##### 



UNITED STATES SECURITIES AND
    EXCHANGE COMMISSIONWashington, 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 June 30, 2007
  Commission File
    No. 1-31753
  CapitalSource Inc.
 (Exact name of registrant as
    specified in its charter)
   Delaware(State of
    Incorporation)

35-2206895(I.R.S. Employer
    Identification No.)    4445 Willard Avenue, 12th Floor
    Chevy Chase, MD 20815 (Address of Principal
    Executive Offices, Including Zip Code)
  (800) 370-9431 (Registrants Telephone
    Number, Including Area Code)
   þ o
  Rule 12b-2 þ o o
  Rule 12b-2 o þ




---



##### 



TABLE OF
    CONTENTS
  PagePART I. FINANCIAL
    INFORMATIONItem 1.


Financial StatementsConsolidated
    Balance Sheets as of June 30, 2007 (unaudited) and
    December 31, 2006


3Consolidated
    Statements of Income (unaudited) for the three and six months
    ended June 30, 2007 and 2006


4Consolidated
    Statement of Shareholders Equity (unaudited) for the six
    months ended June 30, 2007


5Consolidated
    Statements of Cash Flows (unaudited) for the six months ended
    June 30, 2007 and 2006


6Notes to the
    Unaudited Consolidated Financial Statements


7Item 2.


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


34Item 3.


Quantitative and
    Qualitative Disclosures about Market Risk


60Item 4.


Controls and
    Procedures


60PART II.
    OTHER INFORMATIONItem 1.


Legal
    Proceedings


61Item 1A.


Risk
    Factors


61Item 2.


Unregistered Sales
    of Equity Securities and Use of Proceeds


61Item 3.


Defaults Upon
    Senior Securities


61Item 4.


Submission of
    Matters to a Vote of Security Holders


61Item 5.


Other
    Information


62Item 6.


Exhibits


62Signatures


63Index to
    Exhibits


64   2




---



##### 



CapitalSource
    Inc.
  Consolidated Balance Sheets
  June 30,


December 31,2007


2006(Unaudited)($ in thousands)ASSETSCash and cash equivalents

$
271,492


$
396,151Restricted cash


221,650



240,904Mortgage-related receivables, net


2,162,715



2,295,922Mortgage-backed securities
    pledged, trading


4,290,965



3,502,753Receivables under
    reverse-repurchase agreements


26,237



51,892Loans held for sale


154,229



26,521Loans:Loans


8,761,127



7,771,785Less deferred loan fees and
    discounts


(128,785
)


(130,392
)Less allowance for loan losses


(127,547
)


(120,575
)Loans, net


8,504,795



7,520,818Direct real estate investments, net


1,032,838



722,303Investments


197,543



184,333Other assets


299,226



268,977Total assets

$
17,161,690


$
15,210,574LIABILITIES, NONCONTROLLING
    INTERESTS AND SHAREHOLDERS EQUITYLiabilities:Repurchase agreements

$
4,217,086


$
3,510,768Credit facilities


3,671,041



2,538,840Term debt


5,652,228



5,809,685Other borrowings


1,082,176



1,001,393Other liabilities


214,806



200,498Total liabilities


14,837,337



13,061,184Noncontrolling
    interests


44,871



56,350Shareholders
    equity:Preferred stock
    (50,000,000 shares authorized; no shares outstanding)






Common stock ($0.01 par
    value, 500,000,000 shares authorized; 191,877,813 and
    182,752,290 shares issued, respectively; 191,877,813 and
    181,452,290 shares outstanding, respectively)


1,918



1,815Additional paid-in capital


2,361,158



2,139,421Accumulated deficit


(85,978
)


(20,735
)Accumulated other comprehensive
    income, net


2,384



2,465Treasury stock, at cost






(29,926
)Total shareholders equity


2,279,482



2,093,040Total liabilities, noncontrolling
    interests and shareholders equity

$
17,161,690


$
15,210,574    3




---



##### 



CapitalSource
    Inc.
  Consolidated Statements of Income
  Three Months Ended June 30,


Six Months Ended June 30,2007


2006


2007


2006(Unaudited)($ in thousands, except per share data)Net investment
    income:Interest income

$
311,184


$
256,037


$
600,738


$
451,535Fee income


45,056



36,603



95,083



78,145Total interest and fee income


356,240



292,640



695,821



529,680Operating lease income


22,118



6,694



42,406



11,319Total investment income


378,358



299,334



738,227



540,999Interest expense


200,291



153,918



386,940



251,700Net investment income


178,067



145,416



351,287



289,299Provision for loan losses


17,410



11,471



32,336



26,184Net investment income after
    provision for loan losses


160,657



133,945



318,951



263,115Operating expenses:Compensation and benefits


38,615



34,130



78,629



67,450Other administrative expenses


27,828



19,561



53,136



36,860Total operating expenses


66,443



53,691



131,765



104,310Other income
    (expense):Diligence deposits forfeited


1,813



1,103



2,675



3,370Gain (loss) on investments, net


17,002



(1,489
)


23,165



(1,740
)Gain on derivatives


3,153



6,124



898



6,650(Loss) gain on residential
    mortgage investment portfolio


(13,846
)


4,035



(19,544
)


(2,071
)Other income, net of expenses


12,957



1,523



19,934



5,431Total other income


21,079



11,296



27,128



11,640Noncontrolling interests
    expense


1,272



1,230



2,602



2,091Net income before income taxes
    and cumulative effect of accounting change


114,021



90,320



211,712



168,354Income taxes


29,693



17,531



48,694



30,641Net income before cumulative
    effect of accounting change


84,328



72,789



163,018



137,713Cumulative effect of accounting
    change, net of taxes














370Net income

$
84,328


$
72,789


$
163,018


$
138,083Net income per share:Basic

$
0.45


$
0.43


$
0.89


$
0.87Diluted

$
0.45


$
0.43


$
0.88


$
0.85Average shares
    outstanding:Basic


185,371,033



168,866,621



182,274,147



159,309,225Diluted


187,428,430



170,569,836



184,512,451



162,515,548Dividends declared per share

$
0.60


$
0.49


$
1.18


$
0.98    4




---



##### 



CapitalSource
    Inc.
 Consolidated Statement of Shareholders Equity  AccumulatedAdditional





Other


Treasury


TotalCommon


Paid-In


Accumulated


Comprehensive


Stock,


ShareholdersStock


Capital


Deficit


Income, Net


at Cost


Equity(Unaudited)($ in thousands)Total shareholders equity as
    of December 31, 2006

$
1,815


$
2,139,421


$
(20,735
)

$
2,465


$
(29,926
)

$
2,093,040Net income










163,018











163,018Other comprehensive income:Unrealized losses, net of tax














(81
)






(81
)Total comprehensive income






















162,937Cumulative effect of accounting
    change, net of taxes






















Cumulative effect of adoption of
    FIN 48










(5,702
)










(5,702
)Dividends paid






4,745



(222,559
)










(217,814
)Issuance of common stock, net


94



197,721











29,926



227,741Stock option expense






3,909















3,909Exercise of options


2



4,449















4,451Restricted stock activity


7



7,263















7,270Tax benefit on exercise of options






1,005















1,005Tax benefit on vesting of
    restricted stock grants






2,645















2,645Total shareholders equity as
    of June 30, 2007

$
1,918


$
2,361,158


$
(85,978
)

$
2,384


$



$
2,279,482    5




---



##### 



CapitalSource
    Inc.
 Consolidated Statements of Cash Flows  Six Months EndedJune 30,2007


2006(Unaudited)($ in thousands)Operating activities:Net income

$
163,018


$
138,083Adjustments to reconcile net income
    to net cash (used in) provided by operating activities:Stock option expense


3,909



4,409Restricted stock expense


16,662



11,944Loss on extinguishment of debt






2,582Non-cash prepayment fee






(8,353
)Cumulative effect of accounting
    change, net of taxes






(370
)Amortization of deferred loan fees
    and discounts


(49,772
)


(43,143
)Paid-in-kind
    interest on loans


(12,031
)


(3,202
)Provision for loan losses


32,336



26,184Amortization of deferred financing
    fees and discounts


17,418



17,763Depreciation and amortization


16,831



5,719Benefit for deferred income taxes


(3,918
)


(5,684
)Non-cash loss on investments, net


1,216



5,106Non-cash gain on property and
    equipment disposals


(1,408
)


Unrealized gain on derivatives and
    foreign currencies, net


(958
)


(6,650
)Unrealized loss on residential
    mortgage investment portfolio, net


29,950



16,513Net increase in mortgage-backed
    securities pledged, trading


(812,546
)


(7,112
)Amortization of discount on
    residential mortgage investments


(17,318
)


(7,798
)Increase in loans held for sale, net


(162,524
)


(24,843
)Increase in other assets


(13,384
)


(30,458
)(Decrease) increase in other
    liabilities


(16,688
)


3,547Cash (used in) provided by
    operating activities


(809,207
)


94,237Investing activities:Decrease in restricted cash


19,254



60,397Decrease (increase) in
    mortgage-related receivables, net


139,241



(2,442,119
)Decrease (increase) in receivables
    under reverse-repurchase agreements, net


25,655



(62,389
)Increase in loans, net


(926,074
)


(1,168,978
)Acquisition of real estate, net of
    cash acquired


(246,060
)


(37,199
)Acquisition of investments, net


(23,550
)


(14,612
)Acquisition of property and
    equipment, net


(3,559
)


(1,487
)Cash used in investing activities


(1,015,093
)


