##### 









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, 2006


Commission File No. 1-31753


CapitalSource Inc.


(Exact name of registrant as specified in its charter)


|                         |  |                                     
|------------------------ |  | ------------------------------------
|Delaware                 |  | 35-2206895                          
|(State of Incorporation) |  | (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


12b-2


þ o o


12b-2 o þ












---



##### 



TABLE OF CONTENTS


|                              |         |                                                                                           |    |                                                                                                              |    |  |   | 
|----------------------------- | ------- | ----------------------------------------------------------------------------------------- | -- | ------------------------------------------------------------------------------------------------------------ | -- |  | - | 
|                              |         |                                                                                           |    | Page                                                                                                         |   
|                              |         |                                                                                           |    |                                                                                                              |   
|PART I. FINANCIAL INFORMATION
|                              | Item 1. |                                                                                           |    | Financial Statements                                                                                         |    |  |   | 
|                              |         |                                                                                           |    | Consolidated Balance Sheets as of
    March 31, 2006 (unaudited) and December 31,
    2005                   |    |  | 2 | 
|                              |         |                                                                                           |    | Consolidated Statements of Income
    (unaudited) for the three months ended March 31, 2006
    and 2005     |    |  | 3 | 
|                              |         |                                                                                           |    | Consolidated Statement of
    Shareholders Equity (unaudited) for the three months
    ended March 31, 2006 |    |  | 4 | 
|                              |         |                                                                                           |    | Consolidated Statements of Cash Flows
    (unaudited) for the three months ended March 31, 2006
    and 2005 |    |  | 5 | 
|                              |         |                                                                                           |    | Notes to the Unaudited Consolidated
    Financial Statements                                                 |    |  | 6 | 
|Item 2.                       |         | Managements Discussion and Analysis
    of Financial Condition and Results of Operations |    |                                                                                                              | 30 | 
|Item 3.                       |         | Quantitative and Qualitative Disclosures
    about Market Risk                            |    |                                                                                                              | 56 | 
|Item 4.                       |         | Controls and Procedures                                                                   |    |                                                                                                              | 56 | 
|                             
|PART II. OTHER INFORMATION   
|Item 1.                       |         | Legal Proceedings                                                                         |    |                                                                                                              | 57 | 
|Item 1A.                      |         | Risk Factors                                                                              |    |                                                                                                              | 57 | 
|Item 2.                       |         | Unregistered Sales of Equity Securities and
    Use of Proceeds                           |    |                                                                                                              | 57 | 
|Item 3.                       |         | Defaults Upon Senior Securities                                                           |    |                                                                                                              | 57 | 
|Item 4.                       |         | Submission of Matters to a Vote of Security
    Holders                                   |    |                                                                                                              | 57 | 
|Item 5.                       |         | Other Information                                                                         |    |                                                                                                              | 57 | 
|Item 6.                       |         | Exhibits                                                                                  |    |                                                                                                              | 57 | 
|Signatures                    |         |                                                                                           | 58 |                                                                                                             
|Index to Exhibits             |         |                                                                                           | 59 |                                                                                                             

1



---



##### 



CapitalSource Inc.





Consolidated Balance Sheets


|                                                                   |                                                                                                                                                                                    |                  |            |            |              |   |           |           |  
|------------------------------------------------------------------ | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------- | ---------- | ---------- | ------------ | - | --------- | --------- | -
|                                                                   |                                                                                                                                                                                    | March 31,        |            |            | December 31, |  
|                                                                   |                                                                                                                                                                                    | 2006             |            |            | 2005         |  
|                                                                   |                                                                                                                                                                                    |                  |            |            |              |  
|                                                                   |                                                                                                                                                                                    | (Unaudited)      |            |            |             
|                                                                   |                                                                                                                                                                                    | ($ in thousands) |           
|ASSETS                                                            
|Cash and cash equivalents                                          |                                                                                                                                                                                    | $                | 205,484    |            |              | $ | 323,896   |          
|Restricted cash                                                    |                                                                                                                                                                                    |                  | 251,444    |            |              |   | 284,785   |          
|Mortgage-related receivables, net                                  |                                                                                                                                                                                    |                  | 2,472,860  |            |              |   | 39,438    |          
|Mortgage-backed securities pledged, trading                        |                                                                                                                                                                                    |                  | 3,221,981  |            |              |   | 323,370   |          
|Receivables under repurchase agreements                            |                                                                                                                                                                                    |                  | 70,132     |            |              |   | 33,243    |          
|Loans held-for-sale                                                |                                                                                                                                                                                    |                  | 137,570    |            |              |   | 59,589    |          
|Loans:                                                             |                                                                                                                                                                                    |                  |            |            |              |   |           |          
|                                                                   | Loans                                                                                                                                                                              |                  |            | 6,225,235  |              |   |           | 5,894,911 |  
|                                                                   | Less deferred loan fees and discounts                                                                                                                                              |                  |            | (127,501   | )            |   |           | (120,407  | )
|                                                                   | Less allowance for loan losses                                                                                                                                                     |                  |            | (101,506   | )            |   |           | (87,370   | )
|                                                                   |                                                                                                                                                                                    |                  |            |            |              |  
|                                                                   | Loans, net                                                                                                                                                                         |                  |            | 5,996,228  |              |   |           | 5,687,134 |  
|Property and equipment, net                                        |                                                                                                                                                                                    |                  | 212,600    |            |              |   | 11,502    |          
|Investments                                                        |                                                                                                                                                                                    |                  | 101,801    |            |              |   | 126,393   |          
|Deferred financing fees, net                                       |                                                                                                                                                                                    |                  | 44,792     |            |              |   | 42,006    |          
|Other assets                                                       |                                                                                                                                                                                    |                  | 90,244     |            |              |   | 55,712    |          
|                                                                   |                                                                                                                                                                                    |                  |            |            |              |  
|Total assets                                                       |                                                                                                                                                                                    | $                | 12,805,136 |            |              | $ | 6,987,068 |          
|                                                                   |                                                                                                                                                                                    |                  |            |            |              |  
|                                                                  
|LIABILITIES, NONCONTROLLING INTERESTS AND SHAREHOLDERS
    EQUITY
|                                                                  
|Liabilities:                                                      
|                                                                   | Repurchase agreements                                                                                                                                                              |                  | $          | 3,201,025  |              |   | $         | 358,423   |  
|                                                                   | Unsecured credit facilities                                                                                                                                                        |                  |            | 250,000    |              |   |           |          |  
|                                                                   | Secured credit facilities                                                                                                                                                          |                  |            | 2,613,473  |              |   |           | 2,450,452 |  
|                                                                   | Term debt                                                                                                                                                                          |                  |            | 3,861,693  |              |   |           | 1,779,748 |  
|                                                                   | Convertible debt                                                                                                                                                                   |                  |            | 555,000    |              |   |           | 555,000   |  
|                                                                   | Subordinated debt                                                                                                                                                                  |                  |            | 283,504    |              |   |           | 231,959   |  
|                                                                   | Stock dividend payable                                                                                                                                                             |                  |            |           |              |   |           | 280,720   |  
|                                                                   | Cash dividend payable                                                                                                                                                              |                  |            |           |              |   |           | 70,202    |  
|                                                                   | Other liabilities                                                                                                                                                                  |                  |            | 79,014     |              |   |           | 60,626    |  
|                                                                   |                                                                                                                                                                                    |                  |            |            |              |  
|                                                                   | Total liabilities                                                                                                                                                                  |                  |            | 10,843,709 |              |   |           | 5,787,130 |  
|Noncontrolling interests                                           |                                                                                                                                                                                    |                  | 56,341     |            |              |   |          |          
|Shareholders equity:                                              |                                                                                                                                                                                    |                  |            |            |              |   |           |          
|                                                                   | Preferred stock (50,000,000 shares authorized; no shares
    outstanding)                                                                                                          |                  |            |           |              |   |           |          |  
|                                                                   | Common stock ($0.01 par value, 500,000,000 shares
    authorized; 173,665,573 and 141,705,766 shares issued;
    172,365,573 and 140,405,766 shares outstanding,
    respectively) |                  |            | 1,724      |              |   |           | 1,404     |  
|                                                                   | Additional paid-in capital                                                                                                                                                         |                  |            | 1,896,277  |              |   |           | 1,248,745 |  
|                                                                   | Retained earnings                                                                                                                                                                  |                  |            | 36,468     |              |   |           | 46,783    |  
|                                                                   | Deferred compensation                                                                                                                                                              |                  |            |           |              |   |           | (65,729   | )
|                                                                   | Accumulated other comprehensive income (loss), net                                                                                                                                 |                  |            | 543        |              |   |           | (1,339    | )
|                                                                   | Treasury stock, at cost                                                                                                                                                            |                  |            | (29,926    | )            |   |           | (29,926   | )
|                                                                   |                                                                                                                                                                                    |                  |            |            |              |  
|                                                                   | Total shareholders equity                                                                                                                                                         |                  |            | 1,905,086  |              |   |           | 1,199,938 |  
|                                                                   |                                                                                                                                                                                    |                  |            |            |              |  
|                                                                   | Total liabilities, noncontrolling interests and
    shareholders equity                                                                                                           |                  | $          | 12,805,136 |              |   | $         | 6,987,068 |  
|                                                                   |                                                                                                                                                                                    |                  |            |            |              |  



2



---



##### 



CapitalSource Inc.





Consolidated Statements of Income


|                                                                              |                                                      |                                   |         |             |      |   |         |             | 
|----------------------------------------------------------------------------- | ---------------------------------------------------- | --------------------------------- | ------- | ----------- | ---- | - | ------- | ----------- | 
|                                                                              |                                                      | Three Months Ended March 31,      |        
|                                                                              |                                                      |                                   |        
|                                                                              |                                                      | 2006                              |         |             | 2005 |  
|                                                                              |                                                      |                                   |         |             |      |  
|                                                                              |                                                      | (Unaudited)                       |        
|                                                                              |                                                      | ($ in thousands, except per share |        
|                                                                              |                                                      | data)                             |        
|Net interest and fee income:                                                  |                                                      |                                   |         |             |      |   |         |            
|                                                                              | Interest income                                      |                                   | $       | 195,498     |      |   | $       | 108,574     | 
|                                                                              | Fee income                                           |                                   |         | 41,542      |      |   |         | 26,483      | 
|                                                                              |                                                      |                                   |         |             |      |  
|                                                                              | Total interest and fee income                        |                                   |         | 237,040     |      |   |         | 135,057     | 
|                                                                              | Operating lease income                               |                                   |         | 4,625       |      |   |         |            | 
|                                                                              |                                                      |                                   |         |             |      |  
|                                                                              | Total investment income                              |                                   |         | 241,665     |      |   |         | 135,057     | 
|                                                                              | Interest expense                                     |                                   |         | 97,782      |      |   |         | 34,586      | 
|                                                                              |                                                      |                                   |         |             |      |  
|Net investment income                                                         |                                                      |                                   | 143,883 |             |      |   | 100,471 |            
|Provision for loan losses                                                     |                                                      |                                   | 14,713  |             |      |   | 9,902   |            
|                                                                              |                                                      |                                   |         |             |      |  
|Net investment income after provision for loan losses                         |                                                      |                                   | 129,170 |             |      |   | 90,569  |            
|Operating expenses:                                                           |                                                      |                                   |         |             |      |   |         |            
|                                                                              | Compensation and benefits                            |                                   |         | 33,320      |      |   |         | 21,366      | 
|                                                                              | Other administrative expenses                        |                                   |         | 17,299      |      |   |         | 9,254       | 
|                                                                              |                                                      |                                   |         |             |      |  
|Total operating expenses                                                      |                                                      |                                   | 50,619  |             |      |   | 30,620  |            
|Other income (expense):                                                       |                                                      |                                   |         |             |      |   |         |            
|                                                                              | Diligence deposits forfeited                         |                                   |         | 2,267       |      |   |         | 1,148       | 
|                                                                              | (Loss) gain on investments, net                      |                                   |         | (251        | )    |   |         | 2,128       | 
|                                                                              | Gain on derivatives                                  |                                   |         | 526         |      |   |         | 73          | 
|                                                                              | Loss on residential mortgage investment portfolio    |                                   |         | (6,106      | )    |   |         |            | 
|                                                                              | Other income, net of expenses                        |                                   |         | 3,908       |      |   |         | 961         | 
|                                                                              |                                                      |                                   |         |             |      |  
|                                                                              | Total other income                                   |                                   |         | 344         |      |   |         | 4,310       | 
|                                                                             
|Noncontrolling interests expense                                              |                                                      |                                   | (861    | )           |      |   |        |            
|                                                                              |                                                      |                                   |         |             |      |  
|                                                                             
|Net income before income taxes and cumulative effect of
    accounting change |                                                      |                                   | 78,034  |             |      |   | 64,259  |            
|                                                                              | Income taxes                                         |                                   |         | 13,110      |      |   |         | 25,061      | 
|                                                                              |                                                      |                                   |         |             |      |  
|Net income before cumulative effect of accounting change                      |                                                      |                                   | 64,924  |             |      |   | 39,198  |            
|                                                                              | Cumulative effect of accounting change, net of taxes |                                   |         | 370         |      |   |         |            | 
|                                                                              |                                                      |                                   |         |             |      |  
|Net income                                                                    |                                                      | $                                 | 65,294  |             |      | $ | 39,198  |            
|                                                                              |                                                      |                                   |         |             |      |  
|Net income per share:                                                         |                                                      |                                   |         |             |      |   |         |            
|                                                                              | Basic                                                |                                   | $       | 0.44        |      |   | $       | 0.34        | 
|                                                                              | Diluted                                              |                                   | $       | 0.42        |      |   | $       | 0.33        | 
|Average shares outstanding:                                                   |                                                      |                                   |         |             |      |   |         |            
|                                                                              | Basic                                                |                                   |         | 149,722,991 |      |   |         | 116,398,277 | 
|                                                                              | Diluted                                              |                                   |         | 154,450,572 |      |   |         | 117,472,106 | 
|                                                                             
|Dividends declared per share                                                  |                                                      | $                                 | 0.49    |             |      | $ |        |            



3



---



##### 



CapitalSource Inc.





Consolidated Statement of Shareholders Equity


|                                                   |                                                      |                              |       |            |         |   |           |          |   |             |               |         |   |             |         |        |         |   |        |               |       |   |         |   |   |   |           |         |       | 
|-------------------------------------------------- | ---------------------------------------------------- | ---------------------------- | ----- | ---------- | ------- | - | --------- | -------- | - | ----------- | ------------- | ------- | - | ----------- | ------- | ------ | ------- | - | ------ | ------------- | ----- | - | ------- | - | - | - | --------- | ------- | ----- | 
|                                                   |                                                      |                              |       |            |         |   |           |          |   | Accumulated |               |         |   |             |        
|                                                   |                                                      |                              |       |            |         |   |           |          |   | Other       |               |         |   |             |        
|                                                   |                                                      |                              |       | Additional |         |   |           |          |   |             | Comprehensive |         |   | Treasury    |         |        | Total   |  
|                                                   |                                                      | Common                       |       |            | Paid-In |   |           | Retained |   |             | Deferred      |         |   | Income      |         |        | Stock,  |   |        | Shareholders |      
|                                                   |                                                      | Stock                        |       |            | Capital |   |           | Earnings |   |             | Compensation  |         |   | (Loss), net |         |        | at cost |   |        | Equity        |      
|                                                   |                                                      |                              |       |            |         |   |           |          |   |             |               |         |   |             |         |        |         |   |        |               |      
|                                                   |                                                      | (Unaudited)                  |      
|                                                   |                                                      | ($ in thousands)             |      
|Total shareholders equity as of December 31, 2005 |                                                      | $                            | 1,404 |            |         | $ | 1,248,745 |          |   | $           | 46,783        |         |   | $           | (65,729 | )      |         | $ | (1,339 | )             |       | $ | (29,926 | ) |   | $ | 1,199,938 |        
|                                                   | Net income                                           |                              |       |           |         |   |           |         |   |             |               | 65,294  |   |             |         |       |         |   |        |              |       |   |         |  |   |   |           | 65,294  |      
|                                                   | Other comprehensive income:                          |                              |       |            |         |   |           |          |   |             |               |         |   |             |         |        |         |   |        |               |       |   |         |   |   |   |           |         |      
|                                                   |                                                      | Unrealized gains, net of tax |       |            |        |   |           |          |  |             |               |         |  |             |         |        |        |   |        |               | 1,882 |   |         |   |  |   |           |         | 1,882 | 
|                                                   |                                                      |                              |       |            |         |   |           |          |   |             |               |         |   |             |         |        |         |   |        |               |      
|                                                   | Total comprehensive income                           |                              |       |            |         |   |           |          |   |             |               |         |   |             |         |        |         |   |        |               |       |   |         |   |   |   |           | 67,176  |      
|                                                   | Cumulative effect of accounting change, net of taxes |                              |       |           |         |   |           | (370     | ) |             |               |        |   |             |         |       |         |   |        |              |       |   |         |  |   |   |           | (370    | )    
|                                                   | Dividend paid                                        |                              |       |           |         |   |           | 2,171    |   |             |               | (75,561 | ) |             |         |       |         |   |        |              |       |   |         |  |   |   |           | (73,390 | )    
|                                                   | Issuance of common stock, net                        |                              |       | 308        |         |   |           | 705,265  |   |             |               |        |   |             |         |       |         |   |        |              |       |   |         |  |   |   |           | 705,573 |      
|                                                   | Stock option expense                                 |                              |       |           |         |   |           | 785      |   |             |               |        |   |             |         |       |         |   |        |              |       |   |         |  |   |   |           | 785     |      
|                                                   | Exercise of options                                  |                              |       | 2          |         |   |           | 1,709    |   |             |               |        |   |             |         |       |         |   |        |              |       |   |         |  |   |   |           | 1,711   |      
|                                                   | Restricted stock activity                            |                              |       | 10         |         |   |           | (63,705  | ) |             |               | (48     | ) |             |         | 65,729 |         |   |        |              |       |   |         |  |   |   |           | 1,986   |      
|                                                   | Tax benefit on exercise of options                   |                              |       |           |         |   |           | 1,107    |   |             |               |        |   |             |         |       |         |   |        |              |       |   |         |  |   |   |           | 1,107   |      
|                                                   | Tax benefit on vesting of restricted stock grants    |                              |       |           |         |   |           | 570      |   |             |               |        |   |             |         |       |         |   |        |              |       |   |         |  |   |   |           | 570     |      
|                                                   |                                                      |                              |       |            |         |   |           |          |   |             |               |         |   |             |         |        |         |   |        |               |      
|Total shareholders equity as of March 31, 2006    |                                                      | $                            | 1,724 |            |         | $ | 1,896,277 |          |   | $           | 36,468        |         |   | $           |        |        |         | $ | 543    |               |       | $ | (29,926 | ) |   | $ | 1,905,086 |        
|                                                   |                                                      |                              |       |            |         |   |           |          |   |             |               |         |   |             |         |        |         |   |        |               |      



4



---



##### 



CapitalSource Inc.





