##### 



UNITED STATES SECURITIES AND
    EXCHANGE COMMISSION
 Washington, D.C.
    20549
  Form 10-Q
   QUARTERLY REPORT PURSUANT TO
    SECTION 13 OR 15(d)
 OF THE SECURITIES EXCHANGE ACT
    OF 1934
  For the quarterly period ended September 30, 2006
  Commission File
    No. 1-31753
  CapitalSource Inc.
 (Exact name of registrant as
    specified in its charter)
  Delaware

35-2206895(State of
    Incorporation)

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




---



##### 



TABLE OF
    CONTENTS
  
  PagePART I. FINANCIAL
    INFORMATIONItem 1.

Financial StatementsConsolidated
    Balance Sheets as of September 30, 2006 (unaudited) and
    December 31, 2005

2Consolidated
    Statements of Income (unaudited) for the three and nine months
    ended September 30, 2006 and 2005

3Consolidated
    Statement of Shareholders Equity (unaudited) for the nine
    months ended September 30, 2006

4Consolidated
    Statements of Cash Flows (unaudited) for the nine months ended
    September 30, 2006 and 2005

5Notes to the
    Unaudited Consolidated Financial Statements

6Item 2.

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

32Item 3.

Quantitative and
    Qualitative Disclosures about Market Risk

57Item 4.

Controls and
    Procedures

57PART II. OTHER
    INFORMATIONItem 1.

Legal
    Proceedings

58Item 1A.

Risk
    Factors

58Item 2.

Unregistered Sales
    of Equity Securities and Use of Proceeds

58Item 3.

Defaults Upon
    Senior Securities

58Item 4.

Submission of
    Matters to a Vote of Security Holders

58Item 5.

Other
    Information

58Item 6.

Exhibits

58Signatures

59Index to
    Exhibits

60   1




---



##### 



CapitalSource
    Inc.
 Consolidated Balance Sheets  September 30,


December 31,2006


2005(Unaudited)($ in thousands)ASSETSCash and cash equivalents

$
651,143


$
323,896Restricted cash


362,949



284,785Mortgage-related receivables, net


2,340,433



39,438Mortgage-backed securities
    pledged, trading


3,424,516



323,370Receivables under
    reverse-repurchase agreements


52,906



33,243Loans held for sale


77,532



59,589Loans:Loans


7,219,331



5,894,911Less deferred loan fees and
    discounts


(122,255
)


(120,407
)Less allowance for loan losses


(102,659
)


(87,370
)Loans, net


6,994,417



5,687,134Property and equipment, net


278,053



11,502Investments


170,766



126,393Deferred financing fees, net


58,041



42,006Other assets


81,118



55,712Total assets

$
14,491,874


$
6,987,068LIABILITIES, NONCONTROLLING
    INTERESTS AND SHAREHOLDERS EQUITYLiabilities:Repurchase agreements

$
3,387,521


$
358,423Unsecured credit facilities


465,000



Secured credit facilities


2,450,811



2,450,452Term debt


5,080,284



1,779,748Convertible debt


555,000



555,000Subordinated debt


367,721



231,959Stock dividend payable






280,720Cash dividend payable






70,202Other liabilities


111,990



60,626Total liabilities


12,418,327



5,787,130Noncontrolling
    interests


56,371



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






Common stock ($0.01 par
    value, 500,000,000 shares authorized; 178,677,872 and
    141,705,766 shares issued, respectively; 177,377,872 and
    140,405,766 shares outstanding, respectively)


1,774



1,404Additional paid-in capital


2,024,761



1,248,745Retained earnings


18,460



46,783Deferred compensation






(65,729
)Accumulated other comprehensive
    income (loss), net


2,107



(1,339
)Treasury stock, at cost


(29,926
)


(29,926
)Total shareholders equity


2,017,176



1,199,938Total liabilities, noncontrolling
    interests and shareholders equity

$
14,491,874


$
6,987,068    2




---



##### 



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


Nine Months Ended September 30,2006


2005


2006


2005(Unaudited)($ in thousands, except per share data)Net investment
    income:Interest income

$
280,066


$
133,480


$
731,601


$
361,321Fee income


53,955



35,771



132,100



100,723Total interest and fee income


334,021



169,251



863,701



462,044Operating lease income


7,855







19,174



Total investment income


341,876



169,251



882,875



462,044Interest expense


170,118



50,981



421,818



128,364Net investment income


171,758



118,270



461,057



333,680Provision for loan losses


24,849



42,884



51,033



57,833Net investment income after
    provision for loan losses


146,909



75,386



410,024



275,847Operating expenses:Compensation and benefits


33,924



20,253



101,374



72,207Other administrative expenses


19,307



13,042



56,167



32,817Total operating expenses


53,231



33,295



157,541



105,024Other income
    (expense):Diligence deposits forfeited


598



1,628



3,968



3,105Gain on investments, net


7,223



36



5,483



5,328(Loss) gain on derivatives


(5,074
)


(107
)


1,576



(114
)Gain on residential mortgage
    investment portfolio


2,291







220



Other income, net of expenses


5,700



1,186



11,131



4,468Total other income


10,738



2,743



22,378



12,787Noncontrolling interests
    expense


1,259







3,350



Net income before income taxes
    and cumulative effect of accounting change


103,157



44,834



271,511



183,610Income taxes


22,304



16,751



52,945



70,873Net income before cumulative
    effect of accounting change


80,853



28,083



218,566



112,737Cumulative effect of accounting
    change, net of taxes










370



Net income

$
80,853


$
28,083


$
218,936


$
112,737Net income per share:Basic

$
0.47


$
0.24


$
1.34


$
0.97Diluted

$
0.47


$
0.24


$
1.32


$
0.96Average shares
    outstanding:Basic


171,777,989



116,742,755



163,373,576



116,630,570Diluted


173,354,891



117,697,783



166,028,844



117,731,254Dividends declared per share

$
0.49


$



$
1.47


$
    3




---



##### 



CapitalSource
    Inc.
 Consolidated Statement of Shareholders Equity  AccumulatedOtherComprehensive


Treasury


TotalCommon


Additional


Retained


Deferred


Income


Stock,


ShareholdersStock


Paid-in Capital


Earnings


Compensation


(Loss), net


at cost


Equity(Unaudited)($ in thousands)Total shareholders equity as
    of December 31, 2005

$
1,404


$
1,248,745


$
46,783


$
(65,729
)

$
(1,339
)

$
(29,926
)

$
1,199,938Net income










218,936















218,936Other comprehensive income:Unrealized gains, net of tax


















3,446







3,446Total comprehensive income


























222,382Cumulative effect of accounting
    change, net of taxes






(370
)


















(370
)Dividends paid






6,343



(247,211
)














(240,868
)Issuance of common stock, net


352



808,315



















808,667Stock option expense






6,462



















6,462Exercise of options


6



5,277



















5,283Restricted stock activity


12



(53,322
)


(48
)


65,729











12,371Tax benefit on exercise of options






2,902



















2,902Tax benefit on vesting of
    restricted stock grants






409



















409Total shareholders equity as
    of September 30, 2006

$
1,774


$
2,024,761


$
18,460


$



$
2,107


$
(29,926
)

$
2,017,176    4




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##### 



CapitalSource
    Inc.
 Consolidated Statements of Cash Flows  Nine Months Ended September 30,2006


2005(Unaudited)($ in thousands)Operating activities:Net income

$
218,936


$
112,737Adjustments to reconcile net income
    to net cash (used in) provided by operating activities:Stock option expense


6,462



281Restricted stock expense


18,530



13,075Loss on extinguishment of debt


2,497



Non-cash prepayment fee


(8,353
)


Cumulative effect of accounting
    change, net of taxes


(370
)


Amortization of deferred loan fees
    and discounts


(65,808
)


(58,420
)Interest on
    paid-in-kind
    loans


(7,021
)


(8,694
)Provision for loan losses


51,033



57,833Amortization of deferred financing
    fees and discounts


28,551



17,940Depreciation and amortization


9,604



2,015Benefit for deferred income taxes


(9,453
)


(8,965
)Non-cash loss (gain) on
    investments, net


5,510



(2,795
)Non-cash gain on property and
    equipment disposals


(472
)


(Gain) loss on derivatives


(195
)


114Unrealized loss on residential
    mortgage investment portfolio


8,702



Net increase in mortgage-backed
    securities pledged, trading


(331,767
)


Amortization of discount on
    residential mortgage investments


(22,786
)


Increase in loans held for sale, net


(60,154
)


(33,606
)Decrease in other assets


65,211



2,992Increase (decrease) in other
    liabilities


35,423



(21,964
)Cash (used in) provided by
    operating activities


(55,920
)


72,543Investing activities:(Increase) decrease in restricted
    cash


(78,164
)


67,394Increase in mortgage-related
    receivables, net


(2,391,783
)


