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 June 30, 2009
  Commission File
    No. 1-31753
  CapitalSource Inc.
 (Exact name of registrant as
    specified in its charter)
  Delaware(State of
    Incorporation)

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




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##### 





TABLE OF
    CONTENTS
  PagePART I. FINANCIAL INFORMATIONItem 1.

Financial StatementsConsolidated Balance Sheets as of June 30,
    2009 (unaudited) and December 31, 2008


3Consolidated Statements of Income (unaudited) for
    the three and six months ended June 30, 2009 and 2008


4Consolidated Statement of Shareholders
    Equity (unaudited) for the six months ended June 30,
    2009


5Consolidated Statements of Cash Flows (unaudited)
    for the six months ended June 30, 2009 and 2008


6Notes to the Unaudited Consolidated Financial
    Statements


7Item 2.

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


57Item 3.

Quantitative and Qualitative Disclosures about
    Market Risk


89Item 4.

Controls and Procedures


89PART II. OTHER INFORMATIONItem 1A

Risk Factors


90Item 2.

Unregistered Sales of Equity Securities and Use
    of Proceeds


93Item 4.

Submission of Matters to a Vote of Security
    Holders


93Item 6.

Exhibits


94Signatures


95Index to Exhibits


96   2




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##### 



CapitalSource
    Inc.Consolidated Balance Sheets
  June 30,


December 31,2009


2008(Unaudited)($ in thousands)ASSETSCash and cash equivalents

$
1,002,407


$
1,338,563Restricted cash


202,920



419,383Investment securities:Available-for-sale,
    at fair value


829,326



679,551Held-to-maturity,
    at amortized cost


219,154



14,389Total investment securities


1,048,480



693,940Mortgage-backed securities pledged, trading






1,489,291Mortgage-related receivables, net


1,626,387



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


887,569



1,396,611Loans:Loans held for sale


59,460



8,543Loans held for investment


8,884,252



9,396,751Less deferred loan fees and discounts


(155,924
)


(174,317
)Less allowance for loan losses


(447,728
)


(423,844
)Loans held for investment, net


8,280,600



8,798,590Total loans


8,340,060



8,807,133Interest receivable


104,703



117,516Direct real estate investments, net


958,909



989,716Other investments


106,673



127,746Goodwill


173,135



173,135Other assets


654,988



1,065,063Total assets

$
15,106,231


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

$
4,547,939


$
5,043,695Repurchase agreements






1,595,750Credit facilities


1,249,698



1,445,062Term debt


4,770,352



5,338,456Other borrowings


1,598,141



1,573,813Other liabilities


330,661



592,136Total liabilities


12,496,791



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






Common stock ($0.01 par value, 1,200,000,000 shares
    authorized; 303,306,840 and 282,804,211 shares issued and
    outstanding, respectively)


3,033



2,828Additional paid-in capital


3,818,943



3,686,765Accumulated deficit


(1,224,344
)


(868,425
)Accumulated other comprehensive income, net


11,185



9,095Total CapitalSource Inc. shareholders equity


2,608,817



2,830,263Noncontrolling interests


623



457Total shareholders equity


2,609,440



2,830,720Total liabilities and shareholders equity

$
15,106,231


$
18,419,632    3




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##### 



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


Six Months Ended June 30,2009


2008


2009


2008As Adjusted





As Adjusted(Note 3)





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

$
183,093


$
222,118


$
382,485


$
468,619Investment securities


13,469



29,417



34,022



86,757Other


913



2,687



2,655



7,171Total interest income


197,475



254,222



419,162



562,547Fee income


24,906



41,267



56,302



74,908Total interest and fee income


222,381



295,489



475,464



637,455Operating lease income


27,406



24,210



55,286



51,900Total investment income


249,787



319,699



530,750



689,355Interest expense:Deposits


29,959







68,346



Borrowings


80,906



158,115



173,554



348,587Total interest expense


110,865



158,115



241,900



348,587Net investment income


138,922



161,584



288,850



340,768Provision for loan losses


203,847



31,674



359,114



37,333Net investment (loss) income after provision for loan losses


(64,925
)


129,910



(70,264
)


303,435Operating expenses:Compensation and benefits


34,808



37,808



69,845



69,597Depreciation of direct real estate investments


8,838



8,990



17,802



17,906Professional fees


11,860



8,989



29,280



21,923Other administrative expenses


22,254



14,855



39,112



28,725Total operating expenses


77,760



70,642



156,039



138,151Other income (expense):Loss on investments, net


(4,967
)


(4,961
)


(21,094
)


(3,993
)(Loss) gain on derivatives


(1,333
)


15,098



(2,019
)


(23,013
)Gain (loss) on residential mortgage investment portfolio






9,060



15,311



(46,317
)Gain (loss) on extinguishment of debt


4,565



12,725



(52,563
)


12,725Other (expense) income, net


(10,970
)


8,364



(26,467
)


4,485Total other (expense) income


(12,705
)


40,286



(86,832
)


(56,113
)Net (loss) income before income taxes


(155,390
)


99,554



(313,135
)


109,171Income tax expense


91,179



37,243



37,754



40,319Net (loss) income


(246,569
)


62,311



(350,889
)


68,852Net (loss) income attributable to noncontrolling interests


(22
)


283



(38
)


1,580Net (loss) income attributable to CapitalSource Inc.

$
(246,547
)

$
62,028


$
(350,851
)

$
67,272Net (loss) income per share attributable to CapitalSource
    Inc.:Basic

$
(0.82
)

$
0.26


$
(1.19
)

$
0.30Diluted

$
(0.82
)

$
0.26


$
(1.19
)

$
0.29Average shares outstanding:Basic


299,452,870



235,076,287



294,818,311



227,580,584Diluted


299,452,870



236,445,230



294,818,311



228,969,238Dividends declared per share

$
0.01


$
0.60


$
0.02


$
1.20    4




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##### 



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





Other





TotalCommon


Paid-In


Accumulated


Comprehensive


Noncontrolling


ShareholdersStock


Capital


Deficit


Income, Net


Interests


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

$
2,828


$
3,686,765


$
(868,425
)

$
9,095


$
457


$
2,830,720Net loss










(350,851
)






(38
)


(350,889
)Other comprehensive loss:Cumulative effect of adoption of FSP
    FAS 115-2










397



(397
)






Unrealized gain, net of tax














2,487







2,487Total comprehensive loss






















(348,402
)Issuance of noncontrolling interests


















204



204Repurchase of common stock


(6
)


(794
)














(800
)Dividends paid






(586
)


(5,465
)










(6,051
)Proceeds from issuance of common stock, net


2



51















53Exchange of convertible debt


198



118,358















118,556Stock option expense






2,395















2,395Restricted stock activity


11



12,754















12,765Total shareholders equity as of June 30, 2009

$
3,033


$
3,818,943


$
(1,224,344
)

$
11,185


$
623


$
2,609,440    5




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##### 



CapitalSource
    Inc.Consolidated Statements of Cash Flows
   Six Months Ended June 30,2009


2008Unaudited($ in thousands)Operating activities:Net (loss) income

$
(350,889
)

$
68,852Adjustments to reconcile net (loss) income to net cash provided
    by operating activities:Stock option expense


2,395



3Restricted stock expense


13,974



18,541Loss (gain) on extinguishment of debt


52,563



(12,725
)Amortization of deferred loan fees and discounts


(40,869
)


(50,494
)Paid-in-kind
    interest on loans


(9,298
)


6,250Provision for loan losses


359,114



37,333Amortization of deferred financing fees and discounts


33,084



52,128Depreciation and amortization


22,974



18,264Provision (benefit) for deferred income taxes


10,775



(8,104
)Non-cash loss on investments, net


20,642



6,280Non-cash loss on property and equipment disposals


15,386



593Unrealized loss on derivatives and foreign currencies, net


3,485



26,230Unrealized (gain) loss on residential mortgage investment
    portfolio, net


(60,570
)


31,664Net decrease in mortgage-backed securities pledged, trading


1,485,133



2,449,542Amortization of discount on residential mortgage investments


11



(7,108
)Accretion of discount on commercial real estate A
    participation interest


(13,569
)


Decrease in interest receivable


4,485



22,067Decrease in loans held for sale, net


25,282



220,389Decrease in other assets


504,895



48,710Decrease in other liabilities


(282,653
)


(83,725
)Cash provided by operating activities


1,796,350



2,844,690Investing activities:Decrease in restricted cash


216,463



84,848Decrease in mortgage-related receivables, net


134,202



122,118Decrease in commercial real estate A participation
    interest, net


522,611



Acquisition of CS Advisors CLO II






(18,619
)Decrease in loans, net


158,727



449,391Cash received (paid) for real estate


10,743



(10,121
)Acquisition of marketable securities,
    available-for-sale,
    net


(163,548
)


(46,378
)Acquisition of marketable securities,
    held-to-maturity,
    net


(201,154
)


Acquisition of other investments, net


(263
)


(26,950
)Acquisition of property and equipment, net


(11,855
)


(1,328
)Cash provided by investing activities


665,926



552,961Financing activities:Payment of deferred financing fees


(14,283
)


(41,539
)Deposits accepted, net of repayments


(496,170
)


Repayments under repurchase agreements, net


(1,595,750
)


(2,368,232
)Repayments on credit facilities, net


(200,690
)


(526,180
)Borrowings of term debt


26,000



Repayments of term debt


(589,555
)


(588,154
)Borrowings (repayments) under other borrowings, net


78,769



(195,868
)Proceeds from issuance of common stock, net of offering costs


53



599,679Repurchase of common stock


(800
)


Proceeds from exercise of options






326Tax expense on share-based payments






(9,630
)Payment of dividends


(6,006
)


(277,085
)Cash used in financing activities


(2,798,432
)


(3,406,683
)Decrease in cash and cash equivalents


(336,156
)


(9,032
)Cash and cash equivalents as of beginning of period


1,338,563



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

$
1,002,407


$
169,667Supplemental information:Noncash transactions from investing and financing activities:Exchange of common stock for convertible debentures

$
61,618


$
Assets acquired through foreclosure


46,712



46,464Assumption of note payable






25,107Conversion of noncontrolling interests into common stock


2,090



30,200    6




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##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
  Note 1.
    Organization      Segment Data
  Note 2.
    Summary
    of Significant Accounting Policies  Interim
    Consolidated Financial Statements Basis of
    Presentation
  Form 10-Q Regulation S-X. Form 8-K Form 10-K (Form 10-K).
     7




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##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Reclassifications
    Summary of Significant Accounting
    Policies Form 10-K.
  New
    Accounting Pronouncements
  Business
    Combinations
  FAS 157-2, Effective Date of FASB Statement No. FAS 157-2), FAS 157-2 FAS 157-4, Determining Fair Value When the Volume and Level of Activity
    for the Asset or Liability Have Significantly Decreased and
    Identifying Transactions That Are Not Orderly FAS 157-4), Fair Value
    Measurements FAS 157-4 FAS 157-4 FAS 157-4 FAS 157-4,
  Disclosures about Derivative Instruments and Hedging
    Activities  An Amendment of FASB Statement
    No. 133 Accounting for Derivative instruments and Hedging Activities
  Accounting for Assets Acquired
    and Liabilities Assumed in a Business Combination That Arise
    from Contingencies
 8




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##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Accounting for
    Contingencies
  FAS 115-2 FAS 124-2, Recognition and Presentation of
    Other-Than-Temporary
    Impairments FAS 115-2 FAS 124-2), other-than-temporary other-than-temporary FAS 115-2 FAS 124-2 other-than-temporary FAS 115-2 FAS 124-2 FAS 115-2 FAS 124-2,
  FAS 107-1 28-1, Interim Disclosures about Fair Value of Financial Instruments FAS 107-1 28-1), Disclosure about Fair
    Value of Financial Instruments, FAS 107-1 28-1 Interim Financial
    Reporting FAS 107-1 28-1 FAS 107-1 28-1, Fair Value
    Measurements
  Subsequent Events
  Accounting for Transfers of Financial Assets Accounting for Transfers and
    Servicing of Financial Assets and Extinguishments of Liabilities
  Amendments to FASB Interpretation No. 46(R) ,
 9




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##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    the
    FASB Accounting Standards
    Codificationtm
  Note 3.
    Retrospective
    Application of Accounting Pronouncements  14-1, Accounting for Convertible Debt Instruments That May Be
    Settled in Cash upon Conversion (Including Partial Cash
    Settlement) 14-1), Accounting for Convertible Debt and Debt
    Issued with Stock Purchase Warrants 14-1 14-1 14-1
  Noncontrolling Interests in Consolidated Financial
    Statements  An Amendment of ARB No. 51
 10




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##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  14-1 14-1
  Consolidated
    Balance Sheets
  June 30, 2009As Computed Prior to


As Reported underFSP APB 14-1 and


FSP APB 14-1 andSFAS No. 160


SFAS No. 160


Effect of Change($ in thousands)Other assets

$
650,108


$
654,988


$
4,880Other borrowings


1,605,739



1,598,141



(7,598
)Additional paid-in capital


3,803,827



3,818,943



15,116Accumulated deficit


(1,221,706
)


(1,224,344
)


(2,638
)   December 31, 2008As Computed Prior to


As Reported underFSP APB 14-1 and


FSP APB 14-1 andSFAS No. 160


SFAS No. 160


Effect of Change($ in thousands)Other assets

$
1,060,332


$
1,065,063


$
4,731Other borrowings


1,560,224



1,573,813



13,589Additional paid-in capital


3,683,065



3,686,765



3,700Accumulated deficit


(855,867
)


(868,425
)


(12,558
)   Consolidated
    Statements of Income
  Three Months Ended June 30, 2009As Computed Prior to


As Reported underFSP APB 14-1 and


FSP APB 14-1 andSFAS No. 160


SFAS No. 160


Effect of Change($ in thousands, except per share amounts)Interest expense: borrowings

$
82,712


$
80,906


$
(1,806
)Income tax expense


94,335



91,179



(3,156
)Net loss


(251,553
)


(246,569
)


4,984Net loss attributable to noncontrolling interests(1)


(22
)


(22
)


Net loss attributable to CapitalSource Inc.






(246,547
)


(246,547
)Net loss per share attributable to
    CapitalSource Inc.(2)Basic


(0.84
)


(0.82
)


0.02Diluted


(0.84
)


(0.82
)


0.02   11




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##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Three Months Ended June 30, 2008As Originally Reported


As Adjusted


Effect of Change($ in thousands, except per share amounts)Interest expense: borrowings

$
160,083


$
158,115


$
(1,968
)Net income


60,060



62,311



2,251Net income attributable to noncontrolling
    interests(1)


283



283



Net income attributable to CapitalSource Inc.






