version; reflects all amendments through May 1,
    2008)(incorporated by reference to exhibit 3.1 to the Form 10-Q
    filed by CapitalSource on May 12, 2008).3
.2

Amended and Restated Bylaws (composite version; reflects all
    amendments through October 30, 2007) (incorporated by reference
    to exhibit 3.2 to the Form 10-Q filed by CapitalSource on
    November 9, 2007).10
.1

Office Lease Agreement dated as of November 5, 2008, by and
    between Maguire Properties  130 S. State
    College, LLC and CapitalSource Bank.10
.2

Amended and Restated Sale and Servicing Agreement, dated as of
    April 20 2009, by and among CS Funding VII Depositor LLC, as the
    seller, CapitalSource Finance LLC, as the servicer and
    originator, the issuers from time to time party thereto, the
    liquidity banks from time to time party thereto, Citicorp North
    America, Inc., as the administrative agent and Wells Fargo Bank,
    National Association, as the backup servicer and as the
    collateral custodian (incorporated by reference to exhibit 10.1
    to the Form 8-K filed by CapitalSource on April 24, 2009).10
.3

Third Amended and Restated Sale and Servicing Agreement, dated
    as of April 20, 2009, by and among CapitalSource Real Estate
    Loan LLC, 2007-A, as the seller, CSE Mortgage LLC, as the
    originator and servicer, the issuers from time to time party
    thereto, the liquidity banks from time to time party thereto,
    Citicorp North America, Inc., as the administrative agent and
    Wells Fargo Bank, National Association, as the backup servicer
    and as the collateral custodian (incorporated by reference to
    exhibit 10.2 to the
    Form 8-K
    filed by CapitalSource on April 24, 2009).10
.4

Sale and Servicing Agreement dated as of April 20, 2004, by and
    among CapitalSource Funding III LLC, as seller,
    CapitalSource Finance LLC, as originator and servicer, Wachovia
    Capital Markets, LLC as administrative agent and Wells Fargo
    Bank, National Association, as the backup servicer and as the
    collateral custodian (composite version; reflects all amendments
    through April 29, 2009).10
.5*

Separation and Consulting Agreement dated March 25, 2009, by and
    between CapitalSource Inc. and CapitalSource Finance LLC and
    Thomas A. Fink (incorporated by reference to exhibit 99.1 to the
    Form 8-K
    filed by CapitalSource on March 26, 2009).10
.6*

Third Amended and Restated Equity Incentive Plan (composite
    version; reflects all amendments through March 13, 2009).10
.7*

Form of Restricted Stock Agreement (2009).10
.8*

Form of Restricted Stock Agreement for Directors (2009).12
.1

Ratio of Earnings to Fixed Charges.31
.1

Rule 13a  14(a) Certification of Chairman of the
    Board and Chief Executive Officer.31
.2

Rule 13a  14(a) Certification of Chief Financial
    Officer.32


Section 1350 Certifications.     
    
    Filed herewith.*
    
    Management contract or compensatory plan or arrangement.   74