(3,666,387
)Financing activities:Payment of deferred financing fees


(11,387
)


(25,562
)Borrowings under repurchase
    agreements, net


706,318



31,323Borrowings on credit facilities, net


1,132,201



955,705Borrowings of term debt


778,000



3,165,124Repayments of term debt


(985,312
)


(845,333
)Borrowings of subordinated debt


75,630



50,000Proceeds from issuance of common
    stock, net of offering costs


216,208



440,097Proceeds from exercise of options


4,453



3,327Tax benefits on share-based payments


3,650



2,256Payment of dividends


(220,120
)


(226,628
)Cash provided by financing
    activities


1,699,641



3,550,309Decrease in cash and cash
    equivalents


(124,659
)


(21,841
)Cash and cash equivalents as of
    beginning of period


396,151



323,896Cash and cash equivalents as of end
    of period

$
271,492


$
302,055Noncash transactions from
    investing and financing activities:Issuance of common stock in
    connection with dividends and real estate acquisition

$



$
309,736Conversion of noncontrolling
    interests into common stock


11,533



Acquisition of real estate


(78,627
)


Assumption of term debt


44,627



Assumption of intangible lease
    liability


(28,554
)


    6




---



##### 



CapitalSource
    Inc.
  NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
   Note 1.
    Organization    
    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;
    First Mortgage Loans  Commercial loans that are
    secured by first mortgages on the property of the client;
    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;
    Direct Real Estate Investments  Commercial
    investments primarily in land and buildings, including those
    that are purchased from and leased back to the current operators
    through the execution of a long-term,
    triple-net
    operating lease;
    Term B, Second Lien and Mezzanine Loans  Commercial
    loans, including subordinated mortgage loans, that come after a
    clients senior term loans in right of payment or upon
    liquidation;
    Residential Mortgage Investments  Investments in
    residential mortgage loans and residential mortgage-backed
    securities that constitute qualifying REIT assets; and
    Equity Investments  Opportunistic equity investments,
    typically in conjunction with commercial lending relationships
    and on the same terms as other equity investors.      Note 2.
    Summary
    of Significant Accounting Policies  Unaudited
    Interim Consolidated Financial Statements Basis of
    Presentation
  Form 10-Q Regulation S-X. Form 10-K Form 10-K).
   7




---



##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Summary
    of Significant Accounting Policies Form 10-K.
  Note 3.
    New
    Accounting Pronouncements  Accounting for
    Certain Hybrid Financial Instrument Accounting for Derivative Instruments
    and Hedging Activities Accounting for Transfers and
    Servicing of Financial Assets and Extinguishments of Liabilities
  Accounting for Servicing of Financial Assets  An
    Amendment of FASB Statement No. 140
  Accounting for Uncertainty in Income Taxes  An
    Interpretation of FASB Statement No. 109 Accounting for Income Taxes. Income Taxes
  Fair Value Measurements
 8




---



##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  The
    Fair Value Option for Financial Assets and Financial Liabilities
  Clarification of the Scope of
    the Audit and Accounting Guide Investment Companies and
    Accounting by Parent Companies and Equity Method Investors for
    Investments in Investment Companies (SOP 07-1). SOP 07-1 Investment
    Companies SOP 07-1 SOP 07-1 SOP 07-1 SOP 07-1 SOP 07-1
  No. 06-11, Accounting for Income Tax Benefits of Dividends on
    Share-Based Payment Awards (EITF 06-11), EITF 06-11 EITF 06-11 EITF 06-11
  Note 4.
    Mortgage-Related
    Receivables and Related Owners
    Trust Securitizations   Consolidation of Variable Interest Entities  An
    Interpretation of ARB No. 51
     9




---



##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      Note 5.
    Residential
    Mortgage-Backed Securities and Certain Derivative
    Instruments  Investments.
        Note 6.
    Commercial
    Loans and Credit Quality   10




---



##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Credit
    Quality
    June 30,


December 31,Commercial Loan Asset Classification

2007


2006($ in thousands)Loans 60 or more days
    contractually delinquent

$
97,040


$
88,067Non-accrual loans(1)


176,088



183,483Impaired loans(2)


349,486



281,377Less: loans in multiple categories


(251,753
)


(230,469
)Total

$
370,861


$
322,458Total as a percentage of total
    loans


4.15%



4.11%     (1)
    
    Includes commercial loans with an aggregate principal balance of
    $31.0 million and $47.0 million as of June 30,
    2007 and December 31, 2006, respectively, which were also
    classified as loans 60 or more days contractually delinquent.
    Includes non-performing loans classified as held for sale that
    have an aggregate principal balance of $3.0 million as of
    June 30, 2007. There were no non-performing loans
    classified as held for sale as of December 31, 2006.(2)
    
    Includes commercial loans with an aggregate principal balance of
    $78.7 million and $47.0 million as of June 30,
    2007 and December 31, 2006, respectively, which were also
    classified as loans 60 or more days contractually delinquent,
    and commercial loans with an aggregate principal balance of
    $173.1 million and $183.5 million as of June 30,
    2007 and December 31, 2006, respectively, which were also
    placed on non-accrual status. The carrying values of impaired
    commercial loans were $343.4 million and
    $275.3 million as of June 30, 2007 and
    December 31, 2006, respectively.  Accounting by Creditors for Impairment of a Loan
 11




---



##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      Accounting for Debtors and Creditors
    for Troubled Debt Restructurings.
    Six Months Ended June 30,2007


2006($ in thousands)Balance as of beginning of period

$
120,575


$
87,370Provision for loan losses


32,336



25,883Charge offs, net


(23,692
)


(12,478
)Transfers to held for sale


(1,672
)


Balance as of end of period

$
127,547


$
100,775  12




---



##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Note 7.
    Investments    June 30,


December 31,2007


2006($ in thousands)Investments carried at cost

$
82,855


$
71,386Investments carried at fair value:Investments available-for-sale


42,705



61,904Warrants


8,015



6,908Investments accounted for under
    the equity method


63,968



44,135Total

$
197,543


$
184,333   No. 99-20, Recognition of Interest Income on Purchased Beneficial
    Interests and Beneficial Interests that Continue to Be Held by a
    Transferor in Securitized Financial Assets.
  Note 8.
    Guarantor
    Information  Borrowings
 13




---



##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Consolidating
    Balance Sheet
    June 30, 2007
  CapitalSource Finance LLCCombined


Combined


Other Non-Non-Guarantor


Guarantor


Guarantor





ConsolidatedCapitalSource Inc.


Subsidiaries


Subsidiaries


Subsidiaries


Eliminations


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

$



$
181,879


$
34,000


$
55,613


$



$
271,492Restricted cash






30,924



93,875



96,851







221,650Mortgage-related receivables, net














2,162,715







2,162,715Mortgage-backed securities pledged,
    trading














4,290,965







4,290,965Receivables under
    reverse-repurchase agreements






26,237















26,237Loans held for sale






67,911



86,318











154,229Loans:Loans






4,176,650



842,756



3,743,693



(1,972
)


8,761,127Less deferred loan fees and
    discounts






(27,860
)


(57,660
)


(43,265
)






(128,785
)Less allowance for loan losses










(104,619
)


(22,928
)






(127,547
)Loans, net






4,148,790



680,477



3,677,500



(1,972
)


8,504,795Direct real estate investments, net














1,032,838







1,032,838Investment in subsidiaries


3,248,525







837,613



1,215,793



(5,301,931
)


Intercompany due from (due to)


7,314







(8,639
)


1,325







Intercompany note receivable


75,000







50,842







(125,842
)


Investments






130,954



33,810



32,779







197,543Other assets


28,398



31,711



103,446



196,651



(60,980
)


299,226Total assets

$
3,359,237


$
4,618,406


$
1,911,742


$
12,763,030


$
(5,490,725
)

$
17,161,690Liabilities, noncontrolling
    interests and shareholders equityLiabilities:Repurchase agreements

$



$
38,240


$



$
4,178,846


$



$
4,217,086Credit facilities


476,649



1,326,481



89,935



1,777,976







3,671,041Term debt






2,398,532



10,510



3,245,152



(1,966
)


5,652,228Other borrowings


555,000







527,176











1,082,176Other liabilities


48,106



17,490



68,328



141,868



(60,986
)


214,806Intercompany note payable














125,842



(125,842
)


Total liabilities


1,079,755



3,780,743



695,949



9,469,684



(188,794
)


14,837,337Noncontrolling
    interests






63







44,821



(13
)


44,871Shareholders
    equity:Preferred stock






















Common stock


1,918



















1,918Additional paid-in capital


2,361,158



312,145



271,603



2,798,341



(3,382,089
)


2,361,158(Accumulated deficit) retained
    earnings


(85,978
)


523,847



941,486



447,499



(1,912,832
)


(85,978
)Accumulated other comprehensive
    income, net


2,384



1,608



2,704



2,685



(6,997
)


2,384Treasury stock, at cost






















Total shareholders equity


2,279,482



837,600



1,215,793



3,248,525



(5,301,918
)


2,279,482Total liabilities, noncontrolling
    interests and shareholders equity

$
3,359,237


$
4,618,406


$
1,911,742


$
12,763,030


$
(5,490,725
)

$
17,161,690  14




---



##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Consolidating
    Balance Sheet
    December 31, 2006
  CapitalSource Finance LLCCombined


Combined


Other Non-Non-Guarantor


Guarantor


Guarantor





ConsolidatedCapitalSource Inc.


