Item 1. Business.
Capital Source L.P. (the "Registrant" or the "Partnership") was formed in August 1985 under the Delaware Revised Uniform Limited Partnership Act to invest principally in federally-insured mortgages on multifamily housing properties and to acquire, hold, sell, dispose of and otherwise deal with limited partnership interests ("Partnership Equity Investments") in the limited partnerships (the "Operating Partnerships") which construct and operate these properties. The Registrant's investment objectives are to: (i) achieve long-term capital appreciation through increases in the value of the Partnership Equity Investments; (ii) provide quarterly cash distributions to investors; (iii) provide investors with federal income tax deductions that may offset, in part, taxable cash distributions subsequent to the initial closing on Beneficial Assignment Certificates ("BACs") representing a beneficial assignment of limited partnership interests in the Registrant; (iv) provide the potential for increases in cash distributions from income from Operating Partnerships and sale of the multifamily housing properties; and (v) preserve and protect the Registrant's capital. The Partnership originally intended to qualify the BACs for quotation on NASDAQ within 24 to 36 months after it commenced operations in order to make the BACs freely transferable. However, at a Special Meeting of BAC Holders on May 17, 1990, an amendment to the Partnership Agreement was approved to only allow limited transferability of BACs to preserve the tax status of the Partnership and avoid being designated as a "publicly traded partnership".
	 A total of 3,374,222 BACs were sold at $20 per BAC for total capital contributions of $67,484,440 prior to the payment of certain organization and offering costs.
On May 7, 1998, a registration statement on Form S-4 was filed with the Securities and Exchange Commission by America First Real Estate Investment Company, Inc. (AFRIC) relating to a proposed merger of the Registrant and Capital Source, L.P. II-A into AFRIC which was formed for the purpose of making opportunistic, growth-oriented real estate investments. Due to significant changes in the United States equity and real estate markets in the Fall of 1998, the general partners of the Registrant have reevaluated the terms of the proposed merger and have decided to restructure it so that the resulting entity is a publicly-traded limited partnership that will primarily invest in residential apartment complexes and other commercial real estate. Therefore, the investment objectives of the new limited partnership will be substantially similar to those of the Registrant. The proposed merger will be subject to the consent of the BAC holders of the Registrant and Capital Source, L.P. II-A.
	 The Registrant originally acquired (i) five mortgage-backed securities (the "GNMA Certificates") guaranteed as to principal and interest by the Government National Mortgage Association ("GNMA") collateralized by first mortgage loans on multifamily housing properties located in five states, (ii) three first mortgage loans insured by the Federal Housing Administration (the "FHA Loans") on multifamily housing properties located in two states and (iii) Partnership Equity Investments in eight limited partnerships which own the multifamily housing properties financed by the GNMA Certificates and the FHA Loans. The Partnership has been repaid by the FHA on one of its first mortgage loans. The Partnership has also been repaid by GNMA on one of its GNMA Certificates. The Partnership no longer holds a Partnership Equity Investment in the Operating Partnership which owned the property collateralizing the repaid GNMA Certificate. Collectively, the remaining GNMA Certificates, the FHA Loans and the Partnership Equity Investments are referred to as the "Permanent Investments." A description of the properties financed by the Registrant at December 31, 1998, appears in Item 7 hereof. The Partnership has also invested amounts held in its reserve account in certain GNMA securities backed by pools of single-family mortgages ("Reserve Investments").
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While principal of and interest on the GNMA Certificates and the FHA Loan are ultimately guaranteed by the United States government, the amount of cash distributions received by the Registrant from the Partnership Equity Investments is a function of the net rental revenues generated by the properties owned by the Operating Partnerships. Net rental revenues from a multifamily apartment complex depend on the rental and occupancy rates of the property and on the level of operating expenses. Occupancy rate and rents are directly affected by the supply of, and demand for, apartments in the market area in which a property is located. This, in turn, is affected by several factors such as local or national economic conditions, the amount of new apartment construction and interest rates on single-family mortgage loans. In addition, factors such as government regulation (such as zoning laws), inflation, real estate and other taxes, labor problems and natural disasters can affect the economic operations of a property.
In each city in which the Registrant's properties are located, such properties compete with a substantial number of other apartment complexes. Apartment complexes also compete with single-family housing that is either owned or leased by potential tenants. The principal method of competition is to offer competitive rental rates. The Registrant's properties also compete by emphasizing property location, condition and property amenities.
The Registrant believes that each of its properties is in compliance in all material respects with federal, state and local regulations regarding hazardous waste and other environmental matters and the Registrant is not aware of any environmental contamination at any of such properties that would require any material capital expenditure by the Registrant for the remediation thereof.
The Registrant is engaged solely in the business of owning mortgages and holding equity interests in real estate limited partnerships. Accordingly, the presentation of information about industry segments is not applicable and would not be material to an understanding of the Registrant's business taken as a whole.
