UNITED STATES SECURITIES AND
    EXCHANGE COMMISSION
 Washington, D.C.
    20549
  Form 10-Q
  QUARTERLY REPORT PURSUANT TO
    SECTION 13 OR 15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934
  For the quarterly period ended March 31, 2010
  Commission File
    No. 1-31753
  CapitalSource Inc.
 (Exact name of registrant as
    specified in its charter)
  Delaware(State of
    Incorporation)

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




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##### 





TABLE OF
    CONTENTS
  PagePART I. FINANCIAL INFORMATIONItem 1.

Financial StatementsConsolidated Balance Sheets as of March 31,
    2010 (unaudited) and December 31, 2009


3Consolidated Statements of Operations (unaudited)
    for the three months ended March 31, 2010 and 2009


4Consolidated Statement of Shareholders
    Equity (unaudited) for the three months ended March 31,
    2010


5Consolidated Statements of Cash Flows (unaudited)
    for the three months ended March 31, 2010 and 2009


6Notes to the Unaudited Consolidated Financial
    Statements


7Item 2.

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


47Item 3.

Quantitative and Qualitative Disclosures about
    Market Risk


74Item 4.

Controls and Procedures


74PART II. OTHER INFORMATIONItem 2.

Unregistered Sales of Equity Securities and Use
    of Proceeds


75Item 6.

Exhibits


75Signatures


76Index to Exhibits


77   2




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##### 



CapitalSource
    Inc.
  Consolidated
    Balance Sheets
  March 31,


December 31,2010


2009(Unaudited)($ in thousands)ASSETSCash and cash equivalents

$
697,378


$
1,172,785Restricted cash


140,195



172,765Investment securities:Available-for-sale,
    at fair value


1,545,098



960,591Held-to-maturity,
    at amortized cost


218,751



242,078Total investment securities


1,763,849



1,202,669Commercial real estate A Participation Interest, net


327,992



530,560Loans:Loans held for sale


15,005



670Loans held for investment


7,986,929



8,321,160Less deferred loan fees and discounts


(131,824
)


(146,329
)Less allowance for loan losses


(686,193
)


(586,696
)Loans held for investment, net (including $2.8 billion and
    $3.1 billion, respectively, of loans that can be used only
    to settle obligations of consolidated VIEs)


7,168,912



7,588,135Total loans


7,183,917



7,588,805Interest receivable


25,213



33,949Direct real estate investments, net


333,467



336,007Other investments


93,868



96,517Goodwill


173,135



173,135Other assets


642,102



679,209Assets of discontinued operations, held for sale


261,045



260,541Total assets

$
11,642,161


$
12,246,942LIABILITIES AND SHAREHOLDERS EQUITYLiabilities:Deposits

$
4,582,641


$
4,483,879Credit facilities


407,833



542,781Term debt (including $2.4 billion and $2.7 billion,
    respectively, in obligations of consolidated VIEs for which
    there is no recourse to the general credit of CapitalSource Inc.)


2,681,107



2,956,536Other borrowings


1,472,403



1,466,834Other liabilities


317,987



390,504Liabilities of discontinued operations


216,567



223,149Total liabilities


9,678,538



10,063,683Shareholders equity:Preferred stock (50,000,000 shares authorized; no shares
    outstanding)






Common stock ($0.01 par value, 1,200,000,000 shares
    authorized; 322,765,940 and 323,042,613 shares issued and
    outstanding, respectively)


3,228



3,230Additional paid-in capital


3,913,634



3,909,364Accumulated deficit


(1,963,492
)


(1,748,822
)Accumulated other comprehensive income, net


10,127



19,361Total CapitalSource Inc. shareholders equity


1,963,497



2,183,133Noncontrolling interests


126



126Total shareholders equity


1,963,623



2,183,259Total liabilities and shareholders equity

$
11,642,161


$
12,246,942    3




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##### 



CapitalSource
    Inc.
  Consolidated Statements of
    Operations
  Three Months Ended March 31,2010


2009(Unaudited)($ in thousands, except per share data)Net investment income:Interest income:Loans

$
154,384


$
223,198Investment securities


14,591



20,553Other


573



1,742Total interest income


169,548



245,493Fee income


6,442



5,859Total interest and fee income


175,990



251,352Operating lease income


8,503



8,526Total investment income


184,493



259,878Interest expense:Deposits


16,358



38,387Borrowings


51,159



91,284Total interest expense


67,517



129,671Net investment income


116,976



130,207Provision for loan losses


218,940



155,267Net investment loss after provision for loan losses


(101,964
)


(25,060
)Operating expenses:Compensation and benefits


34,183



35,037Depreciation of direct real estate investments


2,540



2,540Professional fees


10,370



17,238Other administrative expenses


18,749



16,876Total operating expenses


65,842



71,691Other income (expense):Gain (loss) on investments, net


6,079



(16,127
)Loss on derivatives


(4,337
)


(686
)Gain on residential mortgage investment portfolio






15,311Gain (loss) on extinguishment of debt


698



(57,128
)Other expense


(28,361
)


(15,140
)Total other expense


(25,921
)


(73,770
)Net loss from continuing operations before income taxes


(193,727
)


(170,521
)Income tax expense (benefit)


21,006



(55,341
)Net loss from continuing operations


(214,733
)


(115,180
)Net income from discontinued operations, net of taxes


3,043



9,653Gain from sale of discontinued operations, net of taxes






1,207Net loss


(211,690
)


(104,320
)Net loss attributable to noncontrolling interests






(16
)Net loss attributable to CapitalSource Inc.

$
(211,690
)

$
(104,304
)Net (loss) income per share attributable to CapitalSource
    Inc.:Basic (loss) income per share:From continuing operations

$
(0.67
)

$
(0.40
)From discontinued operations

$
0.01


$
0.04Attributable to CapitalSource Inc.

$
(0.66
)

$
(0.36
)Diluted (loss) income per share:From continuing operations

$
(0.67
)

$
(0.40
)From discontinued operations

$
0.01


$
0.04Attributable to CapitalSource Inc.

$
(0.66
)

$
(0.36
)Average shares outstanding:Basic


320,294,724



290,098,800Diluted


320,294,724



290,098,800    4




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##### 



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





Comprehensive





TotalCommon


Paid-In


Accumulated


Income


Noncontrolling


ShareholdersStock


Capital


Deficit


(Loss), Net


Interests


Equity(Unaudited)($ in thousands)Total shareholders equity as of December 31, 2009

$
3,230


$
3,909,364


$
(1,748,822
)

$
19,361


$
126


$
2,183,259Net loss










(211,690
)










(211,690
)Other comprehensive loss:Unrealized loss, net of tax














(9,234
)






(9,234
)Total comprehensive loss






















(220,924
)Dividends paid






(248
)


(2,980
)










(3,228
)Stock option expense






1,349















1,349Restricted stock activity


(2
)


3,169















3,167Total shareholders equity as of March 31, 2010

$
3,228


$
3,913,634


$
(1,963,492
)

$
10,127


$
126


$
1,963,623    5




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##### 



CapitalSource
    Inc.
  Consolidated Statements of Cash
    Flows
  Three Months EndedMarch, 312010


2009(Unaudited)($ in thousands)Operating activities:Net loss

$
(211,690
)

$
(104,320
)Adjustments to reconcile net loss to net cash (used in) provided
    by operating activities:Stock option expense


1,349



539Restricted stock expense


4,050



5,933(Gain) loss on extinguishment of debt


(698
)


57,128Amortization of deferred loan fees and discounts


(18,685
)


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


(945
)


(8,278
)Provision for loan losses


218,940



155,267Amortization of deferred financing fees and discounts


12,633



18,784Depreciation and amortization


1,725



8,387Provision (benefit) for deferred income taxes


33,515



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


212



18,828Non-cash loss on foreclosed assets and other property and
    equipment disposals


35,741



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


(5,173
)


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






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






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






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


(5,853
)


(11,018
)Decrease in interest receivable


8,976



23,492(Increase) decrease in loans held for sale, net


(67
)


12,360(Increase) decrease in other assets


(4,258
)


329,424Decrease in other liabilities


(76,656
)


(254,560
)Cash (used in) provided by operating activities


(6,884
)


1,597,561Investing activities:Decrease in restricted cash


36,109



237,434Decrease in mortgage-related receivables, net






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


208,421



329,661Decrease (increase) in loans, net


137,745



(41,817
)Cash received for real estate






7,500Acquisition of marketable securities, available for sale, net


(580,027
)


(353,432
)Reduction (acquisition) of marketable securities, held to
    maturity, net


27,591



(77,931
)Reduction (acquisition) of other investments, net


2,942



(12,818
)Acquisition of property and equipment, net


(467
)


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


(167,686
)


134,623Financing activities:Payment of deferred financing fees


(2,215
)


(6,173
)Deposits accepted, net of repayments


99,067



(317,574
)Repayments under repurchase agreements, net






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


(124,650
)


(35,515
)Borrowings of term debt


14,395



26,000Repayments of term debt


(290,507
)


(303,010
)Borrowings (repayments) under other borrowings, net


5,137



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






22Payment of dividends


(3,228
)


(3,031
)Cash used in financing activities


(302,001
)


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


(476,571
)


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


1,177,020



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

$
700,449


$
765,903Supplemental information:Noncash transactions from investing and financing activities:Assets acquired through foreclosure

$
51,887


$
31,845Exchange of common stock for convertible debentures






61,618Conversion of noncontrolling interests into common stock






9,038    6




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##### 



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




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##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Commercial Lending Assets and Credit Quality
    Note 3.
    Discontinued
    Operations     8




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##### 



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


December 31,2010


2009($ in thousands)Assets:Cash and cash equivalents and restricted cash

$
9,008


$
13,712Direct real estate investments, net


218,149



218,149Other assets


33,888



28,680Total assets

$
261,045


$
260,541Liabilities:Mortgage debt

$
184,334


$
184,923Notes payable


20,000



20,000Other liabilities


12,233



18,226Total liabilities

$
216,567


$
223,149  9




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##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Three Months Ended March 31,2010