Increase in receivables under
    reverse-repurchase agreements, net


(19,663
)


(16,928
)Increase in loans, net


(1,365,905
)


(1,083,002
)Acquisition of real estate, net of
    cash acquired


(66,375
)


Acquisition of investments, net


(22,978
)


(45,329
)Acquisition of property and
    equipment, net


(2,780
)


(3,727
)Cash used in investing activities


(3,947,648
)


(1,081,592
)Financing activities:Payment of deferred financing fees


(37,874
)


(14,875
)Borrowings under repurchase
    agreements, net


269,867



Borrowings on unsecured credit
    facilities, net


465,000



Borrowings on secured credit
    facilities, net


42,538



1,033,739Borrowings of term debt


4,495,533



1,158,485Repayments of term debt


(1,229,379
)


(1,250,315
)Borrowings of subordinated debt


131,685



Proceeds from issuance of common
    stock, net of offering costs


498,931



582Proceeds from exercise of options


5,283



761Tax benefits on share-based payments


3,311



Payment of dividends


(314,080
)


Cash provided by financing
    activities


4,330,815



928,377Increase (decrease) in cash and
    cash equivalents


327,247



(80,672
)Cash and cash equivalents as of
    beginning of period


323,896



206,077Cash and cash equivalents as of end
    of period

$
651,143


$
125,405Noncash transactions from
    investing and financing activities:Issuance of common stock in
    dividend and acquisition

$
309,736


$
    5




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##### 



CapitalSource
    Inc.
  NOTES TO THE UNAUDITED CONSOLIDATED
    FINANCIAL STATEMENTS
  Note 1.
    Organization    
    First Mortgage Loans  Commercial loans that are
    secured by first mortgages on the property of the client;
    Senior Secured Asset-Based Loans  Commercial loans
    that are underwritten based on our assessment of the
    clients eligible collateral, including accounts
    receivable, real estate related receivables
    and/or
    inventory;
    Senior Secured Cash Flow Loans  Commercial loans that
    are underwritten based on our assessment of a clients
    ability to generate cash flows sufficient to repay the loan and
    maintain or increase its enterprise value during the term of the
    loan, thereby facilitating repayment of the principal at
    maturity;
    Term B, Second Lien and Mezzanine Loans  Commercial
    loans, including subordinated mortgage loans, that come after a
    clients senior loans in right of payment or upon
    liquidation;
    Direct Real Estate Investments  Commercial
    investments in land, buildings and other assets, including those
    that are purchased from and triple-net leased back to the
    current operators through sale-leaseback transactions;
    Private Equity Co-Investments  Opportunistic equity
    investments, typically in conjunction with commercial lending
    relationships and on the same terms as other equity
    investors; and
    Residential Mortgage Investments  Investments in
    residential mortgage loans, residential mortgage-backed
    securities and residential asset-backed securities that
    constitute qualifying REIT assets.    Entity

PurposeCapitalSource TRS Inc.

Subsidiary that owns interest in
    CapitalSource Finance LLC that made a taxable REIT subsidiary
    election effective January 1, 2006.CapitalSource Finance LLC

Primary operating subsidiary of
    CapitalSource TRS Inc. that conducts commercial lending and
    investment business of CapitalSource and manages our REIT
    operations.CapitalSource Finance II Inc.

Subsidiary of CapitalSource
    Finance LLC that holds certain limited liability companies
    established in accordance with credit facilities and term debt
    securitizations.CSE Mortgage LLC

Subsidiary that holds qualifying
    REIT assets of CapitalSource.CSE QRS Funding I LLC

Single-purpose, bankruptcy-remote
    subsidiary of CSE Mortgage LLC established in accordance with a
    secured credit facility to finance purchases of qualifying REIT
    assets.    6




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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
      Summary of Significant Accounting
    Policies Form 10-K.
  Mortgage-Related
    Receivables and Related Owner
    Trust Securitizations
  Consolidation
    of Variable Interest Entities  An Interpretation of
    ARB No. 51
  Accounting for Nonrefundable
    Fees and Costs Associated with Originating or Acquiring Loans
    and Initial Direct Costs of Leases.
  Note 3.
    Recently
    Issued Accounting Guidance  Accounting
    for Certain Hybrid Financial Instrument Accounting for Derivative Instruments
    and Hedging Activities Accounting for Transfers and
    Servicing
 7




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##### 



CapitalSource
    Inc.
  NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  of Financial Assets and Extinguishments of Liabilities
  Accounting for Servicing of Financial Assets   An
    Amendment of FASB Statement No. 140
  Accounting for Uncertainty in Income Taxes  An
    Interpretation of FASB Statement No. 109 Accounting for Income Taxes.
  Fair Value Measurements
  Note 4.
    Mortgage-Related
    Receivables  Summary of Significant Accounting Policies
 8




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##### 



CapitalSource
    Inc.
  NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Note 5.
    Residential
    Mortgage-Backed Securities and Certain Derivative
    Instruments  1-year
  Accounting for Certain Investments in
    Debt and Equity Securities Summary of Significant Accounting Policies Form 10-K.
      Note 6.
    Commercial
    Loans and Credit Quality   9




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##### 



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


December 31,Commercial Loan Asset Classification

2006


2005($ in thousands)Loans 60 or more days
    contractually delinquent

$
61,965


$
41,785Non-accrual loans(1)


175,846



137,446Impaired loans(2)


266,816



199,257Less: loans in multiple categories


(222,764
)


(175,070
)Total

$
281,863


$
203,418Total as a percentage of total
    loans


3.83%



3.40%     (1)
    
    Includes commercial loans with an aggregate principal balance of
    $46.9 million and $37.6 million as of
    September 30, 2006 and December 31, 2005,
    respectively, which were also classified as loans 60 or more
    days contractually delinquent.(2)
    
    Includes commercial loans with an aggregate principal balance of
    $46.9 million and $37.6 million as of
    September 30, 2006 and December 31, 2005,
    respectively, which were also classified as loans 60 or more
    days contractually delinquent, and commercial loans with an
    aggregate principal balance of $175.8 million and
    $137.4 million as of September 30, 2006 and
    December 31, 2005, respectively, which were also classified
    as loans on non-accrual status. The carrying value of impaired
    commercial loans was $263.7 million and $194.6 million
    as of September 30, 2006 and December 31, 2005,
    respectively.  Accounting by Creditors for Impairment of a Loan
   10




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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 EndedSeptember 30,2006


2005($ in thousands)Balance as of beginning of period

$
87,370


$
35,208Provision for loan losses


50,732



57,833Charge offs, net


(35,443
)


(11,543
)Balance as of end of period

$
102,659


$
81,498   Note 7.
    Investments    September 30,


December 31,2006


2005($ in thousands)Investments carried at cost

$
69,949


$
51,907Investments carried at fair value:Investments
    available-for-sale


61,720



50,461Warrants


8,210



10,259Investments accounted for under
    the equity method


30,887



13,766Total

$
170,766


$
126,393    11




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##### 



CapitalSource
    Inc.
  NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   Note 8.
    Borrowings  Borrowings Form 10-K,
  Repurchase
    Agreements
    Credit
    Facilities
          Term
    Debt
  Trust 2006-2. Class A-PT, A-1A, A-1B, 30-day
 12




---



##### 



CapitalSource
    Inc.
  NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Subordinated
    Debt
    90-day
  Foreign
    Currency Translation,
  90-day
    The Equity Method of Accounting for Investments
    in Common Stock.
  Note 9.
    Guarantor
    Information   13




---



##### 



CapitalSource
    Inc.
  NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Consolidating
    Balance Sheet
  September 30,
    2006
  CapitalSource Finance LLCCombined Non-


Combined


Other Non-CapitalSource


Guarantor


Guarantor


Guarantor





ConsolidatedInc.