	 At December 31, 1998, the Registrant had one employee. In addition, certain services are provided to the Registrant by employees of America First Companies L.L.C. which is an affiliate of the general partners of the Registrant, and the Registrant reimburses America First Companies L.L.C. for such services at cost. The Registrant is not charged and does not reimburse for the services performed by managers and officers of America First Companies L.L.C..
	 Item 2.
Item 2. Properties. The Registrant does not directly own or lease any physical properties. However, by virtue of its interest in the Partnership Equity Investments in the Operating Partnerships, the Registrant indirectly owns up to a 99% interest in six multifamily apartment projects. In addition, the Registrant owns a 30.29% interest in another multifamily apartment project known as The Ponds at Georgetown. The multifamily apartment projects are described in the following table:
Depreciation is taken by the Operating Partnerships on each property on a straight-line basis over the estimated useful lives of the various components of the properties ranging from five to 40 years.
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The average annual occupancy rate and average effective rental rate per unit for each of the properties for each of the last five years are listed in the following table:
In the opinion of the Partnership's management, each of the properties is adequately covered by insurance. For additional information concerning the properties, see "Management's Discussion and Analysis of Financial Condition and Results of Operations". A discussion of general competitive conditions to which these properties are subject is included in Item 1 hereof.
	 Item 3.
Item 3. Legal Proceedings.
The Registrant has been named as a defendant in a purported class action lawsuit filed in the Delaware Court of Chancery on February 3, 1999 by two BAC holders, Alvin M. Panzer and Sandra G. Panzer, against the Registrant, its general partners, America First and various of their affiliates (including Capital Source, L.P. II-A, a similar partnership with general partners that are affiliates of America First) and Lehman Brothers, Inc. The plaintiffs seek to have the lawsuit certified as a class action on behalf of all BAC holders of the Registrant and Capital Source, L.P. II-A. The lawsuit alleges, among other things, that a proposed merger transaction involving the Registrant and Capital Source, L.P. II-A is deficient and coercive, that the defendants have breached the terms of the Registrant's partnership agreement and that the defendants have acted in manners which violate their fiduciary duties to the BAC holders. The plaintiffs seek to enjoin the proposed merger transaction and to appoint an independent BAC holder representative to investigate alternative transactions. The lawsuit also requests a judicial dissolution of the Registrant, an accounting, and unspecified damages and costs.
There are no other material pending legal proceedings to which the Registrant is a party or to which any of its property is subject.
	 Item 4.
Item 4. Submission of Matters to a Vote of Security Holders. No matter was submitted during the fourth quarter of 1998 to a vote of the Registrant's security holders.
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	 PART II
	 Item 5.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
		 (a)	Market Information. The BACs are subject to various transfer restrictions imposed to prevent the Registrant from being treated as a publicly traded partnership for federal income tax purposes and, accordingly, there is no public trading market for the BACs.
In the event the General Partners have reason to believe that a requested sale, transfer or assignment of BACs would cause the Partnership to be characterized as a publicly traded partnership for federal income tax purposes, the General Partners will, pursuant to their powers under Section 5.09 of the Partnership Agreement, refuse to process such requested sale, transfer or assignment unless the General Partners receive an unqualified opinion of Counsel to the effect that such sale, transfer or assignment of BACs, would not cause the Partnership to be characterized as a publicly traded partnership for federal income tax purposes. Neither the General Partners nor the Partnership may be held liable for any losses resulting to a holder of BACs or a purchaser of Units as a result of a requested sale, transfer or assignment of BACs not being processed due to these limitations.
The foregoing restrictions are intended to prevent the trading volume of BACs from reaching a level that would cause the Partnership to be characterized as a publicly traded partnership under Section 7704 of the Code. In the event the Partnership were characterized as a publicly traded partnership, the Partnership could be subject to entity level taxation. In such event, amounts otherwise distributable to holders of BACs would be used to satisfy federal income tax liabilities of the Partnership and, thus, amounts received by holders of BACs would be less than anticipated.
		 (b)	Investors. The approximate number of BAC Holders on December 					31, 1998, was 5,571.
		 (c)	Distributions. Cash distributions are paid on a quarterly basis to the record holders of BACs as of the last day of each month. Total cash distributions paid or accrued to BAC Holders during the fiscal years ended December 31, 1998, and December 31, 1997, equaled $3,407,963 					and 3,407,965 respectively. The cash distributions paid per BAC during 					the fiscal years ended December 31, 1998, and December 31, 1997 				 were as follows:
See Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, for information regarding the sources of funds used for cash distributions and for a discussion of factors, if any, which may adversely affect the Registrant's ability to make cash distributions at the same levels in 1999 and thereafter.
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Item 6.
Item 6. Selected Financial Data. Set forth below is selected financial data for the Partnership. The information set forth below should be read in conjunction with the Financial Statements and Notes thereto filed in response to Item 8 hereof.										