2009($ in thousands)Revenue:Operating lease income

$
6,763


$
19,354Expenses:Interest


2,926



1,364Depreciation






6,424General and administrative


727



164Other expense (income)


67



(167
)Total expenses


3,720



7,785Gain from sale of discontinued operations






1,407Income tax expense






2,116Net income attributable to discontinued operations

$
3,043


$
10,860   Direct Real Estate Investments
  Note 4.
    Cash and
    Cash Equivalents and Restricted Cash    March 31,


December 31,2010


2009($ in thousands)Cash and cash equivalents and restricted cash from continuing
    operations:Cash and due from banks(1)

$
378,207


$
592,793Interest-bearing deposits in other banks(2)


19,494



27,723Other short-term investments(3)


419,877



555,057Investment securities(4)


19,995



169,977Total cash and cash equivalents and restricted cash from
    continuing operations


837,573



1,345,550Cash and cash equivalents and restricted cash from discontinued
    operations:Cash and due from banks


9,008



13,712Total cash and cash equivalents and restricted cash

$
846,581


$
1,359,262     (1)
    
    Includes principal and interest collections, including those
    related to 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. The restricted portion of
    the balance was $31.3 million and $24.5 million as of
    March 31, 2010 and December 31, 2009, respectively.
    Cash and due from bank accounts for CapitalSource Bank were
    $117.2 million and $235.6 million as of March 31,
    2010 and December 31, 2009, respectively. Included in these
    balances for 10




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##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  CapitalSource Bank were $39.5 million and
    $119.1 million in deposits at the Federal Reserve Bank
    (FRB) as of March 31, 2010 and
    December 31, 2009, respectively. The cash and due from bank
    accounts for CapitalSource Bank were not restricted.(2)
    
    Represents principal and interest collections on loan assets
    pledged to credit facilities. The restricted portion was
    $11.3 million and $11.4 million as of March 31,
    2010 and December 31, 2009, respectively.(3)
    
    Represents principal and interest collections, including those
    related to 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. The restricted portion was
    $97.6 million and $136.9 million as of March 31,
    2010 and December 31, 2009, 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
    $20.0 million and $170.0 million as of March 31,
    2010 and December 31, 2009, respectively, issued by the
    Federal Home Loan Bank System (FHLB) of
    San Francisco (FHLB SF), Fannie Mae or Freddie
    Mac. These investments have a remaining weighted average
    maturity of 65 days and 61 days as of March 31,
    2010 and December 31, 2009, respectively.  Note 5.
    Commercial
    Lending Assets and Credit Quality    Commercial
    Real Estate A Participation Interest
    A Participation Interest as of December 31, 2009

$
530,560Principal payments


(208,421
)Discount accretion


5,853A Participation Interest as of March 31, 2010

$
327,992       Loans
    Held for Sale
   11




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##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      Loans
    Held for Investment
    Three Months Ended March 31,2010


2009($ in thousands)Balance as of beginning of period

$
586,696


$
423,844Provision for loan losses


218,940



140,818Charge offs, net of recoveries


(119,443
)


(119,378
)Balance as of end of period

$
686,193


$
445,284     March 31,

December 31,2010

2009($ in thousands)Accruing loans
    30-89 days
    contractually delinquent

$
153,339


$
95,268Accruing loans 90 or more days contractually delinquent


34,684



66,993Non-accrual loans


1,124,554



1,067,415   30-89 days 30-89 days
  and/or
   12




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##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      Foreclosed
    Assets
  Real
    Estate Owned (REO)
      Three Months Ended March 31,2010


2009($ in thousands)Balance as of beginning of period

$
101,401


$
84,437Transfers from loans


54,566



21,321Fair value adjustments


(16,048
)


(16,075
)Transfers from REO held for use


2,850



Real estate sold


(6,492
)


(2,286
)Balance as of end of period

$
136,277


$
87,397      13




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##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Other
    Foreclosed Assets
    Note 6.
    Investments  Investment
    Securities,
    Available-for-Sale
  available-for-sale
  March 31, 2010


December 31, 2009Gross


Gross








Gross


GrossUnrealized


Unrealized


Fair





Unrealized


Unrealized


FairCost


Gains


Losses


Value


Cost


Gains


Losses


Value($ in thousands)Agency discount notes

$
324,656


$
18


$
(54
)

$
324,620


$
49,988


$
8


$



$
49,996Agency callable notes


243,392



354



(529
)


243,217



252,175



143



(1,788
)


250,530Agency debt


107,345



487



(324
)


107,508



24,430



315



(273
)


24,472Agency MBS


595,272



9,909



(465
)


604,716



412,853



5,999



(462
)


418,390Non-agency MBS


141,346



1,205



(481
)


142,070



152,913



1,031



(669
)


153,275Equity securities


32,140



1,486







33,626



51,074



2,246



(336
)


52,984Corporate debt


12,406



730



(3,608
)


9,528



12,349



877



(3,608
)


9,618Collateralized loan obligation


















1,018



308







1,326U.S. Treasury bills


79,824







(11
)


79,813















Total

$
1,536,381


$
14,189


$
(5,472
)

$
1,545,098


$
956,800


$
10,927


$
(7,136
)

$
960,591   available-for-sale, available-for-sale available-for-sale
  available-for-sale
 14




---



##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  other-than-temporary other-than-temporary
  available-for-sale
  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 March 31, 2010Agency discount notes

$
(54
)

$
164,497


$



$



$
(54
)

$
164,497Agency callable notes


(529
)


158,263











(529
)


158,263Agency debt


(174
)


83,983



(150
)


7,120



(324
)


91,103Agency MBS


(465
)


57,464











(465
)


57,464Non-agency MBS


(481
)


42,655











(481
)


42,655Corporate debt


(3,608
)














(3,608
)


Treasury bills


(11
)


79,813











(11
)


79,813Total

$
(5,322
)

$
586,675


$
(150
)

$
7,120


$
(5,472
)

$
593,795As of December 31, 2009Agency callable notes

$
(1,788
)

$
209,397


$



$



$
(1,788
)

$
209,397Agency debt










(273
)


15,167



(273
)


15,167Agency MBS


(462
)


49,118











(462
)


49,118Non-agency MBS


(669
)


48,868











(669
)


48,868Equity securities










(336
)


178



(336
)


178Corporate debt


(3,608
)














(3,608
)


Total

$
(6,527
)

$
307,383


$
(609
)

$
15,345


$
(7,136
)

$
322,728   available-for-sale other-than-temporary
  Investment
    Securities,
    Held-to-Maturity
  held-to-maturity, held-to-maturity,
 15




---



##### 



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

$
428,405


$
428,308


$
56,309


$
57,694Due after one year through five years


282,608



283,008



162,442



183,436Due after five years through ten years(1)


129,967



127,814







Due after ten years(2)(3)


695,401



705,968







Total

$
1,536,381


$
1,545,098


$
218,751


$
241,130     (1)
    
    Included in this category are Agency and Non-agency MBS with
    fair values of $25.5 million and $48.9 million,
    respectively, and weighted-average expected maturities of
    approximately 2.74 years and 2.27 years, respectively, based on
    interest rates and expected prepayment speeds as of
    March 31, 2010.(2)
    
    Included in this category are Agency and Non-agency MBS with
    fair values of $579.2 million and $93.1 million,
    respectively, and weighted-average expected maturities of
    approximately 3.34 years and 2.11 years, respectively, based on
    interest rates and expected prepayment speeds as of
    March 31, 2010.(3)
    
    Includes securities with no stated maturity.  Other
    Investments
    March 31,


December 31,2010


2009($ in thousands)Investments carried at cost

$
49,427


$
53,205Investments carried at fair value


1,244



1,392Investments accounted for under the equity method


43,197



41,920Total

$
93,868


$
96,517   other-than-temporary
  Residential
    Mortgage-Backed Securities
   16




---



##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Note 7.
    Guarantor
    Information  Borrowings Borrowings,
 17




---



##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Consolidating
    Balance Sheet
    March 31, 2010
    (Unaudited)
  CapitalSource Finance LLCCombined


Combined


Other





ConsolidatedCapitalSource


Non-Guarantor


Guarantor


Non-Guarantor





CapitalSourceInc.


Subsidiaries


Subsidiaries


Subsidiaries


Eliminations


Inc.($ in thousands)AssetsCash and cash equivalents

$
32,941


$
418,035


$
184,045


$
62,357


$



$
697,378Restricted cash






30,629



50,096



59,470







140,195Investment securities:Available-for-sale,
    at fair value






1,507,079







38,019







1,545,098Held-to-maturity,
    at amortized cost






218,751















218,751Total investment securities






1,725,830







38,019







1,763,849Commercial real estate A participation interest, net






327,992















327,992Loans:Loans held for sale










15,005











15,005Loans held for investment






5,256,489



298,513



2,431,933



(6
)


7,986,929Less deferred loan fees and discounts






(90,225
)


12,962



(32,287
)


(22,274
)


(131,824
)Less allowance for loan losses






(343,921
)


(77,472
)


(264,800
)






(686,193
)Loans held for investment, net






4,822,343



234,003



2,134,846



(22,280
)


7,168,912Total loans






4,822,343



249,008



2,134,846



(22,280
)


7,183,917Interest receivable






8,202



41,357



(24,346
)






25,213Direct real estate investments, net














333,467







333,467Investment in subsidiaries


2,456,639



9,084



1,478,434



1,341,247



(5,285,404
)


Intercompany note receivable


375,000



9



147,758



324,053



(846,820
)


Other investments






63,740



14,451



15,677







93,868Goodwill






173,135















173,135Other assets


47,437



181,110



107,574



405,627



(99,646
)


642,102Assets of discontinued operations, held for sale














261,045







261,045Total assets

$
2,912,017


$
7,760,109


$
2,272,723


$
4,951,462


$
(6,254,150
)

$
11,642,161Liabilities and shareholders equityLiabilities:Deposits

$



$
4,582,641


$



$



$



$
4,582,641Credit facilities


103,583



146,127



46,652



111,471







407,833Term debt


283,596



1,351,814







1,045,697







2,681,107Other borrowings


545,286



225,000



440,617



261,500







1,472,403Other liabilities


16,021



63,780



98,836



255,441



(116,091
)


317,987Intercompany note payable






46,850



324,053



460,404



(831,307
)


Liabilities of discontinued operations














216,567







216,567Total liabilities


948,486



6,416,212



910,158



2,351,080



(947,398
)


9,678,538Shareholders equity:Common stock


3,228



921,000











(921,000
)


3,228Additional paid-in capital


3,913,637



116,686



506,972



3,007,996



(3,631,657
)


3,913,634(Accumulated deficit) retained earnings


(1,963,461
)


299,921



845,036



(412,010
)


(732,978
)


(1,963,492
)Accumulated other comprehensive income, net


10,127



6,290



10,557



4,274



(21,121
)


10,127Total CapitalSource Inc. shareholders equity


1,963,531



1,343,897



1,362,565



2,600,260



(5,306,756
)


1,963,497Noncontrolling interests














122



4



126Total shareholders equity


1,963,531



1,343,897



1,362,565



2,600,382



(5,306,752
)


1,963,623Total liabilities and shareholders equity

$
2,912,017


$
7,760,109


$
2,272,723


$
4,951,462


$
(6,254,150
)

$
11,642,161  18




---



##### 



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


Combined


Other





ConsolidatedCapitalSource


Non-Guarantor


Guarantor


Non-Guarantor





CapitalSourceInc.