Consolidated Statements of Cash Flows


|                                                                  |                                                                                                 |                                                                 |          |            |          |   |          |          |         |  
|----------------------------------------------------------------- | ----------------------------------------------------------------------------------------------- | --------------------------------------------------------------- | -------- | ---------- | -------- | - | -------- | -------- | ------- | -
|                                                                  |                                                                                                 | Three Months Ended                                              |         
|                                                                  |                                                                                                 | March 31,                                                       |         
|                                                                  |                                                                                                 |                                                                 |         
|                                                                  |                                                                                                 | 2006                                                            |          |            | 2005     |  
|                                                                  |                                                                                                 |                                                                 |          |            |          |  
|                                                                  |                                                                                                 | (Unaudited)                                                     |         
|                                                                  |                                                                                                 | ($ in thousands)                                                |         
|Operating activities:                                             |                                                                                                 |                                                                 |          |            |          |   |          |         
|                                                                  | Net income                                                                                      |                                                                 | $        | 65,294     |          |   | $        | 39,198   |        
|                                                                  | Adjustments to reconcile net income to net cash (used in)
    provided by operating activities: |                                                                 |          |            |          |   |          |          |        
|                                                                  |                                                                                                 | Stock option expense                                            |          |            | 785      |   |          |          | 132     |  
|                                                                  |                                                                                                 | Restricted stock expense                                        |          |            | 5,752    |   |          |          | 2,145   |  
|                                                                  |                                                                                                 | Restricted stock activity                                       |          |            |         |   |          |          | 6       |  
|                                                                  |                                                                                                 | Loss on extinguishment of debt                                  |          |            | 2,582    |   |          |          |        |  
|                                                                  |                                                                                                 | Non-cash prepayment fee                                         |          |            | (8,353   | ) |          |          |        |  
|                                                                  |                                                                                                 | Cumulative effect of accounting change, net of taxes            |          |            | (370     | ) |          |          |        |  
|                                                                  |                                                                                                 | Amortization of deferred loan fees                              |          |            | (20,158  | ) |          |          | (15,159 | )
|                                                                  |                                                                                                 | Interest on paid-in-kind loans                                  |          |            | (1,274   | ) |          |          | (4,250  | )
|                                                                  |                                                                                                 | Provision for loan losses                                       |          |            | 14,713   |   |          |          | 9,902   |  
|                                                                  |                                                                                                 | Amortization of deferred financing fees and discounts           |          |            | 7,767    |   |          |          | 4,790   |  
|                                                                  |                                                                                                 | Depreciation and amortization                                   |          |            | 2,349    |   |          |          | 644     |  
|                                                                  |                                                                                                 | Benefit for deferred income taxes                               |          |            | (1,651   | ) |          |          | (425    | )
|                                                                  |                                                                                                 | Non-cash loss (gain) on investments, net                        |          |            | 1,236    |   |          |          | (2,726  | )
|                                                                  |                                                                                                 | Gain on derivatives                                             |          |            | (526     | ) |          |          | (73     | )
|                                                                  |                                                                                                 | Unrealized loss on residential mortgage investment portfolio    |          |            | 17,366   |   |          |          |        |  
|                                                                  |                                                                                                 | Net increase in mortgage-backed securities pledged, trading     |          |            | (103,214 | ) |          |          |        |  
|                                                                  |                                                                                                 | Amortization of discount on mortgage-backed securities, trading |          |            | (1,468   | ) |          |          |        |  
|                                                                  |                                                                                                 | Increase in loans held-for-sale, net                            |          |            | (77,981  | ) |          |          |        |  
|                                                                  |                                                                                                 | (Increase) decrease in other assets                             |          |            | (36,238  | ) |          |          | 2,823   |  
|                                                                  |                                                                                                 | Increase (decrease) in other liabilities                        |          |            | 6,423    |   |          |          | (12,232 | )
|                                                                  |                                                                                                 |                                                                 |          |            |          |  
|                                                                  | Cash (used in) provided by operating activities                                                 |                                                                 |          | (126,966   | )        |   |          | 24,775   |        
|Investing activities:                                             |                                                                                                 |                                                                 |          |            |          |   |          |         
|                                                                  | Decrease in restricted cash                                                                     |                                                                 |          | 33,341     |          |   |          | 67,521   |        
|                                                                  | Acquisition of mortgage-related receivables, net                                                |                                                                 |          | (2,493,503 | )        |   |          |         |        
|                                                                  | Increase in receivables under repurchase agreements, net                                        |                                                                 |          | (36,889    | )        |   |          |         |        
|                                                                  | Increase in loans, net                                                                          |                                                                 |          | (368,525   | )        |   |          | (401,454 | )      
|                                                                  | Acquisition of real estate, net of cash acquired                                                |                                                                 |          | (7,180     | )        |   |          |         |        
|                                                                  | Disposal (acquisition) of investments, net                                                      |                                                                 |          | 26,564     |          |   |          | (3,691   | )      
|                                                                  | Acquisition of property and equipment, net                                                      |                                                                 |          | (775       | )        |   |          | (1,290   | )      
|                                                                  |                                                                                                 |                                                                 |          |            |          |  
|                                                                  | Cash used in investing activities                                                               |                                                                 |          | (2,846,967 | )        |   |          | (338,914 | )      
|Financing activities:                                             |                                                                                                 |                                                                 |          |            |          |   |          |         
|                                                                  | Payment of deferred financing fees                                                              |                                                                 |          | (10,553    | )        |   |          | (646     | )      
|                                                                  | Borrowings under repurchase agreements, net                                                     |                                                                 |          | 96,438     |          |   |          |         |        
|                                                                  | Borrowings on unsecured credit facilities, net                                                  |                                                                 |          | 250,000    |          |   |          |         |        
|                                                                  | Borrowings on secured credit facilities, net                                                    |                                                                 |          | 163,021    |          |   |          | 551,502  |        
|                                                                  | Borrowings of term debt                                                                         |                                                                 |          | 2,449,382  |          |   |          | 11,335   |        
|                                                                  | Repayments of term debt                                                                         |                                                                 |          | (398,215   | )        |   |          | (366,660 | )      
|                                                                  | Borrowings of subordinated debt                                                                 |                                                                 |          | 50,000     |          |   |          |         |        
|                                                                  | Proceeds from issuance of common stock, net of offering costs                                   |                                                                 |          | 395,837    |          |   |          |         |        
|                                                                  | Proceeds from exercise of options                                                               |                                                                 |          | 1,711      |          |   |          | 281      |        
|                                                                  | Tax benefits on share-based payments                                                            |                                                                 |          | 1,677      |          |   |          |         |        
|                                                                  | Payment of dividends                                                                            |                                                                 |          | (143,777   | )        |   |          |         |        
|                                                                  |                                                                                                 |                                                                 |          |            |          |  
|                                                                  | Cash provided by financing activities                                                           |                                                                 |          | 2,855,521  |          |   |          | 195,812  |        
|                                                                  |                                                                                                 |                                                                 |          |            |          |  
|Decrease in cash and cash equivalents                             |                                                                                                 |                                                                 | (118,412 | )          |          |   | (118,327 | )       
|Cash and cash equivalents as of beginning of period               |                                                                                                 |                                                                 | 323,896  |            |          |   | 206,077  |         
|                                                                  |                                                                                                 |                                                                 |          |            |          |  
|Cash and cash equivalents as of end of period                     |                                                                                                 | $                                                               | 205,484  |            |          | $ | 87,750   |         
|                                                                  |                                                                                                 |                                                                 |          |            |          |  
|Noncash transactions from investing and financing
    activities: |                                                                                                 |                                                                 |          |            |          |   |          |         
|                                                                  | Issuance of common stock                                                                        |                                                                 | $        | 309,736    |          |   | $        |         |        



5



---



##### 



NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS




|        |             
|------- | ------------
|Note 1. | Organization





| |   |                                                                                                                                                                                                                                                                                                                                      
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | First Mortgage Loans  Commercial loans that are
    secured by first mortgages on the property of the client;                                                                                                                                                                                                                       
|
| |  | Senior Secured Asset-Based loans  Commercial 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  Commercial 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;
|
| |  | Term B, Second Lien, and Mezzanine Loans  Commercial
    loans, including subordinated mortgage loans, that come after a
    clients senior loans in right of payment or upon
    liquidation;                                                                                                                                     
|
| |  | Direct Real Estate Investments  Commercial
    investments in land, buildings and other assets, including those
    that are purchased from and triple-net leased back to the
    current operators through sale-leaseback transactions;                                                                                            
|
| |  | Private Equity Co-Investments  opportunistic equity
    investments, typically in conjunction with commercial lending
    relationships and on the same terms as other equity
    investors; and                                                                                                                                    
|
| |  | Residential Mortgage Investments  investments in
    residential mortgage loans and residential mortgage-backed
    securities that constitute qualifying REIT assets.                                                                                                                                                              



|                              |  |                                                                                                                                                                               
|----------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Entity                        |  | Purpose                                                                                                                                                                       
|                              |  |                                                                                                                                                                               
|CapitalSource TRS Inc.        |  | Subsidiary that owns interest in CapitalSource Finance LLC that
    made a taxable REIT subsidiary election effective
    January 1, 2006.                                    
|CapitalSource Finance LLC     |  | Primary operating subsidiary of CapitalSource TRS Inc. that
    conducts commercial lending and investment business of
    CapitalSource and manages our REIT operations.     
|CSE Mortgage LLC              |  | Subsidiary that holds qualifying REIT assets of CapitalSource.                                                                                                                
|CapitalSource Finance II Inc. |  | Subsidiary of CapitalSource Finance LLC that holds certain
    limited liability companies established in accordance with
    credit facilities and term debt securitizations.
|CS Funding II Depositor LLC   |  | Single-purpose, bankruptcy-remote subsidiary of CapitalSource
    Finance II Inc. established in accordance with a secured
    credit facility to finance commercial loans.   
|CS Funding Depositor VI LLC   |  | Single-purpose, bankruptcy-remote subsidiary of CapitalSource
    Finance II Inc. established in accordance with a secured
    credit facility to finance commercial loans.   

6



---



##### 



NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|        |                                           
|------- | ------------------------------------------
|Note 2. | Summary of Significant Accounting Policies



| |                                                                              
| | -----------------------------------------------------------------------------
| | Unaudited Interim Consolidated Financial Statements Basis
    of Presentation

10-Q S-X. 10-K






Summary of Significant Accounting
Policies 10-K. Critical
Accounting Policies Managements Discussion
and Analysis of Financial Condition and Results of Operations 10-Q.




| |                  
| | -----------------
| | Segment Reporting

Disclosures about Segments of an Enterprise and
Related Information




| |                                                                         
| | ------------------------------------------------------------------------
| | Mortgage-Related Receivables and Related Owner
    Trust Securitizations

Consolidation of
Variable Interest Entities  An Interpretation of ARB
No. 51


Accounting for


7



---



##### 



NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities


Accounting for Nonrefundable Fees and
Costs Associated with Originating or Acquiring Loans and Initial
Direct Costs of Leases




| |                                                             
| | ------------------------------------------------------------
| | Allowance for Loan Losses  Mortgage-Related
    Receivables

Accounting for
Contingencies loan-to




|        |                                    
|------- | -----------------------------------
|Note 3. | Recently Issued Accounting Guidance

Accounting for Servicing of Financial
Assets, Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities






|        |                             
|------- | ----------------------------
|Note 4. | Mortgage-Related Receivables

5-year


8



---



##### 



NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




, Summary of
Significant Accounting Policies Borrowings.






|        |                                       
|------- | --------------------------------------
|Note 5. | Residential Mortgage-Backed Securities

3-year, 5-year 7-year


Critical Accounting
Policies Managements Discussion and Analysis
of Financial Condition and Results of Operations Accounting for Derivative Instruments and Hedging Activities ,




9



---



##### 



NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






|        |                                    
|------- | -----------------------------------
|Note 6. | Commercial Loans and Credit Quality





| |               
| | --------------
| | Credit Quality



|                                               |  |                  |          |   |              |   |          |  
|---------------------------------------------- |  | ---------------- | -------- | - | ------------ | - | -------- | -
|                                               |  | March 31,        |          |   | December 31, |  
|Commercial Loan Asset Classification           |  | 2006             |          |   | 2005         |  
|                                               |  |                  |          |   |              |  
|                                               |  | ($ in thousands) |         
|Loans 60 or more days contractually delinquent |  | $                | 42,295   |   |              | $ | 41,785   |  
|Non-accrual loans(1)                           |  |                  | 144,018  |   |              |   | 137,446  |  
|Impaired loans(2)                              |  |                  | 214,565  |   |              |   | 199,257  |  
|Less: loans in multiple categories             |  |                  | (181,731 | ) |              |   | (175,070 | )
|                                               |  |                  |          |   |              |  
|Total                                          |  | $                | 219,147  |   |              | $ | 203,418  |  
|                                               |  |                  |          |   |              |  
|Total as a percentage of total loans           |  |                  | 3.41%    |   |              |   | 3.40%    |  
|                                               |  |                  |          |   |              |  






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes commercial loans with an aggregate principal balance of
    $33.6 million and $37.6 million as of March 31,
    2006 and December 31, 2005, respectively, which were also
    classified as loans 60 or more days contractually delinquent.                                                                                                                                                                                                                                                                                                                                                                                               
|   
|(2) | Includes commercial loans with an aggregate principal balance of
    $37.7 million and $37.6 million as of March 31,
    2006 and December 31, 2005, respectively, which were also
    classified as loans 60 or more days contractually delinquent,
    and commercial loans with an aggregate principal balance of
    $144.0 million and $137.4 million as of March 31,
    2006 and December 31, 2005, respectively, which were also
    classified as loans on non-accrual status. The carrying value of
    impaired commercial loans was $209.6 million and
    $194.6 million as of March 31, 2006 and
    December 31, 2005, respectively.

Accounting by Creditors
for Impairment of a Loan


10



---



##### 



NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






Accounting for Debtors and Creditors for Troubled Debt
Restructurings.




|                                  |  |                    |         |   |      |   |        |  
|--------------------------------- |  | ------------------ | ------- | - | ---- | - | ------ | -
|                                  |  | Three Months Ended |        
|                                  |  | March 31,          |        
|                                  |  |                    |        
|                                  |  | 2006               |         |   | 2005 |  
|                                  |  |                    |         |   |      |  
|                                  |  | ($ in thousands)   |        
|Balance as of beginning of period |  | $                  | 87,370  |   |      | $ | 35,208 |  
|Provision for loan losses         |  |                    | 14,412  |   |      |   | 9,902  |  
|Charge offs, net                  |  |                    | (276    | ) |      |   | (5     | )
|                                  |  |                    |         |   |      |  
|Balance as of end of period       |  | $                  | 101,506 |   |      | $ | 45,105 |  
|                                  |  |                    |         |   |      |  



|        |            
|------- | -----------
|Note 7. | Investments



|                                                  |                                |                  |         |        |              |   |         |        | 
|------------------------------------------------- | ------------------------------ | ---------------- | ------- | ------ | ------------ | - | ------- | ------ | 
|                                                  |                                | March 31,        |         |        | December 31, |  
|                                                  |                                | 2006             |         |        | 2005         |  
|                                                  |                                |                  |         |        |              |  
|                                                  |                                | ($ in thousands) |        
|Investments carried at cost                       |                                | $                | 53,643  |        |              | $ | 51,907  |       
|Investments carried at fair value:                |                                |                  |         |        |              |   |         |       
|                                                  | Investments available-for-sale |                  |         | 15,513 |              |   |         | 50,461 | 
|                                                  | Warrants                       |                  |         | 10,178 |              |   |         | 10,259 | 
|Investments accounted for under the equity method |                                |                  | 22,467  |        |              |   | 13,766  |       
|                                                  |                                |                  |         |        |              |  
|Total                                             |                                | $                | 101,801 |        |              | $ | 126,393 |       
|                                                  |                                |                  |         |        |              |  

11



---



##### 



NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)








|        |            
|------- | -----------
|Note 8. | Acquisition



Determining Whether a Nonmonetary Transaction Involves
Receipt of Productive Assets or of a Business




S-X.




|        |           
|------- | ----------
|Note 9. | Borrowings

Borrowings 10-K,


12



---



##### 



NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






| |                      
| | ---------------------
| | Repurchase Agreements



Critical
Accounting Policies Managements Discussion
and Analysis of Financial Condition and Results of
Operations. Residential
Mortgage-Backed Securities






| |                  
| | -----------------
| | Credit Facilities







13



---



##### 



NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)








| |          
| | ---------
| | Term Debt

Mortgage-Related Receivables. Summary of Significant Accounting Policies


I-A1 II-A1 III-A1






| |                  
| | -----------------
| | Subordinated Debt



14



---



##### 



NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


90-day




The Equity Method of Accounting
for Investments in Common Stock.




|         |                      
|-------- | ---------------------
|Note 10. | Guarantor Information







15



---



##### 



NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Consolidating Balance Sheet