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Liquidity and Capital Resources
The Partnership originally acquired: (i) five mortgage-backed securities guaranteed as to principal and interest by the Government National Mortgage Association (GNMA) collateralized by first mortgage loans on multifamily housing properties located in five states; (ii) three first mortgage loans insured as to principal and interest by the Federal Housing Administration (FHA) on multifamily housing properties located in two states; and (iii) Partnership Equity Investments in eight limited partnerships which own the multifamily properties financed by the GNMA Certificates and FHA Loans. The Partnership subsequently received FHA Debentures in payment of the FHA Loan on Fox Hollow Apartments which were paid in full in 1993. In 1994, foreclosure proceedings were initiated on Falcon Point Apartments and, accordingly, the Partnership no longer holds a Partnership Equity Investment in this property. In addition, during 1995, the GNMA Certificate related to Falcon Point Apartments was paid-in-full to the Partnership. Collectively, the remaining GNMA Certificates, FHA Loans and Partnership Equity Investments are referred to as the "Permanent Investments". The Partnership has also invested amounts held in its reserve account in certain GNMA securities backed by pools of single-family mortgages (Reserve Investments). The obligations of GNMA and FHA are backed by the full faith and credit of the United States government.
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Distributions
Cash distributions paid or accrued per BAC were as follows:
Regular quarterly distributions to BAC Holders consist primarily of interest received on FHA Loans and GNMA Certificates. Additional cash for distributions is received from other temporary investments. The Partnership may draw on reserves to pay operating expenses or to supplement cash distributions to BAC Holders. The Partnership is permitted to replenish reserves with cash flows in excess of distributions paid. For the year ended December 31, 1998, a net amount of $1,334,522 of undistributed cash flow was added to reserves. The total amount held in reserves at December 31, 1998, was $9,229,246 of which $879,182 was invested in GNMA Certificates.
The Partnership believes that cash provided by operating and investing activities and, if necessary, withdrawals from the Partnership's reserves will be adequate to meet its short-term and long-term liquidity requirements, including the payments of distributions to BAC Holders. Under the terms of the Partnership Agreement, the Partnership has the authority to enter into short-term and long-term debt financing arrangements; however, the Partnership currently does not anticipate entering into such arrangements. The Partnership is not authorized to issue additional BACs to meet short-term and long-term liquidity requirements.
Asset Quality
The FHA Loans and GNMA Certificates owned by the Partnership are guaranteed as to principal and interest by FHA and GNMA, respectively. The obligations of FHA and GNMA are backed by the full faith and credit of the United States government. The Partnership Equity Investments, however, are not insured or guaranteed. The value of these investments is a function of the value of the real estate owned by the Operating Partnerships.
The fair value of the properties underlying the Operating Partnerships is based on management's best estimate of the fair value of such properties, however; the ultimate realized values may vary from these estimates. The fair value of the properties is determined based on the discounted estimated future cash flows from the properties, including estimated sales proceeds. The calculation of discounted estimated future cash flows includes certain variables such as the assumed inflation rates for rents and expenses, capitalization rates and discount rates. These variables are supplied to management by an independent real estate firm and are based on local market conditions for each property. In certain cases, additional factors such as the replacement value of the property or comparable sales of similar properties are also taken into consideration.
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The following table shows the occupancy levels of the properties financed by the Partnership at December 31, 1998:
The following sets forth certain information regarding the properties financed by the Partnership:
Bluff Ridge Apartments
Bluff Ridge Apartments is a 108-unit complex located in Jacksonville, North Carolina. Average occupancy was 99% in 1998, compared to 96% in 1997. Operations at Bluff Ridge are heavily dependent on demand from the local military personnel. The Jacksonville rental market has remained relatively stable throughout 1998. Operating revenue increased as a result of rental rate increases and an increase in average occupancy. In addition, real estate operating costs decreased primarily due to a decrease in repairs and maintenance expenses and property improvements. As a result, net operating income, excluding interest, depreciation and amortization, increased approximately 3% from 1997 to 1998. The property was current on its debt service payments during 1998.
Fox Hollow Apartments
Fox Hollow Apartments is a 184-unit apartment community located in High Point, North Carolina. Average occupancy was 95% in 1998, compared to 96% in 1997. Excluding interest, depreciation and amortization, net operating income increased approximately 19% from 1997 to 1998. This increase was primarily due to a decrease in repairs and maintenance expenses and a slight increase in rental revenues due to rental rate increases. The property remained in compliance with the terms of the Loan Modification Agreement (LMA) entered into with the mortgage holder in 1996. While there can be no assurance that the modified terms of the Fox Hollow mortgage will enable the property to remain current on its mortgage obligations, the restructuring allows the Partnership to retain its Partnership Equity Investment in the Fox Hollow Apartments and improves the property's ability to make its required mortgage payments.