Subsidiaries


Subsidiaries


Subsidiaries


Eliminations


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

$



$
169,149


$
34,552


$
447,442


$



$
651,143Restricted cash






108,330



203,254



51,365







362,949Mortgage-related receivables, net














2,340,433







2,340,433Mortgage-backed securities pledged,
    trading














3,424,516







3,424,516Receivables under
    reverse-repurchase agreements






52,906















52,906Loans held for sale






15,032



62,500











77,532Loans:Loans






4,063,117



520,154



2,646,039



(9,979
)


7,219,331Less deferred loan fees and
    discounts






(31,764
)


(49,618
)


(40,873
)






(122,255
)Less allowance for loan losses










(85,865
)


(16,794
)






(102,659
)Loans, net






4,031,353



384,671



2,588,372



(9,979
)


6,994,417Property and equipment, net






1,311



11,634



265,108







278,053Investment in subsidiaries


3,139,466







791,305



1,111,283



(5,042,054
)


Intercompany (due to) due from


(99,898
)






(65,829
)


165,727







Intercompany note receivable






2,519



11,908







(14,427
)


Investments






48,804



88,294



33,668







170,766Deferred financing fees, net


11,856



25,061



11,139



9,985







58,041Other assets






1,157



27,080



64,680



(11,799
)


81,118Total assets

$
3,051,424


$
4,455,622


$
1,560,508


$
10,502,579


$
(5,078,259
)

$
14,491,874LIABILITIES, NONCONTROLLING
    INTERESTS AND SHAREHOLDERS EQUITYLiabilities:Repurchase agreements

$



$
60,429


$



$
3,327,092


$



$
3,387,521Unsecured credit facilities


465,000



















465,000Secured credit facilities






809,811







1,641,000







2,450,811Term debt






2,755,165



9,624



2,316,298



(803
)


5,080,284Convertible debt


555,000



















555,000Subordinated debt










367,721











367,721Other liabilities


14,248



24,461



71,880



22,376



(20,975
)


111,990Intercompany note payable






14,427











(14,427
)


Total liabilities


1,034,248



3,664,293



449,225



7,306,766



(36,205
)


12,418,327Noncontrolling
    interests






29







56,347



(5
)


56,371Shareholders
    equity:Preferred stock






















Common stock


1,774



















1,774Additional paid-in capital


2,024,761



198,220



282,270



2,884,995



(3,365,485
)


2,024,761Retained earnings


18,460



593,070



826,121



252,062



(1,671,253
)


18,460Accumulated other comprehensive
    income, net


2,107



10



2,892



2,409



(5,311
)


2,107Treasury stock, at cost


(29,926
)


















(29,926
)Total shareholders equity


2,017,176



791,300



1,111,283



3,139,466



(5,042,049
)


2,017,176Total liabilities, noncontrolling
    interests and shareholders equity

$
3,051,424


$
4,455,622


$
1,560,508


$
10,502,579


$
(5,078,259
)

$
14,491,874  14




---



##### 



CapitalSource
    Inc.
  NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Consolidating
    Balance Sheet
  December 31,
    2005
  CapitalSource Finance LLCCombined Non-


Combined


Other Non-CapitalSource


Guarantor


Guarantor


Guarantor





ConsolidatedInc.


Subsidiaries


Subsidiaries


Subsidiaries


Eliminations


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

$
2,038


$
145,065


$
156,571


$
20,222


$



$
323,896Restricted cash






125,832



153,299



5,654







284,785Mortgage-related receivables, net














39,438







39,438Mortgage-backed securities pledged,
    trading














323,370







323,370Receivables under
    reverse-repurchase agreements






33,243















33,243Loans held for sale






17,378



42,211











59,589Loans:Loans






4,087,078



374,833



1,440,828



(7,828
)


5,894,911Less deferred loan fees and
    discounts






(971
)


(100,123
)


(19,313
)






(120,407
)Less allowance for loan losses










(78,003
)


(9,367
)






(87,370
)Loans, net






4,086,107



196,707



1,412,148



(7,828
)


5,687,134Property and equipment, net










11,502











11,502Investment in subsidiaries


2,063,092







655,627







(2,718,719
)


Intercompany note receivable






7,803



35,288







(43,091
)


Investments


33,494



21,210



71,689











126,393Deferred financing fees, net


11,114



22,868



7,944



80







42,006Other assets


20,110



1,018



19,839



14,745







55,712Total assets

$
2,129,848


$
4,460,524


$
1,350,677


$
1,815,657


$
(2,769,638
)

$
6,987,068LIABILITIES AND
    SHAREHOLDERS EQUITYLiabilities:Repurchase agreements

$



$
47,157


$



$
311,266


$



$
358,423Secured credit facilities






1,938,273



42,179



470,000







2,450,452Term debt






1,774,475



5,273











1,779,748Convertible debt


555,000



















555,000Subordinated debt










231,959











231,959Stock dividend payable


280,720



















280,720Cash dividend payable


70,202



















70,202Other liabilities


3,661



22,228



41,112



1,453



(7,828
)


60,626Intercompany note payable


20,327



22,764











(43,091
)


Total liabilities


929,910



3,804,897



320,523



782,719



(50,919
)


5,787,130Shareholders
    equity:Preferred stock






















Common stock


1,404



















1,404Additional paid-in capital


1,248,745



278,656



362,137



1,025,690



(1,666,483
)


1,248,745Retained earnings


46,783



377,492



668,762



7,248



(1,053,502
)


46,783Deferred compensation


(65,729
)


















(65,729
)Accumulated other comprehensive
    loss, net


(1,339
)


(521
)


(745
)






1,266



(1,339
)Treasury stock, at cost


(29,926
)


















(29,926
)Total shareholders equity


1,199,938



655,627



1,030,154



1,032,938



(2,718,719
)


1,199,938Total liabilities and
    shareholders equity

$
2,129,848


$
4,460,524


$
1,350,677


$
1,815,657


$
(2,769,638
)

$
6,987,068  15




---



##### 



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


Combined


Other Non-CapitalSource


Guarantor


Guarantor


Guarantor





ConsolidatedInc.


Subsidiaries


Subsidiaries


Subsidiaries


Eliminations


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

$
3


$
98,673


$
33,637


$
148,195


$
(442
)

$
280,066Fee income






28,171



4,528



21,256







53,955Total interest and fee income


3



126,844



38,165



169,451



(442
)


334,021Operating lease income














7,855







7,855Total investment income


3



126,844



38,165



177,306



(442
)


341,876Interest expense


11,382



55,564



5,527



98,087



(442
)


170,118Net investment (loss) income


(11,379
)


71,280



32,638



79,219







171,758Provision for loan losses










25,551



(702
)






24,849Net investment (loss) income after
    provision for loan losses


(11,379
)


71,280



7,087



79,921







146,909Operating expenses:Compensation and benefits






1,218



32,706











33,924Other administrative expenses


3,998



802



14,138



4,150



(3,781
)


19,307Total operating expenses


3,998



2,020



46,844



4,150



(3,781
)


53,231Other income
    (expense):Diligence deposits forfeited






(128
)


726











598Gain on investments, net










7,223











7,223(Loss) gain on derivatives






(1,656
)


874



(4,292
)






(5,074
)Gain on residential mortgage
    investment portfolio














2,291







2,291Other income, net of expenses






4,411



4,985



85



(3,781
)


5,700Earnings in subsidiaries


96,230







51,781



45,911



(193,922
)


Intercompany






(20,079
)


20,079











Total other income (expense)


96,230



(17,452
)


85,668



43,995



(197,703
)


10,738Noncontrolling interests
    expense






29







1,232



(2
)


1,259Net income before income taxes
    and cumulative effect of accounting change


80,853



51,779



45,911



118,534



(193,920
)


103,157Income taxes














22,304







22,304Net income before cumulative
    effect of accounting change


80,853



51,779



45,911



96,230



(193,920
)


80,853Cumulative effect of accounting
    change, net of taxes






















Net
    income

$
80,853


$
51,779


$
45,911


$
96,230


$
(193,920
)

$
80,853  16




---



##### 



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


Combined


Other Non-CapitalSource


Guarantor


Guarantor


Guarantor





ConsolidatedInc.


Subsidiaries


Subsidiaries


Subsidiaries


Eliminations


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

$
552


$
330,482


$
65,560


$
337,310


$
(2,303
)

$
731,601Fee income






104,902



(19,488
)


46,686







132,100Total interest and fee income


552



435,384



46,072



383,996



(2,303
)


863,701Operating lease income














19,174







19,174Total investment income


552



435,384



46,072



403,170



(2,303
)


882,875Interest expense


24,335



161,020



18,060



220,706



(2,303
)


421,818Net investment (loss) income


(23,783
)


274,364



28,012



182,464







461,057Provision for loan losses










43,304



7,729







51,033Net investment (loss) income after
    provision for loan losses


(23,783
)


274,364



(15,292
)


174,735







410,024Operating expenses:Compensation and benefits






3,524



97,850











101,374Other administrative expenses


11,340



2,039



42,488



11,200



(10,900
)


56,167Total operating expenses


11,340



5,563



140,338



11,200



(10,900
)


157,541Other income
    (expense):Diligence deposits forfeited






(128
)


4,096











3,968Gain on investments, net










5,483











5,483(Loss) gain on derivatives






(621
)


2,112



85







1,576Gain on residential mortgage
    investment portfolio














220







220Other income, net of expenses


76



4,729



19,723



(2,497
)


(10,900
)


11,131Earnings in subsidiaries


253,983







239,349



148,912



(642,244
)


Intercompany






(33,409
)


33,409











Total other income (expense)


254,059



(29,429
)


304,172



146,720



(653,144
)


22,378Noncontrolling interests
    expense






29







3,327



(6
)


3,350Net income before income taxes
    and cumulative effect of accounting change


218,936



239,343



148,542



306,928



(642,238
)


271,511Income taxes














52,945







52,945Net income before cumulative
    effect of accounting change


218,936



239,343



148,542



253,983



(642,238
)


218,566Cumulative effect of accounting
    change, net of taxes










370











370Net
    income

$
218,936


$
239,343


$
148,912


$
253,983


$
(642,238
)

$
218,936  17




---



##### 



CapitalSource
    Inc.
  NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Consolidating
    Statement of Income
  Three
    Months Ended September 30, 2005
  CapitalSource Finance LLCCombined Non-


CombinedCapitalSource


Guarantor


Guarantor





ConsolidatedInc.