62,028



62,028Net income per share attributable to CapitalSource Inc.(2)Basic


0.26



0.26



Diluted


0.25



0.26



0.01   Six Months Ended June 30, 2009As Computed Prior to


As Reported underFSP APB 14-1 and


FSP APB 14-1 andSFAS No. 160


SFAS No. 160


Effect of Change($ in thousands, except per share amounts)Interest expense: borrowings

$
183,474


$
173,554


$
(9,920
)Net loss


(360,847
)


(350,889
)


9,958Net loss attributable to noncontrolling interests(1)


(38
)


(38
)


Net loss attributable to CapitalSource Inc.






(350,851
)


(350,851
)Net loss per share attributable to CapitalSource Inc.(2)Basic


(1.22
)


(1.19
)


0.03Diluted


(1.22
)


(1.19
)


0.03   Six Months Ended June 30, 2008As Originally Reported


As Adjusted


Effect of Change($ in thousands, except per share amounts)Interest expense: borrowings

$
349,028


$
348,587


$
(441
)Net income


66,831



68,852



2,021Net income attributable to noncontrolling interests(1)


1,580



1,580



Net income attributable to CapitalSource Inc.






67,272



67,272Net income per share attributable to CapitalSource Inc.(2)Basic


0.29



0.30



0.01Diluted


0.29



0.29



     (1)
    
    The caption Noncontrolling interests expense was
    changed to Net (loss) income attributable to
    noncontrolling interests to conform to the presentation
    requirements of SFAS No. 160.(2)
    
    The caption Net (loss) income per share was changed
    to Net (loss) income per share attributable to
    CapitalSource Inc. to conform to the presentation
    requirements of SFAS No. 160. 12




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##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   Consolidated
    Statements of Cash Flows
  Six Months Ended June 30, 2009As Computed Prior to


As Reported underFSP APB 14-1 and


FSP APB 14-1 andSFAS No. 160


SFAS No. 160


Effect of Change($ in thousands)Net loss

$
(360,847
)

$
(350,889
)

$
9,958Operating activities:Adjustments to reconcile net loss to net cash provided by (used
    in) operating activitiesAmortization of deferred financing fees and discounts


43,004



33,084



(9,920
)Financing activities:Payment of dividends


(5,968
)


(6,006
)


(38
)   Six Months Ended June 30, 2008As Originally Reported


As Adjusted


Effect of Change($ in thousands)Net income

$
66,831


$
68,852


$
2,021Operating activities:Adjustments to reconcile net income to net cash provided by
    operating activitiesAmortization of deferred financing fees and discounts


52,569



52,128



(441
)Financing activities:Payment of dividends


(275,505
)


(277,085
)


(1,580
)   Note 4.
    Cash and
    Cash Equivalents and Restricted Cash    June 30,


December 31,2009


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

$
201,352


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


15,431



19,963Other short-term investments(3)


838,589



984,237Investment securities(4)


149,955



504,136Total cash and cash equivalents and restricted cash

$
1,205,327


$
1,757,946     (1)
    
    Represents principal and interest collections on loan assets
    held by securitization trusts or pledged to credit facilities
    and escrows for future expenses related to our direct real
    estate investments. A portion of these collections are invested
    in money market funds that invest primarily in U.S. Treasury
    securities, and in 2008, repurchase agreements secured by U.S.
    Treasury securities. The restricted portion of the balance was
    $68.7 million and $60.9 million as of June 30,
    2009 and December 31, 2008, respectively. Cash and due from
    bank accounts for CapitalSource Bank were $102.5 million
    and $132.3 million as of June 30, 2009 and
    December 31, 2008, respectively. Included in this balance
    for CapitalSource Bank were $62.4 million and
    $52.1 million in deposits at the Federal Reserve Bank
    (FRB) as of June 30, 2009 and December 31,
    2008, respectively. The cash and due from bank accounts for
    CapitalSource Bank were not restricted. 13




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##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   (2)
    
    Represents principal and interest collections on loan assets
    pledged to credit facilities. The restricted portion was
    $7.2 million and $8.4 million as of June 30, 2009
    and December 31, 2008, respectively.(3)
    
    Represents principal and interest collections on loan assets
    held by securitization trusts or pledged to credit facilities
    and also includes short-term investments held by CapitalSource
    Bank. Principal and interest collections are invested in money
    market funds that invest primarily in U.S. Treasury securities,
    and in 2008, repurchase agreements secured by U.S. Treasury
    securities. The restricted portion was $127.0 million and
    $150.0 million as of June 30, 2009 and
    December 31, 2008, respectively. The CapitalSource Bank
    cash is invested in (i) short term investment grade
    commercial paper which is rated by at least two of the three
    major rating agencies (S&P, Moodys or Fitch) and has
    a rating of A1 (S&P), P1 (Moodys) or F1 (Fitch), and
    (ii) in money market funds that invest primarily in U.S.
    Treasury and Agency securities and repurchase agreements secured
    by the same.(4)
    
    Includes discount notes with AAA ratings totaling
    $150.0 million and $303.0 million as of June 30,
    2009 and December 31, 2008, respectively, issued by the
    Federal Home Loan Bank System (FHLB), Fannie Mae or
    Freddie Mac. These investments have a remaining weighted average
    maturity of 67 days and 61 days as of June 30,
    2009 and December 31, 2008, respectively. There was no
    restricted portion as of June 30, 2009, and
    $200.0 million was restricted as of December 31, 2008.  Note 5.
    Mortgage-Related
    Receivables and Related Owner
    Trust Securitizations        loan-to-value
   14




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##### 



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

December 31,2009

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

$
108,129


$
51,348Percentage of mortgage-related receivables


6.51
%


2.82
%     (1)
    
    Mortgage loans 90 or more days past due are also placed on
    non-accrual status.      Six Months Ended June 30,2009


2008Balance as of beginning of period

$
9,266


$
796Provision for loan losses


48,965



6,897Charge offs, net of recoveries


(23,732
)


(1,832
)Balance as of end of period

$
34,499


$
5,861     Note 6.
    Commercial
    Lending Assets and Credit Quality    Commercial
    Real Estate A Participation Interest
   15




---



##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    A Participation Interest as of December 31, 2008

$
1,396,611Principal payments


(522,611
)Discount accretion


13,569A Participation Interest as of June 30, 2009

$
887,569       pari passu
    Loans
    Held for Sale
      Loans
    Held for Investment
   16




---



##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Six Months EndedJune 30,2009


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

$
423,844


$
138,930Provision for loan losses


310,149



30,436Charge offs, net of recoveries


(286,265
)


(28,238
)Balance as of end of period

$
447,728


$
141,128     June 30,


December 31,2009


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

$
118,010


$
299,322Loans 90 or more days contractually delinquent


411,865



141,104Non-accrual loans(1)


884,399



439,547Impaired loans(2)


1,202,163



692,278     (1)
    
    Includes loans with aggregate principal balances of
    $295.3 million and $110.3 million as of June 30,
    2009 and December 31, 2008, respectively, which were also
    classified as loans 30 or more days contractually delinquent.
    Includes non-performing loans classified as held for sale that
    had an aggregate principal balance of $13.8 million and
    $14.5 million as of June 30, 2009 and
    December 31, 2008, respectively.(2)
    
    Includes loans with aggregate principal balances of
    $390.3 million and $128.9 million as of June 30,
    2009 and December 31, 2008, respectively, which were also
    classified as loans 30 or more days contractually delinquent,
    and loans with aggregate principal balances of
    $870.6 million and $423.4 million as of June 30,
    2009 and December 31, 2008, respectively, which were also
    classified as loans on non-accrual status. The net carrying
    value of impaired loans was $1.2 billion and
    $683.1 million as of June 30, 2009 and
    December 31, 2008, respectively, prior to the application
    of allocated reserves.  and/or
   17




---



##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      Foreclosed
    Assets
      Three Months Ended June 30,


Six Months Ended June 30,2009


2008


2009


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

$
87,397


$
25,940


$
84,437


$
19,741Transfers from loans held for investment


15,402



42,171



36,723



54,843Fair value adjustments


(550
)


953



(16,625
)


(1,076
)Real estate sold


(7,100
)


(1,455
)


(9,386
)


(5,899
)REO as of end of period

$
95,149


$
67,609


$
95,149


$
67,609    18




---



##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   Note 7.
    Investments  Investment
    Securities,
    Available-for-Sale
  available-for-sale,
  June 30, 2009


December 31, 2008Unrealized


Unrealized


Fair





Unrealized


Unrealized


FairCost


Gains


Losses


Value


Cost


Gains


Losses


Value($ in thousands)Agency discount notes

$
169,275


$
86


$



$
169,361


$
149,383


$
562


$



$
149,945Agency callable notes


278,765



471



(1,043
)


278,193



312,829



2,249







315,078Agency debt


27,226



150



(201
)


27,175



30,697







(383
)


30,314Agency MBS


208,483



4,250



(32
)


212,701



141,213



1,023







142,236Non-agency MBS


124,918



23



(1,749
)


123,192



325



52







377Equity security


514







(293
)


221



514







(301
)


213Corporate debt


18,287



172



(766
)


17,693



39,100



147



(219
)


39,028Collateralized loan obligation


1,515







(725
)


790



2,360











2,360Total

$
828,983


$
5,152


$
(4,809
)

$
829,326


$
676,421


$
4,033


$
(903
)

$
679,551   available-for-sale, available-for-sale, available-for-sale
  available-for-sale
  other-than-temporary other-than-temporary other-than-temporary other-than-temporary other-than-temporary
  available-for-sale
 19




---



##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  available-for-sale,
  Less Than 12 Months


12 Months or More


TotalGross





Gross





GrossUnrealized





Unrealized





UnrealizedLosses


Fair Value


Losses


Fair Value


Losses


Fair Value($ in thousands)As of June 30, 2009Agency callable notes

$
(1,043
)

$
184,690


$



$



$
(1,043
)

$
184,690Agency debt


(201
)


17,164











(201
)


17,164Agency MBS


(32
)


8,135











(32
)


8,135Non-agency MBS


(1,749
)


123,192











(1,749
)


123,192Equity security










(293
)


221



(293
)


221Corporate debt


(766
)


8,918











(766
)


8,918Collateralized loan obligation


(725
)


790











(725
)


790Total

$
(4,516
)

$
342,889


$
(293
)

$
221


$
(4,809
)

$
343,110As of December 31, 2008Agency debt

$
(383
)

$
30,314


$



$



$
(383
)

$
30,314Equity security










(301
)


213



(301
)


213Corporate debt


(219
)


2,781











(219
)


2,781Total

$
(602
)

$
33,095


$
(301
)

$
213


$
(903
)

$
33,308   available-for-sale other-than-temporary
  Investment
    Securities,
    Held-to-Maturity
  held-to-maturity,
 20




---



##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Contractual
    Maturities
  available-for-sale, held-to-maturity,
  Investment Securities,


Investment Securities,Available-for-Sale


Held-to-MaturityEstimated





EstimatedAmortized Cost


Fair Value


Amortized Cost


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

$
184,283


$
184,362


$
10,656


$
10,680Due after one year through five years


258,983



258,588



198,492



218,219Due after five years through ten years


105,829



105,507



10,006



10,735Due after ten years(1)(2)


279,888



280,869







Total

$
828,983


$
829,326


$
219,154


$
239,634     (1)
    
    Included in this category are Agency and Non-agency MBS with
    weighted-average expected maturities of approximately
    2.5 years and 2.6 years, respectively, based on
    current interest rates and expected prepayment speeds as of
    June 30, 2009.(2)
    
    Includes securities with no stated maturity.  Other
    Investments
    June 30,


December 31,2009


2008($ in thousands)Investments carried at cost

$
59,725


$
61,279Investments carried at fair value


5,068



4,661Investments accounted for under the equity method


41,880



61,806Total

$
106,673


$
127,746   other-than-temporary other-than-temporary
  Residential
    Mortgage-Backed Securities
   21




---



##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Note 8.
    Guarantor
    Information  Borrowings Form 10-K,
 22




---



##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Consolidating
    Balance Sheet
    June 30, 2009
  CapitalSource Finance LLCCombined


Combined


Other





ConsolidatedCapitalSource


Non-Guarantor


Guarantor


Non-Guarantor





CapitalSourceInc.


Subsidiaries


Subsidiaries


Subsidiaries


Eliminations


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

$



$
800,801


$
167,069


$
34,537


$



$
1,002,407Restricted cash






30,228



89,315



83,377







202,920Investment securities:Available-for-sale,
    at fair value






816,084



395



12,847







829,326Held-to-maturity,
    at amortized cost






219,154















219,154Total investment securities






1,035,238



395



12,847







1,048,480Mortgage-related receivables, net














1,626,387







1,626,387Commercial real estate A participation interest, net






887,569















887,569Loans:Loans held for sale






34,229



3,210



22,021







59,460Loans held for investment






5,596,463



340,001



2,947,794



(6
)


8,884,252Less deferred loan fees and discounts






(76,969
)


(24,250
)


(39,621
)


(15,084
)


(155,924
)Less allowance for loan losses






(219,440
)


(62,925
)


(165,363
)






(447,728
)Loans held for investment, net






5,300,054



252,826



2,742,810



(15,090
)


8,280,600Total loans






5,334,283



256,036



2,764,831



(15,090
)


8,340,060Interest receivable






40,112



2,723



61,843



25



104,703Direct real estate investments, net














958,909







958,909Investment in subsidiaries


3,860,273







1,608,374



1,477,560



(6,946,207
)


Intercompany note receivable


75,000



9



141,937



424,309



(641,255
)


Other investments






78,684



18,035



9,954







106,673Goodwill






173,135















173,135Other assets


32,648



142,065



169,942



440,352



(130,019
)


654,988Total assets

$
3,967,921


$
8,522,124


$
2,453,826


$
7,894,906


$
(7,732,546
)

$
15,106,231Liabilities and shareholders equityLiabilities:Deposits

$



$
4,547,939


$



$



$



$
4,547,939Credit facilities


770,000



248,421



63,105



168,172







1,249,698Term debt






1,876,653







2,893,699







4,770,352Other borrowings


556,106



200,000



442,022



400,013







1,598,141Other liabilities


32,966



106,981



62,454



260,922



(132,662
)


330,661Intercompany note payable






46,850



283,226



311,179



(641,255
)


Total liabilities


1,359,072



7,026,844



850,807



4,033,985



(773,917
)


12,496,791Shareholders equity:Common stock


3,033



921,000











(921,000
)


3,033Additional paid-in capital


3,818,946



121,964



851,652



3,526,118



(4,499,737
)


3,818,943(Accumulated deficit) retained earnings


(1,224,315
)


444,523



739,366



328,649



(1,512,567
)


(1,224,344
)Accumulated other comprehensive income, net


11,185



7,793



12,001



5,506



(25,300
)


11,185Total CapitalSource Inc. shareholders equity


2,608,849



1,495,280



1,603,019



3,860,273



(6,958,604
)


2,608,817Noncontrolling interests














648



(25
)


623Total shareholders equity


2,608,849



1,495,280



1,603,019



3,860,921



(6,958,629
)


2,609,440Total liabilities and shareholders equity

$
3,967,921


$
8,522,124


$
2,453,826


$
7,894,906


$
(7,732,546
)

$
15,106,231  23




---



##### 



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


Combined


Other





ConsolidatedCapitalSource


Non-Guarantor


Guarantor


Non-Guarantor





CapitalSourceInc.