Highland Park Apartments
Highland Park Apartments contains 252 luxury garden apartments and is located in Columbus, Ohio. Average occupancy was 95% in 1998, compared to 93% in 1997. Excluding interest, depreciation and amortization, net operating income decreased approximately 5% from 1997 to 1998. This decrease is primarily due to an increase in real estate operating expenses of approximately 9% which was partially offset by a 1% increase in rental revenue resulting primarily from the increase in average occupancy. The increases in real estate operating expenses resulted from higher repairs and maintenance expenses and advertising costs which were partially offset by a decrease in other administrative expenses. The property remained current on its mortgage obligations throughout 1998.
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Misty Springs Apartments
Misty Springs Apartments is a 128-unit apartment community located in Daytona Beach, Florida. Average occupancy was 100% in 1998, compared to 98% in 1997. Net operating income, excluding interest, depreciation and amortization, was approximately 5% lower in 1998, compared to 1997. This decrease resulted from a 14% increase in real estate operating expenses which was partially offset by an increase of approximately 5% in operating revenue. Real estate operating expenses were higher primarily due to increases in salaries and related expenses and repairs and maintenance expenses which were partially offset by a 9% decrease in administrative expenses. The increase in operating revenue was due primarily to the increase in average occupancy. Shortfalls of $10,000 were funded by the Partnership reserves in 1998.
At December 31, 1998, the operating partnership was in compliance with the terms of a Reinstatement Agreement entered into in 1993. The Operating Partnership was current on its debt service payments on its mortgage loan during 1998.
The Ponds at Georgetown
The Ponds at Georgetown consists of 134 apartments located in Ann Arbor, Michigan. Average occupancy was 99% in 1998, compared to 97% in 1997. Rental revenue increased approximately 3.5% in 1998, compared to 1997, primarily due to the increase in average occupancy while real estate operating expenses increased approximately 8%. The increase in real estate operating expenses was primarily due to an 8% increase in repairs and maintenance expenses which was partially offset by a 17% decrease in real estate taxes. As previously disclosed, the mortgage loan for the Ponds at Georgetown was restructured in September 1998 which lowered the interest rate from 9.25% to 7.85%. In connection with the restructuring, shortfalls of $176,942 were funded by the Partnership's reserves. As a result of restructuring the mortgage loan, cash flow from the property is now anticipated to be sufficient to cover all the operating partnership's cash needs, including mortgage payments and taxes. The property was current on its mortgage obligations as of December 31, 1998.
Waterman's Crossing
Waterman's Crossing is a 260-unit apartment community located in Newport News, Virginia. Average occupancy was 100% in 1998, compared to 98% in 1997. The operating partnership was current on its mortgage obligations in 1998. Excluding interest, depreciation and amortization, operating income increased 6% from 1997 to 1998. This increase was primarily due to reductions of approximately 5% in repairs and maintenance expenses and 11% in advertising expenses. These decreases were partially offset by an increase in administrative expenses of approximately 6% and an increase in operating revenue of approximately 4%. The increase in operating revenue resulted primarily from the increase in average occupancy.
Water's Edge Apartments
Water's Edge Apartments is a 108-unit apartment complex located in Lake Villa, Illinois. Average occupancy was 96% in 1998 and 1997. Net operating income, excluding interest, depreciation and amortization, increased approximately 2% in 1998 compared to 1997. This increase is primarily attributable to higher operating revenue due primarily to the increase in average occupancy. The operating partnership remained current on its mortgage obligations in 1998.
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Results of Operations
The tables below compare the results of operations for each year shown.
Mortgage-backed securities income decreased $39,805 from 1997 to 1998 and $38,020 from 1996 to 1997, due to the continued amortization of the principal balances of the Partnership's mortgage-backed securities.
Interest income on temporary cash investments and U.S. government securities decreased $24,208 from 1997 to 1998 due to a decrease in the average cash balance primarily due to additional equity contributions made to The Ponds at Georgetown and an increased investment in The Ponds at Georgetown GNMA Certificate.
Interest income on temporary cash investments and U.S. government securities increased $30,968 from 1996 to 1997 due to an increase in the Partnership's cash reserve as additional cash was placed in reserves during 1996 and 1997.
The Partnership suspended recognizing losses in the Operating Partnerships when its entire initial investment had been consumed by such losses. Subsequently, losses have been recognized only to the extent of additional contributions, net of distributions received, to the Operating Partnerships by the Partnership.
The Partnership made additional investments in certain Operating Partnerships of $186,942, $178,550, and $334,745 during 1998, 1997 and 1996, respectively. During 1996, the Partnership received a distribution of $77,233 from one of the Operating Partnerships. The Partnership recorded equity in losses of Operating Partnerships for 1998, 1997, and 1996 to the extent of the additional investments in Operating Partnerships, net of distributions received.