March 31, 2006


|                                                                   |                                                                          |                    |           |                           |              |   |           |              |   |               |              |           |   |              |              |           |                    |   |            |            |   |   |            |            |  
|------------------------------------------------------------------ | ------------------------------------------------------------------------ | ------------------ | --------- | ------------------------- | ------------ | - | --------- | ------------ | - | ------------- | ------------ | --------- | - | ------------ | ------------ | --------- | ------------------ | - | ---------- | ---------- | - | - | ---------- | ---------- | -
|                                                                   |                                                                          |                    |           | CapitalSource Finance LLC |              |   |           |              |   |               |             
|                                                                   |                                                                          |                    |           |                           |              |   |           |              |   |               |             
|                                                                   |                                                                          |                    |           | Combined                  |              |   | Combined  |              |   | Other         |              |           |   |              |             
|                                                                   |                                                                          |                    |           | Non-Guarantor             |              |   | Guarantor |              |   | Non-Guarantor |              |           |   |              | Consolidated |          
|                                                                   |                                                                          | CapitalSource Inc. |           |                           | Subsidiaries |   |           | Subsidiaries |   |               | Subsidiaries |           |   | Eliminations |              |           | CapitalSource Inc. |  
|                                                                   |                                                                          |                    |           |                           |              |   |           |              |   |               |              |           |   |              |              |           |                    |  
|                                                                   |                                                                          | (Unaudited)        |          
|                                                                   |                                                                          | ($ in thousands)   |          
|ASSETS                                                            
|Cash and cash equivalents                                          |                                                                          | $                  | 62        |                           |              | $ | 148,158   |              |   | $             | (435         | )         |   | $            | 57,699       |           |                    | $ |           |            |   | $ | 205,484    |           
|Restricted cash                                                    |                                                                          |                    |          |                           |              |   | 77,793    |              |   |               | 131,087      |           |   |              | 42,564       |           |                    |   |           |            |   |   | 251,444    |           
|Mortgage-related receivables, net                                  |                                                                          |                    |          |                           |              |   |          |              |   |               |             |           |   |              | 2,472,860    |           |                    |   |           |            |   |   | 2,472,860  |           
|Mortgage-backed securities pledged, trading                        |                                                                          |                    |          |                           |              |   |          |              |   |               |             |           |   |              | 3,221,981    |           |                    |   |           |            |   |   | 3,221,981  |           
|Receivables under repurchase agreements                            |                                                                          |                    |          |                           |              |   | 70,132    |              |   |               |             |           |   |              |             |           |                    |   |           |            |   |   | 70,132     |           
|Loans held-for-sale                                                |                                                                          |                    |          |                           |              |   | 15,396    |              |   |               | 122,174      |           |   |              |             |           |                    |   |           |            |   |   | 137,570    |           
|Loans:                                                             |                                                                          |                    |           |                           |              |   |           |              |   |               |              |           |   |              |              |           |                    |   |            |            |   |   |            |           
|                                                                   | Loans                                                                    |                    |           |                          |              |   |           | 3,637,075    |   |               |              | 642,494   |   |              |              | 1,954,032 |                    |   |            | (8,366     | ) |   |            | 6,225,235  |  
|                                                                   | Less deferred loan fees and discounts                                    |                    |           |                          |              |   |           | (49,762      | ) |               |              | (31,912   | ) |              |              | (45,827   | )                  |   |            |           |   |   |            | (127,501   | )
|                                                                   | Less allowance for loan losses                                           |                    |           |                          |              |   |           |             |   |               |              | (88,048   | ) |              |              | (13,458   | )                  |   |            |           |   |   |            | (101,506   | )
|                                                                   |                                                                          |                    |           |                           |              |   |           |              |   |               |              |           |   |              |              |           |                    |  
|                                                                   | Loans, net                                                               |                    |           |                          |              |   |           | 3,587,313    |   |               |              | 522,534   |   |              |              | 1,894,747 |                    |   |            | (8,366     | ) |   |            | 5,996,228  |  
|Property and equipment, net                                        |                                                                          |                    |          |                           |              |   | 29        |              |   |               | 11,768       |           |   |              | 200,803      |           |                    |   |           |            |   |   | 212,600    |           
|Investment in subsidiaries                                         |                                                                          |                    | 2,788,922 |                           |              |   |          |              |   |               | 565,523      |           |   |              | 1,079,792    |           |                    |   | (4,434,237 | )          |   |   |           |           
|Intercompany (due to)/due from                                     |                                                                          |                    | (39,751   | )                         |              |   |          |              |   |               | (9,350       | )         |   |              | 49,101       |           |                    |   |           |            |   |   |           |           
|Intercompany note receivable                                       |                                                                          |                    |          |                           |              |   | 6,742     |              |   |               | 58,413       |           |   |              |             |           |                    |   | (65,155    | )          |   |   |           |           
|Investments                                                        |                                                                          |                    | 88        |                           |              |   | 26,956    |              |   |               | 74,757       |           |   |              |             |           |                    |   |           |            |   |   | 101,801    |           
|Deferred financing fees, net                                       |                                                                          |                    | 12,932    |                           |              |   | 17,029    |              |   |               | 9,316        |           |   |              | 5,515        |           |                    |   |           |            |   |   | 44,792     |           
|Other assets                                                       |                                                                          |                    | 74        |                           |              |   | 598       |              |   |               | 21,345       |           |   |              | 72,605       |           |                    |   | (4,378     | )          |   |   | 90,244     |           
|                                                                   |                                                                          |                    |           |                           |              |   |           |              |   |               |              |           |   |              |              |           |                    |  
|Total assets                                                       |                                                                          | $                  | 2,762,327 |                           |              | $ | 3,950,146 |              |   | $             | 1,507,132    |           |   | $            | 9,097,667    |           |                    | $ | (4,512,136 | )          |   | $ | 12,805,136 |           
|                                                                   |                                                                          |                    |           |                           |              |   |           |              |   |               |              |           |   |              |              |           |                    |  
|                                                                  
|LIABILITIES, NONCONTROLLING INTERESTS AND SHAREHOLDERS
    EQUITY
|                                                                  
|Liabilities:                                                      
|                                                                   | Repurchase agreements                                                    |                    | $         |                          |              |   | $         | 78,770       |   |               | $            |          |   |              | $            | 3,122,255 |                    |   | $          |           |   |   | $          | 3,201,025  |  
|                                                                   | Unsecured credit facilities                                              |                    |           | 250,000                   |              |   |           |             |   |               |              |          |   |              |              |          |                    |   |            |           |   |   |            | 250,000    |  
|                                                                   | Secured credit facilities                                                |                    |           |                          |              |   |           | 1,887,050    |   |               |              | 107,423   |   |              |              | 619,000   |                    |   |            |           |   |   |            | 2,613,473  |  
|                                                                   | Term debt                                                                |                    |           |                          |              |   |           | 1,376,289    |   |               |              | 6,743     |   |              |              | 2,478,661 |                    |   |            |           |   |   |            | 3,861,693  |  
|                                                                   | Convertible debt                                                         |                    |           | 555,000                   |              |   |           |             |   |               |              |          |   |              |              |          |                    |   |            |           |   |   |            | 555,000    |  
|                                                                   | Subordinated debt                                                        |                    |           |                          |              |   |           |             |   |               |              | 283,504   |   |              |              |          |                    |   |            |           |   |   |            | 283,504    |  
|                                                                   | Other liabilities                                                        |                    |           | 7,274                     |              |   |           | 22,326       |   |               |              | 29,670    |   |              |              | 32,488    |                    |   |            | (12,744    | ) |   |            | 79,014     |  
|                                                                   | Intercompany note payable                                                |                    |           | 44,967                    |              |   |           | 20,188       |   |               |              |          |   |              |              |          |                    |   |            | (65,155    | ) |   |            |           |  
|                                                                   |                                                                          |                    |           |                           |              |   |           |              |   |               |              |           |   |              |              |           |                    |  
|                                                                   | Total liabilities                                                        |                    |           | 857,241                   |              |   |           | 3,384,623    |   |               |              | 427,340   |   |              |              | 6,252,404 |                    |   |            | (77,899    | ) |   |            | 10,843,709 |  
|Noncontrolling interests                                           |                                                                          |                    |          |                           |              |   |          |              |   |               |             |           |   |              | 56,341       |           |                    |   |           |            |   |   | 56,341     |           
|Shareholders equity:                                              |                                                                          |                    |           |                           |              |   |           |              |   |               |              |           |   |              |              |           |                    |   |            |            |   |   |            |           
|                                                                   | Preferred stock                                                          |                    |           |                          |              |   |           |             |   |               |              |          |   |              |              |          |                    |   |            |           |   |   |            |           |  
|                                                                   | Common stock                                                             |                    |           | 1,724                     |              |   |           |             |   |               |              |          |   |              |              |          |                    |   |            |           |   |   |            | 1,724      |  
|                                                                   | Additional paid-in capital                                               |                    |           | 1,896,277                 |              |   |           | 144,978      |   |               |              | 346,569   |   |              |              | 2,720,151 |                    |   |            | (3,211,698 | ) |   |            | 1,896,277  |  
|                                                                   | Retained earnings                                                        |                    |           | 36,468                    |              |   |           | 420,971      |   |               |              | 732,378   |   |              |              | 67,926    |                    |   |            | (1,221,275 | ) |   |            | 36,468     |  
|                                                                   | Accumulated other comprehensive income (loss), net                       |                    |           | 543                       |              |   |           | (426         | ) |               |              | 845       |   |              |              | 845       |                    |   |            | (1,264     | ) |   |            | 543        |  
|                                                                   | Treasury stock, at cost                                                  |                    |           | (29,926                   | )            |   |           |             |   |               |              |          |   |              |              |          |                    |   |            |           |   |   |            | (29,926    | )
|                                                                   |                                                                          |                    |           |                           |              |   |           |              |   |               |              |           |   |              |              |           |                    |  
|                                                                   | Total shareholders equity                                               |                    |           | 1,905,086                 |              |   |           | 565,523      |   |               |              | 1,079,792 |   |              |              | 2,788,922 |                    |   |            | (4,434,237 | ) |   |            | 1,905,086  |  
|                                                                   |                                                                          |                    |           |                           |              |   |           |              |   |               |              |           |   |              |              |           |                    |  
|                                                                   | Total liabilities, noncontrolling interests and
    shareholders equity |                    | $         | 2,762,327                 |              |   | $         | 3,950,146    |   |               | $            | 1,507,132 |   |              | $            | 9,097,667 |                    |   | $          | (4,512,136 | ) |   | $          | 12,805,136 |  
|                                                                   |                                                                          |                    |           |                           |              |   |           |              |   |               |              |           |   |              |              |           |                    |  

16



---



##### 



NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Consolidating Balance Sheet


December 31, 2005


|                                            |                                       |                    |           |                           |              |   |           |              |   |               |              |          |   |              |              |           |                    |   |            |        |   |   |           |           |  
|------------------------------------------- | ------------------------------------- | ------------------ | --------- | ------------------------- | ------------ | - | --------- | ------------ | - | ------------- | ------------ | -------- | - | ------------ | ------------ | --------- | ------------------ | - | ---------- | ------ | - | - | --------- | --------- | -
|                                            |                                       |                    |           | CapitalSource Finance LLC |              |   |           |              |   |               |             
|                                            |                                       |                    |           |                           |              |   |           |              |   |               |             
|                                            |                                       |                    |           | Combined                  |              |   | Combined  |              |   | Other         |              |          |   |              |             
|                                            |                                       |                    |           | Non-Guarantor             |              |   | Guarantor |              |   | Non-Guarantor |              |          |   |              | Consolidated |          
|                                            |                                       | CapitalSource Inc. |           |                           | Subsidiaries |   |           | Subsidiaries |   |               | Subsidiaries |          |   | Eliminations |              |           | CapitalSource Inc. |  
|                                            |                                       |                    |           |                           |              |   |           |              |   |               |              |          |   |              |              |           |                    |  
|                                            |                                       | ($ in thousands)   |          
|ASSETS                                     
|Cash and cash equivalents                   |                                       | $                  | 2,038     |                           |              | $ | 145,065   |              |   | $             | 156,571      |          |   | $            | 20,222       |           |                    | $ |           |        |   | $ | 323,896   |          
|Restricted cash                             |                                       |                    |          |                           |              |   | 125,832   |              |   |               | 153,299      |          |   |              | 5,654        |           |                    |   |           |        |   |   | 284,785   |          
|Mortgage-related receivables, net           |                                       |                    |          |                           |              |   |          |              |   |               |             |          |   |              | 39,438       |           |                    |   |           |        |   |   | 39,438    |          
|Mortgage-backed securities pledged, trading |                                       |                    |          |                           |              |   |          |              |   |               |             |          |   |              | 323,370      |           |                    |   |           |        |   |   | 323,370   |          
|Receivables under repurchase agreements     |                                       |                    |          |                           |              |   | 33,243    |              |   |               |             |          |   |              |             |           |                    |   |           |        |   |   | 33,243    |          
|Loans held-for-sale                         |                                       |                    |          |                           |              |   | 17,378    |              |   |               | 42,211       |          |   |              |             |           |                    |   |           |        |   |   | 59,589    |          
|Loans:                                      |                                       |                    |           |                           |              |   |           |              |   |               |              |          |   |              |              |           |                    |   |            |        |   |   |           |          
|                                            | Loans                                 |                    |           |                          |              |   |           | 4,087,078    |   |               |              | 374,833  |   |              |              | 1,440,828 |                    |   |            | (7,828 | ) |   |           | 5,894,911 |  
|                                            | Less deferred loan fees and discounts |                    |           |                          |              |   |           | (971         | ) |               |              | (100,123 | ) |              |              | (19,313   | )                  |   |            |       |   |   |           | (120,407  | )
|                                            | Less allowance for loan losses        |                    |           |                          |              |   |           |             |   |               |              | (78,003  | ) |              |              | (9,367    | )                  |   |            |       |   |   |           | (87,370   | )
|                                            |                                       |                    |           |                           |              |   |           |              |   |               |              |          |   |              |              |           |                    |  
|                                            | Loans, net                            |                    |           |                          |              |   |           | 4,086,107    |   |               |              | 196,707  |   |              |              | 1,412,148 |                    |   |            | (7,828 | ) |   |           | 5,687,134 |  
|Property and equipment, net                 |                                       |                    |          |                           |              |   |          |              |   |               | 11,502       |          |   |              |             |           |                    |   |           |        |   |   | 11,502    |          
|Investment in subsidiaries                  |                                       |                    | 2,063,092 |                           |              |   |          |              |   |               | 655,627      |          |   |              |             |           |                    |   | (2,718,719 | )      |   |   |          |          
|Intercompany note receivable                |                                       |                    |          |                           |              |   | 7,803     |              |   |               | 35,288       |          |   |              |             |           |                    |   | (43,091    | )      |   |   |          |          
|Investments                                 |                                       |                    | 33,494    |                           |              |   | 21,210    |              |   |               | 71,689       |          |   |              |             |           |                    |   |           |        |   |   | 126,393   |          
|Deferred financing fees, net                |                                       |                    | 11,114    |                           |              |   | 22,868    |              |   |               | 7,944        |          |   |              | 80           |           |                    |   |           |        |   |   | 42,006    |          
|Other assets                                |                                       |                    | 20,110    |                           |              |   | 1,018     |              |   |               | 19,839       |          |   |              | 14,745       |           |                    |   |           |        |   |   | 55,712    |          
|                                            |                                       |                    |           |                           |              |   |           |              |   |               |              |          |   |              |              |           |                    |  
|Total assets                                |                                       | $                  | 2,129,848 |                           |              | $ | 4,460,524 |              |   | $             | 1,350,677    |          |   | $            | 1,815,657    |           |                    | $ | (2,769,638 | )      |   | $ | 6,987,068 |          
|                                            |                                       |                    |           |                           |              |   |           |              |   |               |              |          |   |              |              |           |                    |  
|                                           
|LIABILITIES AND SHAREHOLDERS EQUITY       
|                                           
|Liabilities:                                |                                       |                    |           |                           |              |   |           |              |   |               |              |          |   |              |              |           |                    |   |            |        |   |   |           |          
|Repurchase agreements                       |                                       | $                  |          |                           |              | $ | 47,157    |              |   | $             |             |          |   | $            | 311,266      |           |                    | $ |           |        |   | $ | 358,423   |          
|Secured credit facilities                   |                                       |                    |          |                           |              |   | 1,938,273 |              |   |               | 42,179       |          |   |              | 470,000      |           |                    |   |           |        |   |   | 2,450,452 |          
|Term debt                                   |                                       |                    |          |                           |              |   | 1,774,475 |              |   |               | 5,273        |          |   |              |             |           |                    |   |           |        |   |   | 1,779,748 |          
|Convertible debt                            |                                       |                    | 555,000   |                           |              |   |          |              |   |               |             |          |   |              |             |           |                    |   |           |        |   |   | 555,000   |          
|Subordinated debt                           |                                       |                    |          |                           |              |   |          |              |   |               | 231,959      |          |   |              |             |           |                    |   |           |        |   |   | 231,959   |          
|Stock dividend payable                      |                                       |                    | 280,720   |                           |              |   |          |              |   |               |             |          |   |              |             |           |                    |   |           |        |   |   | 280,720   |          
|Cash dividend payable                       |                                       |                    | 70,202    |                           |              |   |          |              |   |               |             |          |   |              |             |           |                    |   |           |        |   |   | 70,202    |          
|Other liabilities                           |                                       |                    | 3,661     |                           |              |   | 22,228    |              |   |               | 41,112       |          |   |              | 1,453        |           |                    |   | (7,828     | )      |   |   | 60,626    |          
|Intercompany note payable                   |                                       |                    | 20,327    |                           |              |   | 22,764    |              |   |               |             |          |   |              |             |           |                    |   | (43,091    | )      |   |   |          |          
|                                            |                                       |                    |           |                           |              |   |           |              |   |               |              |          |   |              |              |           |                    |  
|Total liabilities                           |                                       |                    | 929,910   |                           |              |   | 3,804,897 |              |   |               | 320,523      |          |   |              | 782,719      |           |                    |   | (50,919    | )      |   |   | 5,787,130 |          
|Shareholders equity:                       |                                       |                    |           |                           |              |   |           |              |   |               |              |          |   |              |              |           |                    |   |            |        |   |   |           |          
|Preferred stock                             |                                       |                    |          |                           |              |   |          |              |   |               |             |          |   |              |             |           |                    |   |           |        |   |   |          |          
|Common stock                                |                                       |                    | 1,404     |                           |              |   |          |              |   |               |             |          |   |              |             |           |                    |   |           |        |   |   | 1,404     |          
|Additional paid-in capital                  |                                       |                    | 1,248,745 |                           |              |   | 278,656   |              |   |               | 362,137      |          |   |              | 1,025,690    |           |                    |   | (1,666,483 | )      |   |   | 1,248,745 |          
|Retained earnings                           |                                       |                    | 46,783    |                           |              |   | 377,492   |              |   |               | 668,762      |          |   |              | 7,248        |           |                    |   | (1,053,502 | )      |   |   | 46,783    |          
|Deferred compensation                       |                                       |                    | (65,729   | )                         |              |   |          |              |   |               |             |          |   |              |             |           |                    |   |           |        |   |   | (65,729   | )        
|Accumulated other comprehensive loss, net   |                                       |                    | (1,339    | )                         |              |   | (521      | )            |   |               | (745         | )        |   |              |             |           |                    |   | 1,266      |        |   |   | (1,339    | )        
|Treasury stock, at cost                     |                                       |                    | (29,926   | )                         |              |   |          |              |   |               |             |          |   |              |             |           |                    |   |           |        |   |   | (29,926   | )        
|                                            |                                       |                    |           |                           |              |   |           |              |   |               |              |          |   |              |              |           |                    |  
|Total shareholders equity                  |                                       |                    | 1,199,938 |                           |              |   | 655,627   |              |   |               | 1,030,154    |          |   |              | 1,032,938    |           |                    |   | (2,718,719 | )      |   |   | 1,199,938 |          
|                                            |                                       |                    |           |                           |              |   |           |              |   |               |              |          |   |              |              |           |                    |  
|Total liabilities and shareholders equity  |                                       | $                  | 2,129,848 |                           |              | $ | 4,460,524 |              |   | $             | 1,350,677    |          |   | $            | 1,815,657    |           |                    | $ | (2,769,638 | )      |   | $ | 6,987,068 |          
|                                            |                                       |                    |           |                           |              |   |           |              |   |               |              |          |   |              |              |           |                    |  

17



---



##### 



NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Consolidating Statement of Income