Subsidiaries


Subsidiaries


Subsidiaries


Eliminations


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

$
157


$
238,224


$
46,723


$
111,047


$



$
396,151Restricted cash






55,631



122,655



62,618







240,904Mortgage-related receivables, net














2,295,922







2,295,922Mortgage-backed securities pledged,
    trading














3,502,753







3,502,753Receivables under
    reverse-repurchase agreements






51,892















51,892Loans held for sale






26,521















26,521Loans:Loans


52



4,050,786



762,653



2,968,938



(10,644
)


7,771,785Less deferred loan fees and
    discounts






(33,348
)


(58,203
)


(38,841
)






(130,392
)Less allowance for loan losses










(101,938
)


(18,637
)






(120,575
)Loans, net


52



4,017,438



602,512



2,911,460



(10,644
)


7,520,818Direct real estate investments, net














722,303







722,303Investment in subsidiaries


3,030,807







926,709



1,133,651



(5,091,167
)


Intercompany (due to) due from


(98,737
)






(138,447
)


237,184







Intercompany note receivable


75,000



2,137



11,194







(88,331
)


Investments






118,380



31,710



34,243







184,333Other assets


20,770



25,741



61,024



187,088



(25,646
)


268,977Total assets

$
3,028,049


$
4,535,964


$
1,664,080


$
11,198,269


$
(5,215,788
)

$
15,210,574Liabilities, noncontrolling
    interests and shareholders equityLiabilities:Repurchase agreements

$



$
63,260


$



$
3,447,508


$



$
3,510,768Credit facilities


355,685



998,972







1,184,183







2,538,840Term debt






2,504,472



10,729



3,295,558



(1,074
)


5,809,685Other borrowings


555,000







446,393











1,001,393Other liabilities


24,324



29,220



73,307



108,863



(35,216
)


200,498Intercompany note payable






13,331







75,000



(88,331
)


Total liabilities


935,009



3,609,255



530,429



8,111,112



(124,621
)


13,061,184Noncontrolling
    interests






8







56,350



(8
)


56,350Shareholders
    equity:Preferred stock






















Common stock


1,815



















1,815Additional paid-in capital


2,139,421



564,687



272,828



2,777,426



(3,614,941
)


2,139,421(Accumulated deficit) retained
    earnings


(20,735
)


359,678



857,927



250,613



(1,468,218
)


(20,735
)Accumulated other comprehensive
    income, net


2,465



2,336



2,896



2,768



(8,000
)


2,465Treasury stock, at cost


(29,926
)


















(29,926
)Total shareholders equity


2,093,040



926,701



1,133,651



3,030,807



(5,091,159
)


2,093,040Total liabilities, noncontrolling
    interests and shareholders equity

$
3,028,049


$
4,535,964


$
1,664,080


$
11,198,269


$
(5,215,788
)

$
15,210,574  15




---



##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Consolidating
    Statement of Income
    Three Months Ended June 30, 2007
  CapitalSource Finance LLCCombined


Combined


Other Non-Non-Guarantor


Guarantor


Guarantor





ConsolidatedCapitalSource Inc.


Subsidiaries


Subsidiaries


Subsidiaries


Eliminations


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

$
1,622


$
119,149


$
25,505


$
167,652


$
(2,744
)

$
311,184Fee income






19,683



14,793



10,580







45,056Total interest and fee income


1,622



138,832



40,298



178,232



(2,744
)


356,240Operating lease income














22,118







22,118Total investment income


1,622



138,832



40,298



200,350



(2,744
)


378,358Interest expense


10,140



60,718



8,388



123,789



(2,744
)


200,291Net investment (loss) income


(8,518
)


78,114



31,910



76,561







178,067Provision for loan losses










15,744



1,666







17,410Net investment (loss) income after
    provision for loan losses


(8,518
)


78,114



16,166



74,895







160,657Operating expenses:Compensation and benefits


221



5,434



32,960











38,615Other administrative expenses


15,448



2,153



15,077



9,077



(13,927
)


27,828Total operating expenses


15,669



7,587



48,037



9,077



(13,927
)


66,443Other income
    (expense):Diligence deposits forfeited










1,813











1,813Gain on investments, net






13,534



3,468











17,002Gain (loss) on derivatives






243



(1,902
)


4,812







3,153Loss on residential mortgage
    investment portfolio














(13,846
)






(13,846
)Other income, net of expenses






6,274



20,808



(198
)


(13,927
)


12,957Earnings in subsidiaries


108,515







88,756



82,822



(280,093
)


Intercompany






(1,750
)


1,750











Total other income


108,515



18,301



114,693



73,590



(294,020
)


21,079Noncontrolling interests
    expense






74







1,200



(2
)


1,272Net income before income
    taxes


84,328



88,754



82,822



138,208



(280,091
)


114,021Income taxes














29,693







29,693Net income

$
84,328


$
88,754


$
82,822


$
108,515


$
(280,091
)

$
84,328  16




---



##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Consolidating
    Statement of Income
    Three Months Ended June 30, 2006
  CapitalSource Finance LLCCombined


Combined


Other Non-Non-Guarantor


Guarantor


Guarantor





ConsolidatedCapitalSource Inc.


Subsidiaries


Subsidiaries


Subsidiaries


Eliminations


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

$



$
116,621


$
15,604


$
124,299


$
(487
)

$
256,037Fee income






47,791



(22,505
)


11,317







36,603Total interest and fee income






164,412



(6,901
)


135,616



(487
)


292,640Operating lease income














6,694







6,694Total investment income






164,412



(6,901
)


142,310



(487
)


299,334Interest expense


7,647



52,041



7,006



87,711



(487
)


153,918Net investment (loss) income


(7,647
)


112,371



(13,907
)


54,599







145,416Provision for loan losses










7,432



4,039







11,471Net investment (loss) income after
    provision for loan losses


(7,647
)


112,371



(21,339
)


50,560







133,945Operating expenses:Compensation and benefits






1,375



32,755











34,130Other administrative expenses


3,745



689



14,736



3,978



(3,587
)


19,561Total operating expenses


3,745



2,064



47,491



3,978



(3,587
)


53,691Other income
    (expense):Diligence deposits forfeited










1,103











1,103Loss on investments, net










(1,489
)










(1,489
)Gain on derivatives






624



1,123



4,377







6,124Gain on residential mortgage
    investment portfolio














4,035







4,035Other income, net of expenses


76



89



4,945







(3,587
)


1,523Earnings in subsidiaries


84,105







105,319



47,872



(237,296
)


Intercompany






(5,701
)


5,701











Total other income (expense)


84,181



(4,988
)


116,702



56,284



(240,883
)


11,296Noncontrolling interests
    expense














1,230







1,230Net income before income
    taxes


72,789



105,319



47,872



101,636



(237,296
)


90,320Income taxes














17,531







17,531Net income

$
72,789


$
105,319


$
47,872


$
84,105


$
(237,296
)

$
72,789  17




---



##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Consolidating
    Statement of Income
    Six Months Ended June 30, 2007
  CapitalSource Finance LLCCombined


Combined


Other Non-Non-Guarantor


Guarantor


Guarantor





ConsolidatedCapitalSource Inc.


Subsidiaries


Subsidiaries


Subsidiaries


Eliminations


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

$
9,072


$
232,187


$
49,394


$
320,567


$
(10,482
)

$
600,738Fee income






42,432



33,632



19,019







95,083Total interest and fee income


9,072



274,619



83,026



339,586



(10,482
)


695,821Operating lease income














42,406







42,406Total investment income


9,072



274,619



83,026



381,992



(10,482
)


738,227Interest expense


20,406



115,406



23,050



238,560



(10,482
)


386,940Net investment (loss) income


(11,334
)


159,213



59,976



143,432







351,287Provision for loan losses










28,045



4,291







32,336Net investment (loss) income after
    provision for loan losses


(11,334
)


159,213



31,931



139,141







318,951Operating expenses:Compensation and benefits


858



10,767



67,004











78,629Other administrative expenses


27,379



3,110



30,306



17,581



(25,240
)


53,136Total operating expenses


28,237



13,877



97,310



17,581



(25,240
)


131,765Other income
    (expense):Diligence deposits forfeited










2,675











2,675Gain on investments, net






19,629



3,536











23,165(Loss) gain on derivatives






(35
)


(3,817
)


4,750







898Loss on residential mortgage
    investment portfolio














(19,544
)






(19,544
)Other income, net of expenses






8,572



36,800



(198
)


(25,240
)


19,934Earnings in subsidiaries


202,589







170,274



147,268



(520,131
)


Intercompany






(3,179
)


3,179











Total other income


202,589



24,987



212,647



132,276



(545,371
)


27,128Noncontrolling interests
    expense






54







2,553



(5
)


2,602Net income before income taxes


163,018



170,269



147,268



251,283



(520,126
)


211,712Income taxes














48,694







48,694Net income

$
163,018


$
170,269


$
147,268


$
202,589


$
(520,126
)

$
163,018  18




---



##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Consolidating
    Statement of Income
    Six Months Ended June 30, 2006
  CapitalSource Finance LLCCombined


Combined


Other Non-Non-Guarantor


Guarantor


Guarantor





ConsolidatedCapitalSource Inc.