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Operating and administrative expenses increased $1,077,279 from 1997 to 1998. This increase was due to: (i) the write-off of approximately $767,000 in transaction costs incurred in conjunction with the proposed merger described in Note 9 to the financial statements; (ii) an increase of approximately $273,000 in salaries and related expenses primarily due to additional management time incurred in conjunction with the aforementioned proposed merger; (iii) an increase of approximately $30,000 in fees and expenses incurred in connection with a review of various options for restructuring the Partnership to improve total investment returns and provide liquidity to the Partnership's investors and (iv) an increase of approximately $7,000 in other operating and administrative expenses. Operating and administrative expenses increased $203,581 from 1996 to 1997 primarily due to: (i) and increase of approximately $137,000 in salaries and related expenses, and (ii) an increase of approximately $44,000 in professional fees incurred in connection with a review of various options available to the Partnership to improve total investment returns and provide liquidity to the Partnership's investors and (iii) an increase of approximately $23,000 in other operating and administrative expenses.
Year 2000
The Partnership does not own or operate its own computer system and owns no business or other equipment. However, the operation of the Partnership's business relies on the computer system and other equipment maintained by America First Companies L.L.C., the parent company of its general partners ("America First"). In addition, the Partnership has business relationships with a number of third parties whose ability to perform their obligations to the Partnership depend on such systems and equipment. Some or all of these systems and equipment may be affected by the inability of certain computer programs and embedded circuitry to correctly recognize dates occurring after December 31, 1999. America First has adopted a plan to deal with this so-called "Year 2000 problem" with respect to its information technology ("IT") systems, non-IT systems and third party business relationships.
State of Readiness
The IT system maintained by America First consists primarily of personal computers, most of which are connected by a local area network. All accounting and other record keeping functions relating to the Partnership that are conducted in house by America First are performed on this PC-LAN system. America First does not own or operate any "mainframe" computer systems. The PC-LAN system runs software programs that America First believes are compatible with dates after December 31, 1999. America First has engaged a third party computer consulting firm to review and test its PC-LAN system to ensure that it will function correctly after that date and expects that this process, along with any necessary remediation, will be completed by mid-1999. America First believes any Year 2000 problems relating to its IT systems will be resolved without significant operational difficulties. However, there can be no assurance that testing will discover all potential Year 2000 problems or that it will not reveal unanticipated material problems with the America First IT systems that will need to be resolved.
Non-IT systems include embedded circuitry such as microcontrollers found in telephone equipment, security and alarm systems, copiers, fax machines, mail room equipment, heating and air conditioning systems and other infrastructure systems that are used by America First in connection with the operation of the Partnership's business. America First is reviewing its non-IT systems along with the providers that service and maintain these systems, with initial emphasis being placed on those, such as telephone systems, which have been identified as necessary to America First's ability to conduct the operation of the Partnership's business activities. America First expects that any necessary modification or replacement of such "mission critical" systems will be accomplished by mid-1999.
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The Partnership has no control over the remediation efforts of third parties with which it has material business relationships and the failure of certain of these third parties to successfully remediate their Year 2000 issues could have a material adverse effect on the Partnership. Accordingly, America First has undertaken the process of contacting each such third party to determine the state of their readiness for Year 2000. Such parties include, but are not limited to, the obligors on the Partnership's GNMA Certificates and FHA Loans, the Partnership's transfer and paying agent and the financial institutions with which the Partnership maintains accounts. America First has received initial assurances from certain of these third parties that their ability to perform their obligations to the Partnership are not expected to be materially adversely affected by the Year 2000 problem. America First will continue to request updated information from these material third parties in order to access their Year 2000 readiness. If a material third party vendor is unable to provide assurance to America First that it is, or will be, ready for Year 2000, America First intends to seek an alternative vendor to the extent practical.
Costs
All of the IT systems and non-IT systems used to conduct the Partnership's business operations are owned or leased by America First. Under the terms of its partnership agreement, neither America First nor the Partnership's general partners may be reimbursed by the Partnership for expenses associated with their computer systems or other business equipment. Therefore, the costs associated with the identification, remediation and testing of America First's IT and non-IT systems will be paid by America First rather than the Partnership. The Partnership will bear its proportionate share of the costs associated with surveying the Year 2000 readiness of third parties. However, the Partnership's share of the costs associated with these activities are expected to be insignificant. Accordingly, the costs associated with addressing the Partnership's Year 2000 issues are not expected to have a material effect on the Partnership's results of operations, financial position or cash flow.