Three Months Ended March 31, 2006


|                                                                              |                                                      |                    |        |                           |              |   |           |              |   |               |              |        |   |              |              |        |                    |   |          |          |   |   |         |         |  
|----------------------------------------------------------------------------- | ---------------------------------------------------- | ------------------ | ------ | ------------------------- | ------------ | - | --------- | ------------ | - | ------------- | ------------ | ------ | - | ------------ | ------------ | ------ | ------------------ | - | -------- | -------- | - | - | ------- | ------- | -
|                                                                              |                                                      |                    |        | CapitalSource Finance LLC |              |   |           |              |   |               |             
|                                                                              |                                                      |                    |        |                           |              |   |           |              |   |               |             
|                                                                              |                                                      |                    |        | Combined                  |              |   | Combined  |              |   | Other         |              |        |   |              |             
|                                                                              |                                                      |                    |        | Non-Guarantor             |              |   | Guarantor |              |   | Non-Guarantor |              |        |   |              | Consolidated |       
|                                                                              |                                                      | CapitalSource Inc. |        |                           | Subsidiaries |   |           | Subsidiaries |   |               | Subsidiaries |        |   | Eliminations |              |        | CapitalSource Inc. |  
|                                                                              |                                                      |                    |        |                           |              |   |           |              |   |               |              |        |   |              |              |        |                    |  
|                                                                              |                                                      | (Unaudited)        |       
|                                                                              |                                                      | ($ in thousands)   |       
|Net interest and fee income:                                                  |                                                      |                    |        |                           |              |   |           |              |   |               |              |        |   |              |              |        |                    |   |          |          |   |   |         |        
|                                                                              | Interest income                                      |                    | $      | 556                       |              |   | $         | 115,188      |   |               | $            | 16,319 |   |              | $            | 64,816 |                    |   | $        | (1,381   | ) |   | $       | 195,498 |  
|                                                                              | Fee income                                           |                    |        |                          |              |   |           | 28,940       |   |               |              | (1,511 | ) |              |              | 14,113 |                    |   |          |         |   |   |         | 41,542  |  
|                                                                              |                                                      |                    |        |                           |              |   |           |              |   |               |              |        |   |              |              |        |                    |  
|                                                                              | Total interest and fee income                        |                    |        | 556                       |              |   |           | 144,128      |   |               |              | 14,808 |   |              |              | 78,929 |                    |   |          | (1,381   | ) |   |         | 237,040 |  
|                                                                              | Operating lease income                               |                    |        |                          |              |   |           |             |   |               |              |       |   |              |              | 4,625  |                    |   |          |         |   |   |         | 4,625   |  
|                                                                              |                                                      |                    |        |                           |              |   |           |              |   |               |              |        |   |              |              |        |                    |  
|                                                                              | Total investment income                              |                    |        | 556                       |              |   |           | 144,128      |   |               |              | 14,808 |   |              |              | 83,554 |                    |   |          | (1,381   | ) |   |         | 241,665 |  
|                                                                              | Interest expense                                     |                    |        | 5,313                     |              |   |           | 53,415       |   |               |              | 5,527  |   |              |              | 34,908 |                    |   |          | (1,381   | ) |   |         | 97,782  |  
|                                                                              |                                                      |                    |        |                           |              |   |           |              |   |               |              |        |   |              |              |        |                    |  
|Net investment (loss) income                                                  |                                                      |                    | (4,757 | )                         |              |   | 90,713    |              |   |               | 9,281        |        |   |              | 48,646       |        |                    |   |         |          |   |   | 143,883 |        
|Provision for loan losses                                                     |                                                      |                    |       |                           |              |   |          |              |   |               | 10,321       |        |   |              | 4,392        |        |                    |   |         |          |   |   | 14,713  |        
|                                                                              |                                                      |                    |        |                           |              |   |           |              |   |               |              |        |   |              |              |        |                    |  
|Net investment (loss) income after provision for loan losses                  |                                                      |                    | (4,757 | )                         |              |   | 90,713    |              |   |               | (1,040       | )      |   |              | 44,254       |        |                    |   |         |          |   |   | 129,170 |        
|                                                                             
|Operating expenses:                                                           |                                                      |                    |        |                           |              |   |           |              |   |               |              |        |   |              |              |        |                    |   |          |          |   |   |         |        
|                                                                              | Compensation and benefits                            |                    |        |                          |              |   |           | 931          |   |               |              | 32,389 |   |              |              |       |                    |   |          |         |   |   |         | 33,320  |  
|                                                                              | Other administrative expenses                        |                    |        | 3,597                     |              |   |           | 548          |   |               |              | 13,614 |   |              |              | 3,072  |                    |   |          | (3,532   | ) |   |         | 17,299  |  
|                                                                              |                                                      |                    |        |                           |              |   |           |              |   |               |              |        |   |              |              |        |                    |  
|Total operating expenses                                                      |                                                      |                    | 3,597  |                           |              |   | 1,479     |              |   |               | 46,003       |        |   |              | 3,072        |        |                    |   | (3,532   | )        |   |   | 50,619  |        
|                                                                             
|Other income (expense):                                                       |                                                      |                    |        |                           |              |   |           |              |   |               |              |        |   |              |              |        |                    |   |          |          |   |   |         |        
|                                                                              | Diligence deposits forfeited                         |                    |        |                          |              |   |           |             |   |               |              | 2,267  |   |              |              |       |                    |   |          |         |   |   |         | 2,267   |  
|                                                                              | Loss on investments, net                             |                    |        |                          |              |   |           |             |   |               |              | (251   | ) |              |              |       |                    |   |          |         |   |   |         | (251    | )
|                                                                              | Gain on derivatives                                  |                    |        |                          |              |   |           | 411          |   |               |              | 115    |   |              |              |       |                    |   |          |         |   |   |         | 526     |  
|                                                                              | Loss on residential mortgage investment portfolio    |                    |        |                          |              |   |           |             |   |               |              |       |   |              |              | (6,106 | )                  |   |          |         |   |   |         | (6,106  | )
|                                                                              | Other income, net of expenses                        |                    |        |                          |              |   |           | 229          |   |               |              | 9,793  |   |              |              | (2,582 | )                  |   |          | (3,532   | ) |   |         | 3,908   |  
|                                                                              | Earnings in subsidiaries                             |                    |        | 73,648                    |              |   |           |             |   |               |              | 82,246 |   |              |              | 55,125 |                    |   |          | (211,019 | ) |   |         |        |  
|                                                                              | Intercompany                                         |                    |        |                          |              |   |           | (7,628       | ) |               |              | 7,628  |   |              |              |       |                    |   |          |          |   |   |         |        |  
|                                                                              |                                                      |                    |        |                           |              |   |           |              |   |               |              |        |   |              |              |        |                    |  
|Total other income (expense)                                                  |                                                      |                    | 73,648 |                           |              |   | (6,988    | )            |   |               | 101,798      |        |   |              | 46,437       |        |                    |   | (214,551 | )        |   |   | 344     |        
|Noncontrolling interests expense                                              |                                                      |                    |       |                           |              |   |          |              |   |               |             |        |   |              | (861         | )      |                    |   |         |          |   |   | (861    | )      
|                                                                              |                                                      |                    |        |                           |              |   |           |              |   |               |              |        |   |              |              |        |                    |  
|                                                                             
|Net income before income taxes and cumulative effect of
    accounting change |                                                      |                    | 65,294 |                           |              |   | 82,246    |              |   |               | 54,755       |        |   |              | 86,758       |        |                    |   | (211,019 | )        |   |   | 78,034  |        
|                                                                              | Income taxes                                         |                    |        |                          |              |   |           |             |   |               |              |       |   |              |              | 13,110 |                    |   |          |         |   |   |         | 13,110  |  
|                                                                              |                                                      |                    |        |                           |              |   |           |              |   |               |              |        |   |              |              |        |                    |  
|Net income before cumulative effect of accounting change                      |                                                      |                    | 65,294 |                           |              |   | 82,246    |              |   |               | 54,755       |        |   |              | 73,648       |        |                    |   | (211,019 | )        |   |   | 64,924  |        
|                                                                              |                                                      |                    |        |                           |              |   |           |              |   |               |              |        |   |              |              |        |                    |  
|                                                                              | Cumulative effect of accounting change, net of taxes |                    |        |                          |              |   |           |             |   |               |              | 370    |   |              |              |       |                    |   |          |         |   |   |         | 370     |  
|                                                                              |                                                      |                    |        |                           |              |   |           |              |   |               |              |        |   |              |              |        |                    |  
|Net income                                                                    |                                                      | $                  | 65,294 |                           |              | $ | 82,246    |              |   | $             | 55,125       |        |   | $            | 73,648       |        |                    | $ | (211,019 | )        |   | $ | 65,294  |        
|                                                                              |                                                      |                    |        |                           |              |   |           |              |   |               |              |        |   |              |              |        |                    |  

18



---



##### 



NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Consolidating Statement of Income


Three Months Ended March 31, 2005


|                                                      |                               |                    |        |                           |              |   |           |              |  |   |              |              |   |                    |          |          |   |   |         |         | 
|----------------------------------------------------- | ----------------------------- | ------------------ | ------ | ------------------------- | ------------ | - | --------- | ------------ |  | - | ------------ | ------------ | - | ------------------ | -------- | -------- | - | - | ------- | ------- | 
|                                                      |                               |                    |        | CapitalSource Finance LLC |              |   |           |              | 
|                                                      |                               |                    |        |                           |              |   |           |              | 
|                                                      |                               |                    |        | Combined                  |              |   | Combined  |              |  |   |              |             
|                                                      |                               |                    |        | Non-Guarantor             |              |   | Guarantor |              |  |   |              | Consolidated |  
|                                                      |                               | CapitalSource Inc. |        |                           | Subsidiaries |   |           | Subsidiaries |  |   | Eliminations |              |   | CapitalSource Inc. |         
|                                                      |                               |                    |        |                           |              |   |           |              |  |   |              |              |   |                    |         
|                                                      |                               | (Unaudited)        |       
|                                                      |                               | ($ in thousands)   |       
|Net interest and fee income:                          |                               |                    |        |                           |              |   |           |              |  |   |              |              |   |                    |          |          |   |   |         |        
|                                                      | Interest income               |                    | $      |                          |              |   | $         | 95,480       |  |   | $            | 13,744       |   |                    | $        | (650     | ) |   | $       | 108,574 | 
|                                                      | Fee income                    |                    |        |                          |              |   |           | 9,402        |  |   |              | 17,081       |   |                    |          |         |   |   |         | 26,483  | 
|                                                      |                               |                    |        |                           |              |   |           |              |  |   |              |              |   |                    |         
|                                                      | Total interest and fee income |                    |        |                          |              |   |           | 104,882      |  |   |              | 30,825       |   |                    |          | (650     | ) |   |         | 135,057 | 
|                                                      | Interest expense              |                    |        | 4,199                     |              |   |           | 30,306       |  |   |              | 731          |   |                    |          | (650     | ) |   |         | 34,586  | 
|                                                      |                               |                    |        |                           |              |   |           |              |  |   |              |              |   |                    |         
|Net investment income                                 |                               |                    | (4,199 | )                         |              |   | 74,576    |              |  |   | 30,094       |              |   |                    |         |          |   |   | 100,471 |        
|Provision for loan losses                             |                               |                    |       |                           |              |   |          |              |  |   | 9,902        |              |   |                    |         |          |   |   | 9,902   |        
|                                                      |                               |                    |        |                           |              |   |           |              |  |   |              |              |   |                    |         
|Net investment income after provision for loan losses |                               |                    | (4,199 | )                         |              |   | 74,576    |              |  |   | 20,192       |              |   |                    |         |          |   |   | 90,569  |        
|Operating expenses:                                   |                               |                    |        |                           |              |   |           |              |  |   |              |              |   |                    |          |          |   |   |         |        
|                                                      | Compensation and benefits     |                    |        |                          |              |   |           | 413          |  |   |              | 20,953       |   |                    |          |         |   |   |         | 21,366  | 
|                                                      | Other administrative expenses |                    |        | 158                       |              |   |           | 130          |  |   |              | 8,966        |   |                    |          |         |   |   |         | 9,254   | 
|                                                      |                               |                    |        |                           |              |   |           |              |  |   |              |              |   |                    |         
|Total operating expenses                              |                               |                    | 158    |                           |              |   | 543       |              |  |   | 29,919       |              |   |                    |         |          |   |   | 30,620  |        
|Other income (expense):                               |                               |                    |        |                           |              |   |           |              |  |   |              |              |   |                    |          |          |   |   |         |        
|                                                      | Diligence deposits forfeited  |                    |        |                          |              |   |           |             |  |   |              | 1,148        |   |                    |          |         |   |   |         | 1,148   | 
|                                                      | Gain on investments, net      |                    |        |                          |              |   |           |             |  |   |              | 2,128        |   |                    |          |         |   |   |         | 2,128   | 
|                                                      | Gain (loss) on derivatives    |                    |        |                          |              |   |           | 1,041        |  |   |              | (968         | ) |                    |          |         |   |   |         | 73      | 
|                                                      | Other income, net of expenses |                    |        |                          |              |   |           | 672          |  |   |              | 289          |   |                    |          |         |   |   |         | 961     | 
|                                                      | Earnings in subsidiaries      |                    |        | 68,616                    |              |   |           |             |  |   |              | 76,991       |   |                    |          | (145,607 | ) |   |         |        | 
|                                                      | Intercompany                  |                    |        |                          |              |   |           | 1,245        |  |   |              | (1,245       | ) |                    |          |         |   |   |         |        | 
|                                                      |                               |                    |        |                           |              |   |           |              |  |   |              |              |   |                    |         
|Total other income                                    |                               |                    | 68,616 |                           |              |   | 2,958     |              |  |   | 78,343       |              |   |                    | (145,607 | )        |   |   | 4,310   |        
|                                                      |                               |                    |        |                           |              |   |           |              |  |   |              |              |   |                    |         
|Net income before income taxes                        |                               |                    | 64,259 |                           |              |   | 76,991    |              |  |   | 68,616       |              |   |                    | (145,607 | )        |   |   | 64,259  |        
|                                                      | Income taxes                  |                    |        | 25,061                    |              |   |           |             |  |   |              |             |   |                    |          |         |   |   |         | 25,061  | 
|                                                      |                               |                    |        |                           |              |   |           |              |  |   |              |              |   |                    |         
|Net income                                            |                               | $                  | 39,198 |                           |              | $ | 76,991    |              |  | $ | 68,616       |              |   | $                  | (145,607 | )        |   | $ | 39,198  |        
|                                                      |                               |                    |        |                           |              |   |           |              |  |   |              |              |   |                    |         

19



---



##### 



NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Consolidating Statement of Cash Flows


