1241199--2/29/2008--CAPITALSOURCE

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{loan, real, estate}

{investment, property, distribution}

{loss, insurance, financial}

{tax, income, asset}

{regulation, government, change}

{stock, price, share}

{system, service, information}

{cost, contract, operation}

{product, market, service}

{competitive, industry, competition}

{debt, indebtedness, cash}

The cash flows we receive from the interests we retain in our term debt could be delayed or reduced due to the requirements of the term debt, which could impair our ability to originate new loans or fund commitments under existing loans. The poor performance of a pool of loans we securitize could increase the expense of our subsequent securitizations, which could have a material adverse effect on our results of operations, financial condition and business. Fluctuating interest rates could adversely affect our profit margins and ability to grow our business. Our use of significant leverage could adversely affect our residential mortgage-backed securities portfolio and negatively affect cash available for distribution to our shareholders. Our lenders could terminate us as servicer of loans held as collateral for our credit facilities or term debt, which would adversely affect our ability to manage our portfolio and borrow funds. Hedging against interest rate exposure may materially adversely affect our earnings. Hedging instruments involve inherent risks and costs. We may enter into derivative contracts that could expose us to contingent liabilities in the future. Risks Related to Our Operations as a REIT We have limited experience operating as a REIT. We could lack access to funds to meet our dividend and tax obligations. Complying with REIT requirements may cause us to forego otherwise attractive opportunities and limit our ability to fund dividend payments using cash generated through our TRSs. If we fail to qualify as a REIT in any given year, we will have reduced funds available for distribution to our shareholders and our income will be subject to taxation at regular corporate rates. Our business activities are potentially subject to prohibited transactions tax or corporate level tax. The requirements of the Investment Company Act impose limits on our operations that impact the way we acquire and manage our assets and operations. Rapid changes in the values of our residential mortgage loans and mortgage-backed securities and other real estate assets may make it more difficult for us to maintain our REIT status or exemption from the Investment Company Act. Legislative or other actions affecting REITs could have a negative effect on us. Changes in taxation of corporate dividends may adversely affect the value of our common stock. Risks Related to Our Lending Activities We may not recover all amounts that are contractually owed to us by our borrowers. We make loans to privately owned small and medium-sized companies that present a greater risk of loss than loans to larger companies. We may not have all of the material information relating to a potential client at the time that we make a credit decision with respect to that potential client or at the time we advance funds to the client. As a result, we may suffer losses on loans or make advances that we would not have made if we had all of the material information. Increases in interest rates could negatively affect our borrowers ability to repay their loans. A client s fraud could cause us to suffer losses. Some of our clients require licenses, permits and other governmental authorizations to operate their businesses, which may be revoked or modified by applicable governmental authorities. Any revocation or modification could have a material adverse effect on the business of a client and, consequently, the value of our loan to that client. We make loans to commercial real estate developers. These clients face a variety of risks relating to development, construction and renovation projects, any of which may negatively impact their results of operations and impair their ability to pay principal and interest on our loans to them. Our loans to foreign clients may involve significant risks in addition to the risks inherent in loans to U.S. clients. Our debtor-in-possession loans may have a higher risk of default. Our concentration of loans to a limited number of borrowers within a particular industry, such as the commercial real estate or healthcare industry, or region could impair our revenues if the industry or region were to experience economic difficulties or changes in the regulatory environment. Because of the nature of our loans and the manner in which we disclose client and loan concentrations, it may be difficult to evaluate our risk exposure to any particular client or group of related clients. We may be unable to recognize or act upon an operational or financial problem with a client in a timely fashion so as to prevent a loss of our loan to that client. We may make errors in evaluating information reported by our clients and, as a result, we may suffer losses on loans or advances that we would not have made if we had properly evaluated the information. Our balloon loans and bullet loans may involve a greater degree of risk than other types of loans. We are limited in pursuing certain of our rights and remedies under our Term B, second lien and mezzanine loans, which may increase our risk of loss on these loans. The collateral securing a loan may not be sufficient to protect us from a partial or complete loss if we have not properly obtained or perfected a lien on such collateral or if the loan becomes non-performing, and we are required to foreclose. Our cash flow loans are not fully covered by the value of assets or collateral of the client and, consequently, if any of these loans becomes non-performing, we could suffer a loss of some or all of our value in the loan. We are not the agent for a portion of our loans and, consequently, have little or no control over how those loans are administered or controlled. We are the agent for loans in which syndicates of lenders participate and, in the event of a loss on any such loan, we could have liability to other members of the syndicate related to our management and servicing of the loan. We may purchase distressed loans at amounts that may exceed what we are able to recover on these loans. We may not retain control over our joint venture investments, which may increase the risk of loss with respect to such investments. Our loans could be subject to equitable subordination by a court which would increase our risk of loss with respect to such loans. We may incur lender liability as a result of our lending activities. We have engaged in the past, and may engage in the future, in lending transactions with affiliates of our directors. Because of the conflicts of interest inherent in these transactions, their terms may not be in our shareholders best interests. If we violate HUD lending requirements, we could lose our ability to originate HUD mortgage loans, which could adversely affect our financial results. If we do not obtain the necessary state licenses and approvals, we will not be allowed to acquire, fund or originate residential mortgage loans and other loans in some states, which would adversely affect our operations. Our commitments to lend additional sums to existing clients exceed our resources available to fund these commitments. We are in a highly competitive business and may not be able to take advantage of attractive opportunities. Risks Related to Our Residential Mortgage Investment Portfolio Increases or decreases in interest rates could negatively affect the value of our mortgage investments and related financing and risk management instruments and, as a result, could reduce our earnings and negatively affect the amount of cash available for distribution to our shareholders. Prepayment rates that vary from expectations could negatively affect the value of our residential mortgage investments, and, therefore, could reduce earnings and cash available for distribution to our shareholders. Some of the investments in our residential mortgage investment portfolio are likely to have limited liquidity and, as a result, there will be uncertainty as to the value of these investments. The mortgage loans underlying our residential mortgage investments are subject to delinquency, foreclosure and loss, which could result in losses to us. Risks Related to our Direct Real Estate Investments We are exposed to liabilities, including environmental liabilities, with respect to properties to which we take title. We may experience losses if the creditworthiness of our tenants deteriorates and they are unable to meet their obligations under our leases. The operators of our healthcare properties are faced with increased litigation, rising insurance costs and enhanced government scrutiny that may affect their ability to make payments to us. Since real estate investments are illiquid, we may not be able to sell properties when we desire. Risks Related to our Common Stock Our cash dividends are not guaranteed and may fluctuate; we could reduce or eliminate dividends on our common stock. Acquisitions may adversely impact our business. An investment in our shares of common stock involves tax concerns in addition to those affecting our REIT status. If a substantial number of shares available for sale are sold in a short period of time, the market price of our common stock could decline.

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1241199--2/29/2008--CAPITALSOURCE_INC