Year 2000 Risks
The Partnership's general partners believe that the most reasonably likely worst-case scenario will be that one or more of the third parties with which it has a material business relationship will not have successfully dealt with its Year 2000 issues and, as a result, is unable to provide services or otherwise perform its obligations to the Partnership. For example, if an obligor on the Partnership's GNMA Certificates or FHA Loan encounters a serious and unexpected Year 2000 issue, it may be unable to make a timely payment of principal and interest to the Partnership. This, in turn, could cause a delay or temporary reduction in cash distributions to BAC holders. In addition, if the Partnership's transfer and paying agent experiences Year 2000-related difficulties, it may cause delays in making distributions to BAC holders or in the processing of transfers of BACs. It is also possible that one or more of the IT and non-IT systems of America First will not function correctly, and that such problems may make it difficult to conduct necessary accounting and other record keeping functions for the Partnership. However, based on currently available information, the general partners do not believe that there will be any protracted systemic failures of the IT or non-IT systems utilized by America First in connection with the operation of the Partnership's business.
Contingency Plans
Because of the progress which America First has made toward achieving Year 2000 readiness, the Partnership has not made any specific contingency plans with respect to the IT and non-IT systems of America First. In the event of a Year 2000 problem with its IT system, America First may be required to manually perform certain accounting and other record-keeping functions. America First plans to terminate the Partnership's relationships with material third party service providers that are not able to represent to America First that they will be able to successfully resolve their material Year 2000 issues in a timely manner. However, the Partnership will not be able to terminate its relationships with certain third parties, such as the obligors on its GNMA Certificates and FHA Loans, who may experience Year 2000 problems. The Partnership has no specific contingency plans for dealing with Year 2000 problems experienced with these third parties.
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All forecasts, estimates or other statements in this report relating to the Year 2000 readiness of the Partnership and its affiliates are based on information and assumptions about future events. Such "forward-looking statements" are subject to various known and unknown risks and uncertainties that may cause actual events to differ from such statements. Important factors upon which the Partnership's Year 2000 forward-looking statements are based include, but are not limited to, (a) the belief of America First that the software used in IT systems is already able to correctly read and interpret dates after December 31, 1999 and will require little or any remediation; (b) the ability to identify, repair or replace mission critical non-IT equipment in a timely manner, (c) third parties' remediation of their internal systems to be Year 2000 ready and their willingness to test their systems interfaces with those of America First, (d) no third party system failures causing material disruption of telecommunications, data transmission, payment networks, government services, utilities or other infrastructure, (e) no unexpected failures by third parties with which the Partnership has a material business relationship and (f) no material undiscovered flaws in America First's Year 2000 testing process.
Forward Looking Statements
This report contains forward looking statements that reflect management's current beliefs and estimates of future economic circumstances, industry conditions, the Partnership's performance and financial results. All statements, trend analysis and other information concerning possible or assumed future results of operations of the Partnership and the real estate investments it has made (including, but not limited to, the information contained in "Management's Discussion and Analysis of Financial Condition and Results of Operations"), constitute forward-looking statements. BAC Holders and others should understand that these forward looking statements are subject to numerous risks and uncertainties and a number of factors could affect the future results of the Partnership and could cause those results to differ materially from those expressed in the forward looking statements contained herein.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
The Partnership's primary market risk exposure is interest rate risk. The Partnerhsip's exposure to market risk for changes in interest rates relates primarily to its investment securities which is comprised of investments in debt securities with fixed interest rates. The Partnership does not use derivative financial instruments to hedge its investment portfolio.
The table below presents principal amounts and weighted average interest rates by year of maturity for the Partnership's investment portfolio:
The aggregate fair value of the Partnership's investment securities at December 31, 1998 was $36,129,123.
	 Item 8.
Item 8. Financial Statements and Supplementary Data. The Financial Statements and supporting schedules of the Registrant are set forth in Item 14 hereof and are incorporated herein by reference.
	 Item 9.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure. There were no disagreements with the Registrant's independent accountants on accounting principles and practices or financial disclosure during the fiscal years ended December 31, 1998 and 1997.
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The information required by this Item 9 relating to a change in accountants has been previously reported (as that term is defined by Rule 12a-2 of the Exchange Act) with the Commission by the Partnership on its Current Report on Form 8-K dated October 2, 1998, as amended, and is hereby incorporated by reference.
	 PART III
	 Item 10.
Item 10. Directors and Executive Officers of Registrant. The Registrant has no directors or officers. The general partners of the Registrant are America First Capital Source I, L.L.C. (the "America First General Partner") and Insured Mortgage Equities Inc. (the "IME General Partner"), each of which is controlled by America First Companies L.L.C. ("America First"). Collectively, the America First General Partner and the IME General Partner are referred to as the "General Partners".
	 The following individuals are the officers and directors of the General Partners and the officers and managers of America First, and each serves for a term of one year.