Subsidiaries


Subsidiaries


Subsidiaries


Eliminations


Inc.($ in thousands)AssetsCash and cash equivalents

$
11


$
1,230,254


$
38,866


$
69,432


$



$
1,338,563Restricted cash






35,695



81,337



302,351







419,383Investment securities:Available-for-sale,
    at fair value






646,675



1,236



31,640







679,551Held-to-maturity,
    at amortized cost






14,389















14,389Total investment securities






661,064



1,236



31,640







693,940Mortgage-backed securities pledged, trading














1,489,291







1,489,291Mortgage-related receivables, net














1,801,535







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






1,396,611















1,396,611Loans:Loans held for sale






1,561







6,982







8,543Loans held for investment






6,040,079



398,509



2,958,169



(6
)


9,396,751Less deferred loan fees and discounts






(85,245
)


(32,950
)


(45,052
)


(11,070
)


(174,317
)Less allowance for loan losses






(55,600
)


(295,002
)


(73,242
)






(423,844
)Loans held for investment, net






5,899,234



70,557



2,839,875



(11,076
)


8,798,590Total loans






5,900,795



70,557



2,846,857



(11,076
)


8,807,133Interest receivable






55,689



2,178



59,649







117,516Direct real estate investments, net














989,716







989,716Investment in subsidiaries


4,397,772







1,657,532



1,602,354



(7,657,658
)


Intercompany note receivable


75,000



9



185,765



264,000



(524,774
)


Other investments






86,239



21,098



20,409







127,746Goodwill






173,135















173,135Other assets


39,169



102,213



253,270



853,546



(183,135
)


1,065,063Total assets

$
4,511,952


$
9,641,704


$
2,311,839


$
10,330,780


$
(8,376,643
)

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

$



$
5,043,695


$



$



$



$
5,043,695Repurchase agreements














1,595,750







1,595,750Credit facilities


890,000



456,999



82,462



15,601







1,445,062Term debt






2,238,382







3,100,074







5,338,456Other borrowings


729,474







441,899



402,440







1,573,813Other liabilities


62,181



198,272



52,552



463,656



(184,525
)


592,136Intercompany note payable






46,850



122,917



355,007



(524,774
)


Total liabilities


1,681,655



7,984,198



699,830



5,932,528



(709,299
)


15,588,912Shareholders equity:Common stock


2,828



921,000











(921,000
)


2,828Additional paid-in capital


3,686,965



146,019



699,806



3,926,123



(4,772,148
)


3,686,765(Accumulated deficit) retained earnings


(868,394
)


587,837



908,731



468,063



(1,964,662
)


(868,425
)Accumulated other comprehensive income, net


8,898



2,650



3,472



3,586



(9,511
)


9,095Total CapitalSource Inc. shareholders equity


2,830,297



1,657,506



1,612,009



4,397,772



(7,667,321
)


2,830,263Noncontrolling interests














480



(23
)


457Total shareholders equity


2,830,297



1,657,506



1,612,009



4,398,252



(7,667,344
)


2,830,720Total liabilities and shareholders equity

$
4,511,952


$
9,641,704


$
2,311,839


$
10,330,780


$
(8,376,643
)

$
18,419,632  24




---



##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Consolidating
    Statement of Income
    Three Months Ended June 30, 2009
  CapitalSource Finance LLCCombined


Combined


Other





ConsolidatedCapitalSource


Non-Guarantor


Guarantor


Non-Guarantor





CapitalSourceInc.


Subsidiaries


Subsidiaries


Subsidiaries


Eliminations


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

$
643


$
114,130


$
(365
)

$
70,746


$
(2,061
)

$
183,093Investment securities






11,793



52



1,624







13,469Other






867



32



14







913Total interest income


643



126,790



(281
)


72,384



(2,061
)


197,475Fee income






6,588



13,517



6,594



(1,793
)


24,906Total interest and fee income


643



133,378



13,236



78,978



(3,854
)


222,381Operating lease income














27,406







27,406Total investment income


643



133,378



13,236



106,384



(3,854
)


249,787Interest expense:Deposits






29,959















29,959Borrowings


25,431



12,869



8,316



36,351



(2,061
)


80,906Total interest expense


25,431



42,828



8,316



36,351



(2,061
)


110,865Net investment (loss) income


(24,788
)


90,550



4,920



70,033



(1,793
)


138,922Provision for loan losses






120,454



7,821



75,572







203,847Net investment loss after provision for loan losses


(24,788
)


(29,904
)


(2,901
)


(5,539
)


(1,793
)


(64,925
)Operating expenses:Compensation and benefits


577



12,939



21,292











34,808Depreciation of direct real estate investments














8,838







8,838Professional fees


2,304



934



6,358



2,264







11,860Other administrative expenses


(8,395
)


14,876



14,831



21,715



(20,773
)


22,254Total operating expenses


(5,514
)


28,749



42,481



32,817



(20,773
)


77,760Other income (expense):Loss on investments, net






(3,418
)


(1,026
)


(523
)






(4,967
)(Loss) gain on derivatives






(3,027
)


(2,636
)


4,475



(145
)


(1,333
)Gain on debt extinguishment














4,565







4,565Other income (expense), net






3,754



8,948



(2,938
)


(20,734
)


(10,970
)Earnings in subsidiaries


(227,253
)






(70,330
)


(112,325
)


409,908



Intercompany






















Total other expense


(227,253
)


(2,691
)


(65,044
)


(106,746
)


389,029



(12,705
)Net loss before income taxes


(246,527
)


(61,344
)


(110,426
)


(145,102
)


408,009



(155,390
)Income tax expense


20



4,855







86,304







91,179Net loss


(246,547
)


(66,199
)


(110,426
)


(231,406
)


408,009



(246,569
)Net loss attributable to noncontrolling interests














(4,153
)


4,131



(22
)Net loss attributable to CapitalSource Inc.

$
(246,547
)

$
(66,199
)

$
(110,426
)

$
(227,253
)

$
403,878


$
(246,547
)  25




---



##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Consolidating
    Statement of Income
    Three Months Ended June 30, 2008
  CapitalSource Finance LLCCombined


Combined


Other





ConsolidatedCapitalSource


Non-Guarantor


Guarantor


Non-Guarantor





CapitalSourceInc.


Subsidiaries


Subsidiaries


Subsidiaries


Eliminations


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

$
1,060


$
90,169


$
12,926


$
119,025


$
(1,062
)

$
222,118Investment securities






331



236



28,850







29,417Other






461



786



1,440







2,687Total interest income


1,060



90,961



13,948



149,315



(1,062
)


254,222Fee income






12,911



10,289



18,084



(17
)


41,267Total interest and fee income


1,060



103,872



24,237



167,399



(1,079
)


295,489Operating lease income














24,210







24,210Total investment income


1,060



103,872



24,237



191,609



(1,079
)


319,699Interest expense:Deposits






















Borrowings


20,795



35,240



12,650



90,492



(1,062
)


158,115Total interest expense


20,795



35,240



12,650



90,492



(1,062
)


158,115Net investment (loss) income


(19,735
)


68,632



11,587



101,117



(17
)


161,584Provision for loan losses










25,312



6,362







31,674Net investment (loss) income after provision for loan losses


(19,735
)


68,632



(13,725
)


94,755



(17
)


129,910Operating expenses:Compensation and benefits


426



3,677



33,705











37,808Depreciation of direct real estate investments














8,990







8,990Professional fees


698



781



6,014



1,496







8,989Other administrative expenses


12,451



1,003



9,989



634



(9,222
)


14,855Total operating expenses


13,575



5,461



49,708



11,120



(9,222
)


70,642Other income (expense):Loss on investments, net






(1,190
)


(3,308
)


(463
)






(4,961
)Gain (loss) on derivatives






4,403



(4,821
)


15,516







15,098Gain on residential mortgage investment portfolio














9,060







9,060(Loss) gain on debt extinguishment






(1,520
)


14,245











12,725Other income (expense), net






4,704



13,410



(528
)


(9,222
)


8,364Earnings in subsidiaries


95,338







66,838



28,729



(190,905
)


Intercompany






(2,809
)


5,815



(3,006
)






Total other income


95,338



3,588



92,179



49,308



(200,127
)


40,286Net income before income taxes


62,028



66,759



28,746



132,943



(190,922
)


99,554Income tax expense














37,243







37,243Net income


62,028



66,759



28,746



95,700



(190,922
)


62,311Net (loss) income attributable to noncontrolling interests






(76
)






362



(3
)


283Net income attributable to CapitalSource Inc.

$
62,028


$
66,835


$
28,746


$
95,338


$
(190,919
)

$
62,028  26




---



##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Consolidating
    Statement of IncomeSix Months Ended June 30, 2009
  CapitalSource Finance LLCCombined


Combined


OtherCapitalSource


Non-Guarantor


Guarantor


Non-Guarantor





ConsolidatedInc.


Subsidiaries


Subsidiaries


Subsidiaries


Eliminations


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

$
1,292


$
241,522


$
3,077


$
140,606


$
(4,012
)

$
382,485Investment securities






20,951



234



12,837







34,022Other






2,465



54



136







2,655Total interest income


1,292



264,938



3,365



153,579



(4,012
)


419,162Fee income






14,045



27,509



17,048



(2,300
)


56,302Total interest and fee income


1,292



278,983



30,874



170,627



(6,312
)


475,464Operating lease income














55,286







55,286Total investment income


1,292



278,983



30,874



225,913



(6,312
)


530,750Interest expense:Deposits






68,346















68,346Borrowings


53,617



28,214



17,052



78,683



(4,012
)


173,554Total interest expense


53,617



96,560



17,052



78,683



(4,012
)


241,900Net investment (loss) income


(52,325
)


182,423



13,822



147,230



(2,300
)


288,850Provision for loan losses






136,806



79,888



142,420







359,114Net investment (loss) income after provision for loan losses


(52,325
)


45,617



(66,066
)


4,810



(2,300
)


(70,264
)Operating expenses:Compensation and benefits


814



26,196



42,835











69,845Depreciation of direct real estate investments














17,802







17,802Professional fees


3,778



1,838



19,206



4,458







29,280Other administrative expenses


2,403



27,397



29,214



24,875



(44,777
)


39,112Total operating expenses


6,995



55,431



91,255



47,135



(44,777
)


156,039Other income (expense):Loss on investments, net






(5,544
)


(2,502
)


(13,048
)






(21,094
)(Loss) gain on derivatives






(4,617
)


360



3,590



(1,352
)


(2,019
)Gain on residential mortgage investment portfolio














15,311







15,311(Loss) gain on debt extinguishment


(57,128
)










4,565







(52,563
)Other income (expense), net






14,770



13,639



(11,249
)


(43,627
)


(26,467
)Earnings in subsidiaries


(234,382
)






(14,655
)


(159,423
)


408,460



Intercompany










3,558



(3,558
)






Total other (expense) income


(291,510
)


4,609



400



(163,812
)


363,481



(86,832
)Net loss before income taxes


(350,830
)


(5,205
)


(156,921
)


(206,137
)


405,958



(313,135
)Income tax expense


21



5,319







32,414







37,754Net loss


(350,851
)


(10,524
)


(156,921
)


(238,551
)


405,958



(350,889
)Net loss attributable to noncontrolling interests














(4,169
)


4,131



(38
)Net loss attributable to CapitalSource Inc.

$
(350,851
)

$
(10,524
)

$
(156,921
)

$
(234,382
)

$
401,827


$
(350,851
)  27




---



##### 



Consolidating
    Statement of Income
    Six Months Ended June 30, 2008
  CapitalSource Finance LLCCombined


Combined


Other





ConsolidatedCapitalSource


Non-Guarantor


Guarantor


Non-Guarantor





CapitalSourceInc.


Subsidiaries


Subsidiaries


Subsidiaries


Eliminations


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

$
2,254


$
196,050


$
23,724


$
248,848


$
(2,257
)

$
468,619Investment securities






502



462



85,793







86,757Other






1,165



2,099



3,907







7,171Total interest income


2,254



197,717



26,285



338,548



(2,257
)


562,547Fee income






21,987



23,937



29,022



(38
)


74,908Total interest and fee income


2,254



219,704



50,222



367,570



(2,295
)


637,455Operating lease income














51,900







51,900Total investment income


2,254



219,704



50,222



419,470



(2,295
)


689,355Interest expense:Deposits






















Borrowings


41,585



78,541



24,577



206,140



(2,256
)


348,587Total interest expense


41,585



78,541



24,577



206,140



(2,256
)


348,587Net investment (loss) income


(39,331
)


141,163



25,645



213,330



(39
)


340,768Provision for loan losses










28,469



8,864







37,333Net investment (loss) income after provision for loan losses


(39,331
)


141,163



(2,824
)


204,466



(39
)


303,435Operating expenses:Compensation and benefits


681



6,311



62,605











69,597Depreciation of direct real estate investments














17,906







17,906Professional fees


2,225



1,370



15,688



2,640







21,923Other administrative expenses


22,313



2,157



20,095



2,605



(18,445
)


28,725Total operating expenses


25,219



9,838



98,388



23,151



(18,445
)


138,151Other income (expense):Loss on investments, net






(701
)


(2,221
)


(857
)


(214
)


(3,993
)(Loss) gain on derivatives






(5,066
)


22,087



(40,034
)






(23,013
)Loss on residential mortgage investment portfolio














(46,317
)






(46,317
)(Loss) gain on debt extinguishment






(1,520
)


14,245











12,725Other income (expense), net






67



25,546



(2,683
)


(18,445
)


4,485Earnings in subsidiaries


132,036







120,206



88,416



(340,658
)


Intercompany






(3,806
)


9,804



(5,998
)






Total other income (expense)


132,036



(11,026
)


189,667



(7,473
)


(359,317
)


(56,113
)Net income before income taxes


67,486



120,299



88,455



173,842



(340,911
)


109,171Income tax expense














40,319







40,319Net income


67,486



120,299



88,455



133,523



(340,911
)


68,852Net income attributable to noncontrolling interests






99







1,487



(6
)


1,580Net income attributable to CapitalSource Inc.