Subsidiaries


Subsidiaries


Eliminations


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

$
199


$
110,689


$
23,215


$
(623
)

$
133,480Fee income






11,497



24,274







35,771Total interest and fee income


199



122,186



47,489



(623
)


169,251Interest expense


4,177



47,124



303



(623
)


50,981Net investment (loss) income


(3,978
)


75,062



47,186







118,270Provision for loan losses










42,884







42,884Net investment (loss) income after
    provision for loan losses


(3,978
)


75,062



4,302







75,386Operating expenses:Compensation and benefits






443



19,810







20,253Other administrative expenses


(18
)


286



12,774







13,042Total operating expenses


(18
)


729



32,584







33,295Other income
    (expense):Diligence deposits forfeited










1,628







1,628Gain on investments, net










36







36Gain (loss) on derivatives






588



(695
)






(107
)Other income, net of expenses






979



207







1,186Earnings in subsidiaries


48,794







52,213



(101,007
)


Intercompany






(23,687
)


23,687







Total other income (expense)


48,794



(22,120
)


77,076



(101,007
)


2,743Net income before income
    taxes


44,834



52,213



48,794



(101,007
)


44,834Income taxes


16,751















16,751Net income

$
28,083


$
52,213


$
48,794


$
(101,007
)

$
28,083  18




---



##### 



CapitalSource
    Inc.
  NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Consolidating
    Statement of Income
  Nine
    Months Ended September 30, 2005
  CapitalSource Finance LLCCombined Non-


CombinedCapitalSource


Guarantor


Guarantor





ConsolidatedInc.


Subsidiaries


Subsidiaries


Eliminations


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

$
199


$
305,670


$
57,371


$
(1,919
)

$
361,321Fee income






36,005



64,718







100,723Total interest and fee income


199



341,675



122,089



(1,919
)


462,044Interest expense


12,554



115,729



2,000



(1,919
)


128,364Net investment (loss) income


(12,355
)


225,946



120,089







333,680Provision for loan losses










57,833







57,833Net investment (loss) income after
    provision for loan losses


(12,355
)


225,946



62,256







275,847Operating expenses:Compensation and benefits






1,690



70,517







72,207Other administrative expenses


276



716



31,825







32,817Total operating expenses


276



2,406



102,342







105,024Other income
    (expense):Diligence deposits forfeited










3,105







3,105Gain on investments, net










5,328







5,328Gain (loss) on derivatives






1,377



(1,491
)






(114
)Other income, net of expenses






3,442



1,026







4,468Earnings in subsidiaries


196,241







209,650



(405,891
)


Intercompany






(18,709
)


18,709







Total other income (expense)


196,241



(13,890
)


236,327



(405,891
)


12,787Net income before income
    taxes


183,610



209,650



196,241



(405,891
)


183,610Income taxes


70,873















70,873Net income

$
112,737


$
209,650


$
196,241


$
(405,891
)

$
112,737  19




---



##### 



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


Combined


Other Non-CapitalSource


Guarantor


Guarantor


Guarantor





ConsolidatedInc.


Subsidiaries


Subsidiaries


Subsidiaries


Eliminations


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

$
218,936


$
239,343


$
148,912


$
253,983


$
(642,238
)

$
218,936Adjustments to reconcile net income
    to net cash (used in) provided by operating activities:Stock option expense






55



6,407











6,462Restricted stock expense






450



18,080











18,530Loss on extinguishment of debt














2,497







2,497Non-cash prepayment fee










(8,353
)










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










(370
)










(370
)Amortization of deferred loan fees
    and discounts






(33,534
)


6,936



(39,210
)






(65,808
)Interest on
    paid-in-kind
    loans






6,365



(11,373
)


(2,013
)






(7,021
)Provision for loan losses










43,304



7,729







51,033Amortization of deferred financing
    fees and discounts


2,284



16,750



331



9,186







28,551Depreciation and amortization






34



2,220



7,350







9,604Benefit for deferred income taxes














(9,453
)






(9,453
)Non-cash loss on investments, net










5,510











5,510Non-cash (gain) loss on property
    and equipment disposals






(740
)


268











(472
)Loss (gain) on derivatives






678



(844
)


(29
)






(195
)Unrealized loss on residential
    mortgage investment portfolio














8,702







8,702Net increase in mortgage-backed
    securities pledged, trading














(331,767
)






(331,767
)Amortization of discount on
    residential mortgage investments














(22,786
)






(22,786
)Decrease (increase) in loans held
    for sale, net






2,346



(62,500
)










(60,154
)Decrease in intercompany note
    receivable






5,284



23,380







(28,664
)


Decrease (increase) in other assets


20,110



(817
)


(4,586
)


38,705



11,799



65,211Increase in other liabilities


11,977



821



29,876



5,896



(13,147
)


35,423Net transfers with subsidiaries


(923,633
)


(96,974
)


(88,451
)


466,820



642,238



Cash (used in) provided by
    operating activities


(670,326
)


140,061



108,747



395,610



(30,012
)


(55,920
)Investing activities:Decrease (increase) in restricted
    cash






17,502



(49,955
)


(45,711
)






(78,164
)Increase in mortgage-related
    receivables, net














(2,391,783
)






(2,391,783
)Increase in receivables under
    reverse-repurchase agreements, net






(19,663
)














(19,663
)Decrease (increase) in loans, net






75,404



(301,032
)


(1,142,428
)


2,151



(1,365,905
)Acquisition of real estate, net of
    cash acquired














(66,375
)






(66,375
)Disposal (acquisition) of
    investments, net


33,683



(26,835
)


(10,114
)


(19,712
)






(22,978
)Acquisition of property and
    equipment, net






(605
)


(2,175
)










(2,780
)Cash provided by (used in)
    investing activities


33,683



45,803



(363,276
)


(3,666,009
)


2,151



(3,947,648
)Financing activities:Payment of deferred financing fees


(3,026
)


(18,922
)


(3,526
)


(12,400
)






(37,874
)Decrease in intercompany note
    payable


(20,327
)


(8,337
)










28,664



Borrowings under repurchase
    agreements, net






13,273







256,594







269,867Borrowings on unsecured credit
    facilities, net


465,000



















465,000(Repayments of) borrowings on
    secured credit facilities, net






(1,128,462
)






1,171,000







42,538Borrowings of term debt






2,044,066



4,400



2,447,870



(803
)


4,495,533Repayments of term debt






(1,063,398
)


(49
)


(165,932
)






(1,229,379
)Borrowings of subordinated debt










131,685











131,685Proceeds from issuance of common
    stock, net of offering costs


498,931



















498,931Proceeds from exercise of options


5,283



















5,283Tax benefits on share-based payments














3,311







3,311Payment of dividends


(311,256
)










(2,824
)






(314,080
)Cash provided by (used in)
    financing activities


634,605



(161,780
)


132,510



3,697,619



27,861



4,330,815(Decrease) increase in cash and
    cash equivalents


(2,038
)


24,084



(122,019
)


427,220







327,247Cash and cash equivalents as of
    beginning of period


2,038



145,065



156,571



20,222







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

$



$
169,149


$
34,552


$
447,442


$



$
651,143  20




---



##### 



CapitalSource
    Inc.
  NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Consolidating
    Statement of Cash Flows
  Nine
    Months Ended September 30, 2005
  CapitalSource Finance LLCCombined Non-


CombinedCapitalSource


Guarantor


Guarantor





ConsolidatedInc.