Subsidiaries


Subsidiaries


Subsidiaries


Eliminations


Inc.($ in thousands)AssetsCash and cash equivalents

$
99,103


$
760,343


$
265,977


$
47,362


$



$
1,172,785Restricted cash






72,754



58,250



41,761







172,765Investment securities:Available-for-sale,
    at fair value






902,427



663



57,501







960,591Held-to-maturity,
    at amortized cost






242,078















242,078Total investment securities






1,144,505



663



57,501







1,202,669Commercial real estate A participation interest, net






530,560















530,560Loans:Loans held for sale










670











670Loans held for investment






5,323,957



286,709



2,710,500



(6
)


8,321,160Less deferred loan fees and discounts






(77,853
)


(10,428
)


(38,154
)


(19,894
)


(146,329
)Less allowance for loan losses






(285,863
)


(76,800
)


(224,033
)






(586,696
)Loans held for investment, net






4,960,241



199,481



2,448,313



(19,900
)


7,588,135Total loans






4,960,241



200,151



2,448,313



(19,900
)


7,588,805Interest receivable






14,143



15,850



3,956







33,949Direct real estate investments, net














336,007







336,007Investment in subsidiaries


2,716,099



10,702



1,522,375



1,347,149



(5,596,325
)


Intercompany note receivable


375,000



9



133,674



319,249



(827,932
)


Other investments






66,068



14,400



16,049







96,517Goodwill






173,135















173,135Other assets


63,214



221,990



108,071



417,239



(131,305
)


679,209Assets of discontinued operations, held for sale














260,541







260,541Total assets

$
3,253,416


$
7,954,450


$
2,319,411


$
5,295,127


$
(6,575,462
)

$
12,246,942Liabilities and shareholders equityLiabilities:Deposits

$



$
4,483,879


$



$



$



$
4,483,879Credit facilities


193,637



166,107



56,707



126,330







542,781Term debt


282,938



1,539,915







1,133,683







2,956,536Other borrowings


561,347



200,000



442,727



262,760







1,466,834Other liabilities


32,328



129,604



134,460



240,270



(146,158
)


390,504Intercompany note payable






46,850



319,249



447,730



(813,829
)


Liabilities of discontinued operations














223,149







223,149Total liabilities


1,070,250



6,566,355



953,143



2,433,922



(959,987
)


10,063,683Shareholders equity:Common stock


3,230



921,000











(921,000
)


3,230Additional paid-in capital


3,909,366



(224,375
)


705,847



3,082,775



(3,564,249
)


3,909,364(Accumulated deficit) retained earnings


(1,748,791
)


676,881



641,102



(235,374
)


(1,082,640
)


(1,748,822
)Accumulated other comprehensive income (loss), net


19,361



14,589



19,319



13,680



(47,588
)


19,361Total CapitalSource Inc. shareholders equity


2,183,166



1,388,095



1,366,268



2,861,081



(5,615,477
)


2,183,133Noncontrolling interests














124



2



126Total shareholders equity


2,183,166



1,388,095



1,366,268



2,861,205



(5,615,475
)


2,183,259Total liabilities and shareholders equity

$
3,253,416


$
7,954,450


$
2,319,411


$
5,295,127


$
(6,575,462
)

$
12,246,942  19




---



##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Consolidating
    Statement of Operations
    Three Months Ended March 31, 2010
    (Unaudited)
  CapitalSource Finance LLCCombined


Combined


Other





ConsolidatedCapitalSource


Non-Guarantor


Guarantor


Non-Guarantor





CapitalSourceInc.


Subsidiaries


Subsidiaries


Subsidiaries


Eliminations


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

$
9,850


$
109,100


$
10,578


$
39,634


$
(14,778
)

$
154,384Investment securities






14,305



47



239







14,591Other






570



1



2







573Total interest income


9,850



123,975



10,626



39,875



(14,778
)


169,548Fee income






2,647



1,807



1,988







6,442Total interest and fee income


9,850



126,622



12,433



41,863



(14,778
)


175,990Operating lease income














8,503







8,503Total investment income


9,850



126,622



12,433



50,366



(14,778
)


184,493Interest expense:Deposits






16,358















16,358Borrowings


30,240



8,211



7,743



17,364



(12,399
)


51,159Total interest expense


30,240



24,569



7,743



17,364



(12,399
)


67,517Net investment (loss) income


(20,390
)


102,053



4,690



33,002



(2,379
)


116,976Provision for loan losses






85,548



792



132,600







218,940Net investment (loss) income after provision for loan losses


(20,390
)


16,505



3,898



(99,598
)


(2,379
)


(101,964
)Operating expenses:Compensation and benefits


222



13,270



20,691











34,183Depreciation of direct real estate investments














2,540







2,540Professional fees


681



602



7,385



1,702







10,370Other administrative expenses


1,137



12,892



13,457



13,715



(22,452
)


18,749Total operating expenses


2,040



26,764



41,533



17,957



(22,452
)


65,842Other (expense) income:Gain (loss) on investments, net






5,219



(104
)


964







6,079(Loss) gain on derivatives






(1,542
)


5,231



(8,026
)






(4,337
)Gain on debt extinguishment


698



















698Other income (expense), net


17



7,674



21,083



(34,864
)


(22,271
)


(28,361
)Earnings in subsidiaries


(189,975
)


(514
)


(8,137
)


(21,760
)


220,386



Total other (expense) income


(189,260
)


10,837



18,073



(63,686
)


198,115



(25,921
)Net (loss) income from continuing operations before income
    taxes


(211,690
)


578



(19,562
)


(181,241
)


218,188



(193,727
)Income tax expense






2,169







18,837







21,006Net loss from continuing operations


(211,690
)


(1,591
)


(19,562
)


(200,078
)


218,188



(214,733
)Net income from discontinued operations, net of taxes














3,043







3,043Net loss attributable to CapitalSource Inc.

$
(211,690
)

$
(1,591
)

$
(19,562
)

$
(197,035
)

$
218,188


$
(211,690
)  20




---



##### 



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


Combined


Other





ConsolidatedCapitalSource


Non-Guarantor


Guarantor


Non-Guarantor





CapitalSourceInc.


Subsidiaries


Subsidiaries


Subsidiaries


Eliminations


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

$
649


$
132,305


$
13,023


$
79,679


$
(2,458
)

$
223,198Investment securities






9,158



182



11,213







20,553Other






1,598



22



122







1,742Total interest income


649



143,061



13,227



91,014



(2,458
)


245,493Fee income






2,097



2,961



801







5,859Total interest and fee income


649



145,158



16,188



91,815



(2,458
)


251,352Operating lease income














8,526







8,526Total investment income


649



145,158



16,188



100,341



(2,458
)


259,878Interest expense:Deposits






38,387















38,387Borrowings


28,186



15,345



8,736



40,968



(1,951
)


91,284Total interest expense


28,186



53,732



8,736



40,968



(1,951
)


129,671Net investment (loss) income


(27,537
)


91,426



7,452



59,373



(507
)


130,207Provision for loan losses






16,352



72,067



66,848







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


(27,537
)


75,074



(64,615
)


(7,475
)


(507
)


(25,060
)Operating expenses:Compensation and benefits


237



13,257



21,543











35,037Depreciation of direct real estate investments














2,540







2,540Professional fees


1,474



904



12,848



2,012







17,238Other administrative expenses


10,798



12,521



14,378



3,183



(24,004
)


16,876Total operating expenses


12,509



26,682



48,769



7,735



(24,004
)


71,691Other (expense) income:Loss on investments, net






(2,126
)


(1,476
)


(12,525
)






(16,127
)(Loss) gain on derivatives






(1,590
)


2,996



(885
)


(1,207
)


(686
)Loss on residential mortgage investment portfolio














15,311







15,311Loss on debt extinguishment


(57,128
)


















(57,128
)Other income (expense), net






11,463



6,141



(9,851
)


(22,893
)


(15,140
)Earnings in subsidiaries


(7,130
)






55,675



(47,093
)


(1,452
)


Intercompany










3,558



(3,558
)






Total other (expense) income


(64,258
)


7,747



66,894



(58,601
)


(25,552
)


(73,770
)Net (loss) income from continuing operations before income
    taxes


(104,304
)


56,139



(46,490
)


(73,811
)


(2,055
)


(170,521
)Income tax (benefit) expense






464







(55,805
)






(55,341
)Net (loss) income from continuing operations


(104,304
)


55,675



(46,490
)


(18,006
)


(2,055
)


(115,180
)Net income from discontinued operations, net of taxes














9,653







9,653Gain from sale of discontinued operations, net of taxes














1,207







1,207Net (loss) income


(104,304
)


55,675



(46,490
)


(7,146
)


(2,055
)


(104,320
)Net loss attributable to noncontrolling interests














(16
)






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

$
(104,304
)

$
55,675


$
(46,490
)

$
(7,130
)

$
(2,055
)

$
(104,304
)  21




---



##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Consolidating
    Statement of Cash Flows
    Three Months Ended March 31, 2010
    (Unaudited)
  CapitalSource Finance LLCCombined


Combined


Other





ConsolidatedCapitalSource


Non-Guarantor


Guarantor


Non-Guarantor





CapitalSourceInc.


Subsidiaries


Subsidiaries


Subsidiaries


Eliminations


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

$
(211,690
)

$
(1,591
)

$
(19,562
)

$
(197,035
)

$
218,188


$
(211,690
)Adjustments to reconcile net (loss) income to net cash provided
    by (used in) operating activities:Stock option expense






323



1,026











1,349Restricted stock expense






466



3,584











4,050Gain on extinguishment of debt


(698
)


















(698
)Amortization of deferred loan fees and discounts






(9,840
)


(5,837
)


(3,008
)






(18,685
)Paid-in-kind
    interest on loans






(1,683
)


(1,052
)


1,790







(945
)Provision for loan losses






85,548



792



132,600







218,940Amortization of deferred financing fees and discounts


9,651



1,992



105



885







12,633Depreciation and amortization






(1,865
)


908



2,682







1,725Provision (benefit) for deferred income taxes






11,596



(182
)


22,101







33,515Non-cash loss (gain) on investments, net






431



56



(275
)






212Non-cash loss on foreclosed assets and other property and
    equipment disposals






3,127



293



32,321







35,741Unrealized (gain) loss on derivatives and foreign
    currencies, net






(2,522
)


(10,446
)


7,795







(5,173
)Accretion of discount on commercial real estate A
    participation interest






(5,853
)














(5,853
)Decrease (increase) in interest receivable






5,958



(25,490
)


28,508







8,976Increase in loans held for sale, net






(67
)














(67
)Increase in intercompany note receivable










(14,084
)


(4,804
)


18,888



Decrease (increase) in other assets


10,248



25,272



4,287



(12,406
)


(31,659
)


(4,258
)(Decrease) increase in other liabilities


(16,330
)


(65,631
)


(34,753
)


9,991



30,067



(76,656
)Net transfers with subsidiaries


254,767



(24,037
)


43,044



(53,388
)


(220,386
)


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


45,948



21,624



(57,311
)


(32,243
)


15,098



(6,884
)Investing activities:Decrease (increase) in restricted cash






42,125



8,154



(14,170
)






36,109Decrease in commercial real estate A participation
    interest






208,421















208,421Decrease (increase) in loans, net






40,266



(30,107
)


125,206



2,380



137,745Acquisition of marketable securities, available for
    sale, net






(580,027
)














(580,027
)Reduction of marketable securities, held to maturity, net






27,591















27,591(Acquisition) reduction of other investments, net






(17,950
)


(208
)


21,100







2,942(Acquisition) disposal of property and equipment, net






(7,254
)


(383
)


7,170







(467
)Cash (used in) provided by investing activities






(286,828
)


(22,544
)


139,306



2,380



(167,686
)Financing activities:Payment of deferred financing fees


(833
)


(171
)






(1,211
)






(2,215
)Deposits accepted, net of repayments






99,067















99,067Increase in intercompany note payable










4,804



12,674



(17,478
)


Repayments on credit facilities, net


(90,055
)


(12,875
)


(6,861
)


(14,859
)






(124,650
)Borrowings of term debt














14,395







14,395Repayments of term debt






(188,125
)






(102,382
)






(290,507
)(Repayments) borrowings under other borrowings


(17,994
)


25,000



(20
)


(1,849
)






5,137Payment of dividends


(3,228
)


















(3,228
)Cash (used in) provided by financing activities


(112,110
)


(77,104
)


(2,077
)


(93,232
)


(17,478
)


(302,001
)(Decrease) increase in cash and cash equivalents


(66,162
)


(342,308
)


(81,932
)


13,831







(476,571
)Cash and cash equivalents as of beginning of period


99,103



760,343



265,977



51,597







1,177,020Cash and cash equivalents as of end of period

$
32,941


$
418,035


$
184,045


$
65,428


$



$
700,449  22




---



##### 



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


Combined


Other





ConsolidatedCapitalSource


Non-Guarantor


Guarantor


Non-Guarantor





CapitalSourceInc.


Subsidiaries


Subsidiaries


Subsidiaries


Eliminations


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

$
(104,304
)

$
55,675


$
(46,490
)

$
(7,146
)

$
(2,055
)

$
(104,320
)Adjustments to reconcile net (loss) income to net cash provided
    by (used in) operating activities:Stock option expense






169



370











539Restricted stock expense






1,047



4,886











5,933Loss on debt extinguishment of debt


57,128



















57,128Amortization of deferred loan fees and discounts






(11,775
)


(9,581
)


(2,449
)






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






(6,492
)


3,929



(5,715
)






(8,278
)Provision for loan losses






16,352



72,067



66,848







155,267Amortization of deferred financing fees and discounts


7,811



5,071



105



5,797







18,784Depreciation and amortization






1,332



860



6,195







8,387Benefit for deferred income taxes


(19,979
)


(53,624
)


(13
)


(36
)






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






3,399



3,093



12,336







18,828Non-cash loss (gain) on property and equipment disposals










16,139



(1,365
)






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






3,091



748



(135
)






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














(60,570
)






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














1,485,133







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














11







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






(11,018
)














(11,018
)Decrease in interest receivable






21,289



1,373



855



(25
)


23,492Decrease (increase) in loans held for sale, net






4,955



9,372



(1,967
)






12,360Decrease (increase) in intercompany note receivable










28,808



(89,598
)


60,790



(Increase) decrease in other assets


(58
)


21,924



10,796



268,671



28,091



329,424(Decrease) increase in other liabilities


(13,744
)


(51,468
)


8,292



(224,522
)


26,882



(254,560
)Net transfers with subsidiaries


235,718



(147,382
)


112,154



(145,525
)


(54,965
)


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


162,572



(147,455
)


216,908



1,306,818



58,718



1,597,561Investing activities:(Increase) decrease in restricted cash






(7,005
)


3,440



240,999







237,434Decrease in mortgage-related receivables, net














51,465







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






329,661















329,661Decrease (increase) in loans, net






138,759



(199,772
)


17,124



2,072



(41,817
)Cash received for real estate














7,500







7,500(Acquisition) reduction of marketable securities, available for
    sale, net






(365,850
)


417



12,001







(353,432
)Acquisition of marketable securities, held to maturity, net






(77,931
)














(77,931
)Acquisition of other investments, net






(1,275
)


(794
)


(10,749
)






(12,818
)(Acquisition) disposal of property and equipment, net






(4,388
)


(14,274
)


13,223







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






11,971



(210,983
)


331,563



2,072



134,623Financing activities:Payment of deferred financing fees


(6,072
)


(261
)






160







(6,173
)Deposits accepted, net of repayments






(317,574
)














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










89,598



(28,808
)


(60,790
)


Repayments under repurchase agreements, net














(1,595,750
)






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


(35,000
)


102



(16
)


(601
)






(35,515
)Borrowings of term debt






6,000







20,000







26,000Repayments of term debt






(214,444
)






(88,566
)






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


(118,502
)


50,000



(19
)


(1,292
)






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


22



















22Payment of dividends


(3,031
)


















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


(162,583
)


(476,177
)


89,563



(1,694,857
)


(60,790
)


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


(11
)


(611,661
)


95,488



(56,476
)






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


11



1,230,254



38,866



69,432







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

$



$
618,593


$
134,354


$
12,956


$



$
765,903  23




---



##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Note 8.
    Direct
    Real Estate Investments  triple-net
  March 31,


December 31,2010


2009($ in thousands)Continuing Operations:Land

$
37,760


$
37,760Buildings


313,576



313,576Furniture and equipment


16,020



16,020Accumulated depreciation


(33,889
)


(31,349
)Total direct real estate investments from continuing operations

$
333,467


$
336,007Discontinued Operations:Direct real estate investments, net


218,149



218,149Total

$
551,616


$
554,156   Discontinued Operations,
  Note 9.
    Deposits        March 31,


December 31,2010


2009($ in thousands)Interest-bearing deposits:Money market

$
260,309


$
258,283Savings


706,601



599,084Certificates of deposit


3,615,731



3,626,512Total interest-bearing deposits

$
4,582,641


$
4,483,879  24




---



##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Maturing by:March 31, 2011

$
3,076,076March 31, 2012


469,199March 31, 2013


29,605March 31, 2014


4,800March 31, 2015


36,051Total

$
3,615,731     Three Months EndedMarch 31,2010


2009($ in thousands)Savings and money market deposit accounts

$
2,265


$
3,287Certificates of deposit


14,146



34,827Brokered certificates of deposit






388Fees for early withdrawal


(53
)


(115
)Total interest expense on deposits

$
16,358


$
38,387   Note 10.
    Variable
    Interest Entities  Troubled
    Debt Restructurings
       25




---



##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Term
    Debt Securitizations
      Note 11.
    Borrowings  Borrowings Form 10-K.
 26




---



##### 



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


December 31,2010


2009($ in thousands)Outstanding borrowings from continuing operations:Credit facilities


407,833



542,781Term debt


2,681,107



2,956,536Other borrowings:Convertible debt, net(1)


545,286



561,347Subordinated debt


437,611



439,701Mortgage debt(2)


261,500



262,760FHLB SF borrowings


225,000



200,000Notes payable


3,006



3,026Total other borrowings


1,472,403



1,466,834Total outstanding borrowings from continuing operations


4,561,343



4,966,151Outstanding borrowings from discontinued operations:Mortgage debt


184,334



184,923Notes payable


20,000



20,000Total outstanding borrowings from discontinued operations


204,334



204,923Total borrowings

$
4,765,677


$
5,171,074     (1)
    
    Amounts presented are net of debt discount of $15.4 million
    and $18.7 million as of March 31, 2010 and
    December 31, 2009, respectively.(2)
    
    In February 2010, we exercised the second of the three optional
    one-year extensions resulting in the extension of the maturity
    of these mortgage loans to April 9, 2011.  Credit
    Facilities
  and/or
  and/or
 27




---



##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  FHLB
    SF Borrowings and FRB Credit Program
      Term
    Debt
    2007-A and/or
  Convertible
    Debt
    March 31,


December 31,2010


2009($ in thousands)Convertible debt principal

$
560,704


$
580,000Less:Debt discount


15,418



18,653Net carrying value

$
545,286


$
561,347Equity components recorded in additional paid-in capital

$
101,220


$
101,220    28




---



##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Conversion Price

Number of Shares3.5% Senior Convertible Debentures due 2034

$
20.92



403,6864.0% Senior Subordinated Convertible Debentures due 2034


20.92



14,446,7547.25% Senior Subordinated Convertible Debentures due 2037


27.09



9,226,975     Three Months EndedMarch 31,2010


2009($ in thousands)Interest expense recognized on:Contractual interest coupon

$
7,668


$
8,323Amortization of deferred financing fees


373



517Amortization of debt discount


2,631



4,297Total interest expense recognized

$
10,672


$
13,137Effective interest rate on the liability component:3.5% Senior Convertible Debentures due 2034


7.16
%


7.25
%4.0% Senior Subordinated Convertible Debentures due 2034


7.78
%


7.68
%7.25% Senior Subordinated Convertible Debentures due 2037


7.79
%


7.79
%   Note 12.
    Shareholders
    Equity  Common
    Stock Shares Outstanding
    Outstanding as of December 31, 2009


323,042,613Restricted stock and other stock activities


(276,673
)Outstanding as of March 31, 2010


322,765,940   Note 13.
    Income
    Taxes       29




---



##### 



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




---



##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Note 14.
    Comprehensive
    Loss    Three Months EndedMarch 31,2010


2009($ in thousands)Net loss from continuing operations

$
(214,733
)

$
(115,180
)Net income from discontinued operations, net of taxes


3,043



9,653Gain from sale of discontinued operations, net of taxes






1,207Net loss


(211,690
)


(104,320
)Unrealized gain on
    available-for-sale
    securities, net of taxes


760



488Unrealized loss on foreign currency translation, net of taxes


(9,972
)


(9,506
)Unrealized loss on cash flow hedges, net of taxes


(22
)


(20
)Comprehensive loss


(220,924
)


(113,358
)Comprehensive loss attributable to noncontrolling interests






(16
)Comprehensive loss attributable to CapitalSource Inc.

$
(220,924
)

$
(113,342
)     March 31,


December 31,2010


2009($ in thousands)Unrealized gain on
    available-for-sale
    securities, net of tax

$
5,390


$
5,027Unrealized gain on foreign currency translation, net of tax


4,675



14,647Unrealized gain on cash flow hedge, net of tax


62



84Effect of adoption of amended investment guidance






(397
)Accumulated other comprehensive income, net

$
10,127


$
19,361  31




---



##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Note 15.
    Net
    (Loss) Income Per Share    Three Months EndedMarch 31,2010


2009Net (loss) income:From continuing operations

$
(214,733
)

$
(115,180
)From discontinued operations, net of taxes


3,043



9,653From sale of discontinued operations, net of taxes






1,207Total from discontinued operations


3,043



10,860Attributable to CapitalSource Inc.


(211,690
)


(104,304
)Average shares  basic


320,294,724



290,098,800Effect of dilutive securities:Option shares






Unvested restricted stock






Stock units






Conversion premium on the Debentures






Average shares  diluted


320,294,724



290,098,800Basic net (loss) income per shareFrom continuing operations

$
(0.67
)

$
(0.40
)From discontinued operations, net of taxes


0.01



0.04Attributable to CapitalSource Inc.


(0.66
)


(0.36
)Diluted net (loss) income per shareFrom continuing operations

$
(0.67
)

$
(0.40
)From discontinued operations, net of taxes


0.01



0.04Attributable to CapitalSource Inc.


(0.66
)


(0.36
)     Three Months EndedMarch 31,2010

2009Stock units


3,616,480



2,207,528Stock options


2,563,621



7,170,754Shares subject to a written call option






7,253,392Shares issuable upon conversion of convertible debt


15,013,163



22,504,797Unvested restricted stock


1,080,046



2,979,427   Note 16.
    Bank
    Regulatory Capital   32




---



##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Business  Supervision and
    Regulation Form 10-K
    March 31, 2010

December 31, 2009Actual

Minimum Required

Actual

Minimum RequiredAmount

Ratio

Amount

Ratio

Amount

Ratio

Amount

Ratio($ in thousands)Tier-1 Leverage

$
661,565



11.78
%

$
280,768



5.00
%

$
699,323



12.80
%

$
273,153



5.00
%Tier-1 Risk-Based Capital


661,565



16.05



247,335



6.00



699,323



16.19



259,175



6.00Total Risk-Based Capital


715,245



17.35



618,338



15.00



754,580



17.47



647,938



15.00     Note 17.
    Commitments
    and Contingencies    Commitments and Contingencies Form 10-K.
     33




---



##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      Note 18.
    Derivative
    Instruments          currency-denominated
   34




---



##### 



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


$
20,308



Other liabilities


$
83,559Foreign exchange contracts


Other assets







Other liabilities



4,690Total





$
20,308






$
88,249     Asset Derivatives


Liability DerivativesLocation


Fair Value


Location


Fair Value($ in thousands)Interest rate contracts


Other assets


$
14,073



Other liabilities


$
78,736Foreign exchange contracts


Other assets



256



Other liabilities



3,926Total





$
14,329






$
82,662     Gain (Loss) Recognized in Income Duringthe Three Months Ended March 31,Location

2010


2009($ in thousands)Interest rate contracts

(Loss) on derivatives

$
(2,703
)

$
(2,948
)Interest rate contracts

Gain on residential mortgage investment portfolio






862Foreign exchange contracts

(Loss) gain on derivatives


(1,634
)


2,263Total



$
(4,337
)

$
177   Note 19.
    Fair
    Value Measurements  available-for-sale, held-to-maturity,
  Fair
    Value Determination
   35




---



##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      Assets
    and Liabilities
  Cash
    Investment
    Securities,
    Available-for-Sale
  available-for-sale, available-for-sale available-for-sale other-than-temporary,
  available-for-sale,
  available-for-sale,
  Investment
    Securities,
    Held-to-Maturity
  held-to-maturity other-than-temporary
 36




---



##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Commercial
    Real Estate A Participation Interest
    Loans
    Held for Sale
    Loans
    Held for Investment
      Direct
    Real Estate Investments, net and Direct Real Estate Investments
    Held for Sale
   37




---



##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Other
    Investments
  other-than-temporarily
  Warrants
    FHLB SF
    Stock
    Derivative
    Assets and Liabilities
  over-the-counter
  Real
    Estate Owned
   38




---



##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Loan
    Receivables
    Deposits
    Credit
    Facilities
    Term
    Debt
    Other
    Borrowings
   39




---



##### 



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


Quoted Prices in


Significant Other


SignificantMeasurement as of


Active Markets for


Observable


UnobservableMarch 31, 2010


Identical Assets (Level 1)


Inputs (Level 2)


Inputs (Level 3)($ in thousands)AssetsInvestment securities,
    available-for-sale:Agency discount notes

$
324,620


$



$
324,620


$
Agency callable notes


243,217







243,217



Agency debt


107,508







107,508



Agency MBS


604,716







604,716



Non-agency MBS


142,070







142,042



28Equity securities


33,626



33,626







Corporate debt


9,528







5,163



4,365U.S. Treasury bills


79,813







79,813



Total investment securities,
    available-for-sale


1,545,098



33,626



1,507,079



4,393Investments carried at fair value:Warrants


1,244











1,244Other assets held at fair value:Derivative assets


20,308







20,308



Total assets

$
1,566,650


$
33,626


$
1,527,387


$
5,637LiabilitiesOther liabilities held at fair value:Derivative liabilities

$
88,249


$



$
88,249


$
  40




---



##### 



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, 2009


Identical Assets (Level 1)


Inputs (Level 2)


Inputs (Level 3)($ in thousands)AssetsInvestment securities,
    available-for-sale:Agency discount notes

$
49,996


$



$
49,996


$
Agency callable notes


250,530







250,530



Agency debt


24,472







24,472



Agency MBS


418,390







418,390



Non-agency MBS


153,275







153,214



61Equity securities


52,984



52,984







Corporate debt


9,618







5,161



4,457Collateralized loan obligation


1,326











1,326Total investment securities,
    available-for-sale


960,591



52,984



901,763



5,844Investments carried at fair value:Warrants


1,392











1,392Other assets held at fair value:Derivative assets


14,329







14,329



Total assets

$
976,312


$
52,984


$
916,092


$
7,236LiabilitiesOther liabilities held at fair value:Derivative liabilities

$
82,662


$



$
82,662


$
     Realized and UnrealizedGains (Losses)TotalRealized


Purchases,











UnrealizedIncluded in


and


Sales,


Transfers





Gains (Losses)Balance as of





Other


Unrealized


Issuances, and


In (Out)


Balance as of


As ofJanuary 1,


Included in


Comprehensive


Gains


Settlements,


of Level 3


March 31,


March 31,2010


Income


Income, net


(Losses)


Net


In


(Out)


2010


2010($ in thousands)AssetsInvestment securities,
    available-for-sale:Non-agency MBS

$
61


$



$



$



$
(33
)

$



$



$
28


$
Corporate debt


4,457



57



(149
)


(92
)














4,365



57Collateralized loan obligation


1,326



636



(308
)


328



(1,654
)














Total

$
5,844


$
693


$
(457
)

$
236


$
(1,687
)

$



$



$
4,393


$
57Warrants


1,392



(148
)






(148
)














1,244



(148
)Total assets

$
7,236


$
545


$
(457
)

$
88


$
(1,687
)

$



$



$
5,637


$
(91
)  41




---



##### 



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


Purchases,











UnrealizedIncluded in


Realized


Sales,


Transfers





LossesBalance as of





Other


and


Issuances, and


In (Out)


Balance as


As ofJanuary 1,


Included in


Comprehensive


Unrealized


Settlements,


of Level 3


of March 31,


March 31,2009


Income


Income, net


Losses


Net


In


(Out)


2009


2009($ in thousands)AssetsInvestment securities,
    available-for-saleNon-agency MBS

$
377


$
(13
)

$
(29
)

$
(42
)

$
(234
)

$



$



$
101


$
(13
)Corporate debt


33,886



(11,734
)


(60
)


(11,794
)


132











22,224



(11,734
)Collateralized loan obligation


2,361



(507
)






(507
)


(263
)










1,591



(507
)Total

$
36,624


$
(12,254
)

$
(89
)

$
(12,343
)

$
(365
)

$



$



$
23,916


$
(12,254
)Warrants


4,661



(65
)






(65
)














4,596



(65
)Total assets

$
41,285


$
(12,319
)

$
(89
)

$
(12,408
)

$
(365
)

$



$



$
28,512


$
(12,319
)     Interest

Gain (Loss) onIncome

Investments, net($ in thousands)Total gains included in earnings for the period

$
91


$
454Unrealized gains (losses) relating to assets still held at
    reporting date


57



(148
)     Interest

Loss onIncome

Investments, net($ in thousands)Total gains (losses) included in earnings for the period

$
352


$
(12,671
)Unrealized gains (losses) relating to assets still held at
    reporting date


352



(12,671
)   Assets
    Carried at Fair Value on a Nonrecurring Basis
    42




---



##### 



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


Quoted Prices in








Total Losses forMeasurement for the


Active Markets


Significant Other


Significant


the Three MonthsThree Months Ended


for Identical


Observable Inputs


Unobservable


EndedMarch 31, 2010


Assets (Level 1)


(Level 2)


Inputs (Level 3)


March 31, 2010($ in thousands)AssetsLoans held for sale

$
15,005


$



$
15,005


$



$
Loans held for investment(1)


412,718











412,718



(141,696
)Investments carried at cost


910











910



(2,014
)REO(2)


79,055











79,055



(20,689
)Loan receivables


108,804











108,804



(15,170
)Total assets

$
616,492


$



$
15,005


$
601,487


$
(179,569
)     (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.  Fair Value


Quoted Prices in








Total Losses forMeasurement for the


Active Markets


Significant Other


Significant


the Three MonthsThree Months Ended


for Identical


Observable Inputs


Unobservable


EndedMarch 31, 2009


Assets (Level 1)


(Level 2)


Inputs (Level 3)


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

$
8,500


$



$
8,500


$



$
(21
)Loans held for investment(1)


324,292











324,292



(129,272
)Investments carried at cost


3,515











3,515



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


1,312











1,312



(1,113
)Direct real estate investments, net


4,847











4,847



(42
)REO(2)


86,839











86,839



(20,813
)Total assets

$
429,305


$



$
8,500


$
420,805


$
(152,933
)     (1)
    
    Represents impaired loans held for investment measured at fair
    value of the loans collateral less transaction costs.
    Transaction costs were not significant during the period.(2)
    
    Represents REO measured at fair value of the collateral less
    transaction costs. Transaction costs were not significant during
    the period.  Fair
    Value of Financial Instruments
      43




---



##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  March 31, 2010

December 31, 2009Carrying Value

Fair Value

Carrying Value

Fair Value($ in thousands)Assets:Commercial real estate A Participation Interest, net

$
327,992


$
328,662


$
530,560


$
530,390Loans held for investment, net


7,168,912



6,804,055



7,588,135



7,287,196Investments carried at cost


49,427



88,588



53,205



87,940Investment securities,
    held-to-maturity


218,751



241,130



242,078



262,181Liabilities:Deposits


4,582,641



4,586,396



4,483,879



4,486,285Credit facilities


407,833



376,885



542,781



497,036Term debt


2,681,107



1,921,412



2,956,536



2,162,533Convertible debt, net


545,286



535,303



561,347



525,860Subordinated debt


437,611



253,814



439,701



255,027Mortgage debt


445,834



428,588



447,683



426,865Loan commitments and letters of credit






42,838







45,455   Note 20.
    Segment
    Data   44




---



##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Three Months Ended March 31, 2010OtherCapitalSource


Commercial


Healthcare


Intercompany


ConsolidatedBank


Finance


Net Lease


Eliminations


Total($ in thousands)Total interest and fee income

$
82,512


$
98,081


$
81


$
(4,684
)

$
175,990Operating lease income










8,503







8,503Interest expense(1)


17,323



48,607



3,898



(2,311
)


67,517Provision for loan losses


87,704



131,236











218,940Operating expenses(2)


24,335



48,925



4,219



(11,637
)


65,842Other income (expense), net


7,123



(21,890
)


302



(11,456
)


(25,921
)Net (loss) income from continuing operations before income taxes


(39,727
)


(152,577
)


769



(2,192
)


(193,727
)Income tax (benefit) expense


(56
)


21,062











21,006Net (loss) income from continuing operations


(39,671
)


(173,639
)


769



(2,192
)


(214,733
)Net income from discontinued operations, net of taxes










3,043







3,043Loss from sale of discontinued operations, net of taxes


















Net (loss) income attributable to CapitalSource Inc.

$
(39,671
)

$
(173,639
)

$
3,812


$
(2,192
)

$
(211,690
)Total assets as of March 31, 2010

$
5,697,559


$
5,436,712


$
656,420


$
(148,530
)

$
11,642,161Assets of discontinued operations, held for sale, as of
    March 31, 2010










261,045







261,045Total assets as of December 31, 2009


5,677,354



6,069,857



678,030



(178,299
)


12,246,942Assets of discontinued operations, held for sale, as of
    December 31, 2009










260,541







260,541     (1)
    
    Interest expense in our Healthcare Net Lease segment includes
    interest on a secured credit facility, term debt and mortgage
    debt.(2)
    
    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. 45




---



##### 



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


Commercial


Healthcare


Intercompany


ConsolidatedBank


Finance


Net Lease


Eliminations


Total($ in thousands)Total interest and fee income

$
77,424


$
176,729


$
85


$
(2,886
)

$
251,352Operating lease income










8,526







8,526Interest expense(1)


38,413



89,263



4,393



(2,398
)


129,671Provision for loan losses


24,991



130,276











155,267Operating expenses(2)


23,740



56,144



4,999



(13,192
)


71,691Other income (expense), net


9,561



(70,034
)


(9
)


(13,288
)


(73,770
)Net (loss) income from continuing operations before income taxes


(159
)


(168,988
)


(790
)


(584
)


(170,521
)Income tax (benefit) expense


(65
)


(58,023
)


2,747







(55,341
)Net loss from continuing operations


(94
)


(110,965
)


(3,537
)


(584
)


(115,180
)Net income from discontinued operations, net of taxes










9,653







9,653Gain on sale of discontinued operations, net of taxes










1,207







1,207Net (loss) income


(94
)


(110,965
)


7,323



(584
)


(104,320
)Net loss attributable to noncontrolling interests






(16
)










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

$
(94
)

$
(110,949
)

$
7,323


$
(584
)

$
(104,304
)     (1)
    
    Interest expense in our Healthcare Net Lease segment includes
    interest on a secured credit facility, term debt and mortgage
    debt.(2)
    
    Operating expenses of our Healthcare Net Lease segment include
    depreciation of direct real estate investments, professional
    fees, an allocation of overhead expenses (including compensation
    and benefits) and other direct expenses.  Summary of Significant Accounting Policies Form 10-K.
  Intercompany
    Eliminations
   46




---



##### 



ITEM 2.
    MANAGEMENTS
    DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
    OPERATIONS  CAUTIONARY
    NOTE REGARDING FORWARD-LOOKING STATEMENTS
  Form 10-Q, Form 10-K Form 10-K (Form 10-K), Form 10-Q
    Form 10-Q Form 10-K.
  Overview
    and Highlights
   47




---



##### 



Segment Data,
             48




---



##### 



Consolidated
    Results of Operations
  Explanation
    of Reporting Metrics
  Interest Income.
  Fee Income.
  Operating Lease Income.
  Interest Expense.
  Provision for Loan Losses.
  Other (Expense) Income. other-than-temporary
 49




---



##### 



Operating Expenses.
  Income Taxes.
        Operating
    Results for the Three Months Ended March 31,
    2010
    
    Increased provision for loan losses;
    Increased income tax expense due to additions to the valuation
    allowance for our deferred tax assets;
    Decreased balance of our commercial lending portfolio;
    Gains and losses on our investments;
    Gains and losses on debt extinguishment;
    Decreased operating expenses;
    Losses on REO and loan receivables
    Sale of our residential mortgage investment portfolio in 2009; 50




---



##### 




    Losses on derivatives;
    Changes in lending and borrowing spreads; and
    Divestiture of a substantial portion of our Healthcare Net Lease
    segment.    Three Months Ended March 31,2010

2009

% Change(In thousands)Interest income

$
169,548


$
245,493



(31
)%Fee income


6,442



5,859



10Operating lease income


8,503



8,526



Interest expense


67,517



129,671



(48
)Provision for loan losses


218,940



155,267



41Depreciation of direct real estate investments


2,540



2,540



Operating expenses


63,302



69,151



(8
)Other expense


25,921



73,770



(65
)Net loss from continuing operations before income taxes


(193,727
)


(170,521
)


(14
)Income tax expense (benefit)


21,006



(55,341
)


138Net loss from continuing operations


(214,733
)


(115,180
)


(86
)Net income from discontinued operations, net of taxes


3,043



9,653



(68
)Gain from sale of discontinued operations, net of taxes






1,207



(100
)Net loss


(211,690
)


(104,320
)


(103
)Net loss attributable to noncontrolling interests






(16
)


100Net loss attributable to CapitalSource Inc.


(211,690
)


(104,304
)


(103
)     Three Months Ended March 31,2010


2009Weighted


Net


Average


Weighted


Net


AverageAverage


Investment


Yield/


Average


Investment


Yield/Balance


Income


Cost


Balance


Income


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





$
169,548



6.03
%





$
245,493



6.63
%Fee income






6,442



0.23







5,859



0.16Total interest-earning assets(1)

$
11,407,322



175,990



6.26


$
15,015,679



251,352



6.79Total direct real estate investments


367,356



8,503



9.39



367,281



8,526



9.41Total income earning assets


11,774,678



184,493



6.35



15,382,960



259,878



6.85Total interest-bearing liabilities(2)


9,329,909



67,517



2.93



13,488,202



129,671



3.90Net finance spread





$
116,976



3.42
%





$
130,207



2.95
%Net finance margin










4.03
%










3.43
%     (1)
    
    Interest-earning assets include cash and cash equivalents,
    restricted cash, marketable securities, mortgage-related
    receivables, RMBS, loans, the A Participation
    Interest and investments in debt securities.(2)
    
    Interest-bearing liabilities include deposits, repurchase
    agreements, credit facilities, term debt, convertible debt and
    subordinated debt. 51




---



##### 



Discontinued
    Operations
    Operating
    Expenses
    Income
    Taxes
    Comparison
    of the Three Months Ended March 31, 2010 and
    2009
  CapitalSource
    Bank Segment
    Three Months Ended March 31,2010

2009

% Change($ in thousands)Interest income

$
80,732


$
75,751



7
%Fee income


1,780



1,673



6Interest expense


17,323



38,413



(55
)Provision for loan losses


87,704



24,991



251Operating expenses


24,335



23,740



3Other income


7,123



9,561



(25
)Income tax benefit


(56
)


(65
)


14Net loss


(39,671
)


(94
)


N/A   Interest
    Income
     52




---



##### 



available-for-sale held-to-maturity available-for-sale available-for-sale held-to-maturity, available-for-sale held-to-maturity
    Fee
    Income
    Interest
    Expense
   53




---



##### 



Net
    Finance Margin
    Three Months Ended March 31,2010


2009Weighted


Net


Average


Weighted


Net


AverageAverage


Investment


Yield/


Average


Investment


Yield/Balance


Income


Cost


Balance


Income(1)


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





$
80,732



5.74
%





$
75,751



5.25
%Fee income






1,780



0.13







1,673



0.10Total interest-earning assets(1)

$
5,705,452



82,512



5.87


$
5,857,175



77,424



5.35Total interest-bearing liabilities(2)


4,772,299



17,323



1.47



4,928,789



38,413



3.16Net finance spread





$
65,189



4.40
%





$
39,011



2.19
%Net finance margin










4.63
%










2.69
%     (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
  Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations  Credit Quality and Allowance for Loan
    Losses
  Operating
    Expenses
      Other
    Income
   54




---



##### 



Other
    Commercial Finance Segment
    Three Months EndedMarch 31,2010

2009

% Change($ in thousands)Interest income

$
93,419


$
172,543



(46
)%Fee income


4,662



4,186



11Interest expense


48,607



89,263



(46
)Provision for loan losses


131,236



130,276



1Operating expenses


48,925



56,144



(13
)Other expense


(21,890
)


(70,034
)


69Income tax expense (benefit)


21,062



(58,023
)


136Net loss


(173,639
)


(110,965
)


(56
)Net loss attributable to noncontrolling interests






(16
)


100Net loss income attributable to CapitalSource Inc.


(173,639
)


(110,949
)


(57
)   Interest
    Income
    Fee
    Income
    Interest
    Expense
   55




---



##### 



Net
    Finance Margin
      Three Months Ended March 31,2010


2009Weighted


Net


Average


Weighted


Net


AverageAverage


Investment


Yield/


Average


Investment


Yield/Balance


Income


Cost


Balance


Income


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





$
93,419



6.66
%





$
172,543



7.65
%Fee income






4,662



0.34







4,186



0.19Total interest-earning assets(1)

$
5,686,483



98,081



7.00


$
9,143,704



176,729



7.84Total interest-bearing liabilities(2)


4,315,838



48,607



4.57



8,310,324



89,263



4.36Net finance spread





$
49,474



2.43
%





$
87,466



3.48
%Net finance margin










3.53
%










3.88
%     (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
    Other
    Expenses
     56




---



##### 



available-for-sale
    Healthcare
    Net Lease Segment
    Three Months EndedMarch 31,2010

2009

% ChangeInterest income

$
81


$
85



(5
)%Operating lease income


8,503



8,526



Interest expense


3,898



4,393



(11
)Depreciation of direct real estate investments


2,540



2,540



Other operating expenses


1,679



2,459



(32
)Other income (expense)


302



(9
)


3,456Net income (loss) from continuing operations


769



(790
)


197Net income from discontinued operations, net of taxes


3,043



9,653



(68
)Gain from sale of discontinued operations, net of taxes






1,207



(100
)Income tax expense






2,747



(100
)Net income attributable to CapitalSource Inc.


3,812



7,323



(48
)   Discontinued
    Operations
    Discontinued Operations,
  Operating
    Lease Income
    Interest
    Expense
   57




---



##### 



Depreciation
    of Direct Real Estate Investments
    Operating
    Expenses
    Financial
    Condition
  CapitalSource
    Bank Segment
  Portfolio
    Composition
    March 31,


December 31,2010


2009($ in thousands)Assets:Cash and cash equivalents(1)

$
439,597


$
821,980Investment securities,
    available-for-sale


1,507,079



901,764Investment securities,
    held-to-maturity


218,751



242,078Commercial real estate A Participation Interest, net


327,992



530,560Loans(2)


3,214,362



3,076,267FHLB SF stock


20,195



20,195Total

$
5,727,976


$
5,592,844Liabilities:Deposits

$
4,582,641


$
4,483,879FHLB SF borrowings


225,000



200,000Total

$
4,807,641


$
4,683,879     (1)
    
    As of March 31, 2010 and December 31, 2009, the
    amounts include restricted cash of $24.2 million and
    $65.9 million, respectively.(2)
    
    Excludes deferred loan fees and discounts and the allowance for
    loan losses.  Cash and
    cash equivalents
  Cash and
    Cash Equivalents and Restricted Cash,
  Investment
    Securities,
    Available-for-Sale
  available-for-sale. available-for-sale,
 58




---



##### 



available-for-sale, available-for-sale, Investments
  Investment
    Securities,
    Held-to-Maturity
  held-to-maturity, held-to-maturity, Investments
  Commercial
    Real Estate A Participation Interest
  Commercial Lending Assets and Credit
    Quality
  CapitalSource
    Bank Segment Loan Portfolio Composition
      March 31, 2010


December 31, 2009($ in thousands)Commercial

$
1,686,414



52
%

$
1,599,667



52
%Real estate


1,148,986



36



1,095,780



36Real estate  construction


378,962



12



380,820



12Total

$
3,214,362



100
%

$
3,076,267



100
%     Due in


Due inOne Year


One to


Due Afteror Less


Five Years


Five Years


Total($ in thousands)Commercial

$
229,439


$
1,351,977


$
104,998


$
1,686,414Real estate


266,711



747,884



134,391



1,148,986Real estate  construction


296,577



82,385







378,962Total

$
792,727


$
2,182,246


$
239,389


$
3,214,362    59




---



##### 



Loan TypeReal EstateCommercial


Real Estate


Construction


Total


Percentage($ in thousands)1-Month LIBOR

$
440,477


$
697,414


$
375,535


$
1,513,426



47
%3-Month LIBOR


26,125



96,443







122,568



46-Month LIBOR






25,597







25,597



1Prime


537,252



64,076



3,427



604,755



19Canadian Prime


20,630











20,630



1Canadian Bankers


51,000











51,000



1Blended


578,341



122,946







701,287



22Treasuries






4,597







4,597



Total adjustable rate loans


1,653,825



1,011,073



378,962



3,043,860



95Fixed rate loans


32,589



137,913







170,502



5Total loans

$
1,686,414


$
1,148,986


$
378,962


$
3,214,362



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

December 31,2010

2009($ in thousands)Accruing loans
    30-89 days
    contractually delinquent

$



$
1,057Accruing loans 90 or more days contractually delinquent






17,695Non-accrual loans


326,224



173,931   30-89 days
 60




---



##### 



Three Months EndedMarch 31,2010


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

$
152,508


$
55,600Provision for loan losses:General


20,568



12,500Specific


67,136



12,491Total provision for loan losses


87,704



24,991Charge offs


(17,894
)


(10,018
)Allowance for loan losses as of end of period

$
222,318


$
70,573Total gross loans as of end of period

$
3,214,362


$
2,933,145Allowance for loan losses ratio


6.92
%


2.41
%Provision for loan losses ratio (annualized)


11.07
%


3.46
%Net charge off ratio (annualized)


2.26
%


1.39
%           FHLB SF
    Stock
   61




---



##### 



Deposits
      March 31, 2010


December 31, 2009Weighted





WeightedAverage





AverageBalance


Rate


Balance


Rate($ in thousands)Money market

$
260,309



0.90
%

$
258,283



0.99
%Savings


706,601



0.96



599,084



1.09Certificates of deposit


3,615,731



1.53



3,626,512



1.68Total deposits

$
4,582,641



1.41


$
4,483,879



1.56   March 31, 2010WeightedAverageBalance


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

$
1,262,381



1.55
%4-6 months


714,671



1.137-9 months


749,290



1.5310-12 months


349,734



1.44Longer than 12 months


539,655



2.06Total certificates of deposit

$
3,615,731



1.53   FHLB SF
    Borrowings
      WeightedAverageBalance


Rate($ in thousands)Less than 1 year

$
39,000



1.22
%1 to 2 years


88,000



1.632 to 3 years


58,000



2.063 to 4 years


20,000



2.584 to 5 years


20,000



2.74Total

$
225,000



1.85  62




---



##### 



Other
    Commercial Finance Segment
  Portfolio
    Composition
    March 31,


December 31,2010


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

$
4,594


$
6,022Loans


4,787,572



5,245,563Other investments(1)


93,868



96,517Total

$
4,886,034


$
5,348,102     (1)
    
    Includes investments carried at cost, investments carried at
    fair value and investments accounted for under the equity method.  Other
    Commercial Finance Segment Loan Portfolio Composition
      March 31, 2010


December 31, 2009($ in thousands)Commercial

$
3,300,626



69
%

$
3,452,903



66
%Real estate


833,040



17



951,626



18Real estate  construction


653,906



14



841,034



16Total

$
4,787,572



100
%

$
5,245,563



100
%     Due in


Due inOne Year


One to


Due Afteror Less


Five Years


Five Years


Total($ in thousands)Commercial

$
670,972


$
2,362,951


$
266,703


$
3,300,626Real estate


404,548



309,322



119,170



833,040Real estate  construction


480,202



173,704







653,906Total

$
1,555,722


$
2,845,977


$
385,873


$
4,787,572  63




---



##### 



Loan TypeReal EstateCommercial


Real Estate


Construction


Total


Percentage($ in thousands)1-Month LIBOR

$
642,603


$
572,561


$
443,893


$
1,659,057



35
%2-Month LIBOR


23,605











23,605



13-Month LIBOR


121,683











121,683



26-Month LIBOR


4,909











4,909



1-Month
    EURIBOR


45,782











45,782



13-Month
    EURIBOR


15,963











15,963



Prime


947,809



31,345



156,470



1,135,624



24Blended


1,318,052



41,964







1,360,016



28Total adjustable rate loans


3,120,406



645,870



600,363



4,366,639



91Fixed rate loans


180,220



187,170



53,543



420,933



9Total loans

$
3,300,626


$
833,040


$
653,906


$
4,787,572



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

December 31,2010

2009($ in thousands)Accruing loans
    30-89 days
    contractually delinquent

$
153,339


$
94,211Accruing loans 90 or more days contractually delinquent


34,684



49,298Non-accrual loans


798,330



893,484   30-89 days
 64




---



##### 



Three Months Ended March 31,2010


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

$
434,188


$
368,244Provision for loan losses:General


3,713



282Specific


127,523



115,545Total provision for loan losses


131,236



115,827Charge offs, net of recoveries


(101,549
)


(109,360
)Allowance for loan losses as of end of period

$
463,875


$
374,711Total gross loans as of end of period

$
4,787,572


$
6,365,368Allowance for loan losses ratio


9.69
%


5.89
%Provision for loan losses ratio (annualized)


11.12
%


7.38
%Net charge off ratio (annualized)


8.60
%


6.97
%   and/or
          Other
    Investments
     65




---



##### 



Healthcare
    Net Lease Segment
  Direct
    Real Estate Investments
  We own real estate for long-term investment
    purposes. triple-net triple-net Discontinued
    Operations,
  Liquidity
    and Capital Resources
      Risk Factors Cautionary Note Regarding
    Forward Looking Statements Form 10-K
  CapitalSource
    Bank Liquidity
     66




---



##### 



available-for-sale.
  Parent
    Company Liquidity
    Borrowings, Borrowings  Credit Facilities
  2006-A
    and/or
 67




---



##### 



Cash
    and Cash Equivalents and Restricted Cash
  Cash and Cash Equivalents and
    Restricted Cash
    Deposits
  Deposits,
  Borrowings
  Borrowings Borrowings Form 10-K.
 68




---



##### 



MaximumFacility


Amount


UnusedAmount


Outstanding


Capacity($ in thousands)Credit facilities(1)

$
543,889


$
407,833


$
136,056Term debt


2,740,343



2,681,107



59,236Other borrowings


2,379,071



1,472,403



906,668Total

$
5,663,303


$
4,561,343


$
1,101,960     (1)
    
    As of April 19, 2010, unused capacity was reduced by
    $79.1 million in connection with the maturity of the
    revolving period under one of our credit facilities. The amount
    shown is not reduced by issued and outstanding letters of credit
    totaling $50.1 million as of March 31, 2010, which
    further limit our ability to utilize capacity.    Credit
    Facilities
    Committed


PrincipalCapacity


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

$
30,970


$
30,970CS Funding VII secured credit facility scheduled to mature
    April 17, 2012(2)


190,613



111,471CS Europe secured credit facility scheduled to mature
    May 28, 2010(1)(3)


115,157



115,157CS Inc. syndicated bank credit facility scheduled to mature
    December 31, 2011


207,149



150,235Total credit facilities

$
543,889


$
407,833     (1)
    
    These credit facilities are in their amortization periods so
    that committed capacities equal principal outstanding. In the
    absence of a default and, until the final maturity date, amounts
    due under these facilities are repaid from principal and
    interest proceeds from the respective collateral pools.(2)
    
    The revolving period under this credit facility matured on
    April 19, 2010 and, in the absence of a default, amounts
    due under this credit facility are to be repaid from principal
    and interest proceeds from the collateral pool.(3)
    
    CS Europe is a 85.2 million multi-currency facility
    with borrowings denominated in Euro or British Pound Sterling.
    The amounts presented were translated to USD using the
    applicable spot rates on March 31, 2010.  Term
    Debt
    Convertible
    Debt
   69




---



##### 



Subordinated
    Debt
    Mortgage
    Debt
    FHLB SF
    Borrowings and Federal Reserve Bank Credit Program
      Commitments,
    Guarantees & Contingencies
  Commitments and Contingencies Form 10-K, Liquidity and Capital Resources  Parent
    Company Liquidity
  Commitments and
    Contingencies Form 10-K.
  Commitments and
    Contingencies Commitments and Contingencies Form 10-K.
   70




---



##### 



Credit
    Risk Management
  agreed-upon
    CapitalSource
    Bank and Other Commercial Finance Segments
     71




---



##### 



Concentrations
    of Credit Risk
      Market
    Risk Management
  and/or
    Derivative Instruments Form 10-K.
  Interest
    Rate Risk Management
  Derivative Instruments,
 72




---



##### 



12-month
  Rate Change(Basis Points)− 100

$
1,956− 50


2,151+ 50


(21,384
)+ 100


(41,836
)       Amount


Percentage ofOutstanding


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

$
4,191,263



52
%Exceeding the interest rate floor


106,093



1At the interest rate floor


124,192



2Loans with no interest rate floor


3,580,386



45Total

$
8,001,934



100
%         Critical
    Accounting Estimates
  Managements Discussion and Analysis of Financial
    Condition and Results of Operations Summary of Significant
    Accounting Policies Form 10-K.
 73




---



##### 



Critical Accounting Estimates Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations Form 10-K
  ITEM 3.
    QUANTITATIVE
    AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK  Managements Discussion and
    Analysis of Financial Condition and Results of Operations Market Risk Management Form 10-Q Form 10-K. Derivative Instruments Credit Risk Form 10-K.
  ITEM 4.
    CONTROLS
    AND PROCEDURES  Rule 13a-15
 74




---



##### 



PART II.
    OTHER INFORMATION  ITEM 2.
    UNREGISTERED
    SALES OF EQUITY SECURITIES AND USE OF PROCEEDS    Maximum Numberof Shares (orTotal Number of


ApproximateShares Purchased


Dollar Value)Total Number


Average


as Part of Publicly


that Mayof Shares


Price Paid


Announced Plans


Yet be PurchasedPurchased(1)


per Share


or Programs


Under the PlansJanuary 1  January 31, 2010


58,875


$
4.81







February 1  February 28, 2010


60,929



5.35







March 1  March 31, 2010


47,706



5.76







Total


167,510



5.28







     (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.  ITEM 6.
    EXHIBITS     75




---



##### 



Signatures      Date May 5, 2010

/s/  STEVEN
    A. MUSELESSteven
    A. Museles
    Director and Co-Chief Executive Officer
    (Principal Executive Officer)Date May 5, 2010

/s/  JAMES
    J. PIECZYNSKIJames
    J. Pieczynski
    Director and Co-Chief Executive Officer
    (Principal Executive Officer)Date May 5, 2010

/s/  DONALD
    F. COLEDonald
    F. Cole
    Chief Financial Officer
    (Principal Financial Officer)Date: May 5, 2010

/s/  BRYAN
    D. SMITHBryan
    D. Smith
    Chief Accounting Officer
    (Principal Accounting Officer)  76




---



##### 



INDEX TO
    EXHIBITS  ExhibitNo

Description3
.1

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

Amended and Restated Bylaws (composite version; reflects all
    amendments through November 15, 2009)(incorporated by
    reference to exhibit 3.1 to the
    Form 10-Q
    filed by CapitalSource on November 17, 2009).10
.1

Amendment No. 3 to Lease dated April 8, 2010, by and
    between Wisconsin Place Office LLC and CapitalSource Finance
    LLC.10
.2

Credit Agreement dated as of March 14, 2006, among
    CapitalSource Inc., as borrower, the guarantors and lenders as
    listed in the Credit Agreement, Wells Fargo Bank, N.A. (f/k/a
    Wachovia Bank, National Association), as administrative agent,
    swingline lender and issuing lender, Bank of America, N.A., as
    issuing lender, Wells Fargo Securities, LLC (f/k/a Wachovia
    Capital Markets, LLC), as sole bookrunner and lead arranger, and
    Bank of Montreal, Barclays Bank PLC and SunTrust Bank, as
    co-documentation agents (composite version; reflects all
    amendments through February 24, 2010)(incorporated by
    reference to exhibit 10.9 to the
    Form 10-K
    filed by CapitalSource on March 1, 2010).10
.3

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, each of the conduit purchasers
    and the institutional purchasers from time to time party
    thereto, Wachovia Bank, National Association (WBNA),
    as a purchaser, Wells Fargo Securities, LLC (f/k/a 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 February 24, 2010).10
.4

Second Amended and Restated Sale and Servicing Agreement 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
    February 26, 2010).10
.5

Deed of Amendment Relating to the Servicing Agreement dated
    February 24, 2010, 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 (incorporated by reference to exhibit 10.17.1 to
    the
    Form 10-K
    filed by CapitalSource on March 1, 2010).10
.6

Fourth Amended and Restated Sale and Servicing Agreement 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
    February 26, 2010).10
.7*

Form of Restricted Stock Agreement (2010).10
.8*

Form of Restricted Stock Agreement for Directors (April
    2010).10
.9*

Form of Restricted Stock Unit Agreement (2010).10
.10*

Form of Restricted Stock Unit Agreement for Directors (April
    2010).12
.1

Ratio of Earnings to Fixed Charges.31
.1.1

Rule 13a  14(a) Certification of Chairman of the
    Board and Co-Chief Executive Officer.31
.1.2

Rule 13a  14(a) Certification of Chairman of the
    Board and Co-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 77