Subsidiaries


Subsidiaries


Subsidiaries


Eliminations


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

$
549


$
231,809


$
31,923


$
189,115


$
(1,861
)

$
451,535Fee income






76,731



(24,016
)


25,430







78,145Total interest and fee income


549



308,540



7,907



214,545



(1,861
)


529,680Operating lease income














11,319







11,319Total investment income


549



308,540



7,907



225,864



(1,861
)


540,999Interest expense


12,953



105,456



12,533



122,619



(1,861
)


251,700Net investment (loss) income


(12,404
)


203,084



(4,626
)


103,245







289,299Provision for loan losses










17,753



8,431







26,184Net investment (loss) income after
    provision for loan losses


(12,404
)


203,084



(22,379
)


94,814







263,115Operating expenses:Compensation and benefits






2,306



65,144











67,450Other administrative expenses


7,339



1,237



28,350



7,053



(7,119
)


36,860Total operating expenses


7,339



3,543



93,494



7,053



(7,119
)


104,310Other income
    (expense):Diligence deposits forfeited










3,370











3,370Loss on investments, net










(1,740
)










(1,740
)Gain on derivatives






1,035



1,238



4,377







6,650Loss on residential mortgage
    investment portfolio














(2,071
)






(2,071
)Other income, net of expenses


76



318



14,738



(2,582
)


(7,119
)


5,431Earnings in subsidiaries


157,750







187,564



102,997



(448,311
)


Intercompany






(13,330
)


13,330











Total other income (expense)


157,826



(11,977
)


218,500



102,721



(455,430
)


11,640Noncontrolling interests
    expense














2,091







2,091Net income before income taxes
    and cumulative effect of accounting change


138,083



187,564



102,627



188,391



(448,311
)


168,354Income taxes














30,641







30,641Net income before cumulative
    effect of accounting change


138,083



187,564



102,627



157,750



(448,311
)


137,713Cumulative effect of accounting
    change, net of taxes










370











370Net income

$
138,083


$
187,564


$
102,997


$
157,750


$
(448,311
)

$
138,083  19




---



##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Consolidating
    Statement of Cash Flows
    Six Months Ended June 30, 2007
  CapitalSource Finance LLCCombined


Combined


Other Non-Non-Guarantor


Guarantor


Guarantor





ConsolidatedCapitalSource Inc.


Subsidiaries


Subsidiaries


Subsidiaries


Eliminations


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

$
163,018


$
170,269


$
147,268


$
202,589


$
(520,126
)

$
163,018Adjustments to reconcile net income
    to net cash used in operating activities:Stock option expense






234



3,675











3,909Restricted stock expense






2,245



14,417











16,662Amortization of deferred loan fees
    and discounts






(13,326
)


(22,381
)


(14,065
)






(49,772
)Paid-in-kind
    interest on loans






(1,467
)


(8,401
)


(2,163
)






(12,031
)Provision for loan losses










28,046



4,290







32,336Amortization of deferred financing
    fees and discounts


1,724



7,421



224



8,049







17,418Depreciation and amortization






148



1,577



15,106







16,831Benefit for deferred income taxes














(3,918
)






(3,918
)Non-cash loss on investments, net






1,182



34











1,216Non-cash (gain) loss on property
    and equipment disposals






(1,442
)


34











(1,408
)Unrealized loss (gain) on
    derivatives and foreign currencies, net






(230
)


3,600



(4,328
)






(958
)Unrealized loss on residential
    mortgage investment portfolio, net














29,950







29,950Net increase in mortgage-backed
    securities pledged, trading














(812,546
)






(812,546
)Amortization of discount on
    residential mortgage investments














(17,318
)






(17,318
)Increase in loans held for sale, net






(75,253
)


(87,271
)










(162,524
)Decrease (increase) in intercompany
    note receivable






2,137



(39,648
)






37,511



(Increase) decrease in other assets


(9,294
)


(2,587
)


(42,131
)


5,294



35,334



(13,384
)Increase (decrease) in other
    liabilities


24,149



(12,097
)


(5,008
)


2,038



(25,770
)


(16,688
)Net transfers with subsidiaries


(303,559
)


(262,239
)


(115,430
)


161,102



520,126



Cash used in operating activities


(123,962
)


(185,005
)


(121,395
)


(425,920
)


47,075



(809,207
)Investing activities:Decrease (increase) in restricted
    cash






24,707



28,780



(34,233
)






19,254Decrease in mortgage-related
    receivables, net














139,241







139,241Decrease in receivables under
    reverse-repurchase agreements, net






25,655















25,655Increase in loans, net


52



(83,280
)


(80,072
)


(754,102
)


(8,672
)


(926,074
)Acquisition of real estate, net of
    cash acquired














(246,060
)






(246,060
)(Acquisition) disposal of
    investments, net






(12,703
)


357



(11,204
)






(23,550
)Disposal (acquisition) of property
    and equipment, net






126



(3,685
)










(3,559
)Cash used in investing activities


52



(45,495
)


(54,620
)


(906,358
)


(8,672
)


(1,015,093
)Financing activities:Payment of deferred financing fees


(58
)


(8,992
)


(2,066
)


(271
)






(11,387
)(Decrease) increase in intercompany
    note payable






(13,331
)






50,842



(37,511
)


(Repayments of) borrowings under
    repurchase agreements, net






(25,020
)






731,338







706,318Borrowings on credit facilities, net


120,964



327,509



89,935



593,793







1,132,201Borrowings of term debt






738,892







40,000



(892
)


778,000Repayments of term debt






(844,903
)


(207
)


(140,202
)






(985,312
)Borrowings of subordinated debt










75,630











75,630Proceeds from issuance of common
    stock, net of offering costs


216,208



















216,208Proceeds from exercise of options


4,453



















4,453Tax benefits on share based payments














3,650







3,650Payment of dividends


(217,814
)










(2,306
)






(220,120
)Cash provided by financing
    activities


123,753



174,155



163,292



1,276,844



(38,403
)


1,699,641Decrease in cash and cash
    equivalents


(157
)


(56,345
)


(12,723
)


(55,434
)






(124,659
)Cash and cash equivalents as of
    beginning of period


157



238,224



46,723



111,047







396,151Cash and cash equivalents as of end
    of period

$



$
181,879


$
34,000


$
55,613


$



$
271,492  20




---



##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Consolidating
    Statement of Cash Flows
    Six Months Ended June 30, 2006
  CapitalSource Finance LLCCombined


Combined


Other Non-Non-Guarantor


Guarantor


Guarantor





ConsolidatedCapitalSource Inc.


Subsidiaries


Subsidiaries


Subsidiaries


Eliminations


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

$
138,083


$
187,564


$
102,997


$
157,750


$
(448,311
)

$
138,083Adjustments to reconcile net income
    to net cash (used in) provided by operating activities:Stock option expense


4,409



















4,409Restricted stock expense










11,944











11,944Loss on extinguishment of debt














2,582







2,582Non-cash prepayment fee










(8,353
)










(8,353
)Cumulative effect of accounting
    change, net of taxes










(370
)










(370
)Amortization of deferred loan fees
    and discounts






(24,462
)


15,202



(33,883
)






(43,143
)Paid-in-kind
    interest on loans






5,158



(4,804
)


(3,556
)






(3,202
)Provision for loan losses










17,753



8,431







26,184Amortization of deferred financing
    fees and discounts


1,431



12,079



262



3,991







17,763Depreciation and amortization






4



1,452



4,263







5,719Benefit for deferred income taxes














(5,684
)






(5,684
)Non-cash loss on investments, net










5,106











5,106Gain on derivatives, net






(1,035
)


(1,238
)


(4,377
)






(6,650
)Unrealized loss on residential
    mortgage investment portfolio, net














16,513







16,513Net increase in mortgage-backed
    securities pledged, trading














(7,112
)






(7,112
)Amortization of discount on
    residential mortgage investments














(7,798
)






(7,798
)(Increase) decrease in loans
    held-for-sale, net






(51,056
)


26,213











(24,843
)Decrease in intercompany note
    receivable






4,894



22,885







(27,779
)


Decrease (increase) in other assets


20,104



242



(2,630
)


(56,192
)


8,018



(30,458
)Increase (decrease) in other
    liabilities


11,835



(3,042
)


(1,821
)


5,559



(8,984
)


3,547Net transfers with subsidiaries


(863,138
)


(33,035
)


(68,876
)


516,738



448,311



Cash (used in) provided by
    operating activities


(687,276
)


97,311



115,722



597,225



(28,745
)


94,237Investing activities:(Increase) decrease in restricted
    cash






(5,358
)


78,499



(12,744
)






60,397Increase in mortgage-related
    receivables, net














(2,442,119
)






(2,442,119
)Increase in receivables under
    reverse-repurchase agreements, net






(62,389
)














(62,389
)Decrease (increase) in loans, net






362,559



(315,343
)


(1,217,160
)


966



(1,168,978
)Acquisition of real estate, net of
    cash acquired














(37,199
)






(37,199
)Disposal (acquisition) of
    investments, net


33,484



(19,400
)


(10,751
)


(17,945
)






(14,612
)Acquisition of property and
    equipment, net






(29
)


(1,458
)










(1,487
)Cash provided by (used in)
    investing activities


33,484



275,383



(249,053
)


(3,727,167
)


966



(3,666,387
)Financing activities:Payment of deferred financing fees


(2,909
)


(8,360
)


(910
)


(13,383
)






(25,562
)Decrease in intercompany note
    payable


(20,327
)


(7,452
)










27,779



Borrowings under (repayment of)
    repurchase agreements, net






65,495







(34,172
)






31,323Borrowings on (repayments of)
    credit facilities, net


460,000



(352,295
)






848,000







955,705Borrowings of term debt






715,763



1,491



2,447,870







3,165,124Repayments of term debt






(782,158
)


(49
)


(63,126
)






