1241199--3/9/2006--CAPITALSOURCE

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Our use of significant leverage could adversely affect our residential mortgage loan and mortgage-backed securities portfolio and negatively affect cash available for distribution to our shareholders. The borrowing costs on our residential mortgage loans and mortgage-backed securities could increase relative to the interest we receive on such investments, thereby negatively affecting cash available for distribution to our shareholders. Our lenders could terminate us as servicer of our loans held as collateral for our credit facilities or term debt, which would adversely affect our ability to manage our portfolio. Our liquidity position could be adversely affected if we were unable to complete additional term debt transactions on favorable terms or at all. The cash flows we receive from the interests we retain in our term debt transactions 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 or rising interest rates could adversely affect our profit margins and ability to grow our business. Hedging against interest rate exposure may adversely affect our earnings, which could adversely affect cash available for investment or distribution to our shareholders. Hedging instruments often are not traded on regulated exchanges, guaranteed by an exchange or its clearing house, or regulated by any U.S. or foreign governmental authorities and involve risks and costs. We may enter into derivative contracts that could expose us to contingent liabilities in the future. Risk Related to Our Operations as a REIT We have no prior experience operating as a REIT. Changes as a result of our REIT election may make it difficult for investors to compare our operating results with those of prior periods. 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 as a REIT. 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. The lack of share ownership and transfer restrictions in our charter may affect our ability to qualify as a REIT in any particular year and, if such restrictions are added to our charter, they may discourage strategic transactions that would maximize shareholder value. Risks Related to Our Lending Activities We may not recover the value of amounts that we lend. We make loans to privately owned small and medium-sized companies, which present a greater risk of loss than loans to larger companies. We may be adversely affected by deteriorating economic or business conditions. Our limited operating history makes it difficult for us to accurately judge the credit performance of our portfolio and, as a result, increases the risk that our allowance for loan losses may prove inadequate. 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. We may make errors in evaluating accurate 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. A client s fraud could cause us to suffer losses. 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. We may not retain control over our joint venture investments which may increase the risk of loss with respect to such investment. 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. Changes in interest rates could negatively affect our borrowers ability to repay their loans. 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 the loan becomes non-performing, and we are required to foreclose. Our cash flow loans are not fully covered by the value of tangible 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 subject to federal, state and local laws in connection with our consumer mortgage lending activities. Errors by or dishonesty of our employees could result in loan losses. We have financed in the past, and may finance in the future, the purchase by third parties of non-performing loans or problem loans held by us. These efforts may not eliminate our risk of loss or impairment with respect to these loans. Our loans could be subject to equitable subordination by a court and thereby increase our risk of loss with respect to such loans. We may incur lender liability as a result of our lending activities. We are exposed to environmental and other liabilities with respect to properties to which we take title. We have engaged in the past and may engage in the future in lending transactions with affiliates of our directors. The terms of these transactions may not be in our shareholders best interests. We are not the agent for some of our loans and, consequently, have little or no control over how those loans are administered or controlled. We are sometimes the agent for loans in which a syndicate of lenders participate and, in the event of a loss on any such loan, we could have liability to other members of the syndicate. If we violate HUD lending requirements, we could lose our ability to originate HUD mortgage loans, which could adversely affect our financial results. Some of our borrowers require licenses, permits and other governmental authorizations to operate their businesses, which licenses, permits or authorizations may be revoked or modified by federal, state and local governmental authorities. Any revocation or modification could have a material adverse effect on the business of a borrower and, consequently, the value of our loan to that borrower. We make loans to commercial developers. These borrowers 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 interest and principal on our loans to them. If we do not obtain the necessary state licenses and approvals, we will not be allowed to acquire, fund or originate residential mortgage loans in some states, which would adversely affect our operations. 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. We may purchase distressed loans for more than we are able to recover on such loans. 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 lending opportunities. Risks Related to Our Residential Mortgage Investment Portfolio We have limited experience investing in pools of residential mortgage loans and mortgage-backed securities. Changes in interest rates could negatively affect the value of our residential mortgage-backed securities, which could result in reduced earnings or losses and negatively affect the cash available for distribution to our shareholders. Prepayment rates could negatively affect the value of our residential mortgage-backed securities, which could result in reduced earnings or losses and negatively affect the 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. In the future, a significant portion of our residential mortgage investment portfolio may be invested in mortgage-backed securities and non-agency and non-conforming residential mortgage loans, which have a greater risk of loss than agency guaranteed securities. In the future we may invest in mortgage-backed securities backed by non-prime or sub-prime residential mortgage loans which are subject to higher delinquency, foreclosure and loss rates than prime residential mortgage loans, which could result in losses to us. 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. Our business is highly dependent on members of our credit committee. Acquisitions may adversely impact our business. The price of our common stock may be volatile. 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 become available for sale and 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. Insiders continue to have substantial control over us and could limit your ability to influence the outcome of key transactions, including a change of control.

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1241199--3/9/2006--CAPITALSOURCE_INC