Three Months Ended March 31, 2006


|                                                    |                                                               |                                                                                                 |                                                                 |                           |              |          |           |              |   |            |              |          |   |              |              |            |                    |          |   |          |   |         |          |            |   |          |  
|--------------------------------------------------- | ------------------------------------------------------------- | ----------------------------------------------------------------------------------------------- | --------------------------------------------------------------- | ------------------------- | ------------ | -------- | --------- | ------------ | - | ---------- | ------------ | -------- | - | ------------ | ------------ | ---------- | ------------------ | -------- | - | -------- | - | ------- | -------- | ---------- | - | -------- | -
|                                                    |                                                               |                                                                                                 |                                                                 | CapitalSource Finance LLC |              |          |           |              |   |            |             
|                                                    |                                                               |                                                                                                 |                                                                 |                           |              |          |           |              |   |            |             
|                                                    |                                                               |                                                                                                 |                                                                 | Combined                  |              |          | Combined  |              |   | Other Non- |              |          |   |              |             
|                                                    |                                                               |                                                                                                 |                                                                 | Non-Guarantor             |              |          | Guarantor |              |   | Guarantor  |              |          |   |              | Consolidated |           
|                                                    |                                                               | CapitalSource Inc.                                                                              |                                                                 |                           | Subsidiaries |          |           | Subsidiaries |   |            | Subsidiaries |          |   | Eliminations |              |            | CapitalSource Inc. |         
|                                                    |                                                               |                                                                                                 |                                                                 |                           |              |          |           |              |   |            |              |          |   |              |              |            |                    |         
|                                                    |                                                               | (Unaudited)                                                                                     |                                                                
|                                                    |                                                               | ($ in thousands)                                                                                |                                                                
|Operating activities:                               |                                                               |                                                                                                 |                                                                 |                           |              |          |           |              |   |            |              |          |   |              |              |            |                    |          |   |          |   |         |          |           
|                                                    | Net income                                                    |                                                                                                 | $                                                               | 65,294                    |              |          | $         | 82,246       |   |            | $            | 55,125   |   |              | $            | 73,648     |                    |          | $ | (211,019 | ) |         | $        | 65,294     |  
|                                                    |                                                               | Adjustments to reconcile net income to net cash (used in)
    provided by operating activities: |                                                                 |                           |              |          |           |              |   |            |              |          |   |              |              |            |                    |          |   |          |   |         |          |            |   |         
|                                                    |                                                               |                                                                                                 | Stock option expense                                            |                           |              | 785      |           |              |   |           |              |          |   |             |              |            |                    |         |   |          |   |        |          |            |   | 785      |  
|                                                    |                                                               |                                                                                                 | Restricted stock expense                                        |                           |              |         |           |              |   |           |              |          |   | 5,752        |              |            |                    |         |   |          |   |        |          |            |   | 5,752    |  
|                                                    |                                                               |                                                                                                 | Loss on extinguishment of debt                                  |                           |              |         |           |              |   |           |              |          |   |             |              |            |                    | 2,582    |   |          |   |        |          |            |   | 2,582    |  
|                                                    |                                                               |                                                                                                 | Non-cash prepayment fee                                         |                           |              |         |           |              |   |           |              |          |   | (8,353       | )            |            |                    |         |   |          |   |        |          |            |   | (8,353   | )
|                                                    |                                                               |                                                                                                 | Cumulative effect of accounting change, net of taxes            |                           |              |         |           |              |   |           |              |          |   | (370         | )            |            |                    |         |   |          |   |        |          |            |   | (370     | )
|                                                    |                                                               |                                                                                                 | Amortization of deferred loan fees                              |                           |              |         |           |              |   | (9,583     | )            |          |   | 6,692        |              |            |                    | (17,267  | ) |          |   |        |          |            |   | (20,158  | )
|                                                    |                                                               |                                                                                                 | Interest on paid-in-kind loans                                  |                           |              |         |           |              |   | 2,207      |              |          |   | (2,164       | )            |            |                    | (1,317   | ) |          |   |        |          |            |   | (1,274   | )
|                                                    |                                                               |                                                                                                 | Provision for loan losses                                       |                           |              |         |           |              |   |           |              |          |   | 10,321       |              |            |                    | 4,392    |   |          |   |        |          |            |   | 14,713   |  
|                                                    |                                                               |                                                                                                 | Amortization of deferred financing fees and discounts           |                           |              | 632      |           |              |   | 5,928      |              |          |   | 153          |              |            |                    | 1,054    |   |          |   |        |          |            |   | 7,767    |  
|                                                    |                                                               |                                                                                                 | Depreciation and amortization                                   |                           |              |         |           |              |   | 2          |              |          |   | 712          |              |            |                    | 1,635    |   |          |   |        |          |            |   | 2,349    |  
|                                                    |                                                               |                                                                                                 | Benefit for deferred income taxes                               |                           |              |         |           |              |   |           |              |          |   |             |              |            |                    | (1,651   | ) |          |   |        |          |            |   | (1,651   | )
|                                                    |                                                               |                                                                                                 | Non-cash loss on investments, net                               |                           |              |         |           |              |   |           |              |          |   | 1,236        |              |            |                    |         |   |          |   |        |          |            |   | 1,236    |  
|                                                    |                                                               |                                                                                                 | Gain on derivatives                                             |                           |              |         |           |              |   | (411       | )            |          |   | (115         | )            |            |                    |         |   |          |   |        |          |            |   | (526     | )
|                                                    |                                                               |                                                                                                 | Unrealized loss on residential mortgage investment portfolio    |                           |              |         |           |              |   |           |              |          |   |             |              |            |                    | 17,366   |   |          |   |        |          |            |   | 17,366   |  
|                                                    |                                                               |                                                                                                 | Net increase in mortgage-backed securities pledged, trading     |                           |              |         |           |              |   |           |              |          |   |             |              |            |                    | (103,214 | ) |          |   |        |          |            |   | (103,214 | )
|                                                    |                                                               |                                                                                                 | Amortization of discount on mortgage-backed securities, trading |                           |              |         |           |              |   |           |              |          |   |             |              |            |                    | (1,468   | ) |          |   |        |          |            |   | (1,468   | )
|                                                    |                                                               |                                                                                                 | Decrease (increase) in loans held-for-sale, net                 |                           |              |         |           |              |   | 1,982      |              |          |   | (79,963      | )            |            |                    |         |   |          |   |        |          |            |   | (77,981  | )
|                                                    |                                                               |                                                                                                 | Decrease (increase) in intercompany note receivable             |                           |              |         |           |              |   | 1,061      |              |          |   | (23,125      | )            |            |                    |         |   |          |   | 22,064  |          |            |   |         |  
|                                                    |                                                               |                                                                                                 | Decrease (increase) in other assets                             |                           |              | 20,036   |           |              |   | 420        |              |          |   | (1,561       | )            |            |                    | (59,511  | ) |          |   | 4,378   |          |            |   | (36,238  | )
|                                                    |                                                               |                                                                                                 | Increase (decrease) in other liabilities                        |                           |              | 3,613    |           |              |   | 184        |              |          |   | (10,265      | )            |            |                    | 17,807   |   |          |   | (4,916  | )        |            |   | 6,423    |  
|                                                    |                                                               |                                                                                                 | Net transfers with subsidiaries                                 |                           |              | (651,702 | )         |              |   | (177,213   | )            |          |   | 89,164       |              |            |                    | 528,732  |   |          |   | 211,019 |          |            |   |         |  
|                                                    |                                                               |                                                                                                 |                                                                 |                           |              |          |           |              |   |            |              |          |   |              |              |            |                    |         
|                                                    | Cash (used in) provided by operating activities               |                                                                                                 |                                                                 | (561,342                  | )            |          |           | (93,177      | ) |            |              | 43,239   |   |              |              | 462,788    |                    |          |   | 21,526   |   |         |          | (126,966   | )
|Investing activities:                               |                                                               |                                                                                                 |                                                                 |                           |              |          |           |              |   |            |              |          |   |              |              |            |                    |          |   |          |   |         |          |           
|                                                    | Decrease (increase) in restricted cash                        |                                                                                                 |                                                                 |                          |              |          |           | 48,039       |   |            |              | 22,212   |   |              |              | (36,910    | )                  |          |   |         |   |         |          | 33,341     |  
|                                                    | Acquisition of mortgage-related receivables, net              |                                                                                                 |                                                                 |                          |              |          |           |             |   |            |              |         |   |              |              | (2,493,503 | )                  |          |   |         |   |         |          | (2,493,503 | )
|                                                    | Increase in receivables under repurchase agreements, net      |                                                                                                 |                                                                 |                          |              |          |           | (36,889      | ) |            |              |         |   |              |              |           |                    |          |   |         |   |         |          | (36,889    | )
|                                                    | Decrease (increase) in loans, net                             |                                                                                                 |                                                                 |                          |              |          |           | 505,621      |   |            |              | (329,903 | ) |              |              | (544,781   | )                  |          |   | 538      |   |         |          | (368,525   | )
|                                                    | Acquisition of real estate, net of cash acquired              |                                                                                                 |                                                                 |                          |              |          |           |             |   |            |              |         |   |              |              | (7,180     | )                  |          |   |         |   |         |          | (7,180     | )
|                                                    | Disposal (acquisition) of investments, net                    |                                                                                                 |                                                                 | 33,405                    |              |          |           |             |   |            |              | (6,841   | ) |              |              |           |                    |          |   |         |   |         |          | 26,564     |  
|                                                    | Acquisition of property and equipment, net                    |                                                                                                 |                                                                 |                          |              |          |           | (32          | ) |            |              | (923     | ) |              |              | 180        |                    |          |   |         |   |         |          | (775       | )
|                                                    |                                                               |                                                                                                 |                                                                 |                           |              |          |           |              |   |            |              |          |   |              |              |            |                    |         
|                                                    | Cash provided by (used in) investing activities               |                                                                                                 |                                                                 | 33,405                    |              |          |           | 516,739      |   |            |              | (315,455 | ) |              |              | (3,082,194 | )                  |          |   | 538      |   |         |          | (2,846,967 | )
|Financing activities:                               |                                                               |                                                                                                 |                                                                 |                           |              |          |           |              |   |            |              |          |   |              |              |            |                    |          |   |          |   |         |          |           
|                                                    | Payment of deferred financing fees                            |                                                                                                 |                                                                 | (2,450                    | )            |          |           | (89          | ) |            |              | (1,525   | ) |              |              | (6,489     | )                  |          |   |         |   |         |          | (10,553    | )
|                                                    | Increase (decrease) in intercompany note payable              |                                                                                                 |                                                                 | 24,640                    |              |          |           | (2,576       | ) |            |              |         |   |              |              |           |                    |          |   | (22,064  | ) |         |          |           |  
|                                                    | Borrowings under repurchase agreements, net                   |                                                                                                 |                                                                 |                          |              |          |           | 31,613       |   |            |              |         |   |              |              | 64,825     |                    |          |   |         |   |         |          | 96,438     |  
|                                                    | Borrowings on unsecured credit facilities, net                |                                                                                                 |                                                                 | 250,000                   |              |          |           |             |   |            |              |         |   |              |              |           |                    |          |   |         |   |         |          | 250,000    |  
|                                                    | (Repayments of) borrowings on secured credit facilities, net  |                                                                                                 |                                                                 |                          |              |          |           | (51,223      | ) |            |              | 65,244   |   |              |              | 149,000    |                    |          |   |         |   |         |          | 163,021    |  
|                                                    | Borrowings of term debt                                       |                                                                                                 |                                                                 |                          |              |          |           |             |   |            |              | 1,512    |   |              |              | 2,447,870  |                    |          |   |         |   |         |          | 2,449,382  |  
|                                                    | Repayments of term debt                                       |                                                                                                 |                                                                 |                          |              |          |           | (398,194     | ) |            |              | (21      | ) |              |              |           |                    |          |   |         |   |         |          | (398,215   | )
|                                                    | Borrowings of subordinated debt                               |                                                                                                 |                                                                 |                          |              |          |           |             |   |            |              | 50,000   |   |              |              |           |                    |          |   |         |   |         |          | 50,000     |  
|                                                    | Proceeds from issuance of common stock, net of offering costs |                                                                                                 |                                                                 | 395,837                   |              |          |           |             |   |            |              |         |   |              |              |           |                    |          |   |         |   |         |          | 395,837    |  
|                                                    | Proceeds from exercise of options                             |                                                                                                 |                                                                 | 1,711                     |              |          |           |             |   |            |              |         |   |              |              |           |                    |          |   |         |   |         |          | 1,711      |  
|                                                    | Tax benefits on share-based payments                          |                                                                                                 |                                                                 |                          |              |          |           |             |   |            |              |         |   |              |              | 1,677      |                    |          |   |         |   |         |          | 1,677      |  
|                                                    | Payment of dividends                                          |                                                                                                 |                                                                 | (143,777                  | )            |          |           |             |   |            |              |         |   |              |              |           |                    |          |   |         |   |         |          | (143,777   | )
|                                                    |                                                               |                                                                                                 |                                                                 |                           |              |          |           |              |   |            |              |          |   |              |              |            |                    |         
|                                                    | Cash provided by (used in) financing activities               |                                                                                                 |                                                                 | 525,961                   |              |          |           | (420,469     | ) |            |              | 115,210  |   |              |              | 2,656,883  |                    |          |   | (22,064  | ) |         |          | 2,855,521  |  
|                                                    |                                                               |                                                                                                 |                                                                 |                           |              |          |           |              |   |            |              |          |   |              |              |            |                    |         
|(Decrease) increase in cash and cash equivalents    |                                                               |                                                                                                 | (1,976                                                          | )                         |              |          | 3,093     |              |   |            | (157,006     | )        |   |              | 37,477       |            |                    |          |  |          |   |         | (118,412 | )         
|Cash and cash equivalents as of beginning of period |                                                               |                                                                                                 | 2,038                                                           |                           |              |          | 145,065   |              |   |            | 156,571      |          |   |              | 20,222       |            |                    |          |  |          |   |         | 323,896  |           
|                                                    |                                                               |                                                                                                 |                                                                 |                           |              |          |           |              |   |            |              |          |   |              |              |            |                    |         
|Cash and cash equivalents as of end of period       |                                                               | $                                                                                               | 62                                                              |                           |              | $        | 148,158   |              |   | $          | (435         | )        |   | $            | 57,699       |            |                    | $        |  |          |   | $       | 205,484  |           
|                                                    |                                                               |                                                                                                 |                                                                 |                           |              |          |           |              |   |            |              |          |   |              |              |            |                    |         

20



---



##### 



NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Consolidating Statement of Cash Flows


Three Months Ended March 31, 2005


|                                                    |                                                 |                                                                                                 |                                          |                           |              |         |           |              |   |         |              |              |   |                    |   |          |   |         |          |          |   |         |  
|--------------------------------------------------- | ----------------------------------------------- | ----------------------------------------------------------------------------------------------- | ---------------------------------------- | ------------------------- | ------------ | ------- | --------- | ------------ | - | ------- | ------------ | ------------ | - | ------------------ | - | -------- | - | ------- | -------- | -------- | - | ------- | -
|                                                    |                                                 |                                                                                                 |                                          | CapitalSource Finance LLC |              |         |           |              |  
|                                                    |                                                 |                                                                                                 |                                          |                           |              |         |           |              |  
|                                                    |                                                 |                                                                                                 |                                          | Combined                  |              |         | Combined  |              |   |         |              |             
|                                                    |                                                 |                                                                                                 |                                          | Non-Guarantor             |              |         | Guarantor |              |   |         |              | Consolidated |  
|                                                    |                                                 | CapitalSource Inc.                                                                              |                                          |                           | Subsidiaries |         |           | Subsidiaries |   |         | Eliminations |              |   | CapitalSource Inc. |  
|                                                    |                                                 |                                                                                                 |                                          |                           |              |         |           |              |   |         |              |              |   |                    |  
|                                                    |                                                 | (Unaudited)                                                                                     |                                         
|                                                    |                                                 | ($ in thousands)                                                                                |                                         
|Operating activities:                               |                                                 |                                                                                                 |                                          |                           |              |         |           |              |   |         |              |              |   |                    |   |          |   |         |          |         
|                                                    | Net income                                      |                                                                                                 | $                                        | 39,198                    |              |         | $         | 76,991       |   |         | $            | 68,616       |   |                    | $ | (145,607 | ) |         | $        | 39,198   |  
|                                                    |                                                 | Adjustments to reconcile net income to net cash (used in)
    provided by operating activities: |                                          |                           |              |         |           |              |   |         |              |              |   |                    |   |          |   |         |          |          |   |        
|                                                    |                                                 |                                                                                                 | Stock option expense                     |                           |              | 132     |           |              |   |        |              |              |   |                   |   |          |   |        |          |          |   | 132     |  
|                                                    |                                                 |                                                                                                 | Restricted stock expense                 |                           |              | 2,145   |           |              |   |        |              |              |   |                   |   |          |   |        |          |          |   | 2,145   |  
|                                                    |                                                 |                                                                                                 | Restricted stock activity                |                           |              | 6       |           |              |   |        |              |              |   |                   |   |          |   |        |          |          |   | 6       |  
|                                                    |                                                 |                                                                                                 | Amortization of deferred loan fees       |                           |              |        |           |              |   |        |              |              |   | (15,159            | ) |          |   |        |          |          |   | (15,159 | )
|                                                    |                                                 |                                                                                                 | Interest on paid-in-kind loans           |                           |              |        |           |              |   | (2,858  | )            |              |   | (1,392             | ) |          |   |        |          |          |   | (4,250  | )
|                                                    |                                                 |                                                                                                 | Provision for loan losses                |                           |              |        |           |              |   |        |              |              |   | 9,902              |   |          |   |        |          |          |   | 9,902   |  
|                                                    |                                                 |                                                                                                 | Amortization of deferred financing fees  |                           |              | 579     |           |              |   | 3,933   |              |              |   | 278                |   |          |   |        |          |          |   | 4,790   |  
|                                                    |                                                 |                                                                                                 | Depreciation and amortization            |                           |              |        |           |              |   |        |              |              |   | 644                |   |          |   |        |          |          |   | 644     |  
|                                                    |                                                 |                                                                                                 | Benefit for deferred income taxes        |                           |              | (425    | )         |              |   |        |              |              |   |                   |   |          |   |        |          |          |   | (425    | )
|                                                    |                                                 |                                                                                                 | Non-cash gain on investments, net        |                           |              |        |           |              |   |        |              |              |   | (2,726             | ) |          |   |        |          |          |   | (2,726  | )
|                                                    |                                                 |                                                                                                 | (Gain) loss on derivatives               |                           |              |        |           |              |   | (1,041  | )            |              |   | 968                |   |          |   |        |          |          |   | (73     | )
|                                                    |                                                 |                                                                                                 | Decrease in intercompany note receivable |                           |              |        |           |              |   |        |              |              |   | 2,998              |   |          |   | (2,998  | )        |          |   |        |  
|                                                    |                                                 |                                                                                                 | (Increase) decrease in other assets      |                           |              | (45     | )         |              |   | 2,216   |              |              |   | 652                |   |          |   |        |          |          |   | 2,823   |  
|                                                    |                                                 |                                                                                                 | Increase (decrease) in other liabilities |                           |              | 14,294  |           |              |   | 207     |              |              |   | (26,083            | ) |          |   | (650    | )        |          |   | (12,232 | )
|                                                    |                                                 |                                                                                                 | Net transfers with subsidiaries          |                           |              | (56,080 | )         |              |   | (99,160 | )            |              |   | 9,633              |   |          |   | 145,607 |          |          |   |        |  
|                                                    |                                                 |                                                                                                 |                                          |                           |              |         |           |              |   |         |              |              |   |                    |  
|                                                    | Cash (used in) provided by operating activities |                                                                                                 |                                          | (196                      | )            |         |           | (19,712      | ) |         |              | 48,331       |   |                    |   | (3,648   | ) |         |          | 24,775   |  
|Investing activities:                               |                                                 |                                                                                                 |                                          |                           |              |         |           |              |   |         |              |              |   |                    |   |          |   |         |          |         
|                                                    | (Increase) decrease in restricted cash          |                                                                                                 |                                          |                          |              |         |           | (4,295       | ) |         |              | 71,816       |   |                    |   |         |   |         |          | 67,521   |  
|                                                    | Increase in loans, net                          |                                                                                                 |                                          |                          |              |         |           | (267,000     | ) |         |              | (135,104     | ) |                    |   | 650      |   |         |          | (401,454 | )
|                                                    | Acquisition of investments, net                 |                                                                                                 |                                          |                          |              |         |           |             |   |         |              | (3,691       | ) |                    |   |         |   |         |          | (3,691   | )
|                                                    | Acquisition of property and equipment, net      |                                                                                                 |                                          |                          |              |         |           |             |   |         |              | (1,290       | ) |                    |   |         |   |         |          | (1,290   | )
|                                                    |                                                 |                                                                                                 |                                          |                           |              |         |           |              |   |         |              |              |   |                    |  
|                                                    | Cash used in investing activities               |                                                                                                 |                                          |                          |              |         |           | (271,295     | ) |         |              | (68,269      | ) |                    |   | 650      |   |         |          | (338,914 | )
|Financing activities:                               |                                                 |                                                                                                 |                                          |                           |              |         |           |              |   |         |              |              |   |                    |   |          |   |         |          |         
|                                                    | Payment of deferred financing fees              |                                                                                                 |                                          | (85                       | )            |         |           | (544         | ) |         |              | (17          | ) |                    |   |         |   |         |          | (646     | )
|                                                    | Decrease in intercompany note payable           |                                                                                                 |                                          |                          |              |         |           | (2,998       | ) |         |              |             |   |                    |   | 2,998    |   |         |          |         |  
|                                                    | Borrowings on secured credit facilities, net    |                                                                                                 |                                          |                          |              |         |           | 486,837      |   |         |              | 64,665       |   |                    |   |         |   |         |          | 551,502  |  
|                                                    | Borrowings of term debt                         |                                                                                                 |                                          |                          |              |         |           |             |   |         |              | 11,335       |   |                    |   |         |   |         |          | 11,335   |  
|                                                    | Repayments of term debt                         |                                                                                                 |                                          |                          |              |         |           | (279,723     | ) |         |              | (86,937      | ) |                    |   |         |   |         |          | (366,660 | )
|                                                    | Proceeds from exercise of options               |                                                                                                 |                                          | 281                       |              |         |           |             |   |         |              |             |   |                    |   |         |   |         |          | 281      |  
|                                                    |                                                 |                                                                                                 |                                          |                           |              |         |           |              |   |         |              |              |   |                    |  
|                                                    | Cash provided by (used in) financing activities |                                                                                                 |                                          | 196                       |              |         |           | 203,572      |   |         |              | (10,954      | ) |                    |   | 2,998    |   |         |          | 195,812  |  
|                                                    |                                                 |                                                                                                 |                                          |                           |              |         |           |              |   |         |              |              |   |                    |  
|Decrease in cash and cash equivalents               |                                                 |                                                                                                 |                                         |                           |              |         | (87,435   | )            |   |         | (30,892      | )            |   |                    |  |          |   |         | (118,327 | )       
|Cash and cash equivalents as of beginning of period |                                                 |                                                                                                 |                                         |                           |              |         | 170,532   |              |   |         | 35,545       |              |   |                    |  |          |   |         | 206,077  |         
|                                                    |                                                 |                                                                                                 |                                          |                           |              |         |           |              |   |         |              |              |   |                    |  
|Cash and cash equivalents as of end of period       |                                                 | $                                                                                               |                                         |                           |              | $       | 83,097    |              |   | $       | 4,653        |              |   | $                  |  |          |   | $       | 87,750   |         
|                                                    |                                                 |                                                                                                 |                                          |                           |              |         |           |              |   |         |              |              |   |                    |  

21



---



##### 



NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|         |                     
|-------- | --------------------
|Note 11. | Shareholders Equity



| |                                
| | -------------------------------
| | Common Stock Shares Outstanding



|                                    |                                              |  |             |            | 
|----------------------------------- | -------------------------------------------- |  | ----------- | ---------- | 
|Outstanding as of December 31, 2005 |                                              |  | 140,405,766 |           
|                                    | Issuance of common stock                     |  |             | 31,338,055 | 
|                                    | Exercise of options                          |  |             | 195,392    | 
|                                    | Restricted stock and other stock grants, net |  |             | 426,360    | 
|                                    |                                              |  |            
|Outstanding as of March 31, 2006    |                                              |  | 172,365,573 |           
|                                    |                                              |  |            



| |                              
| | -----------------------------
| | Earnings and Profits Dividend





| |                
| | ---------------
| | Equity Offering

over-allotment




| |                                              
| | ---------------------------------------------
| | Dividend Reinvestment and Stock Purchase Plan





|         |             
|-------- | ------------
|Note 12. | Income Taxes





22



---



##### 



NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






|                                                                            |  |                    |       |   |      |  |      |     
|--------------------------------------------------------------------------- |  | ------------------ | ----- | - | ---- |  | ---- | ----
|                                                                            |  | Three Months Ended |      
|                                                                            |  | March 31,          |      
|                                                                            |  |                    |      
|                                                                            |  | 2006               |       |   | 2005 | 
|                                                                            |  |                    |       |   |      | 
|Federal statutory rate                                                      |  |                    | 35.0  | % |      |  | 35.0 | %   
|Benefit of REIT election                                                    |  |                    | (14.6 | ) |      |  |     |     
|State income taxes, net of federal tax benefit                              |  |                    | 2.7   |   |      |  | 3.8  |     
|Other                                                                       |  |                    | (0.2  | ) |      |  | 0.2  |     
|                                                                            |  |                    |       |   |      | 
|Estimated annual effective income tax rate                                  |  |                    | 22.9  |   |      |  | 39.0 |     
|Discrete item  Benefit for reversal of net
    deferred tax liabilities(1) |  |                    | (6.1  | ) |      |  |     |     
|Current quarter effective income tax rate                                   |  |                    | 16.8  | % |      |  | 39.0 | %(2)
|                                                                            |  |                    |       |   |      | 






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | In connection with our REIT election, we reversed net deferred
    tax liabilities of $4.7 million, relating to REIT
    qualifying activities, into income during the three months ended
    March 31, 2006.                                                                                                                                                                                                                                                                                                                             
|   
|(2) | We provided for income taxes on the income earned for the three
    months ended March 31, 2005 based on a 39.0% effective tax
    rate. However, we provided for income taxes on the total income
    earned in 2005 based on a 38.8% effective tax rate. This
    decrease in the effective tax rate was the result of both a
    reconciliation of our previous provision for income taxes with
    actual tax expense for 2004 plus a change in the estimated tax
    rate for 2005 which was accounted for in the third quarter 2005.



|         |                     
|-------- | --------------------
|Note 13. | Comprehensive Income



|                                                                        |  |                    |        |  |      |   |        |  
|----------------------------------------------------------------------- |  | ------------------ | ------ |  | ---- | - | ------ | -
|                                                                        |  | Three Months Ended |       
|                                                                        |  | March 31,          |       
|                                                                        |  |                    |       
|                                                                        |  | 2006               |        |  | 2005 |  
|                                                                        |  |                    |        |  |      |  
|                                                                        |  | ($ in thousands)   |       
|Net income                                                              |  | $                  | 65,294 |  |      | $ | 39,198 |  
|Unrealized gain (loss) on available-for-sale securities, net of
    tax |  |                    | 612    |  |      |   | (330   | )
|Unrealized gain on cash flow hedges, net of tax                         |  |                    | 1,270  |  |      |   | 31     |  
|                                                                        |  |                    |        |  |      |  
|Comprehensive income                                                    |  | $                  | 67,176 |  |      | $ | 38,899 |  
|                                                                        |  |                    |        |  |      |  

23



---



##### 



NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                                             |  |                  |      |   |              |   |        |  
|------------------------------------------------------------ |  | ---------------- | ---- | - | ------------ | - | ------ | -
|                                                             |  | March 31,        |      |   | December 31, |  
|                                                             |  | 2006             |      |   | 2005         |  
|                                                             |  |                  |      |   |              |  
|                                                             |  | ($ in thousands) |     
|Unrealized loss on available-for-sale securities, net of tax |  | $                | (206 | ) |              | $ | (818   | )
|Unrealized gain (loss) on cash flow hedges, net of tax       |  |                  | 749  |   |              |   | (521   | )
|                                                             |  |                  |      |   |              |  
|Accumulated other comprehensive income (loss)                |  | $                | 543  |   |              | $ | (1,339 | )
|                                                             |  |                  |      |   |              |  



|         |                     
|-------- | --------------------
|Note 14. | Net Income per Share



|                               |                            |                                   |             |           |      |   |             |         | 
|------------------------------ | -------------------------- | --------------------------------- | ----------- | --------- | ---- | - | ----------- | ------- | 
|                               |                            | Three Months Ended March 31,      |            
|                               |                            |                                   |            
|                               |                            | 2006                              |             |           | 2005 |  
|                               |                            |                                   |             |           |      |  
|                               |                            | ($ in thousands, except per share |            
|                               |                            | data)                             |            
|Basic net income per share:    |                            |                                   |             |           |      |   |             |        
|Net income                     |                            | $                                 | 65,294      |           |      | $ | 39,198      |        
|Average shares  basic         |                            |                                   | 149,722,991 |           |      |   | 116,398,277 |        
|Basic net income per share     |                            | $                                 | 0.44        |           |      | $ | 0.34        |        
|                               |                            |                                   |             |           |      |  
|Diluted net income per share:  |                            |                                   |             |           |      |   |             |        
|Net income                     |                            | $                                 | 65,294      |           |      | $ | 39,198      |        
|Average shares  basic         |                            |                                   | 149,722,991 |           |      |   | 116,398,277 |        
|Effect of dilutive securities: |                            |                                   |             |           |      |   |             |        
|                               | Stock dividend declared(1) |                                   |             | 3,276,377 |      |   |             |        | 
|                               | Option shares              |                                   |             | 483,869   |      |   |             | 878,226 | 
|                               | Unvested restricted stock  |                                   |             | 959,723   |      |   |             | 195,603 | 
|                               | Stock units                |                                   |             | 7,612     |      |   |             |        | 
|                               | Non-managing member units  |                                   |             |          |      |   |             |        | 
|                               | Convertible debt           |                                   |             |          |      |   |             |        | 
|                               | Written call option        |                                   |             |          |      |   |             |        | 
|                               |                            |                                   |             |           |      |  
|Average shares  diluted       |                            |                                   | 154,450,572 |           |      |   | 117,472,106 |        
|                               |                            |                                   |             |           |      |  
|Diluted net income per share   |                            | $                                 | 0.42        |           |      | $ | 0.33        |        
|                               |                            |                                   |             |           |      |  






|    |                                                                                                                                                   
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | All conditions were not met for inclusion in the basic net
    income per share calculation until such shares were issued on
    January 25, 2006.



|         |                         
|-------- | ------------------------
|Note 15. | Stock-Based Compensation



| |                      
| | ---------------------
| | Equity Incentive Plan



24



---



##### 



NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)








| |                            
| | ---------------------------
| | Adoption of SFAS No. 123(R)

Share-Based Payment Accounting for Stock-Based
Compensation Accounting for Stock Issued to Employees Statement of Cash Flows.






25



---



##### 



NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                                                                                                              |                       |   |        |      | 
|----------------------------------------------------------------------------------------------------------------------------- | --------------------- | - | ------ | ---- | 
|Net income as reported                                                                                                        |                       | $ | 39,198 |     
|Add back: Stock-based compensation expense from options included
    in reported net income, net of tax                       |                       |   | 81     |     
|Deduct: Total stock-based compensation expense determined under
    fair value-based method for all option awards, net of tax |                       |   | (461   | )   
|                                                                                                                              |                       |   |       
|Pro forma net income                                                                                                          |                       | $ | 38,818 |     
|                                                                                                                              |                       |   |       
|Net income per share:                                                                                                         |                       |   |        |     
|                                                                                                                              | Basic  as reported   |   | $      | 0.34 | 
|                                                                                                                              |                       |   |       
|                                                                                                                              | Basic  pro forma     |   | $      | 0.33 | 
|                                                                                                                              |                       |   |       
|                                                                                                                              | Diluted  as reported |   | $      | 0.33 | 
|                                                                                                                              |                       |   |       
|                                                                                                                              | Diluted  pro forma   |   | $      | 0.33 | 
|                                                                                                                              |                       |   |       





| |              
| | -------------
| | Stock Options



|                                                |           |         |           |          |       |   |                  |                  |  |           |                 |  |  |   |        |  | 
|----------------------------------------------- | --------- | ------- | --------- | -------- | ----- | - | ---------------- | ---------------- |  | --------- | --------------- |  |  | - | ------ |  | 
|                                                |           |         |           | Weighted |       |   | Weighted Average |                  |  |          
|                                                |           |         |           | Average  |       |   | Remaining        |                  |  |          
|                                                |           |         |           | Exercise |       |   | Contractual Life |                  |  | Aggregate |                
|                                                |           | Options |           |          | Price |   |                  | (in years)       |  |           | Intrinsic Value | 
|                                                |           |         |           |          |       |   |                  |                  |  |           |                 | 
|                                                |           |         |           |          |       |   |                  | ($ in thousands) | 
|Outstanding as of December 31, 2005             |           |         | 2,587,312 |          |       | $ | 15.34            |                  |  |           |                 |  |  |   |        | 
|                                                | Granted   |         |           | 91,500   |       |   |                  | 22.79            |  |           |                 |  |  |   |        |  | 
|                                                | Exercised |         |           | (195,392 | )     |   |                  | 8.76             |  |           |                 |  |  |   |        |  | 
|                                                | Forfeited |         |           | (48,401  | )     |   |                  | 18.41            |  |           |                 |  |  |   |        |  | 
|                                                |           |         |           |          |       |   |                  |                  |  |           |                 | 
|Outstanding as of March 31, 2006                |           |         | 2,435,019 |          |       | $ | 16.08            |                  |  |           | 7.99            |  |  | $ | 21,417 | 
|                                                |           |         |           |          |       |   |                  |                  |  |           |                 | 
|Vested or expected to vest as of March 31, 2006 |           |         | 2,225,247 |          |       | $ | 15.75            |                  |  |           | 0.80            |  |  | $ | 20,320 | 
|                                                |           |         |           |          |       |   |                  |                  |  |           |                 | 
|Exercisable as of March 31, 2006                |           |         | 897,144   |          |       | $ | 12.65            |                  |  |           | 7.28            |  |  | $ | 10,970 | 
|                                                |           |         |           |          |       |   |                  |                  |  |           |                 | 



26



---



##### 



NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                        |  |                    |         |   |      |  |         |  
|----------------------- |  | ------------------ | ------- | - | ---- |  | ------- | -
|                        |  | Three Months Ended |        
|                        |  | March 31,          |        
|                        |  |                    |        
|                        |  | 2006               |         |   | 2005 | 
|                        |  |                    |         |   |      | 
|Dividend yield          |  |                    | 7.88    | % |      |  |        |  
|Expected volatility     |  |                    | 20      | % |      |  | 30      | %
|Risk-free interest rate |  |                    | 4.56    | % |      |  | 3.99    | %
|Expected life           |  |                    | 4 years |   |      |  | 6 years |  





| |                 
| | ----------------
| | Restricted Stock



|                                  |           |        |           |            |            |   |       |       | 
|--------------------------------- | --------- | ------ | --------- | ---------- | ---------- | - | ----- | ----- | 
|                                  |           |        |           | Weighted   |           
|                                  |           |        |           | Average    |           
|                                  |           |        |           | Grant-Date |           
|                                  |           | Shares |           |            | Fair Value |  
|                                  |           |        |           |            |            |  
|Nonvested as of December 31, 2005 |           |        | 3,873,124 |            |            | $ | 22.08 |      
|                                  | Granted   |        |           | 1,150,781  |            |   |       | 23.72 | 
|                                  | Vested    |        |           | (476,032   | )          |   |       | 23.09 | 
|                                  | Forfeited |        |           | (66,888    | )          |   |       | 21.51 | 
|                                  |           |        |           |            |            |  
|Nonvested as of March 31, 2006    |           |        | 4,480,985 |            |            | $ | 22.40 |      
|                                  |           |        |           |            |            |  





|         |                              
|-------- | -----------------------------
|Note 16. | Commitments and Contingencies

Guarantors Accounting and Disclosure Requirements
for


27



---



##### 



NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Guarantees, Including Indirect Guarantees of Indebtedness of
Others.






|         |                   
|-------- | ------------------
|Note 17. | Operating Segments

Summary of Significant
Accounting Policies


|                                                                                     |  |            |           |                  |                     |   |           |                    |  |   |            |  
|------------------------------------------------------------------------------------ |  | ---------- | --------- | ---------------- | ------------------- | - | --------- | ------------------ |  | - | ---------- | -
|                                                                                     |  | Commercial |           |                  |                     |   |          
|                                                                                     |  | Lending &  |           |                  | Residential         |   |           |                   
|                                                                                     |  | Investment |           |                  | Mortgage Investment |   |           | Consolidated Total | 
|                                                                                     |  |            |           |                  |                     |   |           |                    | 
|                                                                                     |  |            |           | ($ in thousands) |                     |   |          
|Total interest and fee income                                                        |  | $          | 209,670   |                  |                     | $ | 27,370    |                    |  | $ | 237,040    |  
|Operating lease income                                                               |  |            | 4,625     |                  |                     |   |          |                    |  |   | 4,625      |  
|Interest expense                                                                     |  |            | 72,833    |                  |                     |   | 24,949    |                    |  |   | 97,782     |  
|Provision for loan losses                                                            |  |            | 14,412    |                  |                     |   | 301       |                    |  |   | 14,713     |  
|Operating expenses(1)                                                                |  |            | 48,365    |                  |                     |   | 2,254     |                    |  |   | 50,619     |  
|Other income (expense)(2)                                                            |  |            | 6,450     |                  |                     |   | (6,106    | )                  |  |   | 344        |  
|Noncontrolling interests expense                                                     |  |            | (861      | )                |                     |   |          |                    |  |   | (861       | )
|                                                                                     |  |            |           |                  |                     |   |           |                    | 
|Net income (loss) before income taxes and cumulative effect of
    accounting change |  |            | 84,274    |                  |                     |   | (6,240    | )                  |  |   | 78,034     |  
|Income taxes                                                                         |  |            | 13,110    |                  |                     |   |          |                    |  |   | 13,110     |  
|                                                                                     |  |            |           |                  |                     |   |           |                    | 
|Net income (loss) before cumulative effect of accounting change                      |  |            | 71,164    |                  |                     |   | (6,240    | )                  |  |   | 64,924     |  
|Cumulative effect of accounting change, net of taxes                                 |  |            | 370       |                  |                     |   |          |                    |  |   | 370        |  
|                                                                                     |  |            |           |                  |                     |   |           |                    | 
|Net income (loss)                                                                    |  | $          | 71,534    |                  |                     | $ | (6,240    | )                  |  | $ | 65,294     |  
|                                                                                     |  |            |           |                  |                     |   |           |                    | 
|Total assets                                                                         |  | $          | 7,048,508 |                  |                     | $ | 5,756,628 |                    |  | $ | 12,805,136 |  
|                                                                                     |  |            |           |                  |                     |   |           |                    | 






|    |                                                                                                                                                                                                                                                                   
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Operating expenses of our Residential Mortgage Investment
    segment consist primarily of direct expenses related to
    compensation and benefits, professional fees paid to our
    investment manager and other direct expenses.                              
|   
|(2) | Other income (expense) for our Residential Mortgage Investment
    segment includes the net of interest income and expense accruals
    related to certain of our derivatives along with the changes in
    fair value of our investments and related derivatives.

Summary of Significant Accounting Policies.


28



---



##### 



NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|         |                  
|-------- | -----------------
|Note 18. | Subsequent Events

30-day








29



---



##### 








|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
    CONDITION AND RESULTS OF OPERATIONS

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS


10-Q,


Managements Discussion and Analysis of Financial
Condition and Results of Operations Risk
Factors 10-K


10-Q.


Overview and Highlights








| |   |                                                                                                                                                                                                                                                                                             
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Structured Finance,which generally engages in commercial
    and residential real estate lending and also provides
    asset-based lending to finance companies;                                                                                                                            
|
| |  | Healthcare and Specialty Finance,which generally
    provides asset-based revolving lines of credit, first mortgage
    loans, sale-leaseback financing, equipment financing and other
    senior and mezzanine loans to healthcare businesses and a broad
    range of other companies; and
|
| |  | Corporate Finance,which generally provides senior and
    mezzanine loans principally to businesses backed by private
    equity sponsors.                                                                                                                                                  

30



---



##### 







| |              
| | -------------
| | REIT Election





| |                        
| | -----------------------
| | Internal Reorganization






day-to




| |   |                                                                                        
| | - | ---------------------------------------------------------------------------------------
| |  | any unrealized gains, losses or other items that do not affect
    realized net income;
|
| |  | our direct or indirect ownership interest in our TRSs; and                             

31



---



##### 





| |   |                                                                                        
| | - | ---------------------------------------------------------------------------------------
| |  | one-time events affecting the computation of equity as a result
    of changes in GAAP.





| |                                         
| | ----------------------------------------
| | Residential Mortgage Investment Strategy





| |      
| | -----
| | Goals



| |                    
| | -------------------
| | Operating as a REIT





| |                                                        
| | -------------------------------------------------------
| | Developing Our Residential Mortgage Investment Business





| |                           
| | --------------------------
| | Accessing External Funding



32



---



##### 







Consolidated Results of Operations








| |                                     
| | ------------------------------------
| | Explanation of Key Reporting Metrics

Interest Income.


33



---



##### 



Fee Income.


Operating Lease Income.


Interest Expense. 30-day


Provision for Loan Losses.


Other Income.


Operating Expenses.


Income Taxes.


34



---



##### 





Adjusted Earnings.




| |                                                                
| | ---------------------------------------------------------------
| | Operating Results for the Three Months Ended
    March 31, 2006





| |   |                                                                                                                                                                                                                                                                                         
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Significant growth in our commercial loan portfolio;                                                                                                                                                                                                                                    
|
| |  | Purchases of investments in residential mortgage loans and
    mortgage-backed securities;                                                                                                                                                                                              
|
| |  | Increased borrowings to fund our growth;                                                                                                                                                                                                                                                
|
| |  | Increased operating expenses, consisting primarily of higher
    employee compensation directly related to increases in the
    number of employees necessary to operate and manage our
    Commercial Lending & Investment segment and our
    Residential Mortgage Investment segment;
|
| |  | Addition of operating lease income related to our sale-leaseback
    transaction;                                                                                                                                                                                                       
|
| |  | Increased short-term interest rates and;                                                                                                                                                                                                                                                
|
| |  | Decreased lending and borrowing spreads.                                                                                                                                                                                                                                                

35



---



##### 





|                                                     |  |                    |         |   |      |   |         |          |  |   |          |   |  |  |     |   
|---------------------------------------------------- |  | ------------------ | ------- | - | ---- | - | ------- | -------- |  | - | -------- | - |  |  | --- | --
|                                                     |  | Three Months Ended |         |   |      |   |        
|                                                     |  | March 31,          |         |   |      |   |        
|                                                     |  |                    |         |   |      |   |        
|                                                     |  | 2006               |         |   | 2005 |   |         | $ Change |  |   | % Change |  
|                                                     |  |                    |         |   |      |   |         |          |  |   |          |  
|                                                     |  | ($ in thousands)   |         |   |     
|Interest income                                      |  | $                  | 195,498 |   |      | $ | 108,574 |          |  | $ | 86,924   |   |  |  | 80  | % 
|Fee income                                           |  |                    | 41,542  |   |      |   | 26,483  |          |  |   | 15,059   |   |  |  | 57  | % 
|Operating lease income                               |  |                    | 4,625   |   |      |   |        |          |  |   | 4,625    |   |  |  | N/A |   
|Interest expense                                     |  |                    | 97,782  |   |      |   | 34,586  |          |  |   | 63,196   |   |  |  | 183 | % 
|Provision for loan losses                            |  |                    | 14,713  |   |      |   | 9,902   |          |  |   | 4,811    |   |  |  | 49  | % 
|Operating expenses                                   |  |                    | 50,619  |   |      |   | 30,620  |          |  |   | 19,999   |   |  |  | 65  | % 
|Other income                                         |  |                    | 344     |   |      |   | 4,310   |          |  |   | (3,966   | ) |  |  | (92 | )%
|Noncontrolling interests expense                     |  |                    | (861    | ) |      |   |        |          |  |   | (861     | ) |  |  | N/A |   
|Income taxes                                         |  |                    | 13,110  |   |      |   | 25,061  |          |  |   | (11,951  | ) |  |  | (48 | )%
|Cumulative effect of accounting change, net of taxes |  |                    | 370     |   |      |   |        |          |  |   | 370      |   |  |  | N/A |   
|Net income                                           |  |                    | 65,294  |   |      |   | 39,198  |          |  |   | 26,096   |   |  |  | 67  | % 



| |                                                                 
| | ----------------------------------------------------------------
| | Comparison of the Three Months Ended March 31, 2006
    and 2005





| |                
| | ---------------
| | Interest Income

30-day 30-day






| |           
| | ----------
| | Fee Income



36



---



##### 







| |                       
| | ----------------------
| | Operating Lease Income





| |                 
| | ----------------
| | Interest Expense

30-day






| |                   
| | ------------------
| | Net Finance Margin



37



---



##### 





|                                      |                 |                              |           |              |             |   |         |         |  |  |              |       |   |             |           |  |         |   |         |         |  |  |       |      |  
|------------------------------------- | --------------- | ---------------------------- | --------- | ------------ | ----------- | - | ------- | ------- |  |  | ------------ | ----- | - | ----------- | --------- |  | ------- | - | ------- | ------- |  |  | ----- | ---- | -
|                                      |                 | Three Months Ended March 31, |          
|                                      |                 |                              |          
|                                      |                 | 2006                         |           |              | 2005        |  
|                                      |                 |                              |           |              |             |  
|                                      |                 |                              |           | Interest and |             |   |         |         |  |  | Interest and |       |   |            
|                                      |                 | Weighted                     |           |              | Fee Income/ |   |         | Average |  |  | Weighted     |       |   | Fee Income/ |           |  | Average |  
|                                      |                 | Average                      |           |              | Interest    |   |         | Yield/  |  |  | Average      |       |   | Interest    |           |  | Yield/  |  
|                                      |                 | Balance                      |           |              | Expense     |   |         | Cost    |  |  | Balance      |       |   | Expense     |           |  | Cost    |  
|                                      |                 |                              |           |              |             |   |         |         |  |  |              |       |   |             |           |  |         |  
|                                      |                 | ($ in thousands)             |          
|Interest earning assets:              |                 |                              |           |              |             |   |         |         |  |  |              |       |   |             |           |  |         |   |         |         |  |  |       |     
|                                      | Interest income |                              |           |              |             |   | $       | 168,128 |  |  |              | 10.18 | % |             |           |  |         |   | $       | 108,574 |  |  |       | 9.21 | %
|                                      | Fee income      |                              |           |              |             |   |         | 41,542  |  |  |              | 2.51  |   |             |           |  |         |   |         | 26,483  |  |  |       | 2.25 |  
|                                      |                 |                              |           |              |             |   |         |         |  |  |              |       |   |             |           |  |         |  
|Total interest earning assets(1)      |                 | $                            | 6,699,752 |              |             |   | 209,670 |         |  |  | 12.69        |       |   | $           | 4,780,423 |  |         |   | 135,057 |         |  |  | 11.46 |     
|Total direct real estate investments  |                 |                              | 126,848   |              |             |   | 4,625   |         |  |  | 14.79        |       |   |             |          |  |         |   |        |         |  |  |      |     
|                                      |                 |                              |           |              |             |   |         |         |  |  |              |       |   |             |           |  |         |  
|Total income earning assets           |                 |                              | 6,826,600 |              |             |   | 214,295 |         |  |  | 12.73        |       |   |             | 4,780,423 |  |         |   | 135,057 |         |  |  | 11.46 |     
|Total interest bearing liabilities(2) |                 |                              | 5,322,890 |              |             |   | 72,833  |         |  |  | 5.55         |       |   |             | 3,784,303 |  |         |   | 34,586  |         |  |  | 3.71  |     
|                                      |                 |                              |           |              |             |   |         |         |  |  |              |       |   |             |           |  |         |  
|Net finance spread                    |                 |                              |           |              |             | $ | 141,462 |         |  |  | 7.18         | %     |   |             |           |  |         | $ | 100,471 |         |  |  | 7.75  | %   
|                                      |                 |                              |           |              |             |   |         |         |  |  |              |       |   |             |           |  |         |  
|Net finance margin                    |                 |                              |           |              |             |   |         |         |  |  | 8.40         | %     |   |             |           |  |         |   |         |         |  |  | 8.52  | %   
|                                      |                 |                              |           |              |             |   |         |         |  |  |              |       |   |             |           |  |         |  






|    |                                                                                                                                         
|--- | ----------------------------------------------------------------------------------------------------------------------------------------
|(1) | Interest earning assets include cash, restricted cash, loans and
    investments in debt securities.                                    
|   
|(2) | Interest bearing liabilities include secured and unsecured
    credit facilities, term debt, convertible debt and subordinated
    debt.





| |                          
| | -------------------------
| | Provision for Loan Losses





| |             
| | ------------
| | Other Income

break-up




38



---



##### 







| |                   
| | ------------------
| | Operating Expenses







| |             
| | ------------
| | Income Taxes



39



---



##### 





| |                  
| | -----------------
| | Adjusted Earnings



|                               |                       |                                                                                                          |         |             |        |  
|------------------------------ | --------------------- | -------------------------------------------------------------------------------------------------------- | ------- | ----------- | ------ | -
|Net income                     |                       | $                                                                                                        | 65,294  |            
|                               | Add:                  |                                                                                                          |         |             |       
|                               |                       | Real estate depreciation(1)                                                                              |         |             | 1,390  |  
|                               |                       | Amortization of deferred financing fees                                                                  |         |             | 6,902  |  
|                               |                       | Net unrealized losses on residential mortgage investment
    portfolio, including related derivatives(2) |         |             | 4,447  |  
|                               |                       | Unrealized gain on derivatives and foreign currencies, net                                               |         |             | (251   | )
|                               |                       | Unrealized loss on investments, net                                                                      |         |             | 1,236  |  
|                               |                       | Provision for loan losses                                                                                |         |             | 14,713 |  
|                               | Less:                 |                                                                                                          |         |             |       
|                               |                       | Charge offs(3)                                                                                           |         |             | 276    |  
|                               |                       | Non-recurring items                                                                                      |         |             |       |  
|                               |                       | Cumulative effect of accounting change, net of taxes                                                     |         |             | 370    |  
|Adjustment for income taxes(4) |                       |                                                                                                          | (11,384 | )          
|                               |                       |                                                                                                          |        
|Adjusted earnings              |                       | $                                                                                                        | 81,701  |            
|                               |                       |                                                                                                          |        
|Net income per share:          |                       |                                                                                                          |         |            
|                               | Basic  as reported   |                                                                                                          | $       | 0.44        |       
|                               | Diluted  as reported |                                                                                                          | $       | 0.42        |       
|Adjusted earnings per share:   |                       |                                                                                                          |         |            
|                               | Basic                 |                                                                                                          | $       | 0.55        |       
|                               | Diluted               |                                                                                                          | $       | 0.53        |       
|Average shares outstanding:    |                       |                                                                                                          |         |            
|                               | Basic                 |                                                                                                          |         | 149,722,991 |       
|                               | Diluted               |                                                                                                          |         | 154,450,572 |       






|    |                                                                                                                                                                                                                                                                                                                                                                        
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Depreciation for direct real estate investments only. Excludes
    depreciation for corporate leasehold improvements, fixed assets
    and other non-real estate items.                                                                                                                                                                                                
|   
|(2) | Includes mark-to-market
    changes for residential mortgage-backed securities and related
    derivatives.                                                                                                                                                                                                                                                            
|   
|(3) | To the extent we experience losses on loans for which we
    specifically provided prior to January 1, 2006, there will
    be no adjustment to earnings. All charge offs incremental to
    previously provided for losses will be deducted from net income.                                                                                                          
|   
|(4) | Adjustments to net income shown on a pre-tax basis. Adjustment
    for income taxes made for TRS items assuming a 38.6% tax rate
    for the three months ended March 31, 2006. Also included
    for the three months ended March 31, 2006 is the write-off
    of a $4.7 million net deferred tax liability recorded in
    connection with our conversion to a REIT.

40



---



##### 



Financial Condition




| |                                        
| | ---------------------------------------
| | Commercial Lending & Investment Segment



| |                                         
| | ----------------------------------------
| | Commercial Lending Portfolio Composition



|                                              |                                     |                |           |              |  |  |     |    |   |   |           |           |  |  |     |    |  
|--------------------------------------------- | ----------------------------------- | -------------- | --------- | ------------ |  |  | --- | -- | - | - | --------- | --------- |  |  | --- | -- | -
|                                              |                                     | March 31, 2006 |           |              |  |  |    
|                                              |                                     |                |           |              |  |  |    
|                                              |                                     |                |           | December 31, | 
|                                              |                                     |                |           | 2005         | 
|                                              |                                     |                |           |              | 
|                                              |                                     | ) in thousands |          
|                                              |                                     | ($             |          
|Composition of portfolio by loan type:        |                                     |                |           |              |  |  |     |    |   |   |           |           |  |  |     |   
|                                              | First mortgage loans(1)             |                | $         | 2,389,551    |  |  |     | 37 | % |   | $         | 1,970,709 |  |  |     | 33 | %
|                                              | Senior secured asset-based loans(1) |                |           | 2,030,419    |  |  |     | 32 |   |   |           | 2,022,123 |  |  |     | 34 |  
|                                              | Senior secured cash flow loans(1)   |                |           | 1,745,409    |  |  |     | 27 |   |   |           | 1,740,184 |  |  |     | 29 |  
|                                              | Mezzanine loans                     |                |           | 267,558      |  |  |     | 4  |   |   |           | 254,727   |  |  |     | 4  |  
|                                              |                                     |                |           |              |  |  |     |    |   |   |           |          
|Total                                         |                                     | $              | 6,432,937 |              |  |  | 100 | %  |   | $ | 5,987,743 |           |  |  | 100 | % 
|                                              |                                     |                |           |              |  |  |     |    |   |   |           |          
|Composition of portfolio by lending business: |                                     |                |           |              |  |  |     |    |   |   |           |           |  |  |     |   
|                                              | Structured Finance                  |                | $         | 2,152,785    |  |  |     | 33 | % |   | $         | 1,909,149 |  |  |     | 32 | %
|                                              | Healthcare and Specialty Finance    |                |           | 2,501,217    |  |  |     | 39 |   |   |           | 2,281,419 |  |  |     | 38 |  
|                                              | Corporate Finance                   |                |           | 1,778,935    |  |  |     | 28 |   |   |           | 1,797,175 |  |  |     | 30 |  
|                                              |                                     |                |           |              |  |  |     |    |   |   |           |          
|Total                                         |                                     | $              | 6,432,937 |              |  |  | 100 | %  |   | $ | 5,987,743 |           |  |  | 100 | % 
|                                              |                                     |                |           |              |  |  |     |    |   |   |           |          






|    |                       
|--- | ----------------------
|(1) | Includes Term B loans.



|                                              |                                  |          |     |                  |           |  |       |              |  |  |          |     |  |  |        |        | 
|--------------------------------------------- | -------------------------------- | -------- | --- | ---------------- | --------- |  | ----- | ------------ |  |  | -------- | --- |  |  | ------ | ------ | 
|                                              |                                  |          |     |                  |           |  |       | Average Loan | 
|                                              |                                  | Number   |     |                  | Average   |  |       | Number of    |  |  | Size Per |    
|                                              |                                  | of Loans |     |                  | Loan Size |  |       | Clients      |  |  | Client   |    
|                                              |                                  |          |     |                  |           |  |       |              |  |  |          |    
|                                              |                                  |          |     | ($ in thousands) |           |  |      
|Composition of portfolio by lending business: |                                  |          |     |                  |           |  |       |              |  |  |          |     |  |  |        |       
|                                              | Structured Finance               |          |     | 207              |           |  | $     | 10,400       |  |  |          | 176 |  |  | $      | 12,232 | 
|                                              | Healthcare and Specialty Finance |          |     | 427              |           |  |       | 5,858        |  |  |          | 305 |  |  |        | 8,201  | 
|                                              | Corporate Finance                |          |     | 326              |           |  |       | 5,457        |  |  |          | 149 |  |  |        | 11,939 | 
|                                              |                                  |          |     |                  |           |  |       |              |  |  |          |    
|Overall portfolio                             |                                  |          | 960 |                  |           |  | 6,701 |              |  |  | 630      |     |  |  | 10,211 |       
|                                              |                                  |          |     |                  |           |  |       |              |  |  |          |    



|                                   |                                  |                  |           |         |            |   |           |            |  |   |         |         |  |   |           |           | 
|---------------------------------- | -------------------------------- | ---------------- | --------- | ------- | ---------- | - | --------- | ---------- |  | - | ------- | ------- |  | - | --------- | --------- | 
|                                   |                                  | Due in           |           |         | Due in     |   |           |            |  |  
|                                   |                                  | One Year         |           |         | One to     |   |           | Due After  |  |   |        
|                                   |                                  | Or Less          |           |         | Five Years |   |           | Five Years |  |   | Total   |        
|                                   |                                  |                  |           |         |            |   |           |            |  |   |         |        
|                                   |                                  | ($ in thousands) |          
|Scheduled maturities by loan type: |                                  |                  |           |         |            |   |           |            |  |   |         |         |  |   |           |          
|                                   | First mortgage loans             |                  | $         | 650,265 |            |   | $         | 1,542,367  |  |   | $       | 196,919 |  |   | $         | 2,389,551 | 
|                                   | Senior secured asset-based loans |                  |           | 238,678 |            |   |           | 1,773,489  |  |   |         | 18,252  |  |   |           | 2,030,419 | 
|                                   | Senior secured cash flow loans   |                  |           | 281,542 |            |   |           | 1,328,188  |  |   |         | 135,679 |  |   |           | 1,745,409 | 
|                                   | Mezzanine loans                  |                  |           | 78,626  |            |   |           | 119,826    |  |   |         | 69,106  |  |   |           | 267,558   | 
|                                   |                                  |                  |           |         |            |   |           |            |  |   |         |        
|Total                              |                                  | $                | 1,249,111 |         |            | $ | 4,763,870 |            |  | $ | 419,956 |         |  | $ | 6,432,937 |          
|                                   |                                  |                  |           |         |            |   |           |            |  |   |         |        

41



---



##### 





|                                       |                                  |                  |           |           |       |   |         |         |  |   |           |           | 
|-------------------------------------- | -------------------------------- | ---------------- | --------- | --------- | ----- | - | ------- | ------- |  | - | --------- | --------- | 
|                                       |                                  | Adjustable       |           |           | Fixed |   |         |        
|                                       |                                  | Rates            |           |           | Rates |   |         | Total   | 
|                                       |                                  |                  |           |           |       |   |         |         | 
|                                       |                                  | ($ in thousands) |          
|Composition of portfolio by loan type: |                                  |                  |           |           |       |   |         |         |  |   |           |          
|                                       | First mortgage loans             |                  | $         | 2,101,444 |       |   | $       | 288,107 |  |   | $         | 2,389,551 | 
|                                       | Senior secured asset-based loans |                  |           | 2,000,239 |       |   |         | 30,180  |  |   |           | 2,030,419 | 
|                                       | Senior secured cash flow loans   |                  |           | 1,740,149 |       |   |         | 5,260   |  |   |           | 1,745,409 | 
|                                       | Mezzanine loans                  |                  |           | 208,640   |       |   |         | 58,918  |  |   |           | 267,558   | 
|                                       |                                  |                  |           |           |       |   |         |         | 
|Total                                  |                                  | $                | 6,050,472 |           |       | $ | 382,465 |         |  | $ | 6,432,937 |          
|                                       |                                  |                  |           |           |       |   |         |         | 
|Percentage of total portfolio          |                                  |                  | 94        | %         |       |   | 6       | %       |  |   | 100       | %        
|                                       |                                  |                  |           |           |       |   |         |         | 





| |                                             
| | --------------------------------------------
| | Credit Quality and Allowance for Loan Losses



|                                               |  |                  |          |   |              |   |          |  
|---------------------------------------------- |  | ---------------- | -------- | - | ------------ | - | -------- | -
|                                               |  | March 31,        |          |   | December 31, |  
|Commercial Loan Asset Classification           |  | 2006             |          |   | 2005         |  
|                                               |  |                  |          |   |              |  
|                                               |  | ($ in thousands) |         
|Loans 60 or more days contractually delinquent |  | $                | 42,295   |   |              | $ | 41,785   |  
|Non-accrual loans(1)                           |  |                  | 144,018  |   |              |   | 137,446  |  
|Impaired loans(2)                              |  |                  | 214,565  |   |              |   | 199,257  |  
|Less: loans in multiple categories             |  |                  | (181,731 | ) |              |   | (175,070 | )
|                                               |  |                  |          |   |              |  
|Total                                          |  | $                | 219,147  |   |              | $ | 203,418  |  
|                                               |  |                  |          |   |              |  
|Total as a percentage of total loans           |  |                  | 3.41     | % |              |   | 3.40     | %
|                                               |  |                  |          |   |              |  






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes commercial loans with an aggregate principal balance of
    $33.6 million and $37.6 million as of March 31,
    2006 and December 31, 2005, respectively, which were also
    classified as loans 60 or more days contractually delinquent.                                                                                                                                                                                                                                   
|   
|(2) | Includes commercial loans with an aggregate principal balance of
    $37.7 million and $37.6 million as of March 31,
    2006 and December 31, 2005, respectively, which were also
    classified as loans 60 or more days contractually delinquent,
    and commercial loans with an aggregate principal balance of
    $144.0 million and $137.4 million as of March 31,
    2006 and December 31, 2005, respectively, which were also
    classified as loans on non-accrual status.

Accounting by Creditors for
Impairment of a Loan


42



---



##### 





Accounting for Debtors and Creditors for Troubled Debt
Restructurings.






| |                               
| | ------------------------------
| | Direct Real Estate Investments





| |            
| | -----------
| | Investments







43



---



##### 





| |                                        
| | ---------------------------------------
| | Residential Mortgage Investment Segment



| |                      
| | ---------------------
| | Portfolio Composition



3-year, 5-year 7-year Off-Balance
Sheet Risk Residential
Mortgage-Backed Securities


5-year Mortgage-Related
Receivables.




| |                                             
| | --------------------------------------------
| | Credit Quality and Allowance for Loan Losses





| |          
| | ---------
| | Financing



Quantitative and Qualitative Disclosures About Market Risk


Liquidity and Capital Resources




44



---



##### 















| |                          
| | -------------------------
| | Cash and Cash Equivalents





45



---



##### 













| |           
| | ----------
| | Borrowings

Borrowings 10-K,






| |                      
| | ---------------------
| | Repurchase Agreements





46



---



##### 







| |                  
| | -----------------
| | Credit Facilities





| |          
| | ---------
| | Term Debt

Borrowings


30-day




| |                  
| | -----------------
| | Subordinated Debt





| |                         
| | ------------------------
| | Debt Covenant Compliance



47



---



##### 





| |                
| | ---------------
| | Equity Offering



Off-Balance Sheet Risk


Derivatives
and Off-Balance Sheet Financial Instruments Credit Risk 10-K Quantitative and Qualitative Disclosures About Market Risk




| |                          
| | -------------------------
| | Term Debt Securitizations





| |                           
| | --------------------------
| | Commitments and Guarantees

Guarantors Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of
Others.




| |                                                          
| | ---------------------------------------------------------
| | Derivatives  Commercial Lending &
    Investment Segment

30-day 30-day 30-day


90-day




48



---



##### 



30-day






| |                                                                                                          
| | ---------------------------------------------------------------------------------------------------------
| | Derivatives and Off-Balance Sheet Financial
    Instruments  Residential Mortgage Investment
    Segment



Critical Accounting Policies Accounting for Derivative Instruments
and Hedging Activities


Quantitative and Qualitative Disclosures About Market Risk




| |                                        
| | ---------------------------------------
| | Commercial Lending & Investment Segment

30-day 30-day 30-day


Off-Balance Sheet Risk


49



---



##### 



12-month


|                           |  |                      |        |  
|-------------------------- |  | -------------------- | ------ | -
|                           |  | Estimated (Decrease) |       
|                           |  | Increase in          |       
|                           |  | Net Interest Income  |       
|Rate Change (Basis Points) |  | Over 12 Months       |       
|                           |  |                      |       
|                           |  | ($ in thousands)     |       
|-100                       |  | $                    | (9,217 | )
|-50                        |  |                      | (5,281 | )
|+50                        |  |                      | 5,866  |  
|+100                       |  |                      | 11,738 |  





|                                       |                                   |                  |           |           |                 |  |     |    |  
|-------------------------------------- | --------------------------------- | ---------------- | --------- | --------- | --------------- |  | --- | -- | -
|                                       |                                   | Amount           |           |           | Percentage of   | 
|                                       |                                   | Outstanding      |           |           | Total Portfolio | 
|                                       |                                   |                  |           |           |                 | 
|                                       |                                   | ($ in thousands) |          
|Loans with contractual interest rates: |                                   |                  |           |           |                 |  |     |   
|                                       | Exceeding the interest rate floor |                  | $         | 3,670,545 |                 |  |     | 57 | %
|                                       | At the interest rate floor        |                  |           |          |                 |  |     |   |  
|                                       | Below the interest rate floor     |                  |           | 19,466    |                 |  |     |   |  
|Loans with no interest rate floor      |                                   |                  | 2,742,926 |           |                 |  | 43  |   
|                                       |                                   |                  |           |           |                 | 
|Total                                  |                                   | $                | 6,432,937 |           |                 |  | 100 | % 
|                                       |                                   |                  |           |           |                 | 

mark-to




| |                                        
| | ---------------------------------------
| | Residential Mortgage Investment Segment





50



---



##### 





Off-Balance Sheet
Risk.




|                           |  |                       |        |   |                      |  |       |   
|-------------------------- |  | --------------------- | ------ | - | -------------------- |  | ----- | --
|                           |  | Estimated Decrease in |        |   | Percentage of        | 
|Rate Change (Basis Points) |  | Fair Value            |        |   | Total Segment Assets | 
|                           |  |                       |        |   |                      | 
|                           |  | ($ in thousands)      |        |   |                     
|-100                       |  | $                     | (5,538 | ) |                      |  | (0.10 | )%
|-50                        |  |                       | (1,098 | ) |                      |  | (0.02 | ) 
|+50                        |  |                       | (195   | ) |                      |  |      |   
|+100                       |  |                       | (1,259 | ) |                      |  | (0.02 | ) 



Critical Accounting Policies






| |                                                                                   
| | ----------------------------------------------------------------------------------
| | Interest Income on Mortgage-Related Receivables and
    Mortgage-Backed Securities

Accounting for Nonrefundable Fees and Costs Associated with
Originating or Acquiring Loans and Initial Direct Costs of
Leases catch-up






| |                            
| | ---------------------------
| | Income Recognition on Loans



51



---



##### 













| |                          
| | -------------------------
| | Allowance for Loan Losses



| |                                        
| | ---------------------------------------
| | Commercial Lending & Investment Segment





| |   |                                                                                                                                    
| | - | -----------------------------------------------------------------------------------------------------------------------------------
| |  | the types of loans, for example, whether the loan is
    underwritten based on the borrowers assets, real estate or
    cash flow;
|
| |  | our historical losses with regard to the loan types;                                                                               
|
| |  | our expected losses with regard to the loan types; and                                                                             
|
| |  | the internal credit rating assigned to the loans.                                                                                  



52



---



##### 



Accounting for Contingencies




|                                         |  |                    |         |  
|---------------------------------------- |  | ------------------ | ------- | -
|                                         |  | Estimated Increase |        
|                                         |  | (Decrease) in the  |        
|                                         |  | Allowance for      |        
|Change in Reserve Factors (Basis Points) |  | Loan Losses        |        
|                                         |  |                    |        
|                                         |  | ($ in thousands)   |        
|+50                                      |  | $                  | 30,979  |  
|+25                                      |  |                    | 15,433  |  
|-25                                      |  |                    | (15,659 | )
|-50                                      |  |                    | (20,902 | )





| |                                        
| | ---------------------------------------
| | Residential Mortgage Investment Segment

loan-to




| |                         
| | ------------------------
| | Valuation of Investments

over-the


53



---



##### 







| |                       
| | ----------------------
| | Term Debt Transactions

Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities




| |                                                                 
| | ----------------------------------------------------------------
| | Mortgage-Backed Securities and Related Repurchase
    Agreements

Accounting for Certain Investments in Debt and Equity
Securities






| |                                                                         
| | ------------------------------------------------------------------------
| | Mortgage-Related Receivables and Related Owner
    Trust Securitizations

Consolidation of
Variable Interest Entities  An Interpretation of ARB
No. 51




54



---



##### 









| |             
| | ------------
| | Income Taxes





55



---



##### 








|        |                                                           
|------- | ----------------------------------------------------------
|ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Managements Discussion and
Analysis of Financial Condition and Results of Operations Quantitative and Qualitative Disclosures about Market
Risk Derivatives and Off-Balance Sheet Financial Instruments 10-K,







|        |                        
|------- | -----------------------
|ITEM 4. | CONTROLS AND PROCEDURES

13a-15


56



---



##### 






PART II. OTHER INFORMATION







|        |                  
|------- | -----------------
|ITEM 1. | LEGAL PROCEEDINGS






ITEM 1A.     RISK FACTORS


Risk Factors 10-K,





ITEM 2.     UNREGISTERED SALES
OF EQUITY SECURITIES AND USE OF PROCEEDS









|        |                                
|------- | -------------------------------
|ITEM 3. | DEFAULTS UPON SENIOR SECURITIES








|        |                                                    
|------- | ---------------------------------------------------
|ITEM 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS








|        |                  
|------- | -----------------
|ITEM 5. | OTHER INFORMATION








|        |         
|------- | --------
|ITEM 6. | EXHIBITS

(a) Exhibits




57



---



##### 






Signatures




|                   |  |                                                                                                                               
|------------------ |  | ------------------------------------------------------------------------------------------------------------------------------
|                   |  | CAPITALSOURCE INC.                                                                                                            
|Date: May 10, 2006 |  | /s/ JOHN K. DELANEYJohn
    K. Delaney
    Chairman of the Board and Chief Executive Officer
    (Principal Executive Officer)
|Date: May 10, 2006 |  | /s/ THOMAS A. FINKThomas
    A. Fink
    Chief Financial Officer
    (Principal Financial and Accounting Officer)             

58



---



##### 






INDEX TO EXHIBITS


|        |   |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                
|------- | - | ----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |   |            
|No.     |   | Description
|        |   |            
|        | 3 | .1          |  | Second Amended and Restated Certificate of Incorporation
    (incorporated by reference to the same-numbered exhibit to the
    registrants Current Report on Form 8-K dated
    May 3, 2006).                                                                                                                                                                                                                                                
|        | 3 | .2          |  | Amended and Restated Bylaws (incorporated by reference to the
    same-numbered exhibit to the registrants Quarterly Report
    on Form 10-Q for the quarter ended June 30, 2003).                                                                                                                                                                                                                                                            
|        | 4 | .1          |  | Form of Certificate of Common Stock of CapitalSource Inc.
    (incorporated by reference to the same-numbered exhibit to the
    registrants Registration Statement on Form S-1 (Reg.
    No. 333-106076)).                                                                                                                                                                                                                                   
|        | 4 | .3          |  | Indenture dated as of October 30, 2002, by and between
    CapitalSource Commercial Loan Trust 2002-2, as Issuer, and Wells
    Fargo Bank Minnesota, National Association, as Indenture Trustee
    (incorporated by reference to the same-numbered exhibit to the
    registrants Registration Statement on Form S-1 (Reg.
    No. 333-106076)).                                                                                            
|        | 4 | .4          |  | Indenture dated as of April 17, 2003, by and between
    CapitalSource Commercial Loan Trust 2003-1, as Issuer, and Wells
    Fargo Bank Minnesota, National Association, as Indenture Trustee
    (incorporated by reference to the same-numbered exhibit to the
    registrants Registration Statement on Form S-1 (Reg.
    No. 333-106076)).                                                                                              
|        | 4 | .5          |  | Indenture dated as of September 17, 2003, between
    CapitalSource Funding II Trust and Wells Fargo Bank
    Minnesota, National Association, as Indenture Trustee
    (incorporated by reference to the same-numbered exhibit to the
    registrants Quarterly Report on Form 10-Q for the
    quarter ended September 30, 2003).                                                                                                           
|        | 4 | .6          |  | Indenture dated as of November 25, 2003, by and between
    CapitalSource Commercial Loan Trust 2003-2, as Issuer, and Wells
    Fargo Bank Minnesota, National Association, as Indenture Trustee
    (incorporated by reference to the same-numbered exhibit to the
    registrants Registration Statement on Form S-1 (Reg.
    No. 333-112002)).                                                                                           
|        | 4 | .7          |  | Indenture dated as of March 19, 2004, by and among
    CapitalSource Inc., as Issuer, U.S. Bank National
    Association, as Trustee, and CapitalSource Holdings LLC and
    CapitalSource Finance LLC, as Guarantors, including form of
    Senior Convertible Debenture Due 2034 (incorporated by reference
    to the same-numbered exhibit to the registrants Quarterly
    Report on Form 10-Q for the quarter ended March 31,
    2004).
|        | 4 | .7.1        |  | First Supplemental Indenture dated as of October 18, 2004,
    by and among the registrant, CapitalSource Holdings Inc. and
    CapitalSource Finance LLC, as Guarantors, and U.S. Bank
    National Association, as Trustee (incorporated by reference to
    Exhibit 4.1.1 to the registrants Registration
    Statement on Form S-3 (Reg. No. 333-118744)).                                                                                
|        | 4 | .8          |  | Indenture dated as of June 22, 2004, by and among
    CapitalSource Commercial Loan Trust 2004-1, as Issuer, and Wells
    Fargo Bank Minnesota, National Association, as Indenture Trustee
    (incorporated by reference to the same-numbered exhibit to the
    registrants Quarterly Report on Form 10-Q for the
    quarter ended June 30, 2004).                                                                                        
|        | 4 | .9          |  | Indenture dated as of October 28, 2004, by and between
    CapitalSource Commercial Loan Trust 2004-2, as the Issuer, and
    Wells Fargo Bank, National Association, as the Indenture Trustee
    (incorporated by reference to the same-numbered exhibit to the
    registrants Current Report on Form 8-K dated
    October 28, 2004).                                                                                                     
|        | 4 | .10         |  | Indenture dated as of July 7, 2004, by and among
    CapitalSource Inc., as Issuer, U.S. Bank National
    Association, as Trustee, and CapitalSource Holdings LLC and
    CapitalSource Finance LLC, as Guarantors, including form of
    3.5% Senior Convertible Debenture Due 2034 (incorporated by
    reference to Exhibit 4.1 to the registrants
    Registration Statement on Form S-3
    (Reg. No. 333-118738)).                     
|        | 4 | .10.1       |  | First Supplemental Indenture dated as of October 18, 2004,
    by and among the registrant, CapitalSource Holdings Inc. and
    CapitalSource Finance LLC, as Guarantors, and U.S. Bank
    National Association, as Trustee (incorporated by reference to
    Exhibit 4.1.1 to the registrants Registration
    Statement on Form S-3 (Reg. No. 333-118738)).                                                                                
|        | 4 | .11         |  | Indenture dated as of April 14, 2005, by and between
    CapitalSource Commercial Loan Trust 2005-1, as the Issuer, and
    Wells Fargo Bank, National Association, as the Indenture Trustee
    (incorporated by reference to the same-numbered exhibit to the
    registrants Current Report on Form 8-K dated
    April 20, 2005).                                                                                                         

59



---



##### 



|        |    |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|------- | -- | ----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|No.     |    | Description
|        |    |            
|        | 4  | .12         |  | Junior Subordinated Indenture, dated as of November 21,
    2005, among CapitalSource Finance LLC, as Issuer, CapitalSource
    Inc., as Guarantor, and Wilmington Trust Company, as Trustee
    (incorporated by reference to the same-numbered exhibit to the
    registrants Annual Report on Form 10-K for the year
    ended December 31, 2005).                                                                                                                                                                                                                                                                      
|        | 4  | .13         |  | Junior Subordinated Indenture, dated as of December 14,
    2005, among CapitalSource Finance LLC, CapitalSource Inc. and
    JPMorgan Chase Bank, National Association, as Trustee
    (incorporated by reference to the same-numbered exhibit to the
    registrants Annual Report on Form 10-K for the year
    ended December 31, 2005).                                                                                                                                                                                                                                                                               
|        | 4  | .14         |  | Indenture dated as of April 11, 2006, by and between
    CapitalSource Commercial Loan Trust 2006-1, as the Issuer, and
    Wells Fargo Bank, National Association, as the Indenture Trustee
    (incorporated by reference to the same-numbered exhibit to the
    registrants Current Report on Form 8-K dated
    April 17, 2006).                                                                                                                                                                                                                                                                                      
|        | 4  | .15         |  | Junior Subordinated Indenture, dated as of February 22,
    2006, among CapitalSource Finance LLC, as Issuer, CapitalSource
    Inc., as Guarantor, and JPMorgan Chase Bank, National
    Association, as Trustee.                                                                                                                                                                                                                                                                                                                                                                                                         
|        | 10 | .12*        |  | Third Amended and Restated Equity Incentive Plan (incorporated
    by reference to the same-numbered exhibit to the
    registrants Current Report on Form 8-K dated
    May 3, 2006).                                                                                                                                                                                                                                                                                                                                                                                                                                     
|        | 10 | .33*        |  | Summary of Non-employee Director Compensation (incorporated by
    reference to the same-numbered exhibit to the registrants
    Current Report on Form 8-K dated May 3, 2006).                                                                                                                                                                                                                                                                                                                                                                                                                                            
|        | 10 | .54         |  | Credit Agreement, dated as of March 14, 2006, among
    CapitalSource Inc., as Borrower, the Guarantors and Lenders as
    listed in the Credit Agreement, Wachovia Bank, National
    Association, as Administrative Agent, Swingline Lender and
    Issuing Lender, Bank of America, N.A., as Issuing Lender,
    Wachovia Capital Markets, LLC, as Sole Bookrunner and Lead
    Arranger, and Bank of Montreal, Barclays Bank PLC and SunTrust
    Bank, as Co-Documentation Agents (incorporated by reference to
    the same-numbered exhibit to the registrants Current
    Report on Form 8-K dated March 20, 2006).
|        | 10 | .55         |  | Sale and Servicing Agreement, dated as of April 11, 2006,
    by and among CapitalSource Commercial Loan Trust 2006-1, as the
    Issuer, CapitalSource Commercial Loan LLC, 2006-1, as the Trust
    Depositor, CapitalSource Finance LLC, as the Originator and as
    the Servicer, and Wells Fargo Bank, National Association, as the
    Indenture Trustee and as the Backup Servicer (incorporated by
    reference to the same- numbered exhibit to the registrants
    Current Report on Form 8-K dated April 17, 2006).                                                                                           
|        | 10 | .56         |  | Amended and Restated Trust Agreement, dated as of
    February 22, 2006, among CapitalSource Finance LLC, as
    Depositor, CapitalSource Inc., as Guarantor, JPMorgan Chase
    Bank, National Association, as Property Trustee, Chase Bank USA,
    National Association, as Delaware Trustee, and the
    Administrative Trustees Named Herein, as Administrative
    Trustees.                                                                                                                                                                                                                                         
|        | 10 | .57         |  | Master Repurchase Agreement, dated as of January 17, 2006,
    by and among CSE Mortgage LLC and Barclays Capital Inc.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|        | 12 | .1          |  | Ratio of Earnings to Fixed Charges.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|        | 31 | .1          |  | Rule 13a  14(a) Certification of Chairman 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.

60