Subsidiaries


Subsidiaries


Eliminations


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

$
112,737


$
209,650


$
196,241


$
(405,891
)

$
112,737Adjustments to reconcile net income
    to net cash provided by (used in) operating activities:Stock option expense


281















281Restricted stock expense


13,075















13,075Amortization of deferred loan fees
    and discounts










(58,420
)






(58,420
)Interest on
    paid-in-kind
    loans






(1,408
)


(7,286
)






(8,694
)Provision for loan losses










57,833







57,833Amortization of deferred financing
    fees and discounts


1,747



15,563



630







17,940Depreciation and amortization










2,015







2,015Benefit for deferred income taxes


(8,965
)














(8,965
)Non-cash loss (gain) on
    investments, net






222



(3,017
)






(2,795
)(Gain) loss on derivatives






(1,376
)


1,490







114Increase in loans held for sale, net






(33,606
)










(33,606
)Decrease in intercompany note
    receivable










7,692



(7,692
)


Decrease in other assets


187



1,955



850







2,992(Decrease) increase in other
    liabilities


(14,927
)


6,600



(11,717
)


(1,920
)


(21,964
)Net transfers with subsidiaries


(75,492
)


(199,892
)


(130,507
)


405,891



Cash provided by (used in)
    operating activities


28,643



(2,292
)


55,804



(9,612
)


72,543Investing activities:(Increase) decrease in restricted
    cash






(64,867
)


132,261







67,394Increase in receivables under
    reverse-repurchase agreements, net






(16,928
)










(16,928
)Increase in loans, net






(983,411
)


(101,511
)


1,920



(1,083,002
)Acquisition of investments, net


(28,629
)


(6,175
)


(10,525
)






(45,329
)Acquisition of property and
    equipment, net






5



(3,732
)






(3,727
)Cash (used in) provided by
    investing activities


(28,629
)


(1,071,376
)


16,493



1,920



(1,081,592
)Financing activities:Payment of deferred financing fees


(170
)


(14,277
)


(428
)






(14,875
)Decrease in intercompany note
    payable






(7,692
)






7,692



Borrowings on secured credit
    facilities, net






1,019,426



14,313







1,033,739Borrowings of term debt






1,141,825



16,660







1,158,485Repayments of term debt






(1,128,034
)


(122,281
)






(1,250,315
)Proceeds from issuance of common
    stock, net of offering costs


582















582Proceeds from exercise of options


761















761Cash provided by (used in)
    financing activities


1,173



1,011,248



(91,736
)


7,692



928,377Increase (decrease) in cash and
    cash equivalents


1,187



(62,420
)


(19,439
)






(80,672
)Cash and cash equivalents as of
    beginning of period






170,532



35,545







206,077Cash and cash equivalents as of end
    of period

$
1,187


$
108,112


$
16,106


$



$
125,405  21




---



##### 



CapitalSource
    Inc.
  NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Note 10.
    Shareholders
    Equity  Common
    Stock Shares Outstanding
    Outstanding as of
    December 31, 2005


140,405,766Issuance of common stock


35,845,342Exercise of options


587,716Restricted stock and other stock
    grants, net


539,048Outstanding as of
    September 30, 2006


177,377,872   Dividend
    Reinvestment and Stock Purchase Plan
    Note 11.
    Income
    Taxes       22




---



##### 



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


Nine Months EndedSeptember 30,


September 30,2006


2005


2006


2005Federal statutory rate


35.0
%


35.0
%


35.0
%


35.0
%Benefit of REIT election


(15.9
)






(16.1
)


State income taxes, net of federal
    tax benefit


1.2



2.2



1.4



3.2Other


1.3



0.2



0.9



0.4Estimated annual effective income
    tax rate


21.6



37.4



21.2



38.6Discrete item  Benefit
    for reversal of net deferred tax liabilities(1)










(1.7
)


Current quarter effective income
    tax rate


21.6
%


37.4
%(2)


19.5
%


38.6
%(2)     (1)
    
    In connection with our REIT election, we reversed net deferred
    tax liabilities of $4.7 million, relating to REIT
    qualifying activities, into income during the nine months ended
    September 30, 2006.(2)
    
    We provided for income taxes on the income earned for the three
    months ended September 30, 2005 based on a 37.4% effective
    tax rate, compared to 39.0% for the previous quarters in 2005.
    This decrease in the effective tax rate was the result of both a
    reconciliation of our previous provision for income taxes with
    actual tax expense for 2004 plus a change in the estimated tax
    rate for 2005 which was accounted for in the third quarter 2005.
    Our effective tax rate was 38.6% for the nine months ended
    September 30, 2005 and 38.8% for the year ended
    December 31, 2005.    Note 12.
    Comprehensive
    Income    Three Months Ended


Nine Months EndedSeptember 30,


September 30,2006


2005


2006


2005($ in thousands)Net income

$
80,853


$
28,083


$
218,936


$
112,737Unrealized (loss) gain on
    available-for-sale
    securities, net of tax


(177
)


12



2,371



(278
)Unrealized (loss) gain on cash
    flow hedge, net of tax


(1,381
)


(63
)


1,075



(331
)Comprehensive income

$
79,295


$
28,032


$
222,382


$
112,128  23




---



##### 



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


December 31,2006


2005($ in thousands)Unrealized gain (loss) on
    available-for-sale
    securities, net of tax

$
1,553


$
(818
)Unrealized gain (loss) on cash
    flow hedge, net of tax


554



(521
)Accumulated other comprehensive
    income (loss), net

$
2,107


$
(1,339
)   Note 13.
    Net
    Income per Share    Three Months Ended September 30,


Nine Months Ended September 30,2006


2005


2006


2005($ in thousands, except per share data)Basic net income per
    share:Net income

$
80,853


$
28,083


$
218,936


$
112,737Average shares  basic


171,777,989



116,742,755



163,373,576



116,630,570Basic net income per share

$
0.47


$
0.24


$
1.34


$
0.97Diluted net income per
    share:Net income

$
80,853


$
28,083


$
218,936


$
112,737Average shares  basic


171,777,989



116,742,755



163,373,576



116,630,570Effect of dilutive securities:Stock dividend declared (1)










1,080,124



Option shares


330,551



678,979



397,791



756,282Unvested restricted stock


1,180,952



270,025



1,146,656



339,874Stock units


24,442



6,024



17,045



4,528Non-managing member units














Conversion premium on the March
    Debentures (2)


40,957







13,652



Written call option














Average shares  diluted


173,354,891



117,697,783



166,028,844



117,731,254Diluted net income per share

$
0.47


$
0.24


$
1.32


$
0.96     (1)
    
    All conditions were not met for inclusion in the basic net
    income per share calculation until such shares were issued on
    January 25, 2006.(2)
    
    For the three and nine months ended September 30, 2006, the
    conversion premium on the March Debentures represents the
    dilutive shares associated with 8.8 million shares based on
    a conversion price of $25.71.   24




---



##### 



CapitalSource
    Inc.
  NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Note 14.
    Stock-Based
    Compensation  Equity
    Incentive Plan
    Adoption
    of SFAS No. 123(R)
  Share-Based Payment Accounting for Stock-Based
    Compensation Accounting for Stock Issued to Employees Statement of Cash Flows.
   25




---



##### 



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


Nine Months EndedSeptember 30, 2005


September 30, 2005($ in thousands, except per share data)Net income as reported

$
28,083


$
112,737Add back: Stock-based compensation
    expense from options included in reported net income, net of tax


62



171Deduct: Total stock-based
    compensation expense determined under fair value-based method
    for all option awards, net of tax


(566
)


(1,631
)Pro forma net income

$
27,579


$
111,277Net income per share:Basic  as reported

$
0.24


$
0.97Basic  pro forma

$
0.24


$
0.95Diluted  as reported

$
0.24


$
0.96Diluted  pro forma

$
0.23


$
0.95    26




---



##### 



CapitalSource
    Inc.
  NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Stock
    Options
    Weighted


Weighted AverageAverage


RemainingExercise


Contractual Life


AggregateOptions


Price


(in years)


Intrinsic Value($ in thousands)Outstanding as of
    December 31, 2005


2,587,312


$
15.34Granted


7,967,493



23.71Exercised


(587,716
)


9.36Forfeited


(196,414
)


19.60Outstanding as of
    September 30, 2006


9,770,675


$
22.44



9.28


$
16,319Vested or expected to vest as of
    September 30, 2006


9,611,458


$
22.52



1.66


$
16,151Exercisable as of
    September 30, 2006


2,556,971


$
20.89



8.88


$
5,395     and/or
  Three Months Ended


Nine Months EndedSeptember 30,


September 30,2006


2005


2006


2005Dividend yield


7.75%







8.33%



Expected volatility


20%



35%



20%



32%Risk-free interest rate


4.86%



4.08%



4.98%



4.00%Expected life


4.0 years



6.0 years



9.7 years



6.0 years    27




---



##### 



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


8.25
%Expected volatility


20
%Risk-free interest rate


5.00
%Expected life


10.0 years     Restricted
    Stock
    WeightedAverageGrant-DateShares


Fair ValueNonvested as of December 31,
    2005


3,873,124


$
22.08Granted


1,618,921



23.58Vested


(768,390
)


22.55Forfeited


(116,547
)


22.43Nonvested as of September 30,
    2006


4,607,108


$
22.52     Note 15.
    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
 28




---



##### 



CapitalSource
    Inc.
  NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
     29




