1241199--3/1/2010--CAPITALSOURCE

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We make loans to other lenders and commercial real estate developers which have been disproportionately negatively impacted by the economic recession. These clients face a variety of risks, any of which may negatively impact their results of operations and impair their ability to pay principal and interest on our loans. Our concentration of loans to a limited number of clients within a particular industry, including commercial real estate, or region could impair our revenues if the industry or region were to experience continued or worsening economic difficulties or changes in the regulatory environment. 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 clients 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. Our loans to foreign clients may involve significant risks in addition to the risks inherent in loans to U.S. clients. 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 leveraged 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. Debtor-in-possession loans may have a higher risk of default. 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. At the Parent Company, 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 do not obtain or maintain 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. We are in a competitive business and may not be able to take advantage of attractive opportunities. Risks Impacting Funding our Operations Our ability to operate our business depends on our ability to maintain our external financing, which is challenging in the existing economic environment. Required commitment reductions, proceeds restrictions and mandatory redemption provisions under our indebtedness may limit our ability to maintain sufficient liquidity. We must comply with various covenants and obligations under our indebtedness and our failure to do so could adversely affect our ability to operate our business, manage our portfolio or pursue certain opportunities. Our significant level of debt and interest payment obligations may limit our ability to compete, expose us to interest rate risk to the extent of our variable-rate debt and prevent us from meeting our obligations under our senior secured notes. If our lenders terminate or fail to renew any of our credit facilities, we may not be able to continue to fund our business. We are not currently eligible to maintain a universal shelf registration statement, which could adversely affect our ability to quickly and efficiently access the public capital markets. Our commitments to lend additional amounts to existing clients exceed our resources available to fund these commitments. Our cash flows from the interests we retain in our term debt securitizations have been, and we expect will continue to be, delayed or reduced due to the requirements of the term debt securitizations. Fluctuating interest rates could adversely affect our profit margins and ability to operate our business. Hedging instruments involve inherent risks and costs and may adversely affect our earnings. We may enter into derivative contracts that could expose us to future contingent liabilities. Risks Related to Our Operations We may fail to maintain or raise sufficient deposits or other sources of funding at CapitalSource Bank to operate our business. We are subject to extensive government regulation and supervision which limit our flexibility and could result in adverse actions by regulatory agencies against us. We face risks in connection with our strategic undertakings. Our Agreement to sell our Direct Real Estate Investments is subject to conditions which may not be met. The A Participation Interest may not pay down to the extent necessary to avoid losses. We revoked our REIT election which could have adverse legal implications. If it were determined that we violated REIT requirements or failed to qualify as a REIT in any given year during which we operated as a REIT, it could adversely impact our historical, current and future results of operations. The change of control rules under Section 382 of the Internal Revenue Code may limit our ability to use net operating loss carryovers and other tax attributes to reduce future tax payments or our willingness to issue equity. The requirements of the Investment Company Act impose limits on our operations that impact the way we acquire and manage our assets and operations. Changes in the values of our assets and subsidiaries and the income produced by them have made, and may make, it more difficult for us to maintain our exemptions from the Investment Company Act. Our systems may experience an interruption or breach in security which could subject us to increased operating costs as well as litigation and other liabilities. Our controls and procedures may fail or be circumvented. 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 have experienced and may continue to experience losses if the creditworthiness of our tenants leasing our healthcare properties 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. Risks Related to our Common Stock We may issue additional shares of common stock at prices that are dilutive to our existing shareholders. We may not pay dividends on our common stock. 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. Some provisions of Delaware law and our certificate of incorporation and bylaws may deter third parties from acquiring us.

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1241199--3/1/2010--CAPITALSOURCE_INC