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	 Michael B. Yanney, 65, has served as the Chairman, President and Chief Executive Officer of America First Companies L.L.C. and its predecessors since 1984. From 1977 until the organization of the first such fund in 1984, Mr. Yanney was principally engaged in the ownership and management of commercial banks. Mr. Yanney also has investments in private corporations engaged in a variety of businesses. From 1961 to 1977, Mr. Yanney was employed by Omaha National Bank and Omaha National Corporation (now part of U.S. Bank), where he held various positions, including the position of Executive Vice President and Treasurer of the holding company. Mr. Yanney also serves as a member of the boards of directors of Burlington Northern Santa Fe Corporation, Forest Oil Corporation, Level 3 Communications, Inc., Freedom Communications, Inc., Magnum Resources, RCN Corporation, Rio Grande Medical Technologies, Inc. and PKS Information Services, Inc..
	 Michael Thesing, 44, has been Vice President and Chief Financial Officer of affiliates of America First Companies L.L.C. since July 1984. He serves as President of America First Investment Advisors L.L.C. and is a member of the Board of Managers of America First Companies L.L.C.. From January 1984 until July 1984 he was employed by various companies controlled by Mr. Yanney. He was a certified public accountant with Coopers & Lybrand from 1977 through 1983.
	 William S. Carter, M.D., 72, is a retired physician. Dr. Carter practiced medicine for 30 years in Omaha, Nebraska, specializing in otolaryngology (disorders of the ears, nose and throat).
	 Martin A. Massengale, 65, is President Emeritus of the University of Nebraska, Director of the Center for Grassland Studies and Foundation Distinguished Professor. Prior to becoming President in 1991, he served as Interim President from 1989, as Chancellor of the University of Nebraska Lincoln from 1981 until 1990 and as Vice Chancellor for Agriculture and Natural Resources from 1976 to 1981. Prior to that time, he was a professor and associate dean of the College of Agriculture at the University of Arizona. Dr. Massengale currently serves on the board of directors of Woodmen Accident & Life Insurance Company and IBP, Inc. and is a member of the Board of Trustees of the Great Plains Funds, Inc.
	 Alan Baer, 76, is presently Chairman of Alan Baer & Associates, Inc., a management company located in Omaha, Nebraska. He is also Chairman of Lancer Hockey, Inc., Baer Travel Services, Wessan Telemarketing, Total Security Systems, Inc. and several other businesses. Mr. Baer is the former Chairman and Chief Executive Officer of the Brandeis Department Store chain which, before its acquisition, was one of the larger retailers in the Midwest. Mr. Baer has also owned and served on the board of directors of several banks in Nebraska and Illinois.
	 Gail Walling Yanney, 62, is a retired physician. Dr. Walling practiced anesthesia and was most recently the Executive Director of the Clarkson Foundation until October of 1995. In addition, she was a director of FirsTier Bank, N.A., Omaha prior to its merger with First Bank, N.A.. Ms. Yanney is the wife of Michael B. Yanney.
	 Mariann Byerwalter, 38, is Vice President of Business Affairs and Chief Financial Officer of Stanford University. Ms. Byerwalter was Executive Vice President of America First Eureka Holdings, Inc. ("AFEH") and EurekaBank from 1988 to January 1996. Ms. Byerwalter was Chief Financial Officer and Chief Operating Officer of AFEH, and Chief Financial Officer of EurekaBank from 1993 to January 1996. She was an officer of BankAmerica Corporation and its venture capital subsidiary from 1984 to 1987. She served as Vice President and Executive Assistant to the President of Bank of America and was a Vice President in the bank's Corporate Planning and Development Department. Ms. Byerwalter currently serves on the board of directors of Redwood Trust, Inc.
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	 Item 11.
Item 11. Executive Compensation. The Registrant does not have any directors or officers. Certain services are provided to the Registrant by managers and officers of America First. None of the directors or officers of the General Partners or the managers or officers of America First receive compensation from the Registrant and neither General Partner receives reimbursement from the Registrant for any portion of their salaries. Remuneration paid by the Registrant to the General Partners pursuant to the terms of its agreement of limited partnership during the period ending December 31, 1998, is described in Note 7 to the Notes to the Financial Statements filed in response to Item 8 hereof.
	 Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
(a) No person is known by Registrant to own beneficially more than 5% of the BACs.
	 (b)	No director or officers of the General Partners or managers or officers of America First own any BACs.
(c) There are no arrangements known to the Registrant, the operation of which may at any subsequent date result in a change of control of the Registrant.
	 Item 13.
Item 13. Certain Relationships and Related Transactions. The members of the America First General Partner are America First Companies L.L.C. and Mr. Yanney. The IME General Partner is owned by America First. Except as described herein, the Registrant is not a party to any transaction or proposed transaction with either General Partner or with any person who is: (i) a member, director, or officer of the General Partners or manager or officer of America First; (ii) a nominee for election as a director or manager of a General Partner or a manager of America First; (iii) an owner of more than 5% of the BACs; or, (iv) a member of the immediate family of any of the foregoing persons.