---



##### 



CapitalSource
    Inc.
  NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Note 16.
    Operating
    Segments  Disclosures about Segments of an
    Enterprise and Related Information Organization
  Three Months Ended September 30, 2006Commercial


ResidentialLending &


Mortgage


ConsolidatedInvestment


Investment


Total($ in thousands)Total interest and fee income

$
252,873


$
81,148


$
334,021Operating lease income


7,855







7,855Interest expense


96,872



73,246



170,118Provision for loan losses


24,849







24,849Operating expenses (1)


51,081



2,150



53,231Other income (2)


8,447



2,291



10,738Noncontrolling interests expense


1,259







1,259Net income before income taxes


95,114



8,043



103,157Income taxes


22,304







22,304Net income

$
72,810


$
8,043


$
80,853Total assets as of
    September 30, 2006

$
8,635,672


$
5,856,202


$
14,491,874   Nine Months Ended September 30, 2006Commercial


ResidentialLending &


Mortgage


ConsolidatedInvestment


Investment


Total($ in thousands)Total interest and fee income

$
679,228


$
184,473


$
863,701Operating lease income


19,174







19,174Interest expense


250,967



170,851



421,818Provision for loan losses


50,732



301



51,033Operating expenses (1)


151,183



6,358



157,541Other income (2)


22,158



220



22,378Noncontrolling interests expense


3,350







3,350Net income before income taxes and
    cumulative effect of accounting change


264,328



7,183



271,511Income taxes


52,945







52,945Net income before cumulative effect
    of accounting change


211,383



7,183



218,566Cumulative effect of accounting
    change, net of taxes


370







370Net income

$
211,753


$
7,183


$
218,936Total assets as of
    September 30, 2006

$
8,635,672


$
5,856,202


$
14,491,874     (1)
    
    Operating expenses of our
    Residential Mortgage Investment segment consist primarily of
    direct expenses related to compensation and benefits,
    professional fees paid to our investment manager and other
    direct expenses.(2)
    
    Other income for our Residential
    Mortgage Investment segment includes the net of interest income
    and expense accruals related to certain of our derivatives along
    with the changes in fair value of our investments and related
    derivatives.  Summary of Significant Accounting Policies.
 30




---



##### 



CapitalSource
    Inc.
  NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Note 17.
    Subsequent
    Events       31




---



##### 



ITEM 2.
    MANAGEMENTS
    DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
    OPERATIONS  CAUTIONARY
    NOTE REGARDING FORWARD-LOOKING STATEMENTS
  Form 10-Q,
  Managements Discussion and Analysis of Financial
    Condition and Results of Operations Risk
    Factors Form 10-K
  Form 10-Q.
  Overview
    and Highlights
      
    Structured Finance, which generally engages in commercial
    and residential real estate lending and also provides
    asset-based lending to finance companies;
    Healthcare and Specialty Finance, which generally
    provides asset-based revolving lines of credit, first mortgage
    loans, sale-leaseback financing, equipment financing and other
    senior and mezzanine loans to healthcare businesses and a broad
    range of other companies; and
    Corporate Finance, which generally provides senior and
    mezzanine loans principally to businesses backed by private
    equity sponsors.   32




---



##### 



Consolidated
    Results of Operations
    Explanation
    of Key Reporting Metrics
  Interest Income.
  Fee Income.
  Operating Lease Income.
  Interest Expense. 30-day
  Provision for Loan Losses.
 33




---



##### 



Other Income.
  Operating Expenses.
  Income Taxes.
  Adjusted Earnings.
 34




---



##### 



Operating
    Results for the Three and Nine Months Ended September 30,
    2006
    
    Significant growth in our commercial loan portfolio;
    Purchases of investments in residential mortgage loans and RMBS;
    Increased borrowings to fund our growth;
    Increased operating expenses, consisting primarily of higher
    employee compensation directly related to increases in the
    number of our employees;
    Addition of operating lease income related to our direct real
    estate investments;
    Increase in short-term interest rates;
    Decreased lending and borrowing spreads; and
    A decrease in our effective tax rate.    Three Months Ended September 30,








Nine Months Ended September 30,2006


2005


$ Change


% Change


2006


2005


$ Change


% Change($ in thousands)





($ in thousands)Interest income

$
280,066


$
133,480


$
146,586



110
%

$
731,601


$
361,321


$
370,280



102
%Fee income


53,955



35,771



18,184



51
%


132,100



100,723



31,377



31
%Operating lease income


7,855







7,855



N/A



19,174







19,174



N/AInterest expense


170,118



50,981



119,137



234
%


421,818



128,364



293,454



229
%Provision for loan losses


24,849



42,884



(18,035
)


(42
)%


51,033



57,833



(6,800
)


(12
)%Operating expenses


53,231



33,295



19,936



60
%


157,541



105,024



52,517



50
%Other income


10,738



2,743



7,995



291
%


22,378



12,787



9,591



75
%Noncontrolling interests expense


1,259







1,259



N/A



3,350







3,350



N/AIncome taxes


22,304



16,751



5,553



33
%


52,945



70,873



(17,928
)


(25
)%Cumulative effect of accounting
    change, net of taxes














N/A



370







370



N/ANet income


80,853



28,083



52,770



188
%


218,936



112,737



106,199



94
%  35




---



##### 



Nine Months Ended September 30,2006


2005Weighted


Net


Average


Weighted


Net


AverageAverage


Investment


Yield/


Average


Investment


Yield/Balance


Income


Cost


Balance


Income


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





$
731,601



8.49
%





$
361,321



9.50
%Fee income






132,100



1.53







100,723



2.65Total interest earning
    assets (1)

$
11,527,276



863,701



10.02


$
5,082,760



462,044



12.15Total direct real estate
    investments


203,011



19,174



12.63











Total income earning assets


11,730,287



882,875



10.06



5,082,760



462,044



12.15Total interest bearing
    liabilities (2)


9,901,508



421,818



5.70



4,071,288



128,364



4.22Net finance spread





$
461,507



4.36
%





$
333,680



7.93
%Net finance margin










5.26
%










8.78
%     (1)
    
    Interest earning assets include cash, restricted cash,
    mortgage-related receivables, RMBS, loans, asset-backed
    securities and investments in debt securities.(2)
    
    Interest bearing liabilities include repurchase agreements,
    secured and unsecured credit facilities, term debt, convertible
    debt and subordinated debt.  Comparison
    of the Three Months Ended September 30, 2006 and
    2005
    Interest
    Income
  average 30-day 30-day
   36




---



##### 



Fee
    Income
    Operating
    Lease Income
    Interest
    Expense
  average 30-day
    Net
    Finance Margin
   37




---



##### 



Three Months Ended September 30,2006


2005Weighted


Net


Average


Weighted


Net


AverageAverage


Investment


Yield/


Average


Investment


Yield/Balance


Income


Cost


Balance


Income


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





$
198,918



10.28
%





$
133,480



9.74
%Fee income






53,955



2.79







35,771



2.61Total interest earning assets(1)

$
7,678,450



252,873



13.07


$
5,436,081



169,251



12.35Total direct real estate
    investments


261,376



7,855



11.92











Total income earning assets


7,939,826



260,728



13.03



5,436,081



169,251



12.35Total interest bearing
    liabilities(2)


6,139,327



96,872



6.26



4,383,977



50,981



4.61Net finance spread





$
163,856



6.77
%





$
118,270



7.74
%Net finance margin










8.19
%










8.63
%     (1)
    
    Interest earning assets include cash, restricted cash, loans and
    investments in debt securities.(2)
    
    Interest bearing liabilities include repurchase agreements,
    secured and unsecured credit facilities, term debt, convertible
    debt and subordinated debt.    Provision
    for Loan Losses
    Other
    Income
     38




---



##### 



Operating
    Expenses
      Income
    Taxes
   39




---



##### 



Adjusted
    Earnings
    Net income

$
80,853Add:Real estate depreciation (1)


2,595Amortization of deferred financing
    fees


6,225Non-cash equity compensation


8,640Net unrealized loss on residential
    mortgage investment portfolio, including related derivatives (2)


3,436Unrealized loss on derivatives and
    foreign currencies, net


6,937Unrealized loss on investments, net


404Provision for loan losses


24,849Recoveries (3)


Less:Charge offs (4)


11,000Nonrecurring items


Cumulative effect of accounting
    change, net of taxes


Adjusted earnings

$
122,939Net income per share:Basic  as reported

$
0.47Diluted  as reported

$
0.47Average shares
    outstanding:Basic  as reported


171,777,989Diluted  as reported


173,354,891Adjusted earnings per
    share:Basic

$
0.72Diluted (5)

$
0.71Average shares
    outstanding:Basic


171,777,989Diluted (6)


175,865,709     (1)
    
    Depreciation for direct real estate investments only. Excludes
    depreciation for corporate leasehold improvements, fixed assets
    and other non-real estate items.(2)
    