(845,333
)Borrowings of subordinated debt










50,000











50,000Proceeds from issuance of common
    stock, net of offering costs


440,097



















440,097Proceeds from exercise of options


3,327



















3,327Tax benefits on share-based payments














2,256







2,256Payment of dividends


(226,628
)


















(226,628
)Cash provided by (used in)
    financing activities


653,560



(369,007
)


50,532



3,187,445



27,779



3,550,309(Decrease) increase in cash and
    cash equivalents


(232
)


3,687



(82,799
)


57,503







(21,841
)Cash and cash equivalents as of
    beginning of period


2,038



145,065



156,571



20,222







323,896Cash and cash equivalents as of end
    of period

$
1,806


$
148,752


$
73,772


$
77,725


$



$
302,055  21




---



##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Note 9.
    Direct
    Real Estate Investments  triple-net
  June 30,


December 31,2007


2006($ in thousands)Land

$
111,240


$
91,543Buildings


895,932



607,833Furniture


51,285



34,395Accumulated depreciation


(25,619
)


(11,468
)Total

$
1,032,838


$
722,303     Note 10.
    Borrowings  Borrowings Form 10-K.
  Repurchase
    Agreements
    Credit
    Facilities
     22




---



##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
              Term
    Debt
  series 2004-2
    series 2003-2 2005-1
 23




---



##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Other
    Borrowings
  Subordinated
    Debt
  2007-1 (2007-1 2007-1 2007-1 2007-1 2007-1
  2007-1 2007-1 2007-1
  2007-2 (2007-2 2007-2 2007-2 2007-2 2007-2
  2007-2 2007-2
  Convertible
    Debt
    AmountOutstanding


AmountPrior


Outstandingto Exchange


at Completion ofSecurities

Offers


Exchange Offers($ in thousands)3.50% Senior Convertible
    Notes due 2034

$
330,000


$
8,4461.25% Senior Convertible
    Notes due 2034


225,000



47,6204.00% Senior Subordinated
    Convertible Notes due 2034






321,5541.625% Senior Subordinated
    Convertible Notes due 2034






177,380Total

$
555,000


$
555,000    24




---



##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Guarantor Information
               25




---



##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
          EITF 96-19, Debtors Accounting for a Modification or Exchange of
    Debt Instruments
      Borrowings Form 10-K.
  Note 11.
    Shareholders
    Equity  Common
    Stock Shares Outstanding
    Outstanding as of
    December 31, 2006


181,452,290Issuance of common stock


7,920,776Sale of treasury stock


1,300,000Exercise of options


306,423Restricted stock and other stock
    grants, net


898,324Outstanding as of June 30,
    2007


191,877,813   Dividend
    Reinvestment and Stock Purchase Plan
   26




---



##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Note 12.
    Income
    Taxes          Six Months Ended June 30,2007


2006Federal statutory rate


35.0
%


35.0
%Benefit of REIT election


(14.2
)


(16.1
)State income taxes, net of federal
    tax benefit


1.9



1.5Other


0.3



0.6Effective income tax rate before
    discrete items


23.0



21.0Discrete item  Benefit
    for reversal of net deferred tax liabilities(1)






(2.8
)Effective income tax rate


23.0
%


18.2
%     (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 six months ended
    June 30, 2006. 27




---



##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
     New Accounting
    Pronouncements
      Note 13.
    Comprehensive
    Income    Three Months Ended


Six Months EndedJune 30,


June 30,2007


2006


2007


2006($ in thousands)Net income

$
84,328


$
72,789


$
163,018


$
138,083Unrealized (loss) gain on
    available-for-sale securities, net of tax


(94
)


1,937



(2,798
)


2,549Unrealized gain on foreign
    currency translation, net of tax


1,561







2,181



Unrealized gain on cash flow
    hedge, net of tax


864



1,186



536



2,456Comprehensive income

$
86,659


$
75,912


$
162,937


$
143,088     June 30,


December 31,2007


2006($ in thousands)Unrealized (loss) gain on
    available-for-sale securities, net of tax

$
(84
)

$
2,714Unrealized gain (loss) on foreign
    currency translation, net of tax


1,355



(826
)Unrealized gain on cash flow
    hedge, net of tax


1,113



577Accumulated other comprehensive
    income, net

$
2,384


$
2,465  28




---



##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Note 14.
    Net
    Income per Share    Three Months Ended


Six Months EndedJune 30,


June 30,2007


2006


2007


2006($ in thousands, except per share data)Basic net income per
    share:Net income

$
84,328


$
72,789


$
163,018


$
138,083Average shares  basic


185,371,033



168,866,621



182,274,147



159,309,225Basic net income per share

$
0.45


$
0.43


$
0.89


$
0.87Diluted net income per
    share:Net income

$
84,328


$
72,789


$
163,018


$
138,083Average shares  basic


185,371,033



168,866,621



182,274,147



159,309,225Effect of dilutive securities:Stock dividend declared














1,629,138Option shares


558,360



384,842



599,957



434,331Unvested restricted stock


1,259,472



1,299,293



1,415,191



1,129,508Stock units


41,207



19,080



33,769



13,346Non-managing member units














Convertible debt(1)


198,358







189,387



Written call option














Average shares  diluted


187,428,430



170,569,836



184,512,451



162,515,548Diluted net income per share

$
0.45


$
0.43


$
0.88


$
0.85     (1)
    
    For the three and six months ended June 30, 2007, the
    conversion premium on the 1.25% Debentures and
    1.625% Debentures represented the dilutive shares based on
    a conversion price of $24.05.    Three Months Ended


Six Months EndedJune 30,


June 30,2007


2006


2007


2006(Average shares)Stock options


123,771



2,835,252



72,950



1,781,862Non-managing member units


1,996,855



2,510,818



2,225,248



2,150,148Shares subject to a written call
    option


7,401,420



7,401,420



7,401,420



7,401,420    29




---



##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Note 15.
    Stock-Based
    Compensation    Share-Based
    Payment
      Stock-Based Compensation Form 10-K.
  Note 16.
    Commitments
    and Contingencies  Guarantors Accounting and Disclosure Requirements for
    Guarantees, Including Indirect Guarantees of Indebtedness of
    Others.
  Accounting for Conditional Asset Retirement
    Obligations  An Interpretation of FASB
    No. 143
 30




---



##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      Note 17.
    Segment
    Data  Disclosures about Segments of an
    Enterprise and Related Information Organization
  Three Months Ended June 30,2007


2006Commercial


Residential





Commercial


ResidentialLending


Mortgage


Consolidated


Lending


Mortgage


Consolidated& Investment


Investment


Total


& Investment


Investment


Total($ in thousands)Total interest and fee income

$
272,851


$
83,389


$
356,240


$
216,686


$
75,954


$
292,640Operating lease income


22,118







22,118



6,694







6,694Interest expense


122,513



77,778



200,291



81,262



72,656



153,918Provision for loan losses


17,410







17,410



11,471







11,471Operating expenses(1)


64,564



1,879



66,443



51,737



1,954



53,691Other income (expense)(2)


34,925



(13,846
)


21,079



7,261



4,035



11,296Noncontrolling interests expense


1,272







1,272



1,230







1,230Net income (loss) before income
    taxes


124,135



(10,114
)


114,021



84,941



5,379



90,320Income taxes


29,693







29,693



17,531







17,531Net income (loss)

$
94,442


$
(10,114
)

$
84,328


$
67,410


$
5,379


$
72,789Total assets

$
10,589,381


$
6,572,309


$
17,161,690


$
7,931,088


$
5,638,767


$
13,569,855   31




---



##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Six Months Ended June 30,2007


2006Commercial


Residential





Commercial


ResidentialLending


Mortgage


Consolidated


Lending


Mortgage


Consolidated& Investment


Investment


Total


& Investment


Investment


Total($ in thousands)Total interest and fee income

$
531,532


$
164,289


$
695,821


$
426,356


$
103,324


$
529,680Operating lease income


42,406







42,406



11,319







11,319Interest expense


233,764



153,176



386,940



154,095



97,605



251,700Provision for loan losses


32,336







32,336



25,883



301



26,184Operating expenses(1)


128,785



2,980



131,765



100,102



4,208



104,310Other income (expense)(2)


46,672



(19,544
)


27,128



13,711



(2,071
)


11,640Noncontrolling interests expense


2,602







2,602



2,091







2,091Net income (loss) before income
    taxes and cumulative effect of accounting change


223,123



(11,411
)


211,712



169,215



(861
)


168,354Income taxes


48,694







48,694



30,641







30,641Net income (loss) before
    cumulative effect of accounting change


174,429



(11,411
)


163,018



138,574



(861
)


137,713Cumulative effect of accounting
    change, net of taxes














370







370Net income (loss)

$
174,429


$
(11,411
)

$
163,018


$
138,944


$
(861
)

$
138,083Total assets

$
10,589,381


$
6,572,309


$
17,161,690


$
7,931,088


$
5,638,767


$
13,569,855     (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.
  Note 18.
    Subsequent
    Events   32




---



##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Borrowings
   33




---



##### 



ITEM 2.
    MANAGEMENTS
    DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
    OPERATIONS  CAUTIONARY
    NOTE REGARDING FORWARD-LOOKING STATEMENTS
  Form 10-Q, Form 10-K Form 10-K), Form 8-K
    Form 10-Q.
  Overview
    and Highlights
      