$
67,486


$
120,200


$
88,455


$
132,036


$
(340,905
)

$
67,272  28




---



##### 



Consolidating
    Statement of Cash FlowsSix Months Ended June 30, 2009
  CapitalSource Finance LLCCombined


Combined


Other





ConsolidatedCapitalSource


Non-Guarantor


Guarantor


Non-Guarantor





CapitalSourceInc.


Subsidiaries


Subsidiaries


Subsidiaries


Eliminations


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

$
(350,851
)

$
(10,524
)

$
(156,921
)

$
(238,551
)

$
405,958


$
(350,889
)Adjustments to reconcile net loss to net cash provided by (used
    in) operating activities:Stock option expense






550



1,845











2,395Restricted stock expense






2,136



11,838











13,974Loss (gain) loss on extinguishment of debt


57,128











(4,565
)






52,563Amortization of deferred loan fees and discounts






(18,386
)


(17,421
)


(5,062
)






(40,869
)Paid-in-kind
    interest on loans






(7,917
)


3,302



(4,683
)






(9,298
)Provision for loan losses






136,806



79,888



142,420







359,114Amortization of deferred financing fees and discounts


14,220



8,333



385



10,146







33,084Depreciation and amortization






6,494



1,996



14,484







22,974Provision (benefit) for deferred income taxes


21



19,857



(150
)


(8,953
)






10,775Non-cash loss on investments, net






7,479



2,404



10,759







20,642Non-cash loss on property and equipment and writedowns of real
    estate owned






4,136



3,067



8,183







15,386Unrealized loss (gain) on derivatives and foreign currencies, net






2,632



4,184



(3,331
)






3,485Unrealized gain on residential mortgage investment portfolio, net














(60,570
)






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














1,485,133







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














11







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






(13,569
)














(13,569
)Decrease (increase) in interest receivable






15,622



(2,577
)


(8,535
)


(25
)


4,485Decrease in loans held for sale, net






7,208



18,074











25,282Decrease (increase) in intercompany note receivable










43,828



(160,309
)


116,481



Decrease (increase) in other assets


274



(50,407
)


124,391



483,753



(53,116
)


504,895(Decrease) increase in other liabilities


(30,259
)


(111,568
)


9,448



(202,137
)


51,863



(282,653
)Net transfers with subsidiaries


561,209



(172,028
)


193,586



(174,071
)


(408,696
)


Cash provided by (used in) operating activities


251,742



(173,146
)


321,167



1,284,122



112,465



1,796,350Investing activities:Decrease (increase) in restricted cash






5,467



(7,978
)


218,974







216,463Decrease in mortgage-related receivables, net














134,202







134,202Decrease in commercial real estate A participation
    interest






522,611















522,611Decrease (increase) in loans, net






447,872



(306,435
)


13,274



4,016



158,727Cash received for real estate














10,743







10,743Acquisition of marketable securities,
    available-for-sale,
    net






(163,548
)














(163,548
)Acquisition of marketable securities,
    held-to-maturity,
    net






(201,154
)














(201,154
)Disposal (acquisition) of other investments, net






10,779



(652
)


(10,390
)






(263
)(Acquisition) disposal of property and equipment, net






(9,733
)


(15,500
)


13,378







(11,855
)Cash provided by (used in) investing activities






612,294



(330,565
)


380,181



4,016



665,926Financing activities:Payment of deferred financing fees


(6,497
)










(7,786
)






(14,283
)Deposits accepted, net of repayments






(496,170
)














(496,170
)Increase (decrease) in intercompany note payable










160,309



(43,828
)


(116,481
)


Repayments under repurchase agreements, net














(1,595,750
)






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


(120,000
)


(210,588
)


(22,672
)


152,570







(200,690
)Borrowings of term debt






6,000







20,000







26,000Repayments of term debt






(367,843
)






(221,712
)






(589,555
)(Repayments of) borrowings under other borrowings, net


(118,503
)


200,000



(36
)


(2,692
)






78,769Proceeds from issuance of common stock, net of offering costs


53



















53Repurchase of common stock


(800
)


















(800
)Payment of dividends


(6,006
)


















(6,006
)Cash (used in) provided by financing activities


(251,753
)


(868,601
)


137,601



(1,699,198
)


(116,481
)


(2,798,432
)(Decrease) increase in cash and cash equivalents


(11
)


(429,453
)


128,203



(34,895
)






(336,156
)Cash and cash equivalents as of beginning of period


11



1,230,254



38,866



69,432







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

$



$
800,801


$
167,069


$
34,537


$



$
1,002,407  29




---



##### 



Consolidating
    Statement of Cash Flows
    Six Months Ended June 30, 2008
  CapitalSource Finance LLCCombined


Combined


Other





ConsolidatedCapitalSource


Non-Guarantor


Guarantor


Non-Guarantor





CapitalSourceInc.


Subsidiaries


Subsidiaries


Subsidiaries


Eliminations


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

$
67,486


$
120,299


$
88,455


$
133,523


$
(340,911
)

$
68,852Adjustments to reconcile net income to net cash (used in)
    provided by operating activities:Stock option expense






(140
)


143











3Restricted stock expense






1,401



17,140











18,541(Loss) gain on extinguishment of debt










(14,245
)


1,520







(12,725
)Amortization of deferred loan fees and discounts






(19,560
)


(15,662
)


(15,272
)






(50,494
)Paid-in-kind
    interest on loans






2,103



(92
)


4,239







6,250Provision for loan losses










28,469



8,864







37,333Amortization of deferred financing fees and discounts


20,034



16,693



2,187



13,214







52,128Depreciation and amortization






216



1,925



16,123







18,264Benefit for deferred income taxes














(8,104
)






(8,104
)Non-cash loss (gain) on investments, net






3,432



2,929



(81
)






6,280Non-cash loss on property and equipment and writedowns of real
    estate owned










593











593Unrealized loss on derivatives and foreign currencies, net






4,142



18,680



3,408







26,230Unrealized loss on residential mortgage investment portfolio, net














31,664







31,664Net decrease in mortgage-backed securities pledged, trading














2,449,542







2,449,542Amortization of discount on residential mortgage investments














(7,108
)






(7,108
)(Increase) decrease in interest receivable






(52,055
)


35,699



38,423







22,067Decrease in loans held for sale, net






51,558







168,831







220,389Decrease in intercompany note receivable










14,799



44,917



(59,716
)


(Increase) decrease in other assets


(868
)


17,899



89,690



(57,765
)


(246
)


48,710Decrease in other liabilities


(17,075
)


(13,344
)


(30,168
)


(23,384
)


246



(83,725
)Net transfers with subsidiaries


(398,641
)


114,968



(239,504
)


181,796



341,381



Cash (used in) provided by operating activities


(329,064
)


247,612



1,038



2,984,350



(59,246
)


2,844,690Investing activities:Decrease in restricted cash






25,853



7,289



51,706







84,848Decrease in mortgage-related receivables, net














122,118







122,118Acquisition of CS Advisors CLO II














(18,619
)






(18,619
)Decrease in loans, net






183,743



29,183



237,372



(907
)


449,391Cash paid for real estate














(10,121
)






(10,121
)Acquisition of marketable securities,
    available-for-sale,
    net














(46,378
)






(46,378
)Disposal (acquisition) of other investments, net






2,825



(26,906
)


(2,869
)






(26,950
)Disposal (acquisition) of property and equipment, net






164



(1,492
)










(1,328
)Cash provided by investing activities






212,585



8,074



333,209



(907
)


552,961Financing activities:Payment of deferred financing fees


(15,155
)


(17,742
)


(222
)


(8,420
)






(41,539
)Decrease in intercompany note payable










(44,917
)


(14,799
)


59,716



Repayments under repurchase agreements, net






(12,674
)






(2,355,558
)






(2,368,232
)Borrowings on (repayments of) credit facilities, net


19,763



(244,333
)


79,429



(381,039
)






(526,180
)Borrowings of term debt






(437
)










437



Repayments of term debt






(220,283
)






(367,871
)






(588,154
)Repayments of other borrowings, net










(26,537
)


(169,331
)






(195,868
)Proceeds from issuance of common stock, net of offering costs


599,679



















599,679Proceeds from exercise of options


326



















326Tax expense on share based payments














(9,630
)






(9,630
)Payment of dividends


(275,538
)










(1,547
)






(277,085
)Cash provided by (used in) financing activities


329,075



(495,469
)


7,753



(3,308,195
)


60,153



(3,406,683
)Increase (decrease) in cash and cash equivalents


11



(35,272
)


16,865



9,364







(9,032
)Cash and cash equivalents as of beginning of period






151,511



19,005



8,183







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

$
11


$
116,239


$
35,870


$
17,547


$



$
169,667  30




---



##### 



Note 9.
    Direct
    Real Estate Investments  triple-net
  June 30,


December 31,2009


2008($ in thousands)Land

$
104,961


$
106,797Buildings


898,942



910,413Furniture and equipment


50,374



51,814Accumulated depreciation


(95,368
)


(79,308
)Total

$
958,909


$
989,716   Note 10.
    Deposits        June 30,


December 31,2009


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

$
262,587


$
279,577Savings


494,516



471,014Certificates of deposit


3,790,836



4,259,153Brokered certificates of deposit






33,951Total interest-bearing deposits

$
4,547,939


$
5,043,695     2010

$
3,757,6482011


11,1152012


18,6512013


1,7292014


1,693Total

$
3,790,836  31




---



##### 



Three Months Ended


Six Months EndedJune 30, 2009


June 30, 2009($ in thousands)Money market

$
952


$
2,109Savings


1,831



3,961Certificates of deposit


27,202



62,029Brokered certificates of deposit


68



456Fees for early withdrawal


(94
)


(209
)Total interest expense

$
29,959


$
68,346   Note 11.
    Borrowings  Borrowings Form 10-K.
    June 30,


December 31,2009


2008($ in thousands)Repurchase agreements(1)

$



$
1,595,750Credit facilities


1,249,698



1,445,062Term debt


4,770,352



5,338,456Other borrowings:Convertible debt, net(2)


556,106



729,474Subordinate debt


438,959



438,799Mortgage debt(3)


327,619



330,311FHLB borrowings


200,000



Notes payable


75,457



75,229Total other borrowings


1,598,141



1,573,813Total

$
7,618,191


$
9,953,081     (1)
    
    In the first quarter of 2009, we repaid in full all borrowings
    outstanding under our master repurchase agreements.(2)
    
    Amounts presented are net of debt discount of $23.9 million
    and $30.6 million as of June 30, 2009 and
    December 31, 2008, respectively.(3)
    
    Includes a senior loan and a mezzanine loan with outstanding
    principal balances of $236.9 million and
    $35.1 million, respectively, as of June 30, 2009. In
    September 2008, we exercised the first of our three optional
    one-year extensions on both of these mortgage loans resulting in
    the extension of their maturities from April 2009 to April 2010.  Credit
    Facilities
   32




---



##### 



Form 10-K.
             33




---



##### 



Term
    Debt
  2007-A
    Convertible
    Debt
      Retrospective
    Application of Accounting Prouncements
  June 30, 2009


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

$
580,000


$
760,120Less:Debt discount


23,894



30,646Net carrying value

$
556,106


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

$
101,220


$
101,220     Conversion Price


Number of Shares3.5% Senior Convertible Debentures due 2034

$
21.06



401,0404.0% Senior Subordinated Convertible Debentures due 2034


21.06



15,268,2847.25% Senior Subordinated Convertible Debentures due 2037


27.09



9,226,975  34




---



##### 



Three Months Ended June 30,


Six Months Ended June 30,2009


2008


2009


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

$
7,820


$
8,691


$
16,143


$
17,381Amortization of deferred financing fees


293



550



810



1,091Amortization of debt discount


2,547



4,546



6,844



9,014Total interest expense recognized

$
10,660


$
13,787


$
23,797


$
27,486Effective interest rate on the liability component:3.5% Senior Convertible Debentures due 2034


7.25
%


7.25
%


7.25
%


7.25
%4.0% Senior Subordinated Convertible Debentures due 2034


7.68
%


7.68
%


7.68
%


7.68
%7.25% Senior Subordinated Convertible Debentures due 2037


7.79
%


7.79
%


7.79
%


7.79
%   14-1
  FHLB
    Borrowings and FRB Credit Program
      Debt
    Covenants
  and/or
  12-month
 35




---



##### 



Credit Facilities
      Note 12.
    Shareholders
    Equity  Common
    Stock Shares Outstanding
    Outstanding as of December 31, 2008


282,804,211Issuance of common stock


19,905,236Share repurchase


(639,400
)Restricted stock and other stock grants, net


1,236,793Outstanding as of June 30, 2009


303,306,840   Dividend
    Reinvestment and Stock Purchase Plan
    Share
    Repurchase Plan
   36




---



##### 



Equity
    Offerings
    Note 13.
    Income
    Taxes               37




---



##### 



Note 14.
    Comprehensive
    (Loss) Income    Three Months EndedJune 30,


Six Months Ended June 30,2009


2008


2009


2008($ in thousands)Net (loss) income

$
(246,569
)

$
62,311


$
(350,889
)

$
68,852Unrealized losses on
    available-for-sale
    securities, net of tax


(6,877
)


(718
)


(6,389
)


(5,021
)Unrealized gains on foreign currency translation, net of tax


18,424



366



8,918



10,128Loss on cash flow hedges, net of tax


(22
)


(22
)


(42
)


(776
)Comprehensive (loss) income


(235,044
)


61,937



(348,402
)


73,183Comprehensive (loss) income attributable to noncontrolling
    interests


(22
)


283



(38
)


1,580Comprehensive (loss) income attributable to CapitalSource
    Inc.