    Includes adjustments to reflect the period change in fair value
    of RMBS and related derivative instruments.(3)
    
    Includes all recoveries on loans during the period.(4)
    
    To the extent we experience losses on loans for which we
    specifically provided a reserve prior to January 1, 2006,
    there will be no adjustment to earnings. All charge offs
    incremental to previously established allocated reserves will be
    deducted from net income.(5)
    
    Adjusted to reflect the impact of adding back noncontrolling
    interests expense of $1.3 million to adjusted earnings due
    to the application of the if-converted method on non-managing
    member units, which are considered dilutive to adjusted earnings
    per share, but are antidilutive to GAAP net income per share.(6)
    
    Adjusted to include average non-managing member units of
    2,510,818, which are considered dilutive to adjusted earnings
    per share, but are antidilutive to GAAP net income per share. 40




---



##### 



Comparison
    of the Nine Months Ended September 30, 2006 and
    2005
    Interest
    Income
  average 30-day 30-day
    Fee
    Income
    Operating
    Lease Income
    Interest
    Expense
   41




---



##### 



average 30-day
    Net
    Finance Margin
      Nine Months Ended September 30,2006


2005Weighted


Net


Average


Weighted


Net


AverageAverage


Investment


Yield/


Average


Investment


Yield/Balance


Income


Cost


Balance


Income


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





$
547,128



10.32
%





$
361,321



9.50
%Fee income






132,100



2.49







100,723



2.65Total interest earning assets (1)

$
7,086,281



679,228



12.81


$
5,082,760



462,044



12.15Total direct real estate investments


203,011



19,174



12.63











Total income earning assets


7,289,292



698,402



12.81



5,082,760



462,044



12.15Total interest bearing liabilities
    (2)


5,609,304



250,967



5.98



4,071,288



128,364



4.22Net finance spread





$
447,435



6.83
%





$
333,680



7.93
%Net finance margin










8.21
%










8.78
%     (1)
    
    Interest earning assets include cash, restricted cash, loans and
    investments in debt securities.(2)
    
    Interest bearing liabilities include repurchase agreements,
    secured and unsecured credit facilities, term debt, convertible
    debt and subordinated debt.    Provision
    for Loan Losses
   42




---



##### 



Other
    Income
  break-up
    Operating
    Expenses
      Income
    Taxes
   43




---



##### 



Adjusted
    Earnings
    Net income

$
218,936Add:Real estate depreciation (1)


6,205Amortization of deferred financing
    fees


20,652Non-cash equity compensation


24,993Net unrealized loss on residential
    mortgage investment portfolio, including related derivatives (2)


4,113Unrealized gain on derivatives and
    foreign currencies, net


(196
)Unrealized loss on investments, net


5,510Provision for loan losses


51,133Recoveries (3)


Less:Charge offs (4)


11,276Nonrecurring items (5)


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


370Adjusted earnings

$
314,975Net income per share:Basic  as reported

$
1.34Diluted  as reported

$
1.32Average shares
    outstanding:Basic  as reported


163,373,576Diluted  as reported


166,028,844Adjusted earnings per
    share:Basic

$
1.93Diluted (6)

$
1.89Average shares
    outstanding:Basic


163,373,576Diluted (7)


168,300,536     (1)
    
    Depreciation for direct real estate investments only. Excludes
    depreciation for corporate leasehold improvements, fixed assets
    and other non-real estate items.(2)
    
    Includes adjustments to reflect the period change in fair value
    of RMBS and related derivative instruments.(3)
    
    Includes all recoveries on loans during the period.(4)
    
    To the extent we experience losses on loans for which we
    specifically provided a reserve prior to January 1, 2006,
    there will be no adjustment to earnings. All charge offs
    incremental to previously established allocated reserves will be
    deducted from net income.(5)
    
    Represents the write-off of a net deferred tax liability
    recorded in connection with our conversion to a REIT for the
    nine months ended September 30, 2006.(6)
    
    Adjusted to reflect the impact of adding back noncontrolling
    interests expense of $3.4 million to adjusted earnings due
    to the application of the if-converted method on non-managing
    member units, which are considered dilutive to adjusted earnings
    per share, but are antidilutive to GAAP net income per share for
    all periods presented.(7)
    
    Adjusted to include average non-managing member units of
    2,271,692, which are considered dilutive to adjusted earnings
    per share, but are antidilutive to GAAP net income per share. 44




---



##### 



Financial
    Condition
  Commercial
    Lending & Investment Segment
  Commercial
    Lending Portfolio Composition
    September 30, 2006


December 31, 2005($ in thousands)Composition of loan portfolio by
    loan type:First mortgage loans (1)

$
2,556,621



35
%

$
1,970,709



33
%Senior secured asset-based loans
    (1)


2,438,577



33



2,022,123



34Senior secured cash flow loans (1)


1,837,957



25



1,740,184



29Mezzanine loans


516,614



7



254,727



4Total

$
7,349,769



100
%

$
5,987,743



100
%Composition of loan portfolio by
    lending business:Structured Finance

$
2,482,933



34
%

$
1,909,149



32
%Healthcare and Specialty Finance


2,902,425



39



2,281,419



38Corporate Finance


1,964,411



27



1,797,175



30Total

$
7,349,769



100
%

$
5,987,743



100
%     (1)
    
    Includes Term B loans, which are loans that share a first
    priority lien on the clients collateral with the lenders
    on the clients senior loan, but that come after a senior
    secured loan in order of payment priority preference upon a
    borrowers liquidation.    Average LoanNumber


Average


Number of


Size perof Loans


Loan Size


Clients


Client($ in thousands)Composition of loan portfolio by
    lending business:Structured Finance


246


$
10,093



211


$
11,767Healthcare and Specialty Finance


469



6,189



319



9,099Corporate Finance


332



5,917



149



13,184Overall loan portfolio


1,047



7,020



679



10,824     Due in


Due inOne Year


One to


Due Afteror Less


Five Years


Five Years


Total($ in thousands)Scheduled maturities by loan type:First mortgage loans

$
711,716


$
1,657,190


$
187,715


$
2,556,621Senior secured asset-based loans


302,555



2,133,204



2,818



2,438,577Senior secured cash flow loans


235,088



1,528,282



74,587



1,837,957Mezzanine loans


132,871



141,383



242,360



516,614Total

$
1,382,230


$
5,460,059


$
507,480


$
7,349,769  45




---



##### 



Adjustable


FixedRates


Rates


Total($ in thousands)Composition of loan portfolio by
    loan type:First mortgage loans

$
2,240,448


$
316,173


$
2,556,621Senior secured asset-based loans


2,404,625



33,952



2,438,577Senior secured cash flow loans


1,820,612



17,345



1,837,957Mezzanine loans


473,974



42,640



516,614Total

$
6,939,659


$
410,110


$
7,349,769Percentage of total loan portfolio


94%



6%



100%    46




---



##### 



Credit
    Quality and Allowance for Loan Losses
    September 30,


December 31,Commercial Loan Asset Classification

2006


2005($ in thousands)Loans 60 or more days
    contractually delinquent

$
61,965


$
41,785Non-accrual loans (1)


175,846



137,446Impaired loans (2)


266,816



199,257Less: loans in multiple categories


(222,764
)


(175,070
)Total

$
281,863


$
203,418Total as a percentage of total
    loans


3.83%



3.40%     (1)
    
    Includes commercial loans with an aggregate principal balance of
    $46.9 million and $37.6 million as of
    September 30, 2006 and December 31, 2005,
    respectively, which were also classified as loans 60 or more
    days contractually delinquent.(2)
    
    Includes commercial loans with an aggregate principal balance of
    $46.9 million and $37.6 million as of
    September 30, 2006 and December 31, 2005,
    respectively, which were also classified as loans 60 or more
    days contractually delinquent, and commercial loans with an
    aggregate principal balance of $175.8 million and
    $137.4 million as of September 30, 2006 and
    December 31, 2005, respectively, which were also classified
    as loans on non-accrual status.  Accounting by Creditors for Impairment of a Loan
  Accounting for Debtors and Creditors for Troubled Debt
    Restructurings.
   47




---



##### 



Direct
    Real Estate Investments
      Investments
      Residential
    Mortgage Investment Segment
  Portfolio
    Composition
    1-year Residential
    Mortgage-Backed Securities and Certain Derivative
    Instruments
  Summary of Significant Accounting Policies,
  Credit
    Quality and Allowance for Loan Losses
   48




---



##### 



Financing
    Market Risk
    Management
  Liquidity
    and Capital Resources
          and/or
 49




---



##### 



Cash
    and Cash Equivalents
    Accounting for Certain Investments in
    Debt and Equity Securities.
        Borrowings
  Borrowings Form 10-K,
    Repurchase
    Agreements
   50