    Structured Finance,which generally engages in commercial
    and residential real estate finance and also provides
    asset-based lending to finance companies;
    Healthcare and Specialty Finance,which generally
    provides first mortgage loans, asset-based revolving lines of
    credit, real estate lease financing and cash flow loans to
    healthcare businesses and a broad range of other
    companies; and
    Corporate Finance,which generally provides senior and
    subordinate loans through direct origination and participation
    in widely syndicated loan transactions.    Recent
    Developments  Pending Acquisition of TierOne
    Corporation
   34




---



##### 



Consolidated
    Results of Operations
    Explanation
    of Reporting Metrics
  Interest Income.
  Fee Income.
  Operating Lease Income.
  Interest Expense.
  Provision for Loan Losses.
 35




---



##### 



Other Income, net of expenses.
  Operating Expenses.
  Income Taxes.
  Adjusted Earnings.
 36




---



##### 



Operating
    Results for the Three and Six Months Ended June 30,
    2007
    
    Growth in our commercial loan portfolio;
    Increased operating lease income related to our direct real
    estate investments;
    Increased borrowings to fund our growth;
    Increased operating expenses, including higher employee
    compensation; and
    Decreased lending and borrowing spreads.    Three Months Ended








Six Months EndedJune 30,








June 30,2007


2006


$ Change


% Change


2007


2006


$ Change


% Change($ in thousands)Interest income

$
311,184


$
256,037


$
55,147



22
%

$
600,738


$
451,535


$
149,203



33
%Fee income


45,056



36,603



8,453



23
%


95,083



78,145



16,938



22
%Operating lease income


22,118



6,694



15,424



230
%


42,406



11,319



31,087



275
%Interest expense


200,291



153,918



46,373



30
%


386,940



251,700



135,240



54
%Provision for loan losses


17,410



11,471



5,939



52
%


32,336



26,184



6,152



23
%Operating expenses


66,443



53,691



12,752



24
%


131,765



104,310



27,455



26
%Other income, net of expenses


21,079



11,296



9,783



87
%


27,128



11,640



15,488



133
%Noncontrolling interests expense


1,272



1,230



42



3
%


2,602



2,091



511



24
%Income taxes


29,693



17,531



12,162



69
%


48,694



30,641



18,053



59
%Cumulative effect of accounting
    change, net of taxes














N/A







370



370



100
%Net income


84,328



72,789



11,539



16
%


163,018



138,083



24,935



18
%     Six Months Ended June 30,2007


2006Weighted


Net


Average


Weighted


Net


AverageAverage


Investment


Yield/


Average


Investment


Yield/Balance


Income


Cost


Balance


Income


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





$
600,737



8.29
%





$
451,535



8.54
%Fee income






95,083



1.31







78,145



1.48Total interest earning assets(1)

$
14,620,118



695,820



9.60


$
10,658,010



529,680



10.02Total direct real estate investments


830,035



42,406



10.30



173,496



11,319



13.16Total income earning assets


15,450,153



738,226



9.64



10,831,506



540,999



10.07Total interest bearing
    liabilities(2)


13,278,448



386,941



5.88



9,087,398



251,700



5.59Net finance spread





$
351,285



3.76
%





$
289,299



4.48
%Net finance margin










4.59
%










5.39
%     (1)
    
    Interest earning assets include
    cash, restricted cash, mortgage-related receivables, RMBS,
    loans, and investments in debt securities.(2)
    
    Interest bearing liabilities
    include repurchase agreements, secured and unsecured credit
    facilities, term debt, convertible debt and subordinated debt. 37




---



##### 



Comparison
    of the Three Months Ended June 30, 2007 and
    2006
    Interest
    Income
      Fee
    Income
    Operating
    Lease Income
  triple-net
  Interest
    Expense
   38




---



##### 



Net
    Finance Margin
      Three Months Ended June 30,2007


2006Weighted


Net


Average


Weighted


Net


AverageAverage


Investment


Yield/


Average


Investment


Yield/Balance


Income


Cost


Balance


Income


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





$
227,794



10.06
%





$
180,083



10.45
%Fee income






45,056



1.99







36,603



2.12Total interest earning assets(1)

$
9,083,019



272,850



12.05


$
6,910,554



216,686



12.57Total direct real estate
    investments


872,969



22,118



10.16



219,632



6,694



12.22Total income earning assets


9,955,988



294,968



11.88



7,130,186



223,380



12.57Total interest bearing
    liabilities(2)


7,929,113



122,513



6.20



5,356,722



81,262



6.08Net finance spread





$
172,455



5.68
%





$
142,118



6.49
%Net finance margin










6.95
%










7.99
%     (1)
    
    Interest earning assets include cash, restricted cash, loans and
    investments in debt securities.(2)
    
    Interest bearing liabilities include repurchase agreements,
    secured and unsecured credit facilities, term debt, convertible
    debt and subordinated debt.   39




---



##### 



Provision
    for Loan Losses
    Other
    Income
        Operating
    Expenses
     40




---



##### 



Adjusted
    Earnings
    Three Months EndedJune 302007


2006Net income

$
84,328


$
72,789Add:Real estate depreciation and
    amortization(1)


7,896



2,220Amortization of deferred financing
    fees(2)


6,823



7,525Non-cash equity compensation


9,859



9,817Net realized and unrealized losses
    (gain) on residential mortgage investment portfolio, including
    related derivatives(3)


15,846



(3,770
)Unrealized gains on derivatives and
    foreign currencies, net


(1,287
)


(6,882
)Unrealized losses on investments,
    net


1,170



3,870Provision for loan losses


17,410



11,571Recoveries(4)






Less:Charge offs(5)


13,625



Nonrecurring items






Cumulative effect of accounting
    change, net of taxes






Adjusted earnings

$
128,420


$
97,140Net income per share:Basic  as reported

$
0.45


$
0.43Diluted  as reported

$
0.45


$
0.43Average shares
    outstanding:Basic  as reported


185,371,033



168,866,621Diluted  as reported


187,428,430



170,569,836Adjusted earnings per
    share:Basic

$
0.69


$
0.58Diluted(6)

$
0.68


$
0.57Average shares
    outstanding:Basic


185,371,033



168,866,621Diluted(7)


189,425,285



173,080,654     (1)
    
    Depreciation and amortization for
    direct real estate investments only. Excludes depreciation for
    corporate leasehold improvements, fixed assets and other
    non-real estate items.(2)
    
    Includes amortization of deferred
    financing fees and other non-cash interest expense.(3)
    
    Includes adjustments to reflect the
    realized gains and losses and the period change in fair value of
    RMBS and related derivative instruments.(4)
    
    Includes all recoveries on loans
    during the period.(5)
    
    To the extent we experience losses
    on loans for which we specifically provided a reserve prior to
    January 1, 2006, there will be no adjustment to earnings.
    All charge offs incremental to previously established allocated
    reserves will be deducted from net income.(6)
    
    Adjusted to reflect the impact of
    adding back noncontrolling interests expense of
    $1.3 million and $1.2 million for the three months
    ended June 30, 2007 and 2006, respectively, to adjusted
    earnings due to the application of the if-converted method on
    non-managing member units, which are considered dilutive to
    adjusted earnings per share, but are antidilutive to GAAP net
    income per share for all periods presented.(7)
    
    Adjusted to include average
    non-managing member units of 1,996,855 and 2,510,818 for the
    three months ended June 30, 2007 and 2006, respectively,
    which are considered dilutive to adjusted earnings per share,
    but are antidilutive to GAAP net income per share. 41




---



##### 



Comparison
    of the Six Months Ended June 30, 2007 and
    2006
    Interest
    Income
      Fee
    Income
    Operating
    Lease Income
  triple-net
  Interest
    Expense
   42




---



##### 



Net
    Finance Margin
      Six Months Ended June 30,2007


2006Weighted


Net


Average


Weighted


Net


AverageAverage


Investment


Yield/


Average


Investment


Yield/Balance


Income


Cost


Balance


Income


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





$
436,448



10.05
%





$
348,211



10.35
%Fee income






95,083



2.19







78,145



2.32Total interest earning assets(1)

$
8,758,732



531,531



12.24


$
6,785,120



426,356



12.67Total direct real estate
    investments


830,035



42,406



10.30



173,496



11,319



13.16Total income earning assets


9,588,767



573,937



12.07



6,958,616



437,675



12.68Total interest bearing
    liabilities(2)


7,595,630



233,765



6.21



5,339,899



154,095



5.82Net finance spread





$
340,173



5.86
%





$
283,580



6.86
%Net finance margin










7.15
%










8.22
%     (1)
    
    Interest earning assets include cash, restricted cash, loans and
    investments in debt securities.(2)
    
    Interest bearing liabilities include repurchase agreements,
    secured and unsecured credit facilities, term debt, convertible
    debt and subordinated debt.   43




---



##### 



Provision
    for Loan Losses
    Other
    Income
  break-up
      Operating
    Expenses
      Income
    Taxes
   44




---



##### 



Adjusted
    Earnings
    Six Months EndedJune 302007


2006Net income

$
163,018


$
138,083Add:Real estate depreciation and
    amortization(1)


14,658



3,610Amortization of deferred financing
    fees(2)


12,332



14,427Non-cash equity compensation


20,571



16,353Net realized and unrealized losses
    on residential mortgage investment portfolio, including related
    derivatives(3)


23,381



677Unrealized gains on derivatives
    and foreign currencies, net


(959
)


(7,133
)Unrealized losses on investments,
    net


1,217



5,106Provision for loan losses


32,336



26,284Recoveries(4)






Less:Charge offs(5)


23,876



276Nonrecurring items(6)






4,725Cumulative effect of accounting
    change, net of taxes






370Adjusted earnings

$
242,678


$
192,036Net income per share:Basic  as reported

$
0.89


$
0.87Diluted  as reported

$
0.88


$
0.85Average shares
    outstanding:Basic  as reported


182,274,147



159,309,225Diluted  as reported


184,512,451



162,515,548Adjusted earnings per
    share:Basic

$
1.33


$
1.21Diluted(7)

$
1.31


$
1.18Average shares
    outstanding:Basic


182,274,147



159,309,225Diluted(8)


186,737,699



164,665,696     (1)
    
    Depreciation and amortization for direct real estate investments
    only. Excludes depreciation for corporate leasehold
    improvements, fixed assets and other non-real estate items.(2)
    
    Includes amortization of deferred financing fees and other
    non-cash interest expense.(3)
    
    Includes adjustments to reflect the realized gains and losses
    and the period change in fair value of RMBS and related
    derivative instruments.(4)
    
    Includes all recoveries on loans during the period.(5)
    
    To the extent we experience losses on loans for which we
    specifically provided a reserve prior to January 1, 2006,
    there will be no adjustment to earnings. All charge offs
    incremental to previously established allocated reserves will be
    deducted from net income.(6)
    
    Represents the write-off of a net deferred tax liability
    recorded in connection with our conversion to a REIT for the six
    months ended June 30, 2006.(7)
    
    Adjusted to reflect the impact of adding back noncontrolling
    interests expense of $2.6 million and $2.1 million for
    the six months ended June 30, 2007 and 2006, respectively,
    to adjusted earnings due to the application of the if-converted
    method on non-managing member units, which are considered
    dilutive to adjusted earnings per share, but are antidilutive to
    GAAP net income per share for all periods presented.(8)
    
    Adjusted to include average non-managing member units of
    2,225,248 and 2,150,148 for the six months ended June 30,
    2007 and 2006, respectively, which are considered dilutive to
    adjusted earnings per share, but are antidilutive to GAAP net
    income per share. 45




---



##### 



Financial
    Condition
  Commercial
    Lending & Investment Segment
  Portfolio
    Composition
    June 30,


December 31,2007


2006($ in thousands)Commercial loans

$
8,941,593


$
7,850,198Direct real estate investments


1,032,838



722,303Equity investments


175,968



150,090Total

$
10,150,399


$
8,722,591   Commercial
    Lending Portfolio Composition
    June 30, 2007


December 31, 2006($ in thousands)Composition of loan portfolio by
    loan type:Senior secured loans(1)

$
5,365,138



60
%

$
4,704,166



60
%First mortgage loans(1)


2,864,816



32



2,542,222



32Subordinate loans


711,639



8



603,810



8Total

$
8,941,593



100
%

$
7,850,198



100
%Composition of loan portfolio by
    business:Structured Finance

$
3,534,140



40
%

$
2,839,716



36
%Healthcare and Specialty Finance


2,798,002



31



2,775,748



35Corporate Finance


2,609,451



29



2,234,734



29Total

$
8,941,593



100
%

$
7,850,198



100
%     (1)
    
    Includes Term B loans.    Number


Average


Number of


Average Loanof Loans


Loan Size


Clients


Size per Client($ in thousands)Composition of loan portfolio by
    business:Healthcare and Specialty Finance


426


$
6,568



300


$
9,327Structured Finance


266



13,286



219



16,138Corporate Finance


448



5,825



210



12,426Overall loan portfolio


1,140



7,844



729



12,266  46




---



##### 



Due in


Due inOne Year


One to


Due Afteror Less


Five Years


Five Years


Total($ in thousands)Scheduled maturities by loan type:Senior secured loans(1)

$
714,116


$
4,297,112


$
353,911


$
5,365,139First mortgage loans(1)


1,082,917



1,639,532



142,366



2,864,815Subordinate loans


68,540



106,303



536,796



711,639Total

$
1,865,573


$
6,042,947


$
1,033,073


$
8,941,593     (1)
    
    Includes Term B loans.    Adjustable


FixedRates


Rates


Total($ in thousands)Composition of loan portfolio by
    loan type:Senior secured loans(1)

$
5,306,738


$
58,401


$
5,365,139First mortgage loans(1)


2,562,182



302,633



2,864,815Subordinate loans


577,299



134,340



711,639Total

$
8,446,219


$
495,374


$
8,941,593Percentage of total loan portfolio


94%



6%



100%     (1)
    
    Includes Term B loans.    Credit
    Quality and Allowance for Loan Losses
    June 30,


December 31,Commercial Loan Asset Classification

2007


2006($ in thousands)Loans 60 or more days
    contractually delinquent

$
97,040


$
88,067Non-accrual loans(1)


176,088



183,483Impaired loans(2)


349,486



281,377Less: loans in multiple categories


(251,753
)


(230,469
)Total

$
370,861


$
322,458Total as a percentage of total
    loans


4.15%



4.11%Total as a percentage of all
    commercial assets(3)


3.72%



3.76%     (1)
    
    Includes commercial loans with an aggregate principal balance of
    $31.0 million and $47.0 million as of June 30,
    2007 and December 31, 2006, respectively, which were also
    classified as loans 60 or more days contractually delinquent.
    Includes non-performing loans classified as held for sale that
    have an aggregate principal balance of 47




---



##### 



$3.0 million as of June 30, 2007. There were no
    non-performing loans classified as held for sale as of
    December 31, 2006.  (2)
    
    Includes commercial loans with an aggregate principal balance of
    $78.7 million and $47.0 million as of June 30,
    2007 and December 31, 2006, respectively, which were also
    classified as loans 60 or more days contractually delinquent,
    and commercial loans with an aggregate principal balance of
    $173.1 million and $183.5 million as of June 30,
    2007 and December 31, 2006, respectively, which were also
    placed on non-accrual status.(3)
    
    Commercial assets include commercial loans, loans held for sale,
    receivables under reverse-repurchase agreements and direct real
    estate investments.  Accounting by Creditors for Impairment of a Loan and/or
  Accounting for Debtors and Creditors for Troubled Debt
    Restructurings.
    Direct
    Real Estate Investments
  triple-net triple-net
  Equity
    Investments
     48




---



##### 



Residential
    Mortgage Investment Segment
  Portfolio
    Composition
    June 30,


December 31,2007


2006($ in thousands)Mortgage-related receivables(1)

$
2,162,716


$
2,295,922Residential mortgage-backed
    securities:Agency(2)


4,290,965



3,502,753Non-Agency(3)


21,575



34,243Total

$
6,475,256


$
5,832,918     (1)
    
    Represents secured receivables that are backed by adjustable
    rate, prime residential mortgage loans that are further
    described in Note 4, Mortgage-Related Receivables and
    Related Owners Trust Transactions, in our accompanying
    unaudited consolidated financial statements for the three and
    six months ended June 30, 2007.(2)
    
    Represent mortgage-backed securities (MBS) whose
    payments of principal and interest are guaranteed by Fannie Mae
    or Freddie Mac. See the following paragraph for a description of
    these securities.(3)
    
    See following paragraph for a description of these securities.    Mortgage-Related
    Receivables and Related Owners Trust Securitizations
 49




---



##### 



Credit
    Quality and Allowance for Loan Losses
    Mortgage-Related Receivable (MRR) Asset
    Classification

June 30,2007



December 31,2006($ in thousands)% of MRR






% of MRRTotal mortgage-related receivables

$
2,162,715



100

%

$
2,295,922



100
%Mortgage-related receivables whose
    underlying mortgage loans are 90 or more days past due or are in
    the process of foreclosure


7,531



0.35%(1
)



2,364



0.10
%Foreclosed assets


2,058



0.10

%






     (1)
    
    By comparison, in its June 2007 Monthly Summary Report, Fannie
    Mae reported a serious delinquency rate (SDQ) of 0.62% for
    conventional single family loans that are three months or more
    past due or in foreclosure process while, in its June 2007
    Monthly Volume Summary, Freddie Mac reported an SDQ of 0.49% for
    comparable types of single family loans.    Financing
      Market Risk Management
  Liquidity
    and Capital Resources
   50




---



##### 



and/or
  Cash
    and Cash Equivalents
     51




---



##### 



Sources
    and Uses of Cash
        Borrowings
  Borrowings Form 10-K Borrowings
    Repurchase
    Agreements
    Credit
    Facilities
   52




---



##### 



Term
    Debt
  series 2004-2
    series 2003-2 2005-1
 53




---



##### 



Subordinated
    Debt
  2007-1 (2007-1 2007-1 2007-1 2007-1 2007-1
  2007-1 2007-1 2007-1
  2007-2 (2007-2 2007-2 2007-2 2007-2 2007-2
  2007-2 2007-2
  Convertible
    Debt
           54




---



##### 



Borrowings
    Borrowings
    Borrowings Form 10-K.
  Debt
    Covenant Compliance
    Equity
   55




---



##### 



Commitments,
    Guarantees & Contingencies
    Consolidation of Variable Interest Entities  An
    Interpretation of ARB No. 51, Accounting for Transfers and Servicing of Financial Assets
    and Extinguishments of Liabilities
      Credit
    Risk Management
  agreed-upon
    Commercial
    Lending & Investment Segment
   56




---



##### 



Residential
    Mortgage Investment Segment
    Concentrations
    of Credit Risk
    Derivative
    Counterparty Credit Risk
   57




---



##### 



Market
    Risk Management
  and/or
  Derivative Instruments Form 10-K.
  Interest
    Rate Risk Management  Commercial Lending &
    Investments Segment
    12-month
  Estimated (Decrease)Increase inRate Change

Net Interest Income(Basis Points)

Over 12 Months($ in thousands)−100

$
(4,810
)−50


(3,990
)+ 50


4,690+ 100


9,760    58




---



##### 



Amount


Percentage ofOutstanding


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

$
3,446,460



38
%At the interest rate floor


97,341



1Below the interest rate floor


59,377



1Loans with no interest rate floor


5,338,415



60Total

$
8,941,593



100
%         Interest
    Rate Risk Management  Residential Mortgage Investment
    Segment
     59




---



##### 



Estimated (Decrease)Rate Change

Increase


Percentage of Total(Basis Points)

in Fair Value


Segment Assets($ in thousands)−100

$
(7,332
)


(0.11
)%−50


(1,066
)


(0.02
)+ 50


(1,114
)


(0.02
)+ 100


(3,657
)


(0.06
)         Critical
    Accounting Estimates
  Critical
    Accounting Estimates Managements Discussion
    and Analysis of Financial Condition and Results of Operations Form 10-K
   ITEM 3.
    QUANTITATIVE
    AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK  Market Risk Management Managements Discussion and
    Analysis of Financial Condition and Results of Operations Form 10-Q, Quantitative and Qualitative Disclosures
    about Market Risk Form 10-K Form 8-K Derivative Instruments Form 10-K.
   ITEM 4.
    CONTROLS
    AND PROCEDURES  Rule 13a-15
 60




---



##### 



PART II.
    OTHER INFORMATION  ITEM 1.
    LEGAL
    PROCEEDINGS    ITEM 1A.
    RISK
    FACTORS  Risk Factors Form 10-K Form 8-K
  ITEM 2.
    UNREGISTERED
    SALES OF EQUITY SECURITIES AND USE OF PROCEEDS    Shares Purchased


Maximum NumberTotal Number


Average


as Part of Publicly


of Shares that Mayof Shares


Price Paid


Announced Plans


Yet be PurchasedPurchased(1)


per Share


or Programs


Under the PlansApril 1  April 30,
    2007


2,626,972


$
25.18







May 1  May 31, 2007


329,587



26.27







June 1  June 30,
    2007


581,802



25.26







Total


3,538,361



25.29     (1)
    
    Represents the number of shares acquired as payment by employees
    of applicable statutory minimum withholding taxes owed upon
    vesting of restricted stock granted under the CapitalSource Inc.
    Third Amended and Restated Equity Incentive Plan.  ITEM 3.
    DEFAULTS
    UPON SENIOR SECURITIES    ITEM 4.
    SUBMISSION
    OF MATTERS TO A VOTE OF SECURITY HOLDERS    Election of Directors
  Nominee

In Favor


WithheldAndrew B. Fremder


152,650,013



7,194,247Lawrence C. Nussdorf


157,618,434



2,225,827  61




---



##### 



Director

Term EndsFrederick W. Eubank, II


2008 Annual MeetingJason M. Fish


2008 Annual MeetingTimothy M. Hurd


2008 Annual MeetingWilliam G. Byrnes


2009 Annual MeetingJohn K. Delaney


2009 Annual MeetingSara L. Grootwassink


2009 Annual MeetingThomas F. Steyer


2009 Annual MeetingC. William Hosler (appointed
    effective July 1, 2007)


2010 Annual Meeting   Ratification of Auditors
  In Favor


Against


Abstained159,086,874



659,904



97,481   ITEM 5.
    OTHER
    INFORMATION    ITEM 6.
    EXHIBITS     62




---



##### 



Signatures      Date: August 8, 2007

/s/  JOHN
    K. DELANEYJohn
    K. Delaney
    Chairman of the Board and Chief Executive Officer
    (Principal Executive Officer)Date: August 8, 2007

/s/  THOMAS
    A. FINKThomas
    A. Fink
    Chief Financial Officer
    (Principal Financial Officer)Date: August 8, 2007

/s/  DAVID
    C.
    BJARNASONDavid
    C. Bjarnason
    Chief Accounting Officer
    (Principal Accounting Officer)  63




---



##### 



INDEX TO
    EXHIBITS  ExhibitNo

Description3
.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
.18

Indenture dated as of
    April 12, 2007, by and between CapitalSource Commercial
    Loan
    Trust 2007-1,
    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 18, 2007).4
.19

Indenture dated as of
    April 19, 2007, by and between CapitalSource Funding VII
    Trust, 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 25, 2007).4
.20

Form of First Supplemental
    Indenture between the Company, CapitalSource Finance LLC and
    Wells Fargo Bank, N.A., as Trustee. (incorporated by reference
    to the exhibit 4.1 to the registrants Current Report
    on
    Form 8-K
    dated July 25, 2007).4
.21

Form of 7.250% Senior
    Subordinated Convertible Note due 2037 (incorporated by
    reference to the exhibit 4.2 to the registrants
    Current Report on
    Form 8-K
    dated July 25, 2007).10
.14.4

Side Letter, dated as of
    April 19, 2007, among CapitalSource Funding II Trust, as
    Issuer, CS Funding II Depositor LLC, as Depositor, CapitalSource
    Finance LLC, as Loan Originator and Servicer, Wells Fargo Bank,
    National Association, as Indenture Trustee, Collateral
    Custodian, and Backup Servicer, and Citigroup Global Markets
    Realty Corp. and Transamerica Life Insurance Company, as
    Noteholders/Purchasers.
    10
.21*

CapitalSource Inc. Amended and
    Restated Deferred Compensation Plan, dated as of July 31,
    2007. 10
.23.1

Amended Call Option Transaction
    Confirmation, dated as of April 4, 2007, between
    CapitalSource Inc. and JPMorgan Chase Bank (incorporated by
    reference to the same-numbered exhibit to the registrants
    Quarterly Report on
    Form 10-Q
    for the quarter ended March 31, 2007).10
.23.2

Amended Warrant Transaction
    Confirmation, dated as of April 4, 2007, between
    CapitalSource Inc. and JPMorgan Chase Bank (incorporated by
    reference to the same-numbered exhibit to the registrants
    Quarterly Report on
    Form 10-Q
    for the quarter ended March 31, 2007).10
.23.3

Call Option Transaction
    Confirmation, dated as of April 4, 2007, between
    CapitalSource Inc. and JPMorgan Chase Bank (incorporated by
    reference to the same-numbered exhibit to the registrants
    Quarterly Report on
    Form 10-Q
    for the quarter ended March 31, 2007).10
.54

Amended and Restated Credit
    Agreement, dated as of March 14, 2006, (Composite Version;
    Reflects All Amendments through June 29, 2007) 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. 10
.71

Sale and Servicing Agreement,
    dated as of April 12, 2007, by and among CapitalSource
    Commercial Loan
    Trust 2007-1,
    as the Issuer, CapitalSource Commercial Loan LLC,
    2007-1, 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 18, 2007).10
.72

Note Purchase Agreement, dated as
    of April 19, 2007, among CapitalSource Funding VII Trust,
    as Issuer, CS Funding VII Depositor LLC, as Depositor,
    CapitalSource Finance LLC, as Loan Originator, and Citigroup
    Global Markets Realty Corp., as Purchaser (incorporated by
    reference to the same-numbered exhibit to the registrants
    Current Report on
    Form 8-K
    dated April 25, 2007). 64




---



##### 



ExhibitNo

Description10
.73

Sale and Servicing Agreement,
    dated as of April 19, 2007, by and among CapitalSource
    Funding VII Trust, as Issuer, as the Issuer, and CS Funding VII
    Depositor LLC, as Depositor, and CapitalSource Finance LLC, as
    Loan Originator and Servicer, and Wells Fargo Bank, National
    Association, as Indenture Trustee, Collateral Custodian and
    Backup Servicer (incorporated by reference to the same-numbered
    exhibit to the registrants Current Report on
    Form 8-K
    dated April 25, 2007).10
.74

First Amendment to the Note
    Purchase Agreement, dated as of August 2, 2007, among
    CapitalSource Funding VII Trust, as Issuer, CS Funding VII
    Depositor LLC, as Depositor, CapitalSource Finance LLC, as Loan
    Originator, and Citigroup Global Markets Realty Corp., as
    Purchaser. 10
.75

First Amendment to the Sale and
    Servicing Agreement, dated as of August 2, 2007, by and
    among CapitalSource Funding VII Trust, as Issuer, as the Issuer,
    and CS Funding VII Depositor LLC, as Depositor, and
    CapitalSource Finance LLC, as Loan Originator and Servicer, and
    Wells Fargo Bank, National Association, as Indenture Trustee,
    Collateral Custodian and Backup Servicer. 10
.76*

Form of Restricted Stock Agreement
    for Directors, CapitalSource Inc. Third Amended and Restated
    Equity Incentive Plan. 10
.77*

Form of Restricted Stock Unit
    Agreement for Directors, CapitalSource Inc. Third Amended and
    Restated Equity Incentive Plan. 10
.78*

Form of Non-Qualified Option
    Agreement for Directors, CapitalSource Inc. Third Amended and
    Restated Equity Incentive Plan. 10
.79*

Form of Restricted Stock
    Agreement, CapitalSource Inc. Third Amended and Restated Equity
    Incentive Plan. 10
.80*

Form of Restricted Stock Unit
    Agreement, CapitalSource Inc. Third Amended and Restated Equity
    Incentive Plan. 10
.81*

Form of Non-Qualified Option
    Agreement, CapitalSource Inc. Third Amended and Restated Equity
    Incentive Plan. 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.   65