$
(235,022
)

$
61,654


$
(348,364
)

$
71,603     June 30,


December 31,2009


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

$
1,079


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


10,375



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


128



170Effect of adoption of FSP
    FAS 115-2


(397
)


Accumulated other comprehensive income, net

$
11,185


$
9,095  38




---



##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   Note 15.
    Net
    (Loss) Income Per Share Attributable to CapitalSource
    Inc.    Three Months Ended


Six Months EndedJune 30,


June 30,2009


2008


2009


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

$
(246,547
)

$
62,028


$
(350,851
)

$
67,272Average shares  basic


299,452,870



235,076,287



294,818,311



227,580,584Basic net (loss) income per share attributable to CapitalSource
    Inc.

$
(0.82
)

$
0.26


$
(1.19
)

$
0.30Diluted net (loss) income per share attributable to
    CapitalSource Inc.:Net (loss) income attributable to CapitalSource Inc.

$
(246,547
)

$
62,028


$
(350,851
)

$
67,272Average shares  basic


299,452,870



235,076,287



294,818,311



227,580,584Effect of dilutive securities:Option shares






72,268







82,885Unvested restricted stock






1,165,813







1,196,722Stock units






130,862







109,047Average shares  diluted


299,452,870



236,445,230



294,818,311



228,969,238Diluted net (loss) income per share attributable to
    CapitalSource Inc.

$
(0.82
)

$
0.26


$
(1.19
)

$
0.29     Three Months Ended


Six Months EndedJune 30,


June 30,2009


2008


2009


2008Stock units


2,478,268







2,343,646



Stock options


4,370,395



8,703,256



5,764,205



8,715,502Non-managing member units






740,590







1,359,834Shares subject to a written call option


2,239,404



7,401,420



4,732,547



7,401,420Unvested restricted stock


3,139,027







3,043,032



    39




---



##### 



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

$
21.631.25% Senior Convertible Debentures due 2034


20.694.0% Senior Subordinated Convertible Debentures due 2034


21.631.625% Senior Subordinated Convertible Debentures due 2034


20.697.25% Senior Subordinated Convertible Debentures due 2037


27.09   Note 16.
    Bank
    Regulatory Capital      June 30, 2009


December 31, 2008Actual


Minimum Required


Actual


Minimum RequiredAmount


Ratio


Amount


Ratio


Amount


Ratio


Amount


Ratio($ in thousands)Tier-1 Leverage

$
695,366



12.46
%

$
278,991



5.00
%

$
794,622



13.38
%

$
296,876



5.00
%Tier-1 Risk-Based Capital


695,366



15.51



269,040



6.00



794,622



16.30



292,489



6.00Total Risk-Based Capital


751,890



16.77



672,599



15.00



850,318



17.44



731,222



15.00     Note 17.
    Commitments
    and Contingencies     40




---



##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      Note 18.
    Derivative
    Instruments            Investments,
 41




---



##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      Asset Derivatives


Liability DerivativesLocation


Fair Value


Location


Fair Value($ in thousands)Interest rate contracts


Other assets


$
19,496



Other liabilities


$
(83,075
)Foreign exchange contracts


Other assets







Other liabilities



(2,724
)Total





$
19,496






$
(85,799
)     Gain (Loss) Recognized in IncomeThree Months Ended


Six Months EndedLocation

June 30, 2009


June 30, 2009($ in thousands)Interest rate contracts

(Loss) gain on derivatives

$
3,353


$
405Interest rate contracts

Gain on residential mortgage investment portfolio






862Foreign exchange contracts

(Loss) gain on derivatives


(4,686
)


(2,424
)Total



$
(1,333
)

$
(1,157
)   Note 19.
    Fair
    Value Measurements  available-for-sale,
 42




---



##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Fair
    Value Determination
      Assets
    and Liabilities
  Investment
    Securities,
    Available-for-Sale
  available-for-sale, available-for-sale
  available-for-sale,
  available-for-sale,
  Investment
    Securities,
    Held-to-Maturity
  held-to-maturity other-than-temporary
  Loans
    Held for Sale
   43




---



##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Loans
    Held for Investment
    Direct
    Real Estate Investments, net
  Direct Real Estate
    Investments.
  Other
    Investments
  other-than-temporarily
  Warrants
   44




---



##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Derivative
    Assets and Liabilities
  over-the-counter
  Real
    Estate Owned
    Assets
    and Liabilities Carried at Fair Value on a Recurring
    Basis
    Fair Value


Quoted Prices in


Significant Other


SignificantMeasurement as of


Active Markets for


Observable


UnobservableJune 30, 2009


Identical Assets (Level 1)


Inputs (Level 2)


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

$
829,326


$



$
815,909


$
13,417Investments carried at fair value:Warrants


5,068











5,068Other assets held at fair value:Derivative assets


19,496







19,496



Total assets

$
853,890


$



$
835,405


$
18,485LiabilitiesOther liabilities held at fair value:Derivative liabilities

$
85,799


$



$
85,799


$
  45




---



##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Fair Value


Quoted Prices in


Significant Other


SignificantMeasurement as of


Active Markets for


Observable


UnobservableDecember 31, 2008


Identical Assets (Level 1)


Inputs (Level 2)


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

$
679,551


$



$
642,927


$
36,624Mortgage-backed securities pledged, trading


1,489,291







1,489,291



Investments carried at fair value:Warrants


4,661











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


206,979







206,979



Total assets

$
2,380,482


$



$
2,339,197


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

$
342,784


$



$
342,784


$
     Realized and UnrealizedGains (Losses)Total











UnrealizedRealized


Purchases,








(Losses)Included in


and


Sales,








GainsBalance as of





Other


Unrealized


Issuances, and


Transfers


Balance as of


As ofApril 1,


Included in


Comprehensive


(Losses)


Settlements,


In (Out)


June 30,


June 30,2009


Income


Income, net


Gains


Net


of Level 3


2009


2009($ in thousands)AssetsInvestment securities,
    available-for-sale

$
23,916


$
49


$
(1,212
)

$
(1,163
)

$
(9,336
)

$



$
13,417


$
(328
)Warrants


4,596



152







152



320







5,068



152Total assets

$
28,512


$
201


$
(1,212
)

$
(1,011
)

$
(9,016
)

$



$
18,485


$
(176
)     Realized and UnrealizedGains (Losses)Total


Purchases,








UnrealizedIncluded in


Realized


Sales,





Balance as


LossesBalance as of





Other


and


Issuances, and


Transfers


of


As ofApril 1,


Included in


Comprehensive


Unrealized


Settlements,


In (Out)


June 30,


June 30,2008


Income


Income, net


Losses


Net


of Level 3


2008


2008($ in thousands)AssetsInvestment securities,
    available-for-sale

$
55,084


$
412


$
(1,114
)

$
(702
)

$
(1,059
)

$



$
53,323


$
(1,760
)Warrants


9,917



(983
)


(2
)


(985
)


(1,032
)






7,900



(69
)Total assets

$
65,001


$
(571
)

$
(1,116
)

$
(1,687
)

$
(2,091
)

$



$
61,223


$
(1,829
)  46




---



##### 



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

Loss on

Residential Mortgage

(Loss) Gain onIncome

Investments, net

Investment Portfolio

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

$
236


$
(35
)

$



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


236



(411
)

$



$
     Gain (Loss) onInterest

Loss on

Residential Mortgage

(Loss) Gain onIncome

Investments, net

Investment Portfolio

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

$
2,508


$
(1,117
)

$
(1,963
)

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


1,451



(203
)


(1,963
)


     Realized and Unrealized(Losses) GainsTotal


Purchases,








UnrealizedRealized


Sales,








(Losses)Included in


and


Issuances,








GainsBalance as of





Other


Unrealized


and


Transfers


Balance as of


As ofJanuary 1,


Included in


Comprehensive


(Losses)


Settlements,


In (Out)


June 30,


June 30,2009


Income


Income, net


Gains


Net


of Level 3


2009


2009($ in thousands)AssetsInvestment securities,
    available-for-sale

$
36,624


$
(12,205
)

$
(1,301
)

$
(13,506
)

$
(9,701
)

$



$
13,417


$
(848
)Warrants


4,661



87







87



320







5,068



87Total assets

$
41,285


$
(12,118
)

$
(1,301
)

$
(13,419
)

$
(9,381
)

$



$
18,485


$
(761
)     Realized and UnrealizedGains (Losses)














UnrealizedTotal


Purchases,








(Losses)Included in


Realized


Sales,








GainsBalance as of





Other


and


Issuances and


Transfers


Balance as of


As ofJanuary 1,


Included in


Comprehensive


Unrealized


Settlements,


In (Out)


June 30,


June 30,2008


Income


Income, net


Losses


Net


of Level 3


2008


2008($ in thousands)AssetsInvestment securities,
    available-for-sale

$
13,198


$
1,553


$
(8,223
)

$
(6,670
)

$
46,795


$



$
53,323


$
(8,775
)Warrants


8,994



(44
)


(18
)


(62
)


(1,032
)






7,900



531Total assets

$
22,192


$
1,509


$
(8,241
)

$
(6,732
)

$
45,763


$



$
61,223


$
(8,244
)  47




---



##### 



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

Loss on

Residential Mortgage

(Loss) Gain onIncome

Investments, net

Investment Portfolio

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

$
587


$
(12,706
)

$



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


587



(1,349
)

$



$
     Gain (Loss) onInterest

Loss on

Residential Mortgage

(Loss) Gain onIncome

Investments, net

Investment Portfolio

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

$
4,482


$
(351
)

$
(2,623
)

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


2,377



224



(2,623
)


   Assets
    Carried at Fair Value on a Nonrecurring Basis
    Quoted Prices in








Total LossesFair Value


Active Markets


Significant Other


Significant


Three Months


Six MonthsMeasurement as of


for Identical


Observable Inputs


Unobservable


Ended


EndedJune 30, 2009


Assets (Level 1)


(Level 2)


Inputs (Level 3)


June 30, 2009


June 30, 2009($ in thousands)AssetsLoans held for sale

$
56,186


$



$
56,186


$



$
(8,364
)

$
(8,385
)Loans held for investment(1)


340,378











340,378



(113,188
)


(194,317
)Investments carried at cost


12,318











12,318



(2,586
)


(4,617
)Investments accounted for under the equity method


689







158



531







(754
)REO(2)


70,917











70,917



(597
)


(15,596
)Total assets

$
480,488


$



$
56,344


$
424,144


$
(124,735
)

$
(223,669
)     (1)
    
    Represents impaired loans held for investment measured at fair
    value of the collateral less transaction costs. Transaction
    costs were not significant during the period.(2)
    
    Represents REO measured at fair value of the collateral less
    transaction costs. Transaction costs were not significant during
    the period. 48




---



##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
     Quoted Prices in








Total LossesFair Value


Active Markets


Significant Other


Significant


Three Months


Six MonthsMeasurement as of


for Identical


Observable Inputs


Unobservable


Ended


EndedJune 30, 2008


Assets (Level 1)


(Level 2)


Inputs (Level 3)


June 30, 2008


June 30, 2008($ in thousands)AssetsLoans held for investment(1)

$
91,888


$



$



$
91,888


$
(13,684
)

$
(18,414
)Investments carried at cost


2,572











2,572



(3,023
)


(3,920
)Investments accounted for under the equity method


8,062











8,062



(214
)


(214
)Total assets

$
102,522


$



$



$
102,522


$
(16,921
)

$
(22,548
)     (1)
    
    Represents impaired loans held for investment measured at fair
    value of the loans collateral less transaction costs.
    Transaction costs were not significant during the period.  Fair
    Value of Financial Instruments
  Fair
    Value Measurements, Form 10-K.
    49




---



##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  June 30, 2009


December 31, 2008Carrying Value


Fair Value


Carrying Value


Fair Value($ in thousands)Assets:Mortgage-related receivables, net

$
1,626,387


$
1,018,643


$
1,801,535


$
1,005,639Commercial real estate A participation, net


887,569



881,128



1,396,611



1,266,921Loans held for investment


8,280,600



8,078,641



8,798,590



7,902,886Investments carried at cost


59,725



78,488



61,279



81,237Investment securities,
    held-to-maturity


219,154



239,634



14,389



14,389Liabilities:Deposits

$
4,547,939


$
4,550,875


$
5,043,695


$
5,066,874Credit facilities


1,249,698



1,100,698



1,445,062



1,343,512Owner Trust term debt


1,600,061



1,014,207



1,724,914



997,611Other term debt


3,170,291



2,057,838



3,613,542



2,135,646Convertible debt


556,106



432,283



729,474



455,368Subordinated debt


438,959



219,480



438,799



219,400Mortgage debt


327,619



271,999



330,311



275,995Loan commitments and letters of credit






38,645







45,488   Note 20.
    Segment
    Data      50




---



##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Three Months Ended June 30, 2009OtherCapitalSource


Commercial


Healthcare


Intercompany


ConsolidatedBank(1)


Finance


Net Lease


Eliminations


Total($ in thousands)Total interest and fee income

$
72,796


$
153,688


$
97


$
(4,200
)

$
222,381Operating lease income










27,406







27,406Interest expense(2)


30,551



77,215



5,524



(2,425
)


110,865Provision for loan losses


90,470



113,377











203,847Operating expenses(3)


26,202



50,573



11,676



(10,691
)


77,760Other income (expense), net


8,364



(11,277
)


1,005



(10,797
)


(12,705
)Net (loss) income before income taxes


(66,063
)


(98,754
)


11,308



(1,881
)


(155,390
)Income tax expense (benefit)


4,781



89,702



(3,304
)






91,179Net (loss) income


(70,844
)


(188,456
)


14,612



(1,881
)


(246,569
)Net loss attributable to noncontrolling interests






(22
)










(22
)Net (loss) income attributable to CapitalSource Inc.

$
(70,844
)

$
(188,434
)

$
14,612


$
(1,881
)

$
(246,547
)Total assets as of June 30, 2009

$
5,715,127


$
8,598,141


$
1,038,829


$
(245,866
)

$
15,106,231Total assets as of December 31, 2008

$
6,137,197


$
11,526,255


$
1,059,031


$
(302,851
)

$
18,419,632   Three Months Ended June 30, 2008OtherCapitalSource


Commercial


Healthcare


Intercompany


ConsolidatedBank(1)


Finance


Net Lease


Eliminations


Total($ in thousands)Total interest and fee income

$



$
299,144


$
354


$
(4,009
)

$
295,489Operating lease income










24,210







24,210Interest expense(2)






151,265



10,859



(4,009
)


158,115Provision for loan losses






31,674











31,674Operating expenses(3)






59,262



11,380







70,642Other income (expense), net






41,702



(1,416
)






40,286Net income before income taxes






98,645



909







99,554Income tax expense






37,243











37,243Net income






61,402



909







62,311Net (loss) income attributable to noncontrolling interests






(369
)


652







283Net income attributable to CapitalSource Inc.

$



$
61,771


$
257


$



$
62,028   51




---



##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Six Months Ended June 30, 2009OtherCapitalSource


Commercial


Healthcare


Intercompany


ConsolidatedBank(1)


Finance


Net Lease


Eliminations


Total($ in thousands)Total interest and fee income

$
150,220


$
332,148


$
182


$
(7,086
)

$
475,464Operating lease income










55,286







55,286Interest expense(2)


68,964



166,478



11,281



(4,823
)


241,900Provision for loan losses


115,461



243,653











359,114Operating expenses(3)


49,942



106,717



23,263



(23,883
)


156,039Other income (expense), net


17,925



(83,042
)


2,370



(24,085
)


(86,832
)Net (loss) income before income taxes


(66,222
)


(267,742
)


23,294



(2,465
)


(313,135
)Income tax expense


4,716



31,679



1,359







37,754Net (loss) income


(70,938
)


(299,421
)


21,935



(2,465
)


(350,889
)Net loss attributable to noncontrolling interests






(38
)










(38
)Net (loss) income attributable to CapitalSource Inc.

$
(70,938
)

$
(299,383
)

$
21,935


$
(2,465
)

$
(350,851
)   Six Months Ended June 30, 2008OtherCapitalSource


Commercial


Healthcare


Intercompany


ConsolidatedBank(1)


Finance


Net Lease


Eliminations


Total($ in thousands)Total interest and fee income

$



$
643,043


$
847


$
(6,435
)

$
637,455Operating lease income










51,900







51,900Interest expense(2)






333,367



21,655



(6,435
)


348,587Provision for loan losses






37,333











37,333Operating expenses(3)






115,598



22,553







138,151Other expense, net






(54,697
)


(1,416
)






(56,113
)Net income before income taxes






102,048



7,123







109,171Income tax expense






40,319











40,319Net income






61,729



7,123







68,852Net (loss) income attributable to noncontrolling interests






(486
)


2,066







1,580Net income attributable to CapitalSource Inc.

$



$
62,215


$
5,057


$



$
67,272     (1)
    
    CapitalSource Bank segment reflects activities of CapitalSource
    Bank, which commenced operations on July 25, 2008.(2)
    
    Interest expense in our Healthcare Net Lease segment includes
    interest on its secured credit facility and mortgage debt.(3)
    
    Operating expenses of our Healthcare Net Lease segment include
    depreciation of direct real estate investments, professional
    fees, an allocation of overhead expenses (including compensation
    and benefits) and other direct expenses. 52




---



##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   Summary of Significant Accounting Policies
  Intercompany
    Eliminations
    Note 21.
    Subsequent
    Events    Amendment
    of Syndicated Bank Credit Facility
        
    provides that the loan commitments of non-extending lenders will
    be reduced to $94.9 million on December 31, 2009 and
    to zero on March 13, 2010;
    deletes the requirement to maintain minimum senior unsecured
    debt ratings;
    deletes financial maintenance covenants relating to portfolio
    charged off ratios;
    replaces the existing minimum interest coverage ratio test with
    an interest coverage test that is calculated prior to giving
    effect to our provision for loan losses;
    adds certain provisions relating to issuance of indebtedness
    prior to September 30, 2009, including, among other things,
    (1) provisions permitting the sharing of collateral with
    such indebtedness, (2) limitations on our ability to make
    payments in respect of such indebtedness (other than scheduled
    interest payments and certain prepayments), (3) a
    cross-default provision to such indebtedness and (4) a
    provision that incorporates more restrictive terms of such
    indebtedness into the terms of the Agreement; and
    provides for certain reductions of the
    sub-facilities
    relating to swing-line borrowings, letters of credit and foreign
    currency associated with reductions in the aggregate credit
    facility amount. 53




---



##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   Equity
    Offering
    Senior
    Secured Notes
           54




---



##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
        Collateral
    Agreements
  90-day
 55




---



##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    
    Amended Security Agreement, amended as of July 27, 2009
    (the Security Agreement), among CapitalSource, Inc.
    and certain of its subsidiaries, as guarantors or obligors, in
    favor of Wachovia Bank, National Association, as Collateral
    Agent; and
    Amended Pledge Agreement, amended as of July 27, 2009 (the
    Pledge Agreement), among CapitalSource, Inc. and
    certain of its subsidiaries, as Pledgors, in favor of Wachovia
    Bank, National Association, as Collateral Agent, Wells Fargo
    Bank, National Association, as collateral custodian and
    CapitalSource Finance LLC, as servicer.   56




---



##### 



ITEM 2.
    MANAGEMENTS
    DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
    OPERATIONS  CAUTIONARY
    NOTE REGARDING FORWARD-LOOKING STATEMENTS
  Form 10-Q, Form 10-Q Form 10-K (Form 10-K) Form 10-Q
    Form 10-Q Form 10-K.
  Overview
    and Highlights
   57




---



##### 



Segment
    Data
      triple-net
    Consolidated
    Results of Operations
  Explanation
    of Reporting Metrics
  Interest Income.
 58




---



##### 



Fee Income.
  Operating Lease Income.
  Interest Expense.
  Provision for Loan Losses.
  Other Income. other-than-temporary
  Operating Expenses.
  Income Taxes.
 59




---



##### 



Operating
    Results for the Three and Six Months Ended June 30,
    2009
    
    CapitalSource Bank operations;
    Increased provision for loan losses;
    Establishment of a valuation allowance on a portion of our
    deferred tax assets;
    Decreased balance of our commercial lending portfolio;
    Gains and losses on our residential mortgage investment
    portfolio;
    Losses on derivatives and other investments in our Other
    Commercial Finance segment; and
    Changes in lending and borrowing spreads.    Three Months Ended








Six Months EndedJune 30,








June 30,2009


2008


$ Change


% Change


2009


2008


$ Change


% Change($ in thousands)Interest income

$
197,475


$
254,222


$
(56,747
)


(22
)%

$
419,162


$
562,547


$
(143,385
)


(25
)%Fee income


24,906



41,267



(16,361
)


(40
)


56,302



74,908



(18,606
)


(25
)Operating lease income


27,406



24,210



3,196



13



55,286



51,900



3,386



7Interest expense


110,865



158,115



(47,250
)


(30
)


241,900



348,587



(106,687
)


(31
)Provision for loan losses


203,847



31,674



172,173



544



359,114



37,333



321,781



862Depreciation of direct real estate investments


8,838



8,990



(152
)


(2
)


17,802



17,906



(104
)


(1
)Other operating expenses


68,922



61,652



7,270



12



138,237



120,245



17,992



15Other (expense) income


(12,705
)


40,286



(52,991
)


(132
)


(86,832
)


(56,113
)


(30,719
)


(55
)Income tax expense


91,179



37,243



53,936



145



37,754



40,319



(2,565
)


(6
)Net (loss) income


(246,569
)


62,311



(308,880
)


(496
)


(350,889
)


68,852



(419,741
)


(610
)Net (loss) income attributable to noncontrolling interests


(22
)


283



(305
)


(108
)


(38
)


1,580



(1,618
)


(102
)Net (loss) income attributable to CapitalSource Inc.


(246,547
)


62,028



(308,575
)


(497
)


(350,851
)


67,272



(418,123
)


(622
)  60




---



##### 



Six Months Ended June 30,2009


2008Weighted


Net


Average


Weighted


Net


AverageAverage


Investment


Yield/


Average


Investment


Yield/Balance


Income


Cost


Balance


Income


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





$
419,162



6.02
%





$
562,547



7.43
%Fee income






56,302



0.81







74,908



0.99Total interest earning assets(1)

$
14,037,222



475,464



6.83


$
15,184,475



637,455



8.42Total direct real estate investments


1,064,690



55,286



10.47



1,068,280



51,900



9.74Total income earning assets


15,101,912



530,750



7.09



16,252,755



689,355



8.51Total interest bearing liabilities(2)


12,986,164



241,900



3.76



13,674,303



348,587



5.11Net finance spread





$
288,850



3.33
%





$
340,768



3.40
%Net finance margin










3.86
%










4.20
%     (1)
    
    Interest earning assets include cash and cash equivalents,
    restricted cash, investment securities (including
    mortgage-backed securities), mortgage-related receivables, loans
    and the A Participation Interest.(2)
    
    Interest bearing liabilities include deposits, FHLB borrowings,
    repurchase agreements, secured and unsecured credit facilities,
    term debt, convertible debt and subordinated debt.  Other
    Operating Expenses
      Income
    Taxes
   61




---



##### 



Comparison
    of the Three Months Ended June 30, 2009 and
    2008
    CapitalSource
    Bank Segment
    Interest income

$
66,744Fee income


6,052Interest expense


30,551Provision for loan losses


90,470Operating expenses


26,202Other income


8,364Income tax expense


4,781Net loss


(70,844
)   Interest
    Income
  available-for-sale held-to-maturity available-for-sale held-to-maturity,
  Fee
    Income
    Interest
    Expense
   62




---



##### 



Net
    Finance Margin
    Three Months Ended June 30, 2009Weighted


Net


AverageAverage


Investment


Yield/Balance


Income


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





$
66,744



4.76
%Fee income






6,052



0.43Total interest earning assets(1)

$
5,626,428



72,796



5.19Total interest bearing liabilities(2)


4,752,385



30,551



2.58Net finance spread





$
42,245



2.61
%Net finance margin










3.01
%     (1)
    
    Interest earning assets include cash and cash equivalents,
    investments, A Participation Interest and loans.(2)
    
    Interest bearing liabilities include deposits and borrowings.  Provision
    for Loan Losses
  Credit Quality and
    Allowance for Loan Losses
  Operating
    Expenses
   63




---



##### 



Other
    Income
    Other
    Commercial Finance Segment
    Three Months EndedJune 30,2009


2008


$ Change


% Change($ in thousands)Interest income

$
133,059


$
257,884


$
(124,825
)


(48
)%Fee income


20,629



41,260



(20,631
)


(50
)Interest expense


77,215



151,265



(74,050
)


(49
)Provision for loan losses


113,377



31,674



81,703



258Operating expenses


50,573



59,262



(8,689
)


(15
)Other (expense) income


(11,277
)


41,702



(52,979
)


(127
)Income tax expense


89,702



37,243



52,459



141Net (loss) income


(188,456
)


61,402



(249,858
)


(407
)Net loss attributable to noncontrolling interests


(22
)


(369
)


347



94Net (loss) income attributable to CapitalSource Inc.


(188,434
)


61,771



(250,205
)


(405
)   Interest
    Income
    Fee
    Income
   64




---



##### 



Interest
    Expense
    Net
    Finance Margin
      Three Months Ended June 30,2009


2008Weighted


Net


Average


Weighted


Net


AverageAverage


Investment


Yield/


Average


Investment


Yield/Balance


Income


Cost


Balance


Income


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





$
133,059



6.79
%





$
257,884



7.37
%Fee income






20,629



1.05







41,260



1.18Total interest earning assets(1)

$
7,856,362



153,688



7.84


$
14,040,040



299,144



8.55Total interest bearing liabilities(2)


7,329,372



77,215



4.23



12,234,515



151,265



4.96Net finance spread





$
76,473



3.61
%





$
147,879



3.59
%Net finance margin










3.90
%










4.22
%     (1)
    
    Interest earning assets include cash and cash equivalents,
    restricted cash, mortgage-related receivables, loans and
    investments in debt securities.(2)
    
    Interest bearing liabilities include repurchase agreements,
    secured and unsecured credit facilities, term debt, convertible
    debt and subordinated debt.  Provision
    for Loan Losses
  Credit Quality and
    Allowance for Loan Losses
  Operating
    Expenses
   65




---



##### 



Other
    (Expense) Income, net
      Healthcare
    Net Lease Segment
    Three Months EndedJune 30,2009


2008


$ Change


% Change($ in thousands)Interest income

$
97


$
347


$
(250
)


(72
)%Fee income






7



(7
)


(100
)Operating lease income


27,406



24,210



3,196



13Interest expense


5,524



10,859



(5,335
)


(49
)Depreciation of direct real estate investments


8,838



8,990



(152
)


(2
)Other operating expenses


2,838



2,390



448



19Other income (expense)


1,005



(1,416
)


2,421



171Income tax benefit


(3,304
)






(3,304
)


N/ANet income


14,612



909



13,703



1,507Net income attributable to noncontrolling interests






652



(652
)


(100
)Net income attributable to CapitalSource Inc.


14,612



257



14,355



5,586   Operating
    Lease Income
    Interest
    Expense
   66




---



##### 



Depreciation
    of Direct Real Estate Investments
    Other
    Operating Expenses
    Net
    Income Attributable to Noncontrolling Interests
    Comparison
    of the Six Months Ended June 30, 2009 and
    2008
    CapitalSource
    Bank Segment
    Interest income

$
139,611Fee income


10,609Interest expense


68,964Provision for loan losses


115,461Operating expenses


49,942Other income


17,925Income tax expense


4,716Net loss


(70,938
)   Interest
    Income
  available-for-sale held-to-maturity available-for-sale held-to-maturity,
 67




---



##### 



Fee
    Income
    Interest
    Expense
    Net
    Finance Margin
    Six Months Ended June 30, 2009Weighted


Net


AverageAverage


Investment


Yield/Balance


Income


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





$
139,611



4.90
%Fee income






10,609



0.37Total interest earning assets(1)

$
5,748,737



150,220



5.27Total interest bearing liabilities(2)


4,840,100



68,964



2.87Net finance spread





$
81,256



2.40
%Net finance margin










2.85
%     (1)
    
    Interest earning assets include cash and cash equivalents,
    investments, A Participation Interest and loans.(2)
    
    Interest bearing liabilities include deposits and borrowings.  Provision
    for Loan Losses
  Credit Quality and
    Allowance for Loan Losses
  Operating
    Expenses
   68




---



##### 



Other
    Income
    Other
    Commercial Finance Segment
    Six Months EndedJune 30,2009


2008


$ Change


% Change($ in thousands)Interest income

$
284,192


$
568,153


$
(283,961
)


(50
)%Fee income


47,956



74,890



(26,934
)


(36
)Interest expense


166,478



333,367



(166,889
)


(50
)Provision for loan losses


243,653



37,333



206,320



553Operating expenses


106,717



115,598



(8,881
)


(8
)Other expense


(83,042
)


(54,697
)


(28,345
)


(52
)Income tax expense


31,679



40,319



(8,640
)


(21
)Net (loss) income


(299,421
)


61,729



(361,150
)


(585
)Net loss attributable to noncontrolling interests


(38
)


(486
)


448



92Net (loss) income attributable to CapitalSource Inc.


(299,383
)


62,215



(361,598
)


(581
)   Interest
    Income
   69




---



##### 



Fee
    Income
    Interest
    Expense
    Net
    Finance Margin
      Six Months Ended June 30,2009


2008Weighted


Net


Average


Weighted


Net


AverageAverage


Investment


Yield/


Average


Investment


Yield/Balance


Income


Cost


Balance


Income


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





$
284,192



6.93
%





$
568,153



7.52
%Fee income






47,956



1.17







74,890



0.99Total interest earning assets(1)

$
8,272,665



332,148



8.10


$
15,153,501



643,043



8.51Total interest bearing liabilities(2)


7,817,138



166,478



4.29



13,311,662



333,367



5.02Net finance spread





$
165,670



3.81
%





$
309,676



3.49
%Net finance margin










4.04
%










4.10
%     (1)
    
    Interest earning assets include cash and cash equivalents,
    restricted cash, mortgage-related receivables, loans and
    investments in debt securities.(2)
    
    Interest bearing liabilities include repurchase agreements,
    secured and unsecured credit facilities, term debt, convertible
    debt and subordinated debt.  Provision
    for Loan Losses
   70




---



##### 



Credit Quality and Allowance for Loan Losses
  Operating
    Expenses
    Other
    Expense
      Healthcare
    Net Lease Segment
    Six Months EndedJune 30,2009


2008


$ Change


% Change($ in thousands)Interest income

$
182


$
829


$
(647
)


(78
)%Fee income






18



(18
)


(100
)Operating lease income


55,286



51,900



3,386



7Interest expense


11,281



21,655



(10,374
)


(48
)Depreciation of direct real estate investments


17,802



17,906



(104
)


(1
)Other operating expenses


5,461



4,647



814



18Other income (expense)


2,370



(1,416
)


3,786



267Income tax expense


1,359







1,359



N/ANet income


21,935



7,123



14,812



208Net income attributable to noncontrolling interests






2,066



(2,066
)


(100
)Net income attributable to CapitalSource Inc.


21,935



5,057



16,878



334   Operating
    Lease Income
   71




---



##### 



Interest
    Expense
    Depreciation
    of Direct Real Estate Investments
    Other
    Operating Expenses
    Net
    Income Attributable to Noncontrolling Interests
    Financial
    Condition
  CapitalSource
    Bank Segment
  Portfolio
    Composition
    June 30,


December 31,2009


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

$
815,689


$
642,714Investment securities,
    held-to-maturity


219,154



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


889,009



1,400,333Loans held for investment(1)


2,884,831



2,713,377FHLB stock


20,195



20,195Total

$
4,828,878


$
4,791,008Deposits

$
4,547,939


$
5,043,695FHLB borrowings


200,000



Total

$
4,747,939


$
5,043,695     (1)
    
    Includes related interest receivable.  Investment
    Securities,
    Available-for-Sale
  available-for-sale. available-for-sale,
 72




---



##### 



available-for-sale, available-for-sale, Investments
  Investment
    Securities,
    Held-to-Maturity
  held-to-maturity, available-for-sale, Investments
  Commercial
    Real Estate A Participation Interest
  Commercial Lending
    Assets and Credit Quality
  CapitalSource
    Bank Segment Loan Portfolio Composition
      June 30, 2009


December 31, 2008($ in thousands)Commercial

$
1,916,559



67
%

$
1,813,414



67
%Real estate


761,420



26



595,751



22Real estate  construction


206,852



7



304,212



11Total

$
2,884,831



100
%

$
2,713,377



100
%     Due in


Due inOne Year


One to


Due Afteror Less


Five Years


Five Years


Total($ in thousands)Commercial

$
250,142


$
1,412,933


$
253,484


$
1,916,559Real estate


188,098



561,186



12,136



761,420Real estate  construction


57,751



149,101







206,852Total

$
495,991


$
2,123,220


$
265,620


$
2,884,831    73




---



##### 



Loan TypeReal EstateCommercial


Real Estate


Construction


Total


Percentage($ in thousands)1-Month LIBOR

$
375,348


$
728,968


$
206,852


$
1,311,168



45
%3-Month LIBOR


107,323











107,323



4Prime


706,281



10,831







717,112



25Canadian Prime


19,766











19,766



1Blended


705,767











705,767



24Total adjustable rate loans


1,914,485



739,799



206,852



2,861,136



99Fixed rate loans


2,074



21,621







23,695



1Total loans

$
1,916,559


$
761,420


$
206,852


$
2,884,831



100
%   Credit
    Quality and Allowance for Loan Losses
    June 30,


December 31,2009


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

$



$
Loans 90 or more days contractually delinquent


5,146



Non-accrual loans(1)


85,200



Impaired loans(2)


85,200



     (1)
    
    Includes loans with aggregate principal balances of
    $5.1 million as of June 30, 2009, which were also
    classified as loans 90 or more days contractually delinquent.
    There were no delinquent loans as of December 31, 2008.(2)
    
    Includes loans with aggregate principal balances of
    $5.1 million as of June 30, 2009, which were also
    classified as loans 90 or more days contractually delinquent,
    and loans with aggregate principal balances of
    $85.2 million as of June 30, 2009, which were also
    classified as loans on non-accrual status. There were no
    non-accrual loans as of December 31, 2008.    Three Months Ended


Six Months EndedJune 30, 2009


June 30, 2009($ in thousands)Allowance for loan losses as of beginning of period

$
70,573


$
55,600Provision for loan losses:General


14,900



27,400Specific


75,570



88,061Total provision for loan losses


90,470



115,461Charge offs


(69,510
)


(79,528
)Allowance for loan losses as of end of period

$
91,533


$
91,533Total gross loans as of end of period

$
2,884,831


$
2,884,831Allowance for loan losses ratio


3.17
%


3.17
%Provision for loan losses ratio (annualized)


12.58
%


8.07
%Net charge off ratio (annualized)


9.66
%


5.56
%  74




---



##### 



and/or
      FHLB SF
    Stock
    Deposits
      June 30, 2009


December 31, 2008Weighted





WeightedAverage





AverageBalance


Rate


Balance


Rate($ in thousands)Money market deposit accounts

$
262,587



1.34
%

$
279,577



2.26
%Savings accounts


494,516



1.43



471,014



2.89Certificates of deposit


3,790,836



2.42



4,259,153



3.55Brokered certificates of deposit










33,951



5.70Total deposits

$
4,547,939



2.25


$
5,043,695



3.42   June 30, 2009WeightedAverageBalance


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

$
1,543,097



2.56
%4-6 months


1,115,168



2.557-9 months


717,193



2.0910-12 months


382,190



1.93Longer than 12 months


33,188



4.25Total certificates of deposit

$
3,790,836



2.42  75




---



##### 



FHLB
    Borrowings
      WeightedAverageBalance


Rate($ in thousands)Less than 1 year

$
15,000



0.99
%1 to 2 years


74,000



1.402 to 3 years


73,000



1.923 to 4 years


18,000



2.284 to 5 years


20,000



2.86Total

$
200,000



1.78   Other
    Commercial Finance Segment
  Portfolio
    Composition
    June 30,


December 31,2009


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

$
13,637


$
36,837Loans(1)


6,151,067



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


1,626,387



1,801,535Other investments


106,673



127,746Total

$
7,897,764


$
8,747,614     (1)
    
    Includes loans held for sale, loans held for investment and
    related interest receivable.(2)
    
    Represents secured receivables that are backed by
    adjustable-rate residential prime mortgage loans.  Other
    Commercial Finance Segment Loan Portfolio Composition
   76




---



##### 



June 30, 2009


December 31, 2008($ in thousands)Commercial

$
4,032,359



66
%

$
4,573,586



67
%Real estate


1,402,769



23



1,525,916



23Real estate  construction


715,939



11



681,994



10Total

$
6,151,067



100
%

$
6,781,496



100
%     Due in


Due inOne Year


One to


Due Afteror Less


Five Years


Five Years


Total($ in thousands)Commercial

$
927,376


$
2,738,075


$
366,908


$
4,032,359Real estate


395,292



920,261



87,216



1,402,769Real estate  construction


553,176



162,763







715,939Total

$
1,875,844


$
3,821,099


$
454,124


$
6,151,067     Loan TypeReal EstateCommercial


Real Estate


Construction


Total


Percentage($ in thousands)1-Month LIBOR

$
466,032


$
1,046,070


$
612,731


$
2,124,833



35
%2-Month LIBOR


34,604











34,604



13-Month LIBOR


131,630



3,271







134,901



26-Month LIBOR


5,022











5,022



1-Month
    EURIBOR


65,578











65,578



1Prime


1,479,883



173,375



3,159



1,656,417



27Canadian Prime


12,525











12,525



Blended


1,649,406







37,887



1,687,293



27Total adjustable rate loans


3,844,680



1,222,716



653,777



5,721,173



93Fixed rate loans


187,679



180,053



62,162



429,894



7Total loans

$
4,032,359


$
1,402,769


$
715,939


$
6,151,067



100
%    77




---



##### 



Credit
    Quality and Allowance for Loan Losses
    June 30,


December 31,2009


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

$
118,010


$
299,322Loans 90 or more days contractually delinquent


406,719



141,104Non-accrual loans(1)


799,199



439,547Impaired loans(2)


1,116,963



692,278     (1)
    
    Includes loans with aggregate principal balances of
    $290.1 million and $110.3 million as of June 30,
    2009 and December 31, 2008, respectively, which were also
    classified as loans 30 or more days contractually delinquent.
    Includes non-performing loans classified as held for sale that
    have an aggregate principal balance of $13.8 million and
    $14.5 million as of June 30, 2009 and
    December 31, 2008, respectively.(2)
    
    Includes loans with aggregate principal balances of
    $385.2 million and $128.9 million as of June 30,
    2009 and December 31, 2008, respectively, which were also
    classified as loans 30 or more days contractually delinquent,
    and loans with aggregate principal balances of
    $785.4 million and $423.4 million as of June 30,
    2009 and December 31, 2008, respectively, which were also
    classified as loans on non-accrual status. The net carrying
    values of impaired loans were $1.1 billion and
    $683.1 million as of June 30, 2009 and
    December 31, 2008, respectively, prior to the application
    of allocated reserves.    Three Months Ended June 30,


Six Months Ended June 30,2009


2008


2009


2008($ in thousands)Allowance for loan losses as of beginning of period

$
374,711


$
136,745


$
368,244


$
138,930Provision for loan losses:General


(2,162
)


(1,064
)


(1,879
)


(2,115
)Specific


81,023



28,529



196,567



32,551Total provision for loan losses


78,861



27,465



194,688



30,436Charge offs, net of recoveries


(97,377
)


(23,082
)


(206,737
)


(28,238
)Allowance for loan losses as of end of period

$
356,195


$
141,128


$
356,195


$
141,128Total gross loans as of end of period

$
6,151,067


$
9,427,885


$
6,151,067


$
9,427,885Allowance for loan losses ratio


5.79
%


1.50
%


5.79
%


1.50
%Provision for loan losses ratio (annualized)


5.14
%


1.17
%


6.38
%


0.65
%Net charge off ratio (annualized)


6.35
%


0.98
%


6.78
%


0.60
%   and/or
   78




---



##### 



Mortgage-related
    Receivables
  Mortgage-Related Receivables and Related Owner
    Trust Securitizations
  Other
    Investments
      Healthcare
    Net Lease Segment
  Direct
    Real Estate Investments
  triple-net triple-net
  Liquidity
    and Capital Resources
     79




---



##### 



Risk Factors Cautionary
    Note Regarding Forward Looking Statements Form 10-Q Form 10-K
  CapitalSource Bank Liquidity 
        available-for-sale.
  Parent Company Liquidity 
 80




---



##### 



2006-A
    Subsequent Events,
    and/or
    Subsequent Events,
 81




---



##### 



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


Amount


UnusedAmount


Outstanding


Capacity(1)($ in thousands)Credit facilities(2)(3)

$
1,383,421


$
1,249,698


$
133,723Term debt


4,853,406



4,770,352



83,054Other borrowings


2,273,259



1,598,141



675,118Total

$
8,510,086


$
7,618,191


$
891,895     (1)
    
    Excludes issued and outstanding letters of credit totaling
    $60.1 million as of June 30, 2009.(2)
    
    Unused capacity is limited by the amount of letters of credit
    outstanding under such facilities and the amount of eligible
    collateral that we have available to pledge in order to utilize
    such unused capacity. We have limited available collateral to
    pledge to use this unused capacity. However, such unused
    capacity may become available to us to the extent we have
    additional eligible collateral in the future. For additional
    information on our credit facilities, see Note 11,
    Borrowings,and Note 21, Subsequent Events,in our consolidated financial statements for the three and
    six months ended June 30, 2009.(3)
    
    Included in this amount is $1.2 million of unpaid exit fees
    as of June 30, 2009, which are not part of our total drawn
    capacity. There were no such fees as of December 31, 2008. 82




---



##### 



Repurchase
    Agreements
    Credit
    Facilities
    Committed


PrincipalCapacity


Outstanding($ in thousands)Credit Facilities:CS Funding III secured credit facility scheduled to mature
    May 29, 2012(1)

$
106,518


$
106,518CS Funding VII secured credit facility scheduled to mature
    April 17, 2012(2)


235,000



168,172CS Europe secured credit facility scheduled to mature
    May 28, 2010(1)(3)


141,903



141,903CS Inc. syndicated bank secured credit facility scheduled to
    mature March 31, 2012(4)


900,000



833,105Total credit facilities

$
1,383,421


$
1,249,698     (1)
    
    These credit facilities are in their amortization periods so
    that committed capacity equals principal outstanding. In the
    absence of a default, amounts due under these facilities are
    repaid from proceeds from amortization of the respective
    collateral pools..(2)
    
    On maturity or termination of the revolving period under this
    credit facility, in the absence of a default, amounts due under
    this facility are repaid from proceeds from amortization of the
    collateral pool.(3)
    
    CS Europe is a 100.7 million multi-currency facility
    allowing for principal to be drawn in US Dollars
    (USD), Euro or British Pound Sterling, and the
    amounts presented were translated to USD using the applicable
    spot rates on June 30, 2009.(4)
    
    In July 2009, we reduced the facility by $300.0 million to
    $600.0 million We also extended commitments representing
    approximately $478.0 million to March 31, 2012, while
    the remaining approximately $122.0 million of commitments
    mature March 13, 2010, subject, in each case, to mandatory
    commitment reductions. For additional information on this
    facility, see Note 21, Subsequent Events, in our
    consolidated financial statements for the three and six months
    ended June 30, 2009.  Term
    Debt
    Owner
    Trust Term Debt
  Mortgage-Related Receivables and Related Owner
    Trust Securitizations Borrowings Form 10-K.
 83




---



##### 



Convertible
    Debt
  Borrowings Borrowings Form 10-K.
  Subordinated
    Debt
  Borrowings Borrowings Form 10-K.
  Mortgage
    Debt
  Borrowings Borrowings Form 10-K.
  FHLB
    Borrowings and Federal Reserve Bank Credit Program
      Notes
    Payable
    Debt
    Covenants
   84




---



##### 



and/or
  Borrowings
    Equity
  Shareholders Equity Shareholders Equity Form 10-K.
    Subsequent Events
  Commitments,
    Guarantees & Contingencies
  Commitments and Contingencies Form 10-K. Risk Factors
  Commitments and Contingencies Form 10-K.
   85




---



##### 



Commitments and
    Contingencies
        Credit
    Risk Management
  agreed-upon
    CapitalSource
    Bank and Other Commercial Finance Segments
     86




---



##### 



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

$
(1,680
)−50


(2,640
)+ 50


(26,640
)+ 100


(50,040
)    87




---



##### 



Amount


Percentage ofOutstanding(1)


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

$
8,255




%At the interest rate floor


52,594



1Below the interest rate floor


4,701,750



52Loans with no interest rate floor


4,273,300



47Total

$
9,035,899



100
%     (1)
    
    Includes related interest receivable.        Critical
    Accounting Estimates
  Managements Discussion and Analysis of Financial
    Condition and Results of Operations Summary of Significant Accounting Policies Form 10-K. Critical Accounting Estimates Managements Discussion and Analysis of Financial
    Condition and Results of Operations Form 10-K.
  Income
    Taxes
   88




---



##### 



ITEM 3.
    QUANTITATIVE
    AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK  Managements Discussion and
    Analysis of Financial Condition and Results of Operations Market Risk Management Form 10-Q Form 10-K. Derivative Instruments Credit Risk Form 10-K.
  ITEM 4.
    CONTROLS
    AND PROCEDURES  Rule 13a-15
 89




---



##### 



PART II.
    OTHER INFORMATION  ITEM 1A.
    RISK
    FACTORS  Our business faces many risks. The risks described below may
    not be the only risks we face. Additional risks that we do not
    yet know of or that we currently believe are immaterial may also
    impair our business operations. If any of the events or
    circumstances described in the following risks actually occur,
    our business, financial condition or results of operations could
    suffer, and the trading price of our securities could decline
    even further than it has over the past several months. The
    U.S. economy is currently in an economic recession and we
    expect this to have a significant adverse impact on our business
    and operations, including, without limitation, the credit
    quality of our loan portfolio, our liquidity, our earnings and
    the realizable amount of our net deferred tax assets. Before
    deciding to invest in our securities, you should consider all of
    the following risks, together with all of the other Risk Factors
    set forth in our Annual Report on
    Form 10-K
    for the year ended December 31, 2008, as filed with the SEC
    on March 2, 2009 (the
    Form 10-K),
    and all of the other information in this Quarterly Report on
    Form 10-Q
    and our other filings with the SEC.
  Some statements in this
    Form 10-Q,
    including within the risk factors below and those which are
    incorporated by reference, are forward-looking statements.
    Please refer to the section entitled Cautionary Note
    Regarding Forward-Looking Statements.
  Our
    ability to operate our business depends on our ability to
    maintain our external financing, which is extremely challenging
    in the existing economic environment.
    We are
    unable to access funds held by CapitalSource Bank to supplement
    our constrained liquidity position.
   90




---



##### 



Required
    commitment reductions in our syndicated bank credit facility as
    well as mandatory redemptions of our outstanding convertible
    debentures may limit our ability to maintain sufficient
    liquidity.
    
    75% of the cash proceeds of any unsecured debt issuance by the
    Parent Company, and
    75% of any principal repayments on, or the cash proceeds
    received on the disposition of or the incurrence of secured debt
    with respect to, assets constituting collateral under the
    facility.          We
    must comply with various covenants and obligations under our
    indebtedness and our failure to do so could adversely affect our
    ability to operate our business, manage our portfolio or pursue
    certain opportunities.
  and/or
   91




---



##### 




    incur various types of additional indebtedness and grant
    additional liens;
    make specified investments or other restricted payments;
    merge with or into another person or consummate other
    transactions that could result in a change of control;
    make capital expenditures;
    pay dividends or make other distributions or repurchase or
    redeem our stock; and
    enter into transactions with affiliates.  and/or
    Our
    significant level of debt and interest payment obligations may
    limit our ability to compete, expose us to interest rate risk to
    the extent of our variable-rate debt and prevent us from meeting
    our obligations under our senior secured notes.
    
    make it more difficult for us to satisfy our financial
    obligations, including those relating to our senior secured
    notes;
    increase our vulnerability to general adverse economic and
    industry conditions, including interest rate fluctuations,
    because a significant portion of our borrowings are at variable
    rates of interest;
    require us to dedicate a substantial portion of our cash flow
    from operations to payments on our indebtedness, thereby
    reducing the availability of our cash flow to fund working
    capital, capital expenditures and other general corporate
    purposes;
    limit our ability to borrow additional funds to expand our
    business or alleviate liquidity constraints, as a result of
    financial and other restrictive covenants in our indebtedness;
    limit our ability to refinance all or a portion of our
    indebtedness on or before maturity;
    limit our flexibility in planning for, or reacting to, changes
    in our business and industry; and
    place us at a competitive disadvantage relative to companies
    that have less indebtedness. 92




---



##### 



We may
    or may not pay dividends on our common stock.
    ITEM 2.
    UNREGISTERED
    SALES OF EQUITY SECURITIES AND USE OF PROCEEDS    Maximum Numberof Shares (orTotal Number of


ApproximateShares Purchased


Dollar Value)Total Number


Average


as Part of Publicly


that Mayof Shares


Price Paid


Announced Plans


Yet be PurchasedPurchased(1)


per Share


or Programs


Under the Plans(2)April 1  April 30, 2009


70,252


$
2.30



639,400


$
24,218,493May 1  May 31, 2009


8,022



3.69







June 1  June 30, 2009


72,454



4.37







Total


150,728


$
3.37



639,400
(3)

$
24,218,493     (1)
    
    Represents the number of shares acquired as payment by employees
    of applicable statutory minimum withholding taxes owed upon
    vesting of restricted stock granted under our Third Amended and
    Restated Equity Incentive Plan.(2)
    
    In March 2009, our Board of Directors authorized us to
    repurchase up to $25.0 million of our common stock through
    open market purchases or privately negotiated transactions from
    time to time for a period of up to two years. All shares
    repurchased under the share repurchase plan were retired upon
    settlement. The amount and timing of any repurchases will depend
    on market conditions and other factors and repurchases may be
    suspended or discontinued at any time. Our ability to repurchase
    additional shares may be limited by the terms of our senior
    secured notes due 2014, and there is no assurance that we will
    repurchase any additional shares.(3)
    
    Includes 400,000 shares which were repurchased on
    March 31, 2009, but did not settle until April 2009.  ITEM 4.
    SUBMISSION
    OF MATTERS TO A VOTE OF SECURITY HOLDERS    Election of Directors
  Nominee

In Favor


WithheldWilliam G. Byrnes


238,712,046



15,340,260John K. Delaney


240,414,008



13,638,297Sara L. Grootwassink


237,894,677



16,157,629  93




---



##### 



Director

Term EndsFrederick W. Eubank, II

2011 Annual MeetingAndrew B. Fremder

2010 Annual MeetingC. William Hosler

2010 Annual MeetingTimothy M. Hurd

2011 Annual MeetingLawrence C. Nussdorf

2010 Annual Meeting   Ratification of Auditors 
  In Favor

Against


Abstained252,140,011


983,723



928,570   ITEM 6.
    EXHIBITS     94




---



##### 



Signatures      Date: August 10, 2009

/s/  JOHN
    K. DELANEYJohn
    K. Delaney
    Chairman of the Board and Chief Executive Officer (Principal
    Executive Officer)Date: August 10, 2009

/s/  DONALD
    F. COLEDonald
    F. Cole
    Chief Financial Officer
    (Principal Financial Officer)Date: August 10, 2009

/s/  BRYAN
    D. SMITHBryan
    D. Smith
    Chief Accounting Officer
    (Principal Accounting Officer)  95




---



##### 



INDEX TO
    EXHIBITS  ExhibitNo

Description1
.1

Underwriting Agreement dated July 14, 2009, by and between the
    Company and Credit Suisse Securities (USA) LLC, as
    representative of the several underwriters (incorporated by
    reference to exhibit 1.1 to the Form 8-K filed by CapitalSource
    on July 16, 2009).3
.1

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

Amended and Restated Bylaws (composite version; reflects all
    amendments through October 30, 2007) (incorporated by reference
    to exhibit 3.2 to the Form 10-Q filed by CapitalSource on
    November 9, 2007).4
.1

Indenture dated as of July 27, 2009 between CapitalSource Inc.,
    the guarantors of the Notes from time to time parties thereto
    Indenture and U.S. Bank National Association, as trustee
    (incorporated by reference to exhibit 4.1 to the Form 8-K filed
    by CapitalSource on July 30, 2009).4
.2

Intercreditor Agreement dated as of July 27, 2009, among
    Wachovia Bank, National Association, , as collateral agent for
    the First Lien Secured Parties, Wachovia Bank, National
    Association, as authorized representative for the Credit
    Agreement Secured Parties and administrative agent, and U.S.
    Bank National Association, as authorized representative for the
    Notes Secured Parties and trustee (incorporated by reference to
    exhibit 4.2 to the Form 8-K filed by CapitalSource on July 30,
    2009).4
.3

Amended Security Agreement dated as of July 27, 2009 by and
    among CapitalSource Inc. and certain direct and indirect
    subsidiaries of CapitalSource Inc. that are or become guarantors
    collectively, the guarantors and the obligors, and Wachovia
    Bank, National Association, as collateral agent (incorporated by
    reference to exhibit 4.3 to the Form 8-K filed by CapitalSource
    on July 30, 2009).4
.4

Amended Pledge Agreement dated as of July 27, 2009 by and among
    CapitalSource Inc. and certain direct and indirect subsidiaries
    of CapitalSource Inc. that are or become guarantors
    collectively, the guarantors and pledgors, Wachovia Bank,
    National Association, as collateral agent, Wells Fargo Bank,
    National Association as collateral custodian and CapitalSource
    Finance LLC, as servicer (incorporated by reference to exhibit
    4.4 to the Form 8-K filed by CapitalSource on July 30, 2009).10
.1

Sale and Servicing Agreement dated as of May 29, 2009, by and
    among CSE QRS Funding I LLC, as a seller, CapitalSource
    Funding III LLC, as a seller, CSE Mortgage LLC, as QRS
    originator, CapitalSource Finance LLC, as CS III originator and
    servicer, CS Europe Finance Limited, as a guarantor, and CS UK
    Finance Limited, as a guarantor, Wachovia Capital Markets, LLC,
    as administrative agent  and WBNA agent, and Wells Fargo Bank,
    National Association, as backup servicer and collateral
    custodian (composite version; reflects all amendments through
    June 30, 2009).10
.2

Second Amended and Restated Sale and Servicing Agreement, dated
    as of June 16 2009, by and among CS Funding VII Depositor
    LLC, as the seller, CapitalSource Finance LLC, as the servicer
    and originator, the issuers from time to time party thereto, the
    liquidity banks from time to time party thereto, Citicorp North
    America, Inc., as the administrative agent and Wells Fargo Bank,
    National Association, as the backup servicer and as the
    collateral custodian (composite version; reflects all amendments
    through July 14, 2009).10
.3

Fourth Amended and Restated Sale and Servicing Agreement, dated
    as of June 16, 2009, by and among CapitalSource Real Estate Loan
    LLC, 2007-A, as the seller, CSE Mortgage LLC, as the originator
    and servicer, the issuers from time to time party thereto, the
    liquidity banks from time to time party thereto, Citicorp North
    America, Inc., as the administrative agent and Wells Fargo Bank,
    National Association, as the backup servicer and as the
    collateral custodian (composite version; reflects all amendments
    through July 14, 2009).10
.4

Facility Agreement dated as of October 3, 2007, among CS Europe
    Finance Limited and CS UK Finance Limited, as borrowers and
    guarantors, CapitalSource Finance LLC, as servicer, Wachovia
    Bank, N.A., as administrative agent and security trustee and
    Wachovia Securities International Ltd., as lead arranger and
    sole bookrunner (composite version; reflects all amendments
    through May 29, 2009)(incorporated by reference to exhibit 10.2
    to the Form 8-K filed by CapitalSource on June 4, 2009). 96




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##### 



ExhibitNo

Description10
.5

Servicing Agreement dated October 3, 2007, between CS UK Finance
    Limited and CS Europe Finance Limited, as borrowers,
    CapitalSource Finance LLC, as servicer, CapitalSource Europe
    Limited, as subservicer and parent, CapitalSource UK Limited, as
    parent, Wachovia Bank, N.A., as administrative agent and
    security trustee, and Wachovia Securities International Ltd., as
    lead arranger and sole bookrunner (composite version; reflects
    all amendments through May 29, 2009)(incorporated by reference
    to exhibit 10.3 to the Form 8-K filed by CapitalSource on June
    4, 2009).10
.6

Amendment No. 1 to Lease dated August 25, 2008 by and between
    Wisconsin Place Office LLC and CapitalSource Finance LLC.10
.7

Amendment No. 2 to Lease dated February 17, 2009 by and between
    Wisconsin Place Office LLC and CapitalSource Finance LLC.10
.8*

Third Amended and Restated Equity Incentive Plan (composite
    version; reflects all amendments through August 10, 2009).12
.1

Ratio of Earnings to Fixed Charges.31
.1

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

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


Section 1350 Certifications.     
    
    Filed herewith.*
    
    Management contract or compensatory plan or arrangement.   97