---



##### 



Credit
    Facilities
    Term
    Debt
      Subordinated
    Debt
    Foreign Currency Translation,
 51




---



##### 



Debt
    Covenant Compliance
    Equity
    Off-Balance
    Sheet Transactions
  Credit Risk Form 10-K,
  Funding-Related
    Commitments
  Guarantors Accounting and Disclosure Requirements for
    Guarantees, Including Indirect Guarantees of Indebtedness of
    Others.
  Guarantee
    to Special Purpose Entity
  Consolidation of Variable Interest Entities  An
    Interpretation of ARB No. 51
  Market
    Risk Management
   52




---



##### 



Derivatives and
    Off-Balance Sheet Financial Instruments Form 10-K.
  Commercial
    Lending & Investment Segment
  30-day 30-day 30-day
  12-month
  Estimated (Decrease)Increase inNet Interest IncomeRate Change (Basis Points)

Over 12 Months($ in thousands)100

$
(14,664
)50


(7,854
)+50


8,658+100


17,235       Amount


Percentage ofOutstanding


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

$
3,581,723



49
%At the interest rate floor


8,664



Below the interest rate floor


37,537



Loans with no interest rate floor


3,721,845



51Total

$
7,349,769



100
%   Hedging
    Activities
  30-day 30-day
 53




---



##### 















Residential
    Mortgage Investment Segment












|                           |  |                    |        |   |                     |  |       |   
|-------------------------- |  | ------------------ | ------ | - | ------------------- |  | ----- | --
|                           |  | Estimated Decrease |        |   | Percentage of Total | 
|Rate Change (Basis Points) |  | in Fair Value      |        |   | Segment Assets      | 
|                           |  | ($ in thousands)   |        |   |                     | 
|                          
|100                       |  | $                  | (7,162 | ) |                     |  | (0.12 | )%
|50                        |  |                    | (1,032 | ) |                     |  | (0.02 | ) 
|+50                        |  |                    | (1,443 | ) |                     |  | (0.02 | ) 
|+100                       |  |                    | (5,601 | ) |                     |  | (0.10 | ) 









Hedging
    Activities






54



---



##### 







Critical
    Accounting Policies




Critical Accounting Policies Managements Discussion and Analysis of Financial
    Condition and Results of Operations Form 10-K




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




Accounting for
    Nonrefundable Fees and Costs Associated with Originating or
    Acquiring Loans and Initial Direct Costs of Leases No. 99-20, Recognition of Interest Income and Impairment on Purchased
    and Retained Beneficial Interests in Securitized Assets No. 03-3, Accounting for Certain Loans or Debt Securities Acquired in a
    Transfer








Mortgage-Related
    Receivables and Related Owner
    Trust Securitizations












Income
    Taxes






55



---



##### 









56



---



##### 



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



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




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



Rule 13a-15


57



---



##### 

PART II.
    OTHER INFORMATION

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







|         |                 
|-------- | ----------------
|ITEM 1A. | RISK
    FACTORS



Risk Factors Form 10-K,




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







|                                     |  |               |        |  |            |   |       |                     |  |  |                    |  |  |  |   | 
|------------------------------------ |  | ------------- | ------ |  | ---------- | - | ----- | ------------------- |  |  | ------------------ |  |  |  | - | 
|                                     |  |               |        |  |            |   |       | Shares Purchased    |  |  | Maximum Number     | 
|                                     |  | Total Number  |        |  | Average    |   |       | as Part of Publicly |  |  | of Shares that May | 
|                                     |  | of Shares     |        |  | Price Paid |   |       | Announced Plans     |  |  | Yet be Purchased   | 
|                                     |  | Purchased (1) |        |  | per Share  |   |       | or Programs         |  |  | Under the Plans    | 
|                                    
|July 1  July 31,
    2006           |  |               | 3,546  |  |            | $ | 23.66 |                     |  |  |                   |  |  |  |  | 
|August 1 
    August 31, 2006       |  |               | 14,990 |  |            |   | 23.30 |                     |  |  |                   |  |  |  |  | 
|September 1 
    September 30, 2006 |  |               | 8,054  |  |            |   | 24.09 |                     |  |  |                   |  |  |  |  | 
|                                     |  |               |        |  |            |   |       |                     |  |  |                    |  |  |  |   | 
|Total                                |  |               | 26,590 |  |            | $ | 23.59 |                     |  |  |                    |  |  |  |   | 
|                                     |  |               |        |  |            |   |       |                     |  |  |                    |  |  |  |   | 









|    |  |                                                                                                                                                                                                                                                            
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) |  | Represents the number of shares acquired as payment by employees
    of applicable statutory minimum withholding taxes owed upon
    vesting of restricted stock granted under the CapitalSource Inc.
    Third Amended and Restated Equity Incentive Plan.



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







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







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







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









58



---



##### 

Signatures















JOHN
    K. DELANEY
















THOMAS
    A. FINK
















DAVID
    C. BJARNASON










59



---



##### 

INDEX TO
    EXHIBITS



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

60



---



##### 



|        |    |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|------- | -- | ----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|No      |    | Description
|       
|        | 4  | .12         |  | Junior Subordinated Indenture,
    dated as of November 21, 2005, among CapitalSource Finance
    LLC, as Issuer, CapitalSource Inc., as Guarantor, and Wilmington
    Trust Company, as Trustee (incorporated by reference to the
    same-numbered exhibit to the registrants Annual Report on
    Form 10-K
    for the year ended December 31, 2005).                                                                                                                                                                                                                                                                       
|        | 4  | .13         |  | Junior Subordinated Indenture,
    dated as of December 14, 2005, among CapitalSource Finance
    LLC, CapitalSource Inc. and JPMorgan Chase Bank, National
    Association, as Trustee (incorporated by reference to the
    same-numbered exhibit to the registrants Annual Report on
    Form 10-K
    for the year ended December 31, 2005).                                                                                                                                                                                                                                                                                
|        | 4  | .14         |  | Indenture dated as of
    April 11, 2006, by and between CapitalSource Commercial
    Loan
    Trust 2006-1,
    as the Issuer, and Wells Fargo Bank, National Association, as
    the Indenture Trustee (incorporated by reference to the
    same-numbered exhibit to the registrants Current Report on
    Form 8-K
    dated April 17, 2006).                                                                                                                                                                                                                                                                               
|        | 4  | .15         |  | Junior Subordinated Indenture,
    dated as of February 22, 2006, among CapitalSource Finance
    LLC, as Issuer, CapitalSource Inc., as Guarantor, and JPMorgan
    Chase Bank, National Association, as Trustee (incorporated by
    reference to the same-numbered exhibit to the registrants
    Quarterly Report on
    Form 10-Q
    for the quarter ended March 31, 2006).                                                                                                                                                                                                                                               
|        | 4  | .16         |  | Indenture dated as of
    September 28, 2006, by and among CapitalSource Commercial
    Loan
    Trust 2006-2,
    as the Issuer, and Wells Fargo Bank, National Association, as
    the Indenture Trustee (incorporated by reference to the
    same-numbered exhibit to the registrants Current Report on
    Form 8-K
    dated October 4, 2006).                                                                                                                                                                                                                                                                            
|        | 10 | .65         |  | Amended and Restated Sale and
    Servicing Agreement, dated as of July 28, 2006, among CSE
    QRS Funding II LLC, as Seller, CSE Mortgage LLC, as
    Originator and Servicer, Citigroup Global Markets Realty Corp.,
    as Administrative Agent and as Citigroup Agent, Wells Fargo
    Bank, National Association, as Backup Servicer and Collateral
    Custodian, MICA Funding, LLC as a Purchaser and Swiss Re
    Financial Products Corporation as Micas Purchaser Agent
    (incorporated by reference to the same-numbered exhibit to the
    registrants Current Report on
    Form 8-K
    dated August 3, 2006).
|        | 10 | .66         |  | Sale and Servicing Agreement,
    dated as of September 28, 2006, by and among CapitalSource
    Commercial Loan
    Trust 2006-2,
    as the Issuer, CapitalSource Commercial Loan LLC, 2006-2, as the
    Trust Depositor, CapitalSource Finance LLC, as the
    Originator and as the Servicer, and Wells Fargo Bank, National
    Association, as the Indenture Trustee and as the Backup Servicer
    (incorporated by reference to the same-numbered exhibit to the
    registrants Current Report on
    Form 8-K
    dated October 4, 2006).                                                                            
|        | 12 | .1          |  | Ratio of Earnings to Fixed
    Charges.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|        | 31 | .1          |  | Rule 13a  14(a)
    Certification of Chairman and Chief Executive Officer.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|        | 31 | .2          |  | Rule 13a  14(a)
    Certification of Chief Financial Officer.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|        | 32 |             |  | Section 1350
    Certifications.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                









|  |  |                
|- |  | ---------------
| |  | Filed herewith.

61