UNITED STATES SECURITIES AND
    EXCHANGE COMMISSIONWashington, D.C.
    20549
  Form 10-Q
  QUARTERLY REPORT PURSUANT TO
    SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
    1934
  For the quarterly period ended September 30, 2008
   Commission File
    No. 1-31753
  CapitalSource Inc. (Exact name of
    registrant as specified in its charter)
  Delaware(State of
    Incorporation)

35-2206895(I.R.S. Employer
    Identification No.)   4445 Willard Avenue, 12th Floor
    Chevy Chase, MD 20815 (Address of Principal
    Executive Offices, Including Zip Code)
  (800) 370-9431
 (Registrants telephone
    number, including area code)
   þ o
  Rule 12b-2
  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
    September 30, 2008 (unaudited) and
    December 31, 2007


3Consolidated Statements of Income (unaudited) for
    the three and nine months ended September 30, 2008 and
    2007


4Consolidated Statement of Shareholders
    Equity (unaudited) for the nine months ended September 30,
    2008


5Consolidated Statements of Cash Flows (unaudited)
    for the nine months ended September 30, 2008 and 2007


6Notes to the Unaudited Consolidated Financial
    Statements


7Item 2.


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


45Item 3.


Quantitative and Qualitative Disclosures about
    Market Risk


80Item 4.


Controls and Procedures


80PART II. OTHER INFORMATIONItem 1A.


Risk Factors


80Item 2.


Unregistered Sales of Equity Securities and Use
    of Proceeds


84Item 6.


Exhibits


84Signatures


85Index to Exhibits


86   2




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##### 



CapitalSource
    Inc.
  Consolidated Balance Sheets
  September 30,


December 31,2008


2007(Unaudited)($ in thousands)ASSETSCash and cash equivalents

$
1,289,360


$
178,699Restricted cash and cash equivalents


1,796,225



513,803Marketable securities, available-for-sale


797,063



Mortgage-related receivables, net


1,841,629



2,033,296Mortgage-backed securities pledged, trading


1,522,960



4,030,180Commercial real estate A participation interest, net


1,626,602



Loans held for sale


86,234



94,327Loans:Loans


9,282,358



9,717,146Less deferred loan fees and discounts


(176,234
)


(147,089
)Less allowance for loan losses


(163,855
)


(138,930
)Loans, net


8,942,269



9,431,127Interest receivable


84,592



95,425Direct real estate investments, net


998,834



1,017,604Investments


202,549



231,661Goodwill


179,706



5,344Other assets


498,013



408,883Total assets

$
19,866,036


$
18,040,349LIABILITIES, NONCONTROLLING INTERESTS AND SHAREHOLDERS
    EQUITYLiabilities:Deposits

$
5,048,251


$
Repurchase agreements


2,870,073



3,910,027Credit facilities


1,515,261



2,207,063Term debt


5,412,535



7,146,437Other borrowings


1,600,223



1,704,108Other liabilities


359,031



444,997Total liabilities


16,805,374



15,412,632Noncontrolling interests


10,627



45,446Shareholders equity:Preferred stock (50,000,000 shares authorized; no shares
    outstanding)






Common stock ($0.01 par value, 1,200,000,000 and
    500,000,000 shares authorized, respectively; 276,364,708
    and 220,704,800 shares issued and outstanding, respectively)


2,764



2,207Additional paid-in capital


3,604,114



2,902,501Accumulated deficit


(544,274
)


(327,387
)Accumulated other comprehensive (loss) income, net


(12,569
)


4,950Total shareholders equity


3,050,035



2,582,271Total liabilities, noncontrolling interests and
    shareholders equity

$
19,866,036


$
18,040,349    3




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##### 



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


Nine Months Ended September 30,2008


2007


2008


2007(Unaudited)($ in thousands, except per share data)Net investment income:Interest income:Loans

$
239,294


$
272,827


$
707,909


$
757,488Mortgage-backed securities pledged, trading


20,784



58,127



103,035



155,893Investment securities


3,955



957



8,461



3,122Other


9,979



12,132



17,154



28,278Total interest income


274,012



344,043



836,559



944,781Fee income


29,974



29,338



104,882



124,421Total interest and fee income


303,986



373,381



941,441



1,069,202Operating lease income


28,140



27,490



80,040



69,934Total investment income


332,126



400,871



1,021,481



1,139,136Interest expense:Deposits


32,178







32,178



Borrowings


148,318



232,754



497,346



619,694Total interest expense


180,496



232,754



529,524



619,694Net investment income


151,630



168,117



491,957



519,442Provision for loan losses


110,261



12,353



147,594



44,690Net investment income after provision for loan losses


41,369



155,764



344,363



474,752Operating expenses:Compensation and benefits


29,473



38,309



99,070



116,937Depreciation of direct real estate investments


8,898



8,924



26,804



23,075Professional fees


7,839



7,002



29,762



22,361Other administrative expenses


15,309



10,898



44,034



34,525Total operating expenses


61,519



65,133



199,670



196,898Other income (expense):(Loss) gain on investments, net


(29,488
)


(1,984
)


(33,174
)


21,181Gain (loss) on derivatives


2,659



(15,494
)


(20,354
)


(14,596
)Loss on residential mortgage investment portfolio


(26,956
)


(30,225
)


(73,273
)


(49,769
)Gain on debt extinguishment


70,057







82,782



Other income (expense), net


11,891



(1,924
)


16,069



20,686Total other income (expense)


28,163



(49,627
)


(27,950
)


(22,498
)Noncontrolling interests expense


(100
)


1,182



1,480



3,784Net income before income taxes


8,113



39,822



115,263



251,572Income taxes


58



11,557



40,377



60,251Net income

$
8,055


$
28,265


$
74,886


$
191,321Net income per share:Basic

$
0.03


$
0.15


$
0.31


$
1.03Diluted

$
0.03


$
0.15


$
0.31


$
1.02Average shares outstanding:Basic


272,005,048



191,976,931



242,495,601



185,522,634Diluted


272,585,479



193,607,986



243,614,848



187,636,502Dividends declared per share

$
0.05


$
0.60


$
1.25


$
1.78    4




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##### 



CapitalSource
    Inc.
  Consolidated Statement of Shareholders
    Equity
  AccumulatedOtherAdditional





Comprehensive


TotalCommon


Paid-In


Accumulated


(Loss)


ShareholdersStock


Capital


Deficit


Income, Net


Equity(Unaudited)($ in thousands)Total shareholders equity as of December 31, 2007

$
2,207


$
2,902,501


$
(327,387
)

$
4,950


$
2,582,271Net income










74,886







74,886Other comprehensive income:Unrealized losses, net of tax














(17,519
)


(17,519
)Total comprehensive income


















57,367Dividends paid






4,216



(291,773
)






(287,557
)Proceeds from issuance of common stock, net


555



635,969











636,524Stock option expense






530











530Exercise of options


1



360











361Restricted stock activity


1



16,140











16,141Beneficial conversion option on convertible debt






50,946











50,946Tax benefit on exercise of options






109











109Tax expense on vesting of restricted stock grants






(6,657
)










(6,657
)Total shareholders equity as of September 30, 2008

$
2,764


$
3,604,114


$
(544,274
)

$
(12,569
)

$
3,050,035    5




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##### 



CapitalSource
    Inc.
  Consolidated Statements of Cash Flows
  Nine Months Ended September 30,2008


2007Unaudited($ in thousands)Operating activities:Net income

$
74,886


$
191,321Adjustments to reconcile net income to net cash provided by
    (used in) operating activities:Stock option expense


530



5,694Restricted stock expense


26,498



26,214Gain on extinguishment of debt


(82,782
)


Amortization of deferred loan fees and discounts


(71,576
)


(66,844
)Paid-in-kind
    interest on loans


13,430



(19,697
)Provision for loan losses


147,594



44,690Amortization of deferred financing fees and discounts


95,173



31,262Depreciation and amortization


28,608



26,367Benefit for deferred income taxes


(18,807
)


(3,741
)Non-cash loss on investments, net


35,119



6,980Non-cash loss on property and equipment disposals


9,270



559Unrealized loss on derivatives and foreign currencies, net


10,756



10,302Unrealized loss on residential mortgage investment portfolio, net


51,810



60,310Net decrease (increase) in mortgage-backed securities pledged,
    trading


2,508,787



(638,780
)Amortization of discount on residential mortgage investments


(8,398
)


(29,862
)Accretion of discount on commercial real estate A
    participation interest


(12,694
)


Decrease in interest receivable


16,077



49,460Decrease (increase) in loans held for sale, net


246,376



(524,127
)Increase in other assets


(43,402
)


(68,493
)(Decrease) increase in other liabilities


(96,676
)


73,903Cash provided by (used in) operating activities


2,930,579



(824,482
)Investing activities:Increase in restricted cash


(1,282,422
)


(55,885
)Decrease in mortgage-related receivables, net


175,556



217,263Decrease in commercial real estate A participation
    interest, net


206,730



Acquisition of CS Advisors CLO II


(18,619
)


Decrease in receivables under reverse-repurchase agreements, net






25,735Decrease (increase) in loans, net


292,458



(1,302,236
)Acquisition of real estate, net of cash acquired


(10,154
)


(253,182
)Acquisition of investments, net


(42,833
)


(36,670
)Acquisition of marketable securities, available-for-sale, net


(797,063
)


Net cash acquired in FIL transaction


3,187,037



Acquisition of property and equipment, net


(3,564
)


(4,337
)Cash provided by (used in) investing activities


1,707,126



(1,409,312
)Financing activities:Payment of deferred financing fees


(59,477
)


(35,421
)Deposits accepted, net of repayments


(122,115
)


(Repayments) borrowings under repurchase agreements, net


(1,039,954
)


519,709(Repayments) borrowings on credit facilities, net


(860,855
)


448,281Borrowings of term debt






1,859,927Repayments of term debt


(1,682,698
)


(1,201,986
)(Repayments) borrowings under other borrowings


(68,505
)


320,780Proceeds from issuance of common stock, net of offering costs


601,881



507,479Proceeds from exercise of options


361



4,693Tax (expense) benefit on share-based payments


(6,548
)


2,354Payment of dividends


(289,134
)


(342,311
)Cash (used in) provided by financing activities


(3,527,044
)


2,083,505Increase (decrease) in cash and cash equivalents


1,110,661



(150,289
)Cash and cash equivalents as of beginning of period


178,699



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

$
1,289,360


$
245,862Supplemental information:Noncash transactions from investing and financing activities:Assumption of FIL assets and liabilities

$
3,292,185


$
Beneficial conversion option on convertible debt


50,946



Assets acquired through foreclosure


94,030



12,791Intangible lease liability adjustments


2,397



Assumption of note payable


25,647



Acquisition of real estate


2,120



110,675Conversion of noncontrolling interests into common stock


34,819



11,533Assumption of intangible lease liability






28,554Assumption of term debt






71,027    6




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##### 



CapitalSource
    Inc.



NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  Note 1.
    Organization    
    Depository products and services  Savings, money
    market and certificates of deposit insured up to the maximum
    amounts permitted by the Federal Deposit Insurance Corporation
    (FDIC);
    First Mortgage Loans  Commercial loans that are
    secured by first mortgages on the property of the client;
    Senior Secured Asset-Based Loans  Commercial loans
    that are underwritten based on our assessment of the
    clients eligible collateral, including accounts
    receivable, real estate related receivables and inventory;
    Senior Secured Cash Flow Loans  Commercial loans that
    are underwritten based on our assessment of a clients
    ability to generate cash flows sufficient to repay the loan and
    maintain or increase its enterprise value during the term of the
    loan, thereby facilitating repayment of the principal at
    maturity;
    Direct Real Estate Investments  Investments in
    income-producing healthcare facilities that generally are leased
    through long-term,
    triple-net
    operating leases;
    Second Lien and Mezzanine Loans  Commercial loans,
    including subordinated mortgage loans, that come after a
    clients senior term loans in right of payment or upon
    liquidation;
    Equity Investments  Opportunistic equity investments,
    typically in conjunction with commercial financing relationships
    and on the same terms as other equity investors; and
    Residential Mortgage Investments  Investments in
    residential mortgage loans, residential mortgage-backed
    securities and other REIT qualifying investments.     7




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##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Note 2.
    Summary
    of Significant Accounting Policies  Unaudited
    Interim Consolidated Financial Statements Basis of
    Presentation
  Form 10-Q Regulation S-X. Form 10-K Form 10-K).
      Summary of Significant Accounting
    Policies Form 10-K.
  Interest
    and Fee Income Recognition on Loans
    Fair
    Value Measurements
  Fair Value
    Measurements
       8




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##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
        Note 3.
    New
    Accounting Pronouncements  SFAS 157-2, Effective Date of FASB Statement No. SFAS 157-2), SFAS 157-2, SFAS 157-2 SFAS 157-3, Determining the Fair Value of a Financial Asset When the
    Market for That Asset Is Not Active SFAS 157-3). SFAS 157-3 SFAS 157-3 SFAS 157-3,
  The
    Fair Value Option for Financial Assets and Financial Liabilities
  No. 06-11, Accounting for Income Tax Benefits of Dividends on
    Share-Based Payment Awards (EITF 06-11), EITF 06-11
  Business Combinations
 9




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##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Noncontrolling Interests in Consolidated Financial
    Statements  An Amendment of ARB No. 51
  Disclosures about Derivative Instruments and Hedging
    Activities  An Amendment of FASB Statement
    No. 133 Accounting for Derivative instruments and Hedging Activities
  Note 4.
    Acquisition      Cash

$
3,292,185A Participation Interest


1,820,638Interest receivable


5,244Goodwill


174,363Other assets


7,597Other liabilities


(12,231
)Deposits


(5,170,833
)Total purchase price

$
116,963  10




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##### 



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


Nine Months EndedSeptember 30,


September 30,2008


2007


2008


2007($ in thousands, except per share data)Pro forma investment income

$
351,264


$
516,608


$
1,150,622


$
1,305,925Pro forma net income


22,842



72,557



108,326



215,865Pro forma net income per share  basic


0.08



0.38



0.45



1.16Pro forma net income per share  diluted


0.08



0.37



0.44



1.15   Note 5.
    Cash and
    Cash Equivalents    September 30,


December 31,2008


2007($ in thousands)Cash and due from banks

$
205,979


$
490Interest-bearing deposits in other banks


46,138



24,575Other short-term investments(1)


319,461



143,094Investment securities(2)


717,782



10,540Total cash and cash equivalents

$
1,289,360


$
178,699     (1)
    
    Cash invested in money market funds that invest primarily in
    U.S. Treasury securities and repurchase agreements secured by
    the U.S. Treasury.(2)
    
    Discount notes with AAA ratings issued by the Federal Home Loan
    Bank (FHLB), Fannie Mae and Freddie Mac
    (hereinafter, Agency Discount Notes) with remaining
    weighted average maturity of 20 days as of
    September 30, 2008.    Note 6.
    Restricted
    Cash and Cash Equivalents    September 30,


December 31,2008


2007($ in thousands)Cash and due from banks(1)

$
32,067


$
82,097Interest-bearing deposits in other banks(2)


12,141



6,203Other short-term investments(3)


136,124



268,174Investment securities(4)


1,615,893



157,329Total

$
1,796,225


$
513,803     (1)
    
    Represents principal and interest collections on loan assets
    held by securitization trusts or pledged to credit facilities
    and escrows for future expenses related to our direct real
    estate investments.(2)
    
    Represents principal and interest collections on loan assets
    pledged to credit facilities. 11




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##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   (3)
    
    Cash invested in money market funds that invest primarily in
    U.S. Treasury securities and repurchase agreements secured by
    U.S. Treasury securities and principal and interest collections
    on loan assets held by securitization trusts or pledged to
    credit facilities.(4)
    
    As of September 30, 2008 approximately $1.0 billion of
    the investment securities represent U.S. Treasury securities
    with a remaining weighted average maturity of 23 days and
    approximately $616 million are Agency Discount Notes with
    AAA ratings and a remaining weighted average maturity of
    43 days, that collateralize various financings under our
    repurchase agreements and derivatives, which are held under the
    custody of our prime broker.    Note 7.
    Mortgage-Related
    Receivables and Related Owners
    Trust Securitizations  Consolidation of Variable
    Interest Entities  An Interpretation of ARB
    No. 51
        September 30,


December 31,2008


2007($ in thousands)Mortgage-related receivables whose underlying mortgage loans are
    90 or more days past due or were in the process of foreclosure(1)

$
40,006


$
14,751Percentage of mortgage-related receivables


2.16
%(2)


0.72
%(2)     (1)
    
    Mortgage loans 90 or more days past due are also placed on
    non-accrual status.(2)
    
    By comparison, in their September 2008 Monthly Summary Reports,
    which reflected up to August 2008 and September 2008
    performance, Fannie Mae and Freddie Mac, respectively, reported
    single-family delinquency (SDQ) rates of 1.57% and
    1.27%, respectively. The SDQ rates are based on loans
    90 days or more delinquent or in 12




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##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  foreclosure as of period end and in addition, the SDQ rate from
    Freddie Mac includes loans underlying their structured
    transactions. The comparable August 2008 statistic for
    mortgage-related receivables was 2.12%.      Note 8.
    Residential
    Mortgage-Backed Securities and Certain Derivative
    Instruments        Note 9.
    Commercial
    Lending Assets and Credit Quality   13




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##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      Commercial
    Real Estate A Participation Interest
  Acquisition
    A Participation Interest as of July 25, 2008

$
1,820,638Principal payments


(206,730
)Discount accretion


12,694A Participation Interest as of September 30,
    2008

$
1,626,602        14




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##### 



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


December 31,Commercial Lending Asset Classification

2008


2007($ in thousands)Loans 60 or more days contractually delinquent

$
200,317


$
74,298Non-accrual loans(1)


263,905



170,522Impaired loans(2)


702,596



318,945Less: loans in multiple categories


(438,837
)


(226,021
)Total

$
727,981


$
337,744Total as a percentage of total commercial lending assets


6.58%



3.42%     (1)
    
    Includes commercial loans with aggregate principal balances of
    $100.0 million and $55.5 million as of
    September 30, 2008 and December 31, 2007,
    respectively, which were also classified as loans 60 or more
    days contractually delinquent. Includes non-performing loans
    classified as held for sale that have an aggregate principal
    balance of $14.5 million as of September 30, 2008. As
    of December 31, 2007, there were no non-performing loans
    classified as held for sale.(2)
    
    Includes commercial loans with aggregate principal balances of
    $174.9 million and $55.5 million as of
    September 30, 2008 and December 31, 2007,
    respectively, which were also classified as loans 60 or more
    days contractually delinquent, and commercial loans with
    aggregate principal balances of $249.4 million and
    $170.5 million as of September 30, 2008 and
    December 31, 2007, respectively, which were also classified
    as loans on non-accrual status. The carrying values of impaired
    commercial loans were $697.4 million and
    $311.6 million as of September 30, 2008 and
    December 31, 2007, respectively, prior to the application
    of allocated reserves.  Accounting by
    Creditors for Impairment of a Loan and/or
     15




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##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Accounting for Debtors and Creditors for Troubled Debt
    Restructurings.
    Nine Months Ended September 30,2008


2007($ in thousands)Balance as of beginning of period

$
138,930


$
120,575Provision for loan losses


135,718



44,460Charge offs, net


(110,793
)


(51,671
)Transfers to held for sale






(1,672
)Balance as of end of period

$
163,855


$
111,692   and/or
  Foreclosed
    Assets
     16




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##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Note 10.
    Marketable
    Securities and Investments  Marketable
    Securities, available-for-sale
    Investments
    September 30,


December 31,2008


2007($ in thousands)Investments carried at cost

$
83,224


$
127,183Investments carried at fair value:Investments available-for-sale


33,213



13,325Warrants


5,930



8,994Investments accounted for under the equity method


80,182



82,159Total

$
202,549


$
231,661   No. 99-20, Recognition of Interest Income on Purchased Beneficial
    Interests and Beneficial Interests that Continue to Be Held by a
    Transferor in Securitized Financial Assets No. 99-20). No. 99-20.
 17




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##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Note 11.
    Guarantor
    Information  Borrowings, Form 10-K,
 18




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##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Consolidating
    Balance Sheet
    September 30, 2008
  CapitalSource Finance LLCCombined


Combined


OtherCapitalSource


Non-Guarantor


Guarantor


Non-Guarantor





ConsolidatedInc.


Subsidiaries


Subsidiaries


Subsidiaries


Eliminations


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

$
11


$
1,100,265


$
26,046


$
163,038


$



$
1,289,360Restricted cash and cash equivalents






61,174



83,088



1,651,963







1,796,225Marketable securities, available for sale






797,063















797,063Mortgage-related receivables, net














1,841,629







1,841,629Mortgage-backed securities pledged, trading














1,522,960







1,522,960Commercial real estate A participation interest, net






1,626,602















1,626,602Loans held for sale






15,392



4,559



66,283







86,234Loans:Loans






5,822,659



527,977



2,923,527



8,195



9,282,358Less deferred loan fees and discounts






(65,818
)


(43,872
)


(58,354
)


(8,190
)


(176,234
)Less allowance for loan losses






(3,535
)


(130,965
)


(29,355
)






(163,855
)Loans, net






5,753,306



353,140



2,835,818



5



8,942,269Interest receivable






56,351



(22,924
)


51,165







84,592Direct real estate investments, net














998,834







998,834Investment in subsidiaries


4,605,828







1,805,395



1,839,120



(8,250,343
)


Intercompany note receivable


75,000



9



195,876



222,959



(493,844
)


Investments






109,656



31,198



61,695







202,549Goodwill






174,363



5,343











179,706Other assets


24,561



87,016



217,020



313,359



(143,943
)


498,013Total assets

$
4,705,400


$
9,781,197


$
2,698,741


$
11,568,823


$
(8,888,125
)

$
19,866,036Liabilities, noncontrolling interests and shareholders
    equityLiabilities:Deposits

$



$
5,048,251


$



$



$



$
5,048,251Repurchase agreements














2,870,073







2,870,073Credit facilities


905,000



485,161



99,100



26,000







1,515,261Term debt






2,271,655







3,141,385



(505
)


5,412,535Other borrowings


749,103







471,794



379,326







1,600,223Other liabilities


1,262



123,936



57,652



311,498



(135,317
)


359,031Intercompany note payable






46,850



222,959



224,035



(493,844
)


Total liabilities


1,655,365



7,975,853



851,505



6,952,317



(629,666
)


16,805,374Noncontrolling interests






(27
)






10,678



(24
)


10,627Shareholders equity:Preferred stock






















Common stock


2,764



921,000











(921,000
)


2,764Additional paid-in capital


3,604,114



217,630



594,437



3,923,799



(4,735,866
)


3,604,114(Accumulated deficit) retained earnings


(544,274
)


665,057



1,250,218



694,295



(2,609,570
)


(544,274
)Accumulated other comprehensive (loss) income, net


(12,569
)


1,684



2,581



(12,266
)


8,001



(12,569
)Total shareholders equity


3,050,035



1,805,371



1,847,236



4,605,828



(8,258,435
)


3,050,035Total liabilities, noncontrolling interests and
    shareholders equity

$
4,705,400


$
9,781,197


$
2,698,741


$
11,568,823


$
(8,888,125
)

$
19,866,036  19




---



##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Consolidating
    Balance Sheet
    December 31, 2007
  CapitalSource Finance LLCCombined


Combined


OtherCapitalSource


Non-Guarantor


Guarantor


Non-Guarantor





ConsolidatedInc.


Subsidiaries


Subsidiaries


Subsidiaries


Eliminations


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

$



$
151,511


$
19,005


$
8,183


$



$
178,699Restricted cash and cash equivalents






80,782



168,928



264,093







513,803Mortgage-related receivables, net














2,033,296







2,033,296Mortgage-backed securities pledged, trading














4,030,180







4,030,180Loans held for sale






78,675



15,652











94,327Loans:Loans






4,221,190



459,561



5,036,952



(557
)


9,717,146Less deferred loan fees and discounts






(37,052
)


(61,492
)


(49,053
)


508



(147,089
)Less allowance for loan losses










(107,611
)


(31,319
)






(138,930
)Loans, net






4,184,138



290,458



4,956,580



(49
)


9,431,127Interest receivable










22,446



72,979







95,425Direct real estate investments, net














1,017,604







1,017,604Investment in subsidiaries


3,777,732







1,079,432



1,217,739



(6,074,903
)


Intercompany note receivable


75,000



9



286,101



207,806



(568,916
)


Investments






122,240



39,536



69,885







231,661Goodwill










5,344











5,344Other assets


18,046



42,570



113,919



255,504



(21,156
)


408,883Total assets

$
3,870,778


$
4,659,925


$
2,040,821


$
14,133,849


$
(6,665,024
)

$
18,040,349Liabilities, noncontrolling interests and shareholders
    equityLiabilities:Repurchase agreements

$



$
12,673


$



$
3,897,354


$



$
3,910,027Credit facilities


480,237



932,195







794,631







2,207,063Term debt






2,570,125







4,576,863



(551
)


7,146,437Other borrowings


780,630







535,991



387,487







1,704,108Other liabilities


27,640



18,634



79,793



340,092



(21,162
)


444,997Intercompany note payable






46,850



207,806



314,260



(568,916
)


Total liabilities


1,288,507



3,580,477



823,590



10,310,687



(590,629
)


15,412,632Noncontrolling interests






34







45,430



(18
)


45,446Shareholders equity:Preferred stock






















Common stock


2,207



















2,207Additional paid-in capital


2,902,501



524,914



90,979



3,256,263



(3,872,156
)


2,902,501(Accumulated deficit) retained earnings


(327,387
)


549,305



1,120,817



516,216



(2,186,338
)


(327,387
)Accumulated other comprehensive income, net


4,950



5,195



5,435



5,253



(15,883
)


4,950Total shareholders equity


2,582,271



1,079,414



1,217,231



3,777,732



(6,074,377
)


2,582,271Total liabilities, noncontrolling interests and
    shareholders equity

$
3,870,778


$
4,659,925


$
2,040,821


$
14,133,849


$
(6,665,024
)

$
18,040,349  20




---



##### 



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


Combined


OtherCapitalSource


Non-Guarantor


Guarantor


Non-Guarantor





ConsolidatedInc.


Subsidiaries


Subsidiaries


Subsidiaries


Eliminations


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

$
1,081


$
139,953


$
6,346


$
93,001


$
(1,087
)

$
239,294Mortgage-backed securities pledged, trading














20,784







20,784Investment securities






2,021



172



1,762







3,955Other






7,025



551



2,403







9,979Total interest income


1,081



148,999



7,069



117,950



(1,087
)


274,012Fee income






5,305



15,383



8,919



367



29,974Total interest and fee income


1,081



154,304



22,452



126,869



(720
)


303,986Operating lease income














28,140







28,140Total investment income


1,081



154,304



22,452



155,009



(720
)


332,126Interest expense:Deposits






32,178















32,178Borrowings


30,155



35,966



12,195



71,089



(1,087
)


148,318Total interest expense


30,155



68,144



12,195



71,089



(1,087
)


180,496Net investment (loss) income


(29,074
)


86,160



10,257



83,920



367



151,630Provision for loan losses






3,535



107,166



(440
)






110,261Net investment (loss) income after provision for loan losses


(29,074
)


82,625



(96,909
)


84,360



367



41,369Operating expenses:Compensation and benefits


194



9,455



19,820



4







29,473Depreciation on direct real estate investments














8,898







8,898Professional fees


234



1,593



4,732



1,280







7,839Other administrative expenses


8,688



11,832



12,966



9



(18,186
)


15,309Total operating expenses


9,116



22,880



37,518



10,191



(18,186
)


61,519Other income (expense):Loss on investments, net






(2,023
)


(3,748
)


(23,717
)






(29,488
)Gain (loss) on derivatives






3,677



1,725



(2,743
)






2,659Loss on residential mortgage investment portfolio














(26,956
)






(26,956
)Gain on debt extinguishment










14,259



55,798







70,057Other income (expense)






14,451



23,034



1,545



(27,139
)


11,891Earnings in subsidiaries


46,245







61,527



(33,191
)


(74,581
)


Intercompany






(7,109
)


13,025



(5,916
)






Total other income


46,245



8,996



109,822



(35,180
)


(101,720
)


28,163Noncontrolling interests expense






(71
)






(29
)






(100
)Net income (loss) before income taxes


8,055



68,812



(24,605
)


39,018



(83,167
)


8,113Income taxes






7,285







(7,227
)






58Net income (loss)

$
8,055


$
61,527


$
(24,605
)

$
46,245


$
(83,167
)

$
8,055  21




---



##### 



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


Combined


OtherCapitalSource


Non-Guarantor


Guarantor


Non-Guarantor





ConsolidatedInc.


Subsidiaries


Subsidiaries


Subsidiaries


Eliminations


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

$
1,616


$
124,372


$
19,713


$
130,886


$
(3,760
)

$
272,827Mortgage-backed securities pledged, trading














58,127







58,127Investment securities






20



16



921







957Other






1,389



1,945



8,798







12,132Total interest income


1,616



125,781



21,674



198,732



(3,760
)


344,043Fee income






11,901



9,554



7,883







29,338Total interest and fee income


1,616



137,682



31,228



206,615



(3,760
)


373,381Operating lease income














27,490







27,490Total investment income


1,616



137,682



31,228



234,105



(3,760
)


400,871Interest expense


17,464



63,354



11,594



144,102



(3,760
)


232,754Net investment (loss) income


(15,848
)


74,328



19,634



90,003







168,117Provision for loan losses










11,264



1,089







12,353Net investment (loss) income after provision for loan losses


(15,848
)


74,328



8,370



88,914







155,764Operating expenses:Compensation and benefits


93



6,260



31,935



21







38,309Depreciation on direct real estate investments














8,924







8,924Professional fees


918



729



3,738



1,617







7,002Other administrative expenses


9,747



753



8,812



913



(9,327
)


10,898Total operating expenses


10,758



7,742



44,485



11,475



(9,327
)


65,133Other income (expense):Gain (loss) on investments, net






1,553



(3,537
)










(1,984
)Gain (loss) on derivatives






2,232



3,234



(20,960
)






(15,494
)Loss on residential mortgage investment portfolio














(30,225
)






(30,225
)Other income (expense)






4,799



3,220



(616
)


(9,327
)


(1,924
)Earnings in subsidiaries


54,871







71,335



41,991



(168,197
)


Intercompany






(3,854
)


3,854











Total other income (expense)


54,871



4,730



78,106



(9,810
)


(177,524
)


(49,627
)Noncontrolling interests expense






(16
)






1,201



(3
)


1,182Net income before income taxes


28,265



71,332



41,991



66,428



(168,194
)


39,822Income taxes














11,557







11,557Net income

$
28,265


$
71,332


$
41,991


$
54,871


$
(168,194
)

$
28,265  22




---



##### 



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


Combined


OtherCapitalSource


Non-Guarantor


Guarantor


Non-Guarantor





ConsolidatedInc.


Subsidiaries


Subsidiaries


Subsidiaries


Eliminations


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

$
3,335


$
336,004


$
30,071


$
341,843


$
(3,344
)

$
707,909Mortgage-backed securities pledged, trading














103,035







103,035Investment securities






2,522



633



5,306







8,461Other






8,190



2,650



6,314







17,154Total interest income


3,335



346,716



33,354



456,498



(3,344
)


836,559Fee income






27,292



39,320



37,941



329



104,882Total interest and fee income


3,335



374,008



72,674



494,439



(3,015
)


941,441Operating lease income














80,040







80,040Total investment income


3,335



374,008



72,674



574,479



(3,015
)


1,021,481Interest expense:Deposits






32,178















32,178Borrowings


72,181



114,507



36,773



277,229



(3,344
)


497,346Total interest expense


72,181



146,685



36,773



277,229



(3,344
)


529,524Net investment (loss) income


(68,846
)


227,323



35,901



297,250



329



491,957Provision for loan losses






3,535



135,635



8,424







147,594Net investment (loss) income after provision for loan losses


(68,846
)


223,788



(99,734
)


288,826



329



344,363Operating expenses:Compensation and benefits


875



15,766



82,425



4







99,070Depreciation on direct real estate investments














26,804







26,804Professional fees


2,459



2,963



20,421



3,919







29,762Other administrative expenses


31,001



13,989



33,060



2,615



(36,631
)


44,034Total operating expenses


34,335



32,718



135,906



33,342



(36,631
)


199,670Other income (expense):Loss on investments, net






(2,571
)


(5,815
)


(24,574
)


(214
)


(33,174
)(Loss) gain on derivatives






(1,389
)


23,812



(42,777
)






(20,354
)Loss on residential mortgage investment portfolio














(73,273
)






(73,273
)Gain on debt extinguishment










28,504



54,278







82,782Other income (expense)






12,845



48,426



382



(45,584
)


16,069Earnings in subsidiaries


178,281







181,733



55,225



(415,239
)


Intercompany






(10,915
)


22,829



(11,914
)






Total other income (expense)


178,281



(2,030
)


299,489



(42,653
)


(461,037
)


(27,950
)Noncontrolling interests expense






28







1,458



(6
)


1,480Net income before income taxes


75,100



189,012



63,849



211,373



(424,071
)


115,263Income taxes






7,285







33,092







40,377Net income

$
75,100


$
181,727


$
63,849


$
178,281


$
(424,071
)

$
74,886  23




---



##### 



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


Combined


OtherCapitalSource


Non-Guarantor


Guarantor


Non-Guarantor





ConsolidatedInc.


Subsidiaries


Subsidiaries


Subsidiaries


Eliminations


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

$
10,686


$
353,223


$
65,024


$
342,797


$
(14,242
)

$
757,488Mortgage-backed securities pledged, trading














155,893







155,893Investment securities






72



90



2,960







3,122Other


2



4,673



5,954



17,649







28,278Total interest income


10,688



357,968



71,068



519,299



(14,242
)


944,781Fee income






54,659



42,860



26,902







124,421Total interest and fee income


10,688



412,627



113,928



546,201



(14,242
)


1,069,202Operating lease income














69,934







69,934Total investment income


10,688



412,627



113,928



616,135



(14,242
)


1,139,136Interest expense


37,870



178,760



34,644



382,662



(14,242
)


619,694Net investment (loss) income


(27,182
)


233,867



79,284



233,473







519,442Provision for loan losses










39,310



5,380







44,690Net investment (loss) income after provision for loan losses


(27,182
)


233,867



39,974



228,093







474,752Operating expenses:Compensation and benefits


951



17,027



98,938



21







116,937Depreciation on direct real estate investments














23,075







23,075Professional fees


2,344



2,087



13,609



4,321







22,361Other administrative expenses


35,700



2,505



29,247



1,640



(34,567
)


34,525Total operating expenses


38,995



21,619



141,794



29,057



(34,567
)


196,898Other income (expense):Gain (loss) on investments, net






21,182



(1
)










21,181Gain (loss) on derivatives






2,197



(583
)


(16,210
)






(14,596
)Loss on residential mortgage investment portfolio














(49,769
)






(49,769
)Other income (expense)






13,371



42,696



(814
)


(34,567
)


20,686Earnings in subsidiaries


257,498







241,935



189,260



(688,693
)


Intercompany






(7,033
)


7,033











Total other income


257,498



29,717



291,080



122,467



(723,260
)


(22,498
)Noncontrolling interests expense






38







3,754



(8
)


3,784Net income before income taxes


191,321



241,927



189,260



317,749



(688,685
)


251,572Income taxes














60,251







60,251Net income

$
191,321


$
241,927


$
189,260


$
257,498


$
(688,685
)

$
191,321  24




---



##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Consolidating
    Statement of Cash flows
 Nine Months Ended September 30, 2008
  CapitalSource Finance LLCCombined


Combined


OtherCapitalSource


Non-Guarantor


Guarantor


Non-Guarantor





ConsolidatedInc.


Subsidiaries


Subsidiaries


Subsidiaries


Eliminations


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

$
75,100


$
181,727


$
63,849


$
178,281


$
(424,071
)

$
74,886Adjustments to reconcile net income to net cash (used in)
    provided by operating activities:Stock option expense






(50
)


580











530Restricted stock expense






2,313



24,185











26,498Gain on extinguishment of debt










(28,504
)


(54,278
)






(82,782
)Amortization of deferred loan fees and discounts






(26,660
)


(25,789
)


(19,127
)






(71,576
)Paid-in-kind
    interest on loans






9,585



2,945



900







13,430Provision for loan losses






3,535



135,635



8,424







147,594Amortization of deferred financing fees and discounts


42,425



25,946



2,486



24,316







95,173Depreciation and amortization






1,184



2,786



24,638







28,608Benefit for deferred income taxes














(18,807
)






(18,807
)Non-cash loss (gain) on investments, net






28,442



6,757



(80
)






35,119Non-cash loss on property and equipment disposals










9,270











9,270Unrealized (gain) loss on derivatives and foreign currencies, net






(4,869
)


9,312



6,313







10,756Unrealized loss on residential mortgage investment portfolio, net














51,810







51,810Net decrease in mortgage-backed securities pledged, trading














2,508,787







2,508,787Amortization of discount on residential mortgage investments














(8,398
)






(8,398
)Accretion of discount on commercial real estate A
    participation interest






(12,694
)














(12,694
)(Increase) decrease in interest receivable






(51,107
)


45,370



21,814







16,077Decrease in loans held for sale, net






42,545



4,547



199,284







246,376Decrease (increase) in intercompany note receivable










90,225



(15,153
)


(75,072
)


Increase in other assets


(4,343
)


(33,652
)


(90,808
)


(37,385
)


122,786



(43,402
)(Decrease) increase in other liabilities


(27,154
)


93,846



(23,285
)


(25,929
)


(114,154
)


(96,676
)Net transfers with subsidiaries


(800,289
)


570,759



(195,434
)


9,517



415,447



Cash (used in) provided by operating activities


(714,261
)


830,850



34,127



2,854,927



(75,064
)


2,930,579Investing activities:Decrease (increase) in restricted cash






19,608



85,840



(1,387,870
)






(1,282,422
)Decrease in mortgage-related receivables, net














175,556







175,556Decrease in commercial real estate A participation
    interest






206,730















206,730Acquisition of CS Advisors CLO II














(18,619
)






(18,619
)(Increase) decrease in loans, net






(1,569,218
)


(173,529
)


2,035,259



(54
)


292,458Acquisition of real estate, net of cash acquired














(10,154
)






(10,154
)Acquisition of investments, net






(33,722
)


(4,168
)


(4,943
)






(42,833
)Acquisition of marketable securities, available-for-sale






(797,063
)














(797,063
)Net cash acquired in FIL transaction






3,187,037















3,187,037Acquisition of property and equipment, net






(804
)


(2,430
)


(330
)






(3,564
)Cash provided by (used in) investing activities






1,012,568



(94,287
)


788,899



(54
)


1,707,126Financing activities:Payment of deferred financing fees


(25,178
)


(20,353
)


120



(14,066
)






(59,477
)Deposits accepted, net of repayments






(122,115
)














(122,115
)Increase (decrease) in intercompany note payable










15,153



(90,225
)


75,072



Repayments of repurchase agreements, net






(12,673
)






(1,027,281
)






(1,039,954
)Borrowings on (repayments of) credit facilities, net


424,763



(440,949
)


111,091



(955,760
)






(860,855
)Borrowings of term debt






(46
)










46



Repayments of term debt






(298,528
)






(1,384,170
)






(1,682,698
)Repayments of other borrowings










(59,163
)


(9,342
)






(68,505
)Proceeds from issuance of common stock, net of offering costs


601,881



















601,881Proceeds from exercise of options


361



















361Tax expense on share based payments














(6,548
)






(6,548
)Payment of dividends


(287,555
)










(1,579
)






(289,134
)Cash provided by (used in) financing activities


714,272



(894,664
)


67,201



(3,488,971
)


75,118



(3,527,044
)Increase in cash and cash equivalents


11



948,754



7,041



154,855







1,110,661Cash and cash equivalents as of beginning of period






151,511



19,005



8,183







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

$
11


$
1,100,265


$
26,046


$
163,038


$



$
1,289,360  25




---



##### 



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


Combined


OtherCapitalSource


Non-Guarantor


Guarantor


Non-Guarantor





ConsolidatedInc.


Subsidiaries


Subsidiaries


Subsidiaries


Eliminations


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

$
191,321


$
241,927


$
189,260


$
257,498


$
(688,685
)

$
191,321Adjustments to reconcile net income to net cash (used in)
    provided by operating activities:Stock option expense






344



5,350











5,694Restricted stock expense






3,136



23,078











26,214Amortization of deferred loan fees and discounts






(18,526
)


(27,597
)


(20,721
)






(66,844
)Paid-in-kind
    interest on loans






(4,747
)


(11,163
)


(3,787
)






(19,697
)Provision for loan losses










39,310



5,380







44,690Amortization of deferred financing fees and discounts


2,885



11,173



349



16,855







31,262Depreciation and amortization






236



2,456



23,675







26,367Benefit for deferred income taxes














(3,741
)






(3,741
)Non-cash loss on investments, net






3,232



3,748











6,980Non-cash (gain) loss on property and equipment disposals






(1,347
)


766



1,140







559Unrealized loss (gain) on derivatives and foreign currencies, net






(6,569
)


15,392



1,479







10,302Unrealized loss on residential mortgage investment portfolio, net














60,310







60,310Net increase in mortgage-backed securities pledged, trading














(638,780
)






(638,780
)Amortization of discount on residential mortgage investments














(29,862
)






(29,862
)Decrease in interest receivable






13,941



8,685



26,834







49,460Increase in loans held for sale, net






(114,487
)


(38,435
)


(371,205
)






(524,127
)Decrease (increase) in intercompany note receivable






2,137



(117,124
)






114,987



(Increase) decrease in other assets


(13,735
)


249



(20,387
)


(42,750
)


8,130



(68,493
)(Decrease) increase in other liabilities


(7,072
)


(10,253
)


(8,685
)


98,479



1,434



73,903Net transfers with subsidiaries


(645,444
)


(77,536
)


(407,115
)


441,410



688,685



Cash (used in) provided by operating activities


(472,045
)


42,910



(342,112
)


(177,786
)


124,551



(824,482
)Investing activities:Decrease (increase) in restricted cash






20,689



32,674



(109,248
)






(55,885
)Decrease in mortgage-related receivables, net














217,263







217,263Decrease in receivables under reverse-repurchase agreements, net






25,735















25,735Decrease (increase) in loans, net


104



(395,915
)


134,023



(1,030,231
)


(10,217
)


(1,302,236
)Acquisition of real estate, net of cash acquired














(253,182
)






(253,182
)Acquisition of investments, net






(16,787
)


(1,394
)


(18,489
)






(36,670
)Disposal (acquisition) of property and equipment, net






33



(4,370
)










(4,337
)Cash provided by (used in) investing activities


104



(366,245
)


160,933



(1,193,887
)


(10,217
)


(1,409,312
)Financing activities:Payment of deferred financing fees


(1,283
)


(19,211
)


(2,287
)


(12,640
)






(35,421
)(Decrease) increase in intercompany note payable






(13,331
)






128,318



(114,987
)


(Repayments of) borrowings repurchase agreements, net






(25,160
)






544,869







519,709Borrowings on (repayments of) credit facilities, net


54,552



489,021



110,033



(205,325
)






448,281Borrowings of term debt






737,347



232



1,121,695



653



1,859,927Repayments of term debt






(959,048
)


(4,830
)


(238,108
)






(1,201,986
)Borrowings under other borrowings


245,151







75,629











320,780Proceeds from issuance of common stock, net of offering costs


507,479



















507,479Proceeds from exercise of options


4,693



















4,693Tax benefits on share based payments














2,354







2,354Payment of dividends


(338,808
)










(3,503
)






(342,311
)Cash provided by financing activities


471,784



209,618



178,777



1,337,660



(114,334
)


2,083,505(Decrease) increase in cash and cash equivalents


(157
)


(113,717
)


(2,402
)


(34,013
)






(150,289
)Cash and cash equivalents as of beginning of period


157



238,224



46,723



111,047







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

$



$
124,507


$
44,321


$
77,034


$



$
245,862  26




---



##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Note 12.
    Direct
    Real Estate Investments  triple-net
  September 30,


December 31,2008


2007($ in thousands)Land

$
106,797


$
106,620Buildings


910,413



902,863Furniture and equipment


51,847



51,545Accumulated depreciation


(70,223
)


(43,424
)Total

$
998,834


$
1,017,604   Note 13.
    Deposits        Interest-bearing deposits:Money market

$
317,725Savings


290,904Certificates of deposit


4,391,970Brokered certificates of deposit


47,652Total interest-bearing deposits

$
5,048,251       Maturing by September 30,

Amount


Weighted Average Rate($ in thousands)2009

$
4,394,294



3.57
%2010


23,624



4.202011


11,738



5.072012


9,220



4.972013


746



4.43Total

$
4,439,622



3.58
%  27




---



##### 



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

$
2,855Certificates of deposit


28,954Brokered certificates of deposit


505Penalties for early withdrawal


(136
)Total interest expense

$
32,178   Note 14.
    Borrowings  Borrowings Form 10-K.
  September 30, 2008


December 31, 2007Short-Term


Long-Term


Total Borrowings


Short-Term


Long-Term


Total Borrowings($ in thousands)Repurchase agreements

$
2,772,073


$
98,000


$
2,870,073


$
3,783,722


$
126,305


$
3,910,027Credit facilities






1,515,261



1,515,261



71,338



2,135,725



2,207,063Term debt






5,412,535



5,412,535



59,911



7,086,526



7,146,437Other borrowings






1,600,223



1,600,223







1,704,108



1,704,108Total

$
2,772,073


$
8,626,019


$
11,398,092


$
3,914,971


$
11,052,664


$
14,967,635       Repurchase
    Agreements
     28




---



##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Credit
    Facilities
                  Term
    Debt
  series 2004-1
  2007-A
 29




---



##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  2006-A
  Other
    Borrowings
    September 30,


December 31,2008


2007($ in thousands)Convertible debt, net (1)

$
749,102


$
780,630Subordinated debt


444,265



529,877Mortgage debt


331,693



341,086Notes payable


75,163



52,515Total

$
1,600,223


$
1,704,108     (1)
    
    Amounts presented are net of $51.9 million and
    $19.7 million in beneficial conversion options, net of
    amortization, as of September 30, 2008 and
    December 31, 2007, respectively.  Subordinated
    Debt
        Single
    Purpose Loan Financing
   30




---



##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Note 15.
    Shareholders
    Equity  Common
    Stock Shares Outstanding
    Outstanding as of December 31, 2007


220,704,800Issuance of common stock


54,966,791Exercise of options


56,813Restricted stock and other stock grants, net


636,304Outstanding as of September 30, 2008


276,364,708     Dividend
    Reinvestment and Stock Purchase Plan
    Equity
    Offering
    Note 16.
    Income
    Taxes     31




---



##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
          Note 17.
    Comprehensive
    (Loss) Income    Three Months Ended


Nine Months EndedSeptember 30,


September 30,2008


2007


2008


2007($ in thousands)Net income

$
8,055


$
28,265


$
74,886


$
191,321Unrealized loss on available-for-sale securities, net of tax


(9,501
)


(606
)


(14,522
)


(3,404
)Unrealized (loss) gain on foreign currency translation, net of
    tax


(12,328
)


3,528



(2,198
)


5,709Unrealized loss on cash flow hedges, net of tax


(22
)


(833
)


(799
)


(296
)Comprehensive (loss) income

$
(13,796
)

$
30,354


$
57,367


$
193,330  32




---



##### 



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


December 31,2008


2007($ in thousands)Unrealized loss on available-for-sale securities, net of tax

$
(14,911
)

$
(389
)Unrealized gain on foreign currency translation, net of tax


2,151



4,349Unrealized gain on cash flow hedge, net of tax


191



990Accumulated other comprehensive (loss) income, net

$
(12,569
)

$
4,950   Note 18.  Net
    Income per Share
    Three Months Ended


Nine Months EndedSeptember 30,


September 30,2008


2007


2008


2007($ in thousands, except per share data)Basic net income per share:Net income

$
8,055


$
28,265


$
74,886


$
191,321Average shares  basic


272,005,048



191,976,931



242,495,601



185,522,634Basic net income per share

$
0.03


$
0.15


$
0.31


$
1.03Diluted net income per share:Net income

$
8,055


$
28,265


$
74,886


$
191,321Average shares  basic


272,005,048



191,976,931



242,495,601



185,522,634Effect of dilutive securities:Option shares


53,964



161,394



73,245



453,770Unvested restricted stock


362,763



1,415,679



918,736



1,493,333Stock units


163,704



53,982



127,266



40,507Conversion premium on the Debentures(1)














126,258Average shares  diluted


272,585,479



193,607,986



243,614,848



187,636,502Diluted net income per share

$
0.03


$
0.15


$
0.31


$
1.02     (1)
    
    For the nine months ended September 30, 2007, the
    conversion premiums on the 1.25% Debentures and
    1.625% Debentures represented the dilutive shares based on
    a conversion price of $23.22. 33




---



##### 



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


Nine Months EndedSeptember 30,


September 30,2008


2007


2008


2007Stock options


8,785,232



8,543,433



8,699,727



3,792,836Non-managing member units


499,226



1,996,855



1,070,871



2,148,2801.25% and 1.625% Convertible Debentures due 2034(1)


10,877,640







3,652,346



3.5% and 4.0% Convertible Debentures due 2034(1)


15,258,465







5,123,280



Shares subject to a written call option


7,401,420



7,401,420



7,401,420



7,401,420     (1)
    
    For the three months ended September 30, 2008, we began
    applying the if-converted method to determine the effect on
    diluted net income per share of shares issuable pursuant to
    convertible debt as we are no longer assuming cash settlement of
    the underlying principal. For the periods prior to the three
    months ended September 30, 2008, we used the treasury stock
    method to determine the effect on diluted income per share of
    shares issuable pursuant to the conversion premium of
    convertible debt. See Note 25, Subsequent Events,
    and Note 11, Borrowings, of our audited consolidated
    financial statements as of December 31, 2007, included in
    our
    Form 10-K,
    for further information on convertible debt.    Note 19.
    Stock-Based
    Compensation       34




---



##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Stock-Based Compensation Form 10-K.
  Note 20.
    Bank
    Regulation  de novo
  cease-and-desist
       35




---



##### 



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


Minimum RequiredAmount


Ratio


Amount


Ratio($ in thousands)Tier-1 Leverage Capital

$
756,603



12.65
%

$
298,943



5.00
%Risk-Based Capital:Tier-1


756,603



16.05



282,927



6.00Total


760,149



16.12



707,318



15.00     Common stockholders equity at CapitalSource Bank

$
931,435Less:Disallowed goodwill and other disallowed intangible assets


(174,671
)Unrealized gains on available-for-sale securities


(161
)Total Tier-1 Capital


756,603Add: Allowable portion of the allowance for loan losses and other


3,546Total Risk-Based Capital

$
760,149   Note 21.
    Commitments
    and Contingencies  Guarantors Accounting and Disclosure Requirements for
    Guarantees, Including Indirect Guarantees of Indebtedness of
    Others.
    Accounting for Conditional Asset
    Retirement Obligations  An Interpretation of FASB
    No. 143
 36




---



##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      Note 22.
    Derivative
    Instruments  Residential
    Mortgage-Backed Securities and Certain Derivative Instruments,
  Note 23.
    Fair
    Value Measurements  New Accounting
    Pronouncements
  Fair
    Value Determination
      Assets
    and Liabilities
  Marketable
    Securities
  Investments in Debt and Equity
    Securities
  Residential
    Mortgage-Backed Securities
   37




---



##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Loans
    Held for Sale
    Investments
    The Equity Method of Accounting for
    Investments in Common Stock
  Warrants
    Derivative
    Assets and Liabilities
   38




---



##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Loans
    Held for Investment
    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


UnobservableSeptember 30, 2008


Identical Assets (Level 1)


Inputs (Level 2)


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

$
797,063


$



$
797,063


$
Mortgage-backed securities pledged, trading


1,522,960







1,522,960



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


33,213







375



32,838Warrants


5,930











5,930Other assets held at fair value:Derivative assets


55,642







55,642



Total assets

$
2,414,808


$



$
2,376,040


$
38,768LiabilitiesOther liabilities held at fair value:Derivative liabilities

$
187,364


$



$
187,364


$
     Realized and UnrealizedLosses





Purchases,Total


Sales,Included in


Realized


Issuances,Balance as of





Other


and


and


Transfers


Balance as of


UnrealizedJuly 1,


Included in


Comprehensive


Unrealized


Settlements,


In (Out)


September 30,


Losses2008


Income


Income, Net


Losses


net


of Level 3


2008


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

$
50,794


$
(2,074
)

$
(15,883
)

$
(17,957
)

$



$



$
32,838


$
(17,957
)Warrants


7,900



(772
)






(772
)


(1,198
)






5,930



(1,521
)Total assets

$
58,694


$
(2,846
)

$
(15,883
)

$
(18,729
)

$
(1,198
)

$



$
38,768


$
(19,478
)     (1)
    
    Represents unrealized losses relating to assets/liabilities held
    as of September 30, 2008. 39




---



##### 



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

Loss on

Residential MortgageIncome

Investments, net

Investment Portfolio($ in thousands)Total losses included in earnings for the period

$
(114
)

$
(1,294
)

$
(1,438
)Unrealized losses relating to assets still held at reporting date


(114
)


(2,043
)


(1,438
)     Realized and UnrealizedLosses





Purchases,Total


Sales,Included in


Realized


Issuances,Balance as of





Other


and


and


Transfers


Balance as of


UnrealizedJanuary 1,


Included in


Comprehensive


Unrealized


Settlements,


In (Out)


September 30,


Losses2008


Income


Income, Net


Losses


net


of Level 3


2008


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

$
12,837


$
(4,793
)

$
(24,106
)

$
(28,899
)

$
48,900


$



$
32,838


$
(28,899
)Warrants


8,994



(569
)


(18
)


(587
)


(2,477
)






5,930



(927
)Total assets

$
21,831


$
(5,362
)

$
(24,124
)

$
(29,486
)

$
46,423


$



$
38,768


$
(29,826
)     (1)
    
    Represents unrealized losses relating to assets/liabilities held
    as of September 30, 2008.    Loss onInterest


Loss on


Residential MortgageIncome


Investments, net


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

$
96


$
(1,398
)

$
(4,061
)Unrealized gains (losses) relating to assets still held at
    reporting date


96



(1,756
)


(4,061
)  40




---



##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Assets
    Carried at Fair Value on a Nonrecurring Basis
    Quoted Prices in








Total LossesFair Value


Active Markets


Significant Other


Significant


Three Months


Nine MonthsMeasurement as of


for Identical


Observable Inputs


Unobservable


Ended


EndedSeptember 30, 2008


Assets (Level 1)


(Level 2)


Inputs (Level 3)


September 30, 2008


September 30, 2008($ in thousands)AssetsLoans held for sale

$
29,055


$



$
15,392


$
13,663


$
(1,087
)

$
(1,087
)Loans held for investment(1)


383,762











383,762



(74,954
)


(89,988
)Investments carried at cost


18,523











18,523



(33,377
)


(33,790
)Investments accounted for under the equity method


6,675











6,675



(2,598
)


(2,812
)Total assets

$
438,015


$



$
15,392


$
422,623


$
(112,016
)

$
(127,677
)     (1)
    
    Represents impaired loans held for investment measured at fair
    value of the loans collateral less transaction costs as
    provided for by SFAS No. 114. Transaction costs were
    not significant as of the balance sheet date.  Note 24.
    Segment
    Data  Disclosures about Segments of an
    Enterprise and Related Information,
    41




---



##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Three Months Ended September 30, 2008ResidentialCommercial


Healthcare


Mortgage


ConsolidatedBanking


Net Lease


Investment


Total($ in thousands)Total interest and fee income

$
257,120


$
336


$
46,530


$
303,986Operating lease income






28,140







28,140Interest expense


133,357



10,824
(1)


36,315



180,496Provision for loan losses


105,282







4,979



110,261Operating expenses(2)


47,454



11,555



2,510



61,519Other income (expense)(3)


54,813



107



(26,757
)


28,163Noncontrolling interests expense


(154
)


54







(100
)Net income (loss) before income taxes


25,994



6,150



(24,031
)


8,113Income taxes


58











58Net income (loss)

$
25,936


$
6,150


$
(24,031
)

$
8,055Total assets as of September 30, 2008

$
13,753,793


$
1,066,868


$
5,045,375


$
19,866,036   Three Months Ended September 30, 2007ResidentialCommercial


Healthcare


Mortgage


ConsolidatedBanking


Net Lease


Investment


Total($ in thousands)Total interest and fee income

$
278,823


$
487


$
94,071


$
373,381Operating lease income






27,490







27,490Interest expense


132,595



11,007
(1)


89,152



232,754Provision for loan losses


11,938







415



12,353Operating expenses(2)


52,782



11,001



1,350



65,133Other income (expense)(3)


(18,177
)


(1,225
)


(30,225
)


(49,627
)Noncontrolling interests expense


(276
)


1,458







1,182Net income (loss) before income taxes


63,607



3,286



(27,071
)


39,822Income taxes


11,557











11,557Net income (loss)

$
52,050


$
3,286


$
(27,071
)

$
28,265Total assets as of December 31, 2007

$
10,609,306


$
1,098,287


$
6,332,756


$
18,040,349   42




---



##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Nine Months Ended September 30, 2008ResidentialCommercial


Healthcare


Mortgage


ConsolidatedBanking


Net Lease


Investment


Total($ in thousands)Total interest and fee income

$
758,019


$
1,183


$
182,239


$
941,441Operating lease income






80,040







80,040Interest expense


355,425



32,479
(1)


141,620



529,524Provision for loan losses


135,718







11,876



147,594Operating expenses(2)


158,434



34,108



7,128



199,670Other income (expense)(3)


48,936



(1,309
)


(75,577
)


(27,950
)Noncontrolling interests expense


(640
)


2,120







1,480Net income (loss) before income taxes


158,018



11,207



(53,962
)


115,263Income taxes


40,377











40,377Net income (loss)

$
117,641


$
11,207


$
(53,962
)

$
74,886Total assets as of September 30, 2008

$
13,753,793


$
1,066,868


$
5,045,375


$
19,866,036   Nine Months Ended September 30, 2007ResidentialCommercial


Healthcare


Mortgage


ConsolidatedBanking


Net Lease


Investment


Total($ in thousands)Total interest and fee income

$
810,060


$
781


$
258,361


$
1,069,202Operating lease income






69,934







69,934Interest expense


347,211



30,155
(1)


242,328



619,694Provision for loan losses


44,275







415



44,690Operating expenses(2)


162,008



29,521



5,369



196,898Other income (expense)(3)


28,496



(1,225
)


(49,769
)


(22,498
)Noncontrolling interests expense


(733
)


4,517







3,784Net income (loss) before income taxes


285,795



5,297



(39,520
)


251,572Income taxes


60,251











60,251Net income (loss)

$
225,544


$
5,297


$
(39,520
)

$
191,321Total assets as of December 31, 2007

$
10,609,306


$
1,098,287


$
6,332,756


$
18,040,349     (1)
    
    Interest expense in our Healthcare Net Lease segment includes
    interest on its secured credit facility and mortgage debt as
    well as an allocation of interest on its allocated intercompany
    debt.(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. In our Residential
    Mortgage Investment Segment, operating expenses include an
    allocation of overhead expenses, compensation and benefits,
    professional fees paid to our investment manager and other
    direct expenses.(3)
    
    Other (expense) income for our Residential Mortgage Investment
    segment includes the net of interest income and expense accruals
    related to certain of our derivatives along with the changes in
    fair value of our Agency MBS and related derivatives. 43




---



##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   Summary of Significant Accounting Policies.
  Note 25.
    Subsequent
    Events  Induced Conversions of
    Convertible Debt  an amendment of APB Opinion
    No. 26
   44




---



##### 



ITEM 2.
    MANAGEMENTS
    DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
    OPERATIONS  CAUTIONARY
    NOTE REGARDING FORWARD-LOOKING STATEMENTS
  Form 10-Q, Form 10-Q Form 10-Q, Form 10-K Form 10-K), Form 10-Q Form 8-K. Form 10-Q
    Form 10-Q.
  Overview
    and Highlights
     45




---



##### 



Segment Data
    triple-net
    and/or
    
    Corporate Finance,which generally provides senior and
    subordinate loans through direct origination and participation
    in widely syndicated loan transactions;
    Healthcare and Specialty Finance, which, including our
    Healthcare Net Lease segment activities, generally provides
    first mortgage loans, asset-based revolving lines of credit, and
    other cash flow loans to healthcare businesses and a broad range
    of other companies and makes investments in income-producing
    healthcare facilities, particularly long-term care
    facilities; and
    Structured Finance, which generally engages in commercial
    and residential real estate finance and also provides
    asset-based lending to finance companies.     46




---



##### 



Deposit
    Based Funding
        de novo
       47




---



##### 



CapitalSource
    Healthcare REIT
  Form S-11
  REIT
    Status
    Dividend
    Policy
    Impact
    of Recent Market Conditions
         48




---



##### 



Consolidated
    Results of Operations
  We operate as three reportable
    segments:
    Explanation
    of Reporting Metrics
  Interest Income.
  Fee Income.
  Operating Lease Income.
  Interest Expense.
 49




---



##### 



Provision for Loan Losses.
  Other Income.
  Operating Expenses.
  Income Taxes.
  Adjusted Earnings.
 50




---



##### 



Operating
    Results for the Three and Nine Months Ended September 30,
    2008
    
    Commencement of CapitalSource Bank operations;
    Gains on the extinguishment of debt;
    Mark to market losses on our Residential Mortgage Investment
    Portfolio;
    Gains and losses on derivatives and other investments in our
    Commercial Banking segment;
    Increased provision for loan losses;
    Increased operating lease income related to our direct real
    estate investments;
    Increased balance of our commercial lending portfolio;
    Increases in operating expenses;
    Increased lending spreads;
    Increased borrowing spreads ; and
    Reduced prepayment-related fee income and reduced gains on
    equity sales.    Three Months Ended








Nine Months EndedSeptember 30,








September 30,2008


2007


$ Change


% Change


2008


2007


$ Change


% Change($ in thousands)Interest income

$
274,012


$
344,043


$
(70,031
)


(20
)%

$
836,559


$
944,781


$
(108,222
)


(11
)%Fee income


29,974



29,338



636



2



104,882



124,421



(19,539
)


(16
)Operating lease income


28,140



27,490



650



2



80,040



69,934



10,106



14Interest expense


180,496



232,754



(52,258
)


(22
)


529,524



619,694



(90,170
)


(15
)Provision for loan losses


110,261



12,353



97,908



793



147,594



44,690



102,904



230Depreciation of directreal estate investments


8,898



8,924



(26
)


(0
)


26,804



23,075



3,729



16Other operating expenses


52,621



56,209



(3,588
)


(6
)


172,866



173,823



(957
)


(1
)Other income (expense)


28,163



(49,627
)


77,790



157



(27,950
)


(22,498
)


(5,452
)


(24
)Noncontrolling interests expense


(100
)


1,182



(1,282
)


(108
)


1,480



3,784



(2,304
)


(61
)Income taxes


58



11,557



(11,499
)


(99
)


40,377



60,251



(19,874
)


(33
)Net income


8,055



28,265



(20,210
)


(72
)


74,886



191,321



(116,435
)


(61
)  51




---



##### 



Nine Months Ended September 30,2008


2007Weighted


Net


Average


Weighted


Net


AverageAverage


Investment


Yield/


Average


Investment


Yield/Balance


Income


Cost


Balance


Income


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





$
836,559



7.19
%





$
944,781



8.33
%Fee income






104,882



0.90







124,421



1.10Total interest earning assets(1)

$
15,508,148



941,441



8.09


$
15,162,542



1,069,202



9.43Total direct real estate investments


1,068,530



80,040



9.98



909,240



69,934



10.28Total income earning assets


16,576,678



1,021,481



8.21



16,071,782



1,139,136



9.48Total interest bearing liabilities(2)


13,903,078



529,524



5.07



13,852,181



619,694



5.98Net finance spread





$
491,957



3.14
%





$
519,442



3.50
%Net finance margin










3.95
%










4.32
%     (1)
    
    Interest earning assets include cash and cash equivalents,
    restricted cash, mortgage-related receivables, RMBS, loans, the
    A Participation Interest and investments in debt
    securities.(2)
    
    Interest bearing liabilities include deposits, repurchase
    agreements, secured and unsecured credit facilities, term debt,
    convertible debt and subordinated debt.  Operating
    Expenses
      Income
    Taxes
   52




---



##### 



Comparison
    of the Three Months Ended September 30, 2008 and
    2007
    Commercial
    Banking Segment
    Three Months EndedSeptember 30,2008


2007


$ Change


% Change($ in thousands)Interest income

$
227,367


$
249,485


$
(22,118
)


(9
)%Fee income


29,753



29,338



415



1Interest expense


133,357



132,595



762



1Provision for loan losses


105,282



11,938



93,344



782Operating expenses


47,454



52,782



(5,328
)


(10
)Other income (expense)


54,967



(17,901
)


72,868



407Income taxes


58



11,557



(11,499
)


(99
)Net income


25,936



52,050



(26,114
)


(50
)   Interest
    Income
    Fee
    Income
    Interest
    Expense
   53




---



##### 



Net
    Finance Margin
      Three Months Ended September 30,2008


2007Weighted


Net


Average


Weighted


Net


AverageAverage


Investment


Yield/


Average


Investment


Yield/Balance


Income


Cost


Balance


Income


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





$
227,367



7.39
%





$
249,485



10.12
%Fee income






29,753



0.97







29,338



1.19Total interest earning assets(1)

$
12,206,770



257,120



8.36


$
9,776,438



278,823



11.31Total interest bearing liabilities(2)


10,173,193



133,357



5.20



8,201,972



132,595



6.41Net finance spread





$
123,763



3.16
%





$
146,228



4.90
%Net finance margin










4.02
%










5.93
%     (1)
    
    Interest earning assets include cash, restricted cash, loans and
    investments in debt securities.(2)
    
    Interest bearing liabilities include deposits, repurchase
    agreements, secured and unsecured credit facilities, term debt,
    convertible debt and subordinated debt.  Provision
    for Loan Losses
    Operating
    Expenses
   54




---



##### 



Other
    Income
      Healthcare
    Net Lease Segment
    Three Months EndedSeptember 30,2008


2007


$ Change


% Change($ in thousands)Interest income

$
115


$
487


$
(372
)


(76
)%Fee income


221







221



100Operating lease income


28,140



27,490



650



2Interest expense


10,824



11,007



(183
)


(2
)Depreciation of direct real estate investments


8,898



8,924



(26
)


(0
)Other operating expenses


2,657



2,077



580



28Other income (expense)


107



(1,225
)


1,332



109Noncontrolling interests expense


54



1,458



(1,404
)


(96
)Net income


6,150



3,286



2,864



87   Operating
    Lease Income
  triple-net
  Other
    income (expense)
    Noncontrolling
    interest expense
    Net
    Finance Margin
   55




---



##### 



Residential
    Mortgage Investment Segment
    Three Months EndedSeptember 30,2008


2007


$ Change


% Change($ in thousands)Interest income

$
46,530


$
94,071


$
(47,541
)


(51
)%Interest expense


36,315



89,152



(52,837
)


(59
)Provision for loan losses


4,979



415



4,564



1,100Operating expenses


2,510



1,350



1,160



86Other expense


26,757



30,225



(3,468
)


(11
)Net loss


24,031



27,071



(3,040
)


(11
)   Interest
    Income
    Interest
    Expense
    Provision
    for loan losses
    Operating
    Expenses
    Other
    Expense
   56




---



##### 



Non-GAAP Adjusted
    Earnings
    Three Months Ended September 30,2008


2007($ in thousands, except per share data)Net income

$
8,055


$
28,265Add:Real estate depreciation and amortization(1)


8,183



8,570Amortization of deferred financing fees(2)


32,865



7,491Non-cash equity compensation


8,483



11,336Net realized and unrealized (gains) losses on residential
    mortgageinvestment portfolio, including related derivatives(3)


(16,229
)


32,425Unrealized (gains) losses on derivatives and foreign currencies,
    net


(18,031
)


16,464Unrealized losses on investments, net


34,148



8,452Provision for loan losses


110,605



12,353Recoveries(4)


(344
)


Less:Charge offs


85,515



27,796Nonrecurring items






Adjusted earnings

$
82,220


$
97,560Net income per share:Basic  as reported

$
0.03


$
0.15Diluted  as reported

$
0.03


$
0.15Average shares outstanding:Basic  as reported


272,005,048



191,976,931Diluted  as reported


272,585,479



193,607,986Adjusted earnings per share:Basic

$
0.30


$
0.51Diluted

$
0.30


$
0.50Average shares outstanding:Basic


272,005,048



191,976,931Diluted


272,585,479



193,607,986     (1)
    
    Depreciation and amortization for direct real estate investments
    only. Excludes depreciation for corporate leasehold
    improvements, fixed assets and other non-real estate items.(2)
    
    Includes amortization of deferred financing fees and other
    non-cash interest expense.(3)
    
    Includes adjustments to reflect realized and unrealized gains
    and losses related to residential mortgage investments held in
    our portfolio as of the balance sheet date and related
    derivative instruments.(4)
    
    Includes all recoveries on loans during the period. 57




---



##### 



Comparison
    of the Nine Months Ended September 30, 2008 and
    2007
    Commercial
    Banking Segment
    Nine Months EndedSeptember 30,2008


2007


$ Change


% Change($ in thousands)Interest income

$
653,376


$
685,639


$
(32,263
)


(5
)%Fee income


104,643



124,421



(19,778
)


(16
)Interest expense


355,425



347,211



8,214



2Provision for loan losses


135,718



44,275



91,443



207Operating expenses


158,434



162,008



(3,574
)


(2
)Other income


49,576



29,229



20,347



70Income taxes


40,377



60,251



(19,874
)


(33
)Net income


117,641



225,544



(107,903
)


(48
)   Interest
    Income
    Fee
    Income
    Interest
    Expense
   58




---



##### 



Net
    Finance Margin
      Nine Months Ended September 30,2008


2007Weighted


Net


Average


Weighted


Net


AverageAverage


Investment


Yield/


Average


Investment


Yield/Balance


Income


Cost


Balance


Income


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





$
653,376



8.09
%





$
685,639



10.09
%Fee income






104,643



1.29







124,421



1.83Total interest earning assets(1)

$
10,766,220



758,019



9.38


$
9,083,745



810,060



11.92Total interest bearing liabilities(2)


8,869,384



355,425



5.34



7,476,024



347,211



6.21Net finance spread





$
402,594



4.04
%





$
462,849



5.71
%Net finance margin










4.98
%










6.81
%     (1)
    
    Interest earning assets include cash, restricted cash, loans and
    investments in debt securities.(2)
    
    Interest bearing liabilities include deposits, repurchase
    agreements, secured and unsecured credit facilities, term debt,
    convertible debt and subordinated debt.  Provision
    for Loan Losses
    Operating
    Expenses
    Other
    Income
   59




---



##### 



Healthcare
    Net Lease Segment
    Nine Months EndedSeptember 30,2008


2007


$ Change


% Change($ in thousands)Interest income

$
944


$
781


$
163



21
%Fee income


239







239



100Operating lease income


80,040



69,934



10,106



14Interest expense


32,479



30,155



2,324



8Depreciation of direct real estate investments


26,804



23,076



3,728



16Other operating expenses


7,304



6,445



859



13Other expense


1,309



1,225



84



7Noncontrolling interests expense


2,120



4,517



(2,397
)


(53
)Net income


11,207



5,297



5,910



112   Operating
    Lease Income
  triple-net
  Interest
    Expense
    Net
    Finance Margin
    Depreciation
    of Direct Real Estate Investments
   60




---



##### 



Noncontrolling
    interest expense
    Residential
    Mortgage Investment Segment
    Nine Months EndedSeptember 30,2008


2007


$ Change


% Change($ in thousands)Interest income

$
182,239


$
258,361


$
(76,122
)


(29
)%Interest expense


141,620



242,328



(100,708
)


(42
)Provision for loan losses


11,876



415



11,461



2762Operating expenses


7,128



5,369



1,759



33Other expense


75,577



49,769



25,808



52Net loss


53,962



39,520



14,442



37   Interest
    Income
    Interest
    Expense
    Provision
    for Loan Losses
    Operating
    Expenses
    Other
    Expense
   61




---



##### 



Non-GAAP Adjusted
    Earnings
    Nine Months Ended September 30,2008


2007($ in thousands, except per share data)Net income

$
74,886


$
191,321Add:Real estate depreciation and amortization(1)


25,402



23,675Amortization of deferred financing fees(2)


71,628



19,823Non-cash equity compensation


27,027



31,908Net realized and unrealized (gains) losses on residential
    mortgage investment portfolio, including related derivatives(3)


(45,857
)


55,805Unrealized (gains) losses on derivatives and foreign currencies,
    net


(3,539
)


15,504Unrealized losses on investments, net


43,280



9,669Provision for loan losses


148,294



44,690Recoveries(4)


(700
)


Less:Charge offs


115,828



51,671Nonrecurring items






Adjusted earnings

$
224,593


$
340,724Net income per share:Basic  as reported

$
0.31


$
1.03Diluted  as reported

$
0.31


$
1.02Average shares outstanding:Basic  as reported


242,495,601



185,522,634Diluted  as reported


243,614,848



187,636,502Adjusted earnings per share:Basic

$
0.93


$
1.84Diluted(5)

$
0.92


$
1.82Average shares outstanding:Basic


242,495,601



185,522,634Diluted(6)


243,614,848



189,120,843     (1)
    
    Depreciation and amortization for direct real estate investments
    only. Excludes depreciation for corporate leasehold
    improvements, fixed assets and other non-real estate items.(2)
    
    Includes amortization of deferred financing fees and other
    non-cash interest expense.(3)
    
    Includes adjustments to reflect realized and unrealized gains
    and losses related to residential mortgage investments held in
    our portfolio as of the balance sheet date and related
    derivative instruments.(4)
    
    Includes all recoveries on loans during the period.(5)
    
    Adjusted to reflect the impact of adding back noncontrolling
    interests expense totaling $2.8 million for the nine months
    ended September 30, 2007, respectively, to adjusted
    earnings due to the application of the if-converted method on
    non-managing member units, which were considered dilutive to
    adjusted earnings per share, but were antidilutive to GAAP net
    income per share.(6)
    
    Adjusted to include average non-managing member units of
    1,484,341 for the nine months ended September 30, 2007,
    which were considered dilutive to adjusted earnings per share,
    but are antidilutive to GAAP net income per share. 62




---



##### 



Financial
    Condition
  Commercial
    Banking Segment
  Commercial
    Banking Portfolio Composition
    September 30,


December 31,2008


2007($ in thousands)Marketable securities, available-for-sale

$
797,063


$
Commercial real estate A Participation Interest,
    net(1)


1,632,328



Commercial loans, net(1)(2)


9,426,510



9,867,737Investments


201,983



227,144Total

$
12,057,884


$
10,094,881     (1)
    
    Include related interest receivables.(2)
    
    Includes loans held for sale and loans.  Marketable
    securities, available-for-sale
    Commercial
    Loan Portfolio
    Commercial
    real estate A Participation Interest
  Commercial Lending Assets and Credit
    Quality
 63




---



##### 



Commercial
    Loan Portfolio Composition
    September 30,


December 31,2008


2007($ in thousands)Composition of commercial loan portfolio by loan type:Senior secured loans(1)

$
5,593,220



59
%

$
5,695,167



58
%First mortgage loans(1)


2,668,600



28



2,995,048



30Subordinate loans


1,164,690



13



1,177,522



12Total

$
9,426,510



100
%

$
9,867,737



100
%Composition of commercial loan portfolio by business:Corporate Finance

$
2,766,461



29
%

$
2,979,241



30
%Healthcare and Specialty Finance


2,822,086



30



2,934,666



30Structured Finance


3,837,963



41



3,953,830



40Total

$
9,426,510



100
%

$
9,867,737



100
%     (1)
    
    Includes Term B loans.    Number


Average


Number of


Average Loanof Loans


Loan Size


Clients


Size per Client($ in thousands)Composition of commercial loan portfolio by business:Corporate Finance


503


$
5,500



251


$
11,022Healthcare and Specialty Finance


371



7,607



256



11,024Structured Finance


211



18,189



177



21,683Overall commercial loan portfolio


1,085



8,688



684



13,781     Due in


Due inOne Year


One to


Due Afteror Less


Five Years


Five Years


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

$
612,925


$
4,601,719


$
378,576


$
5,593,220First mortgage loans(1)


1,127,002



1,441,918



99,680



2,668,600Subordinate loans


49,275



571,348



544,067



1,164,690Total

$
1,789,202


$
6,614,985


$
1,022,323


$
9,426,510     (1)
    
    Includes Term B loans. 64




---



##### 



Adjustable


FixedRates


Rates


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

$
5,560,524


$
32,696


$
5,593,220First mortgage loans(1)


2,391,172



277,428



2,668,600Subordinate loans


1,032,669



132,021



1,164,690Total

$
8,984,365


$
442,145


$
9,426,510Percentage of total commercial loan portfolio


95%



5%



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


December 31,Commercial Loan Asset Classification

2008


2007($ in thousands)Loans 60 or more days contractually delinquent

$
200,317


$
74,298Non-accrual loans(1)


263,905



170,522Impaired loans(2)


702,596



318,945Less: loans in multiple categories


(438,837
)


(226,021
)Total

$
727,981


$
337,744Total as a percentage of total commercial lending assets


6.58
%


3.42
%     (1)
    
    Includes commercial loans with aggregate principal balances of
    $100.0 million and $55.5 million as of
    September 30, 2008 and December 31, 2007,
    respectively, which were also classified as loans 60 or more
    days contractually delinquent. Includes non-performing loans
    classified as held for sale that have an aggregate principal
    balance of $14.5 million as of September 30, 2008. As
    of December 31, 2007, there were no non performing loans
    classified as held for sale.(2)
    
    Includes commercial loans with aggregate principal balances of
    $174.9 million and $55.5 million as of
    September 30, 2008 and December 31, 2007,
    respectively, which were also classified as loans 60 or more
    days contractually delinquent, and commercial loans with
    aggregate principal balances of $249.4 million and
    $170.5 million as of September 30, 2008 and
    December 31, 2007, respectively, which were also classified
    as loans on non-accrual status. The carrying values of impaired
    commercial loans were $697.4 million and
    $311.6 million as of September 30, 2008 and
    December 31, 2007, respectively, prior to the application
    of allocated reserves.  Accounting by Creditors for
    Impairment of a Loan
 65




---



##### 



and/or
    Accounting for Debtors and Creditors for Troubled Debt
    Restructurings
    Investments
      Healthcare
    Net Lease Segment
  Direct
    Real Estate Investments
  triple-net triple-net
 66




---



##### 



Residential
    Mortgage Investment Segment
  Portfolio
    Composition
    September 30,


December 31,2008


2007($ in thousands)Prime brokerage securities(1)

$
1,568,640


$
112,239Mortgage-related receivables(2)


1,841,629



2,033,296Residential mortgage-backed securities:Agency(3)


1,522,960



4,030,180Non-Agency(3)


566



4,632Total

$
4,933,795


$
6,180,347     (1)
    
    Represents U.S. Treasury securities and Agency Discount Notes.(2)
    
    Represents secured receivables that are backed by
    adjustable-rate residential prime mortgage loans.(3)
    
    See following paragraph for a description of these securities.    Mortgage-Related Receivables and Related Owner
    Trust Securitizations
   67




---



##### 



Credit
    Quality and Allowance for Loan Losses
    September 30,


December 31,2008


2007($ in thousands)Mortgage-related receivables whose underlying mortgage loans are
    90 or more days past due or were in the process of foreclosure(1)

$
40,006


$
14,751Percentage of mortgage-related receivables


2.16
%(2)


0.72
%(2)     (1)
    
    Mortgage loans 90 or more days pass due are also placed on
    non-accrual status.(2)
    
    By comparison, in their September 2008 Monthly Summary Reports,
    which reflected up to August 2008 and September 2008
    performance, Fannie Mae and Freddie Mac, respectively, reported
    single-family delinquency (SDQ) rates of 1.57% and
    1.27%, respectively. The SDQ rates are based on loans
    90 days or more delinquent or in foreclosure as of period
    end and in addition, the SDQ rate from Freddie Mac includes
    loans underlying their structured transactions. The comparable
    August 2008 statistic for mortgage-related receivables was 2.12%.      Financing
      Market Risk Management
  Liquidity
    and Capital Resources
   68




---



##### 



69




---



##### 



and/or
  Cash
    and Cash Equivalents
      Sources
    and Uses of Cash
        Deposits
   70




---



##### 



Deposits,
  Borrowings
  Borrowings Form 10-K Borrowings
        Repurchase
    Agreements
      Credit
    Facilities
   71




---



##### 



Principal


Interest

MaturityCommitment


Outstanding


Rate(1)

Date($ in thousands)Secured Credit Facilities:CS Funding III

$
150,000


$
79,000


LIBOR + 2.00%

April 29, 2009CS Funding VII


285,000
(2)


183,000


CP + 2.25%

March 31, 2009CS Funding VIII


50,388



50,388


CP + 0.75%

July 19, 2010CSE QRS Funding I


815,000
(2)


26,000


CP/LIBOR + 2.00%

April 24, 2009CS Europe(3)


281,840



172,773


EURIBOR + 2.50%(4)

September 23, 2009Total Secured Credit Facilities


1,582,228



511,161
(5)Unsecured Credit Facilities:CS Inc.


1,070,000



1,004,100


LIBOR + 3.0%(6)

March 13, 2010Total credit facilities

$
2,652,228


$
1,515,261     (1)
    
    As of September 30, 2008, the one-month LIBOR was 3.93%;
    the one-month EURIBOR was 5.05%; the CP rate for CS Funding VIII
    was 2.77%; and the blended CP/LIBOR rate for CSE QRS Funding I
    was 4.61%; the CP rates for CS Funding VII were 3.35%.(2)
    
    Upon termination of the revolving period, there is an
    amortization period of up to one year.(3)
    
    CS Europe is a 200 million facility and the amounts
    presented were translated to United States Dollars
    (USD) using the spot rate as of September 30,
    2008.(4)
    
    Borrowings in Euro or British Pounds Sterling (GBP)
    are at EURIBOR or GBP LIBOR + 2.50%, respectively, and
    borrowings in USD are at LIBOR + 2.50%.(5)
    
    The aggregate outstanding collateral balance pledged to our
    secured credit facilities as of September 30, 2008 was
    $975 million.(6)
    
    LIBOR + 3.0% or at an alternative base rate, which is the
    greater of the prime rate for USD borrowings or the Federal
    Funds Rate + 1.50%, or for foreign currency borrowings, at the
    prevailing EURIBOR + 3.0% or GBP LIBOR +3.0%.    Term
    Debt
    Owners
    Trust Term Debt
   72




---



##### 



Convertible
    Debt
    Subordinated
    Debt
    Mortgage
    Debt
    Debt
    Covenants
  and/or
  Federal
    Home Loan Bank Financing
    Equity
     73




---



##### 



Commitments,
    Guarantees & Contingencies
    Commitments and
    Contingencies
  Commitments and
    Contingencies
      Credit
    Risk Management
  agreed-upon
 74




---



##### 



Commercial
    Banking Segment
      Residential
    Mortgage Investment Segment
    Concentrations
    of Credit Risk
    Derivative
    Counterparty Credit Risk
   75




---



##### 



Market
    Risk Management
  and/or
  Derivative Instruments
  Interest
    Rate Risk Management  Commercial Banking
    Segment & Healthcare Net Lease Segment
    12-month
  Estimated (Decrease)Increase inRate Change

Net Interest Income(Basis Points)

Over 12 Months($ in thousands)− 100

$
27,240− 50


13,080+ 50


(8,760
)+ 100


(15,840
)    76




---



##### 



Amount


Percentage ofOutstanding


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

$
1,609,265



17
%At the interest rate floor


177,548



2Below the interest rate floor


2,271,232



24Loans with no interest rate floor


5,368,465



57Total

$
9,426,510



100
%         Interest
    Rate Risk Management  Residential Mortgage Investment
    Segment
        Estimated (Decrease)Rate Change

Increase


Percentage of Total(Basis Points)

in Fair Value


Segment Assets($ in thousands)− 100

$
2,099



0.042
%− 50


1,139



0.023+ 50


(933
)


(0.019
)+ 100


(1,507
)


(0.030
)  77




---



##### 



Critical
    Accounting Estimates
  Managements Discussion and Analysis of Financial
    Condition and Results of Operations Summary of Significant Accounting Policies Critical Accounting Estimates Managements Discussion and Analysis of Financial
    Condition and Results of Operations Form 10-K
  Fair
    Value Measurements
    Fair Value Measurements ,
     78




---



##### 




    Selection of third-party market data sources;
    Evaluation of the expected reliability of the estimate;
    Reliability, timeliness and cost of alternative valuation
    methodologies; and
    Selection of proxy instruments, as necessary.     79




---



##### 



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
 PART II.
    OTHER INFORMATION  ITEM 1A.
    RISK
    FACTORS  Our business faces many risks.  The risks described
    below may not be the only risks we face. Additional risks that
    we do not yet know of or that we currently believe are
    immaterial may also impair our business operations. If any of
    the events or circumstances described in the following risks
    actually occur, our business, financial condition or results of
    operations could suffer, and the trading price of our securities
    could decline. As a result, you should consider all of the
    following risks, together with all of the other Risk Factors set
    forth in our Annual Report on
    Form 10-K
    for the year ended December 31, 2007, as filed with the SEC
    on February 29, 2008 (the
    Form 10-K)
    and our Quarterly Reports on
    Form 10-Q
    for the quarters ended March 31, 2008 and June 30,
    2008, as filed with the SEC on May 12, 2008 and
    August 11, 2008, respectively, and the other information in
    this Quarterly Report on
    Form 10-Q,
    the
    Form 10-K
    and our filings with the SEC before deciding to invest in our
    securities.
  Compliance
    with applicable regulations could be more costly than expected
    and could negatively impact our business.
   80




---



##### 



California
    Law
    Federal
    Law
    Safety
    and Soundness Standards
   81




---



##### 



Capital
    Standards
           82




---



##### 



Limitations
    on Dividends
    Other
    Regulation
    The
    acquisition of CapitalSource Bank has required us to acquire
    additional REIT-eligible assets to optimize our REIT structure
    for 2008.
    We may
    not be successful in effecting any transaction with respect to
    our healthcare net lease business or realizing proceeds for our
    account through any transaction, which could impair our
    liquidity position.
    We
    have determined not to qualify as a REIT beyond 2008 and the
    effects of this change in tax status could have adverse
    implications on our liquidity.
     83




---



##### 



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


Maximum NumberTotal Number


Average


as Part of Publicly


of Shares that Mayof Shares


Price Paid


Announced Plans


Yet be PurchasedPurchased(1)


per Share


or Programs


Under the PlansJuly 1  July 31, 2008


208,549


$
10.84







August 1  August 31, 2008


44,468



12.28







September 1  September 30, 2008


12,073



12.02







Total


265,090



11.13     (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     84




---



##### 



Signatures      Date: November 10, 2008

/s/  JOHN
    K. DELANEYJohn
    K. Delaney
    Chairman of the Board and Chief Executive Officer
    (Principal Executive Officer)Date: November 10, 2008

/s/  THOMAS
    A. FINKThomas
    A. Fink
    Chief Financial Officer
    (Principal Financial Officer)Date: November 10, 2008

/s/  BRYAN
    D. SMITHBryan
    D. Smith
    Chief Accounting Officer
    (Principal Accounting Officer)  85




---



##### 



INDEX TO
    EXHIBITS  ExhibitNo

Description3
.1

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

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

Capital Maintenance and Liquidity Agreement dated as of
    July 25, 2008, among CapitalSource Inc., CapitalSource TRS
    Inc., CapitalSource Finance LLC, CapitalSource Bank and the FDIC
    (incorporated by reference to exhibit 10.1 to the
    Form 8-K
    filed by CapitalSource on July 28, 2008).10
.2

Parent Company Agreement dated as of July 25, 2008, among
    CapitalSource Inc., CapitalSource TRS Inc., CapitalSource
    Finance LLC, CapitalSource Bank and the FDIC (incorporated by
    referenced to exhibit 10.2 to the
    Form 8-K
    filed by CapitalSource on July 28, 2008).10
.3

Amended and Restated Sale and Servicing Agreement, dated as of
    April 28, 2006, by and among CSE QRS Funding I LLC, as the
    seller, CSE Mortgage LLC, as the Originator and as the Servicer,
    each of the Purchasers and Purchaser Agents from time to time
    party thereto, Wachovia Capital Markets, LLC, as the
    Administrative Agent and as the WBNA Agent, and Wells Fargo
    Bank, National Association, as the Backup Servicer and as the
    Collateral Custodian (composite version; reflects all amendments
    through August 26, 2008).10
.4

Second Amended and Restated Sale and Servicing Agreement, dated
    as of May 8, 2008, by and among CapitalSource Real Estate
    Loan LLC,
    2007-A, as
    the Seller, CSE Mortgage LLC, as the Originator and Service, 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
    May 8, 2008)(incorporated by reference to exhibit 10.2
    to the
    Form 10-Q
    filed by CapitalSource on May 12, 2008).10
.4.1

First Amendment, dated July 31, 2008, to the Second Amended
    and Restated Sale and Servicing Agreement dated as of
    May 8, 2008, 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.10
.4.2

Second Amendment, dated as of August 20, 2008, to the
    Second Amended and Restated Sale and Servicing Agreement dated
    as of May 8, 2008, by and among CapitalSource Real Estate
    Loan LLC,
    2007-A, as
    the Seller, CSE Mortgage LLC, as the Originator and Service, 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.10
.5

Sale and Servicing Agreement, dated as of May 8, 2008, by
    and among CS Funding VII Depositor LLC, as the Seller,
    CapitalSource Finance LLC, as the Servicer and Originator, the
    Issuers from time to time party thereto, the Liquidity Banks
    from time to time party thereto, Citicorp North America, Inc.,
    as the Administrative Agent and Wells Fargo Bank, National
    Association, as the Backup Servicer and as the Collateral
    Custodian (incorporated by reference to exhibit 10.3 to the
    Form 10-Q
    filed by CapitalSource on May 12, 2008).10
.5.1

First Amendment, dated July 31, 2008, to the Sale and
    Servicing Agreement dated as of May 8, 2008, 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. 86




---



##### 



ExhibitNo

Description10
.5.2

Second Amendment, dated August 20, 2008, to the Sale and
    Servicing Agreement dated as of May 8, 2008, 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.10
.6*

Relocation Agreement, dated August 22, 2008, by and between
    CapitalSource Inc. and Steven A. Museles.10
.7*

CapitalSource Inc. Amended and Restated Deferred Compensation
    Plan.10
.8*

Summary of Non-employee Director Compensation.10
.9*

Form of Restricted Stock Agreement (2008) (incorporated by
    reference to exhibit 10.6 to the
    Form 10-Q
    filed by CapitalSource on August 11, 2008).10
.10*

Form of Restricted Stock Unit Agreement (2008) (incorporated by
    reference to exhibit 10.7 to the
    Form 10-Q
    filed by CapitalSource on August 11, 2008).10
.11*

Form of Non-Qualified Option Agreement (2008) (incorporated by
    reference to exhibit 10.8 to the
    Form 10-Q
    filed by CapitalSource on August 11, 2008).12
.1

Ratio of Earnings to Fixed Charges.31
.1

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

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


Section 1350 Certifications.     
    
    Filed herewith.*
    
    Management contract or compensatory plan or arrangement.   87