	 The General Partners are entitled to receive an asset management and partnership administrative fee equal to 0.5% of invested assets per annum, payable only during such years that an 8% return has been paid to investors on a noncumulative basis. Any unpaid amounts will accrue and be payable only after a 13% annual return to investors has been paid on a cumulative basis and the investors have received the return of their capital contributions. During 1998, distributions to investors represented less than an 8% return; accordingly, no fees were paid or accrued during 1998.
	 During 1998, the Registrant paid or reimbursed the General Partners $1,305,744 for certain costs and expenses incurred in connection with the operation of the Registrant, including legal and accounting fees and investor communication costs, such as printing and mailing charges. See Note 7 to Notes to Financial Statements filed in response to Item 8 hereof for a description of these costs and expenses.
America First Properties Management Company, L.L.C. (the "Manager") has been retained to provide property management services with respect to the day-to-day operation of Waterman's Crossing, Misty Springs, Fox Hollow Apartments and The Ponds at Georgetown. The property management agreements provide that the Manager is entitled to receive a management fee equal to a stated percentage of the gross revenues generated by the property under management. Management fees payable to the Manager range from 4% to 4.4% of gross revenues. Because the Manager is an affiliate of the General Partners, the management fees payable by the Registrant to the Manager may not exceed the lesser of (i) the rates that the Registrant would pay an unaffiliated manager for similar services in the same geographic location or (ii) the Manager's actual cost for providing such services. During the year ended December 31, 1998, the Manager was paid property management fees of $196,606.
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	 PART IV
	 Item 14.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. (a) The following documents are filed as part of this report:
		 1.	Financial Statements. The following financial statements are included in response to Item 8 of this report:
		 Independent Auditors' Report.
		 Balance Sheets of the Registrant as of December 31, 1998, and December 31, 1997.
		 Statements of Income and Comprehensive Income of the Registrant 											 for the years ended December 31, 1998, December 31, 1997, and 											 December 31, 1996.
		 Statements of Partners' Capital (Deficit) of the Registrant for the years ended December 31, 1998, December 31, 1997, and December 31, 1996.
		 Statements of Cash Flows of the Registrant for the years ended December 31, 1998, December 31, 1997, and December 31, 1996.
		 Notes to Financial Statements of the Registrant.
		 2.	Financial Statement Schedules. The information required to be set forth in the financial statement schedules is shown in the Notes to Financial Statements filed in response to Item 8 hereof.
						 3.	Exhibits. The following exhibits were filed as required by Item 14(c) of this report. Exhibit numbers refer to the paragraph numbers under Item 601 of Regulation S-K:
			 4(a). Agreement of Limited Partnership of Capital Source L.P. (incorporated herein by reference from Exhibit A of the Prospectus contained in the Registrant's Post Effective Amendment No. 3 dated May 15, 1986, to the Registration Statement on Form S-11 (Commission File No. 0-16497)).
			 4(b). Beneficial Assignment Certificate (incorporated by reference to page 47 of Form 10-K for the fiscal year ended December 31, 1989, filed with the Securities and Exchange Commission by the Registrant (Commission File No. 0-16497)).
															24. Power of Attorney
															27. Financial Data Schedule 			 	 (b)	The Registrant filed the following Form 8-K during the last quarter of the period covered by this report:
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INDEPENDENT AUDITORS' REPORT
To the Partners Capital Source L.P.:
We have audited the accompanying balance sheets of Capital Source L.P. as of December 31, 1998 and 1997, and the related statements of income and comprehensive income, partners' capital (deficit) and cash flows for the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Capital Source L.P. as of December 31, 1998 and 1997, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles.
Omaha, Nebraska March 19, 1999																																		/s/KPMG Peat Marwick LLP
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CAPITAL SOURCE L.P. BALANCE SHEETS
CAPITAL SOURCE L.P. STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
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CAPITAL SOURCE L.P. STATEMENT OF PARTNERS' CAPITAL (DEFICIT) FROM DECEMBER 31, 1995 TO DECEMBER 31, 1998
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CAPITAL SOURCE L.P. STATEMENTS OF CASH FLOWS
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CAPITAL SOURCE L.P. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1998
1.	Organization
Capital Source L.P. (the Partnership) was formed on August 22, 1985, under the Delaware Revised Uniform Limited Partnership Act. The General Partners of the Partnership are Insured Mortgage Equities Inc. and America First Capital Source I, L.L.C. (the General Partners).
The Partnership was formed to invest principally in federally-insured mortgages on multifamily housing properties and limited partnership interests in the operating partnerships which construct and operate these properties. Each federally insured loan is guaranteed in amounts equal to the face amount of the mortgage, by the Federal Housing Administration (FHA) or the Government National Mortgage Association (GNMA). Hereinafter, the Partnership's investments in such mortgages are referred to as investments in mortgage-backed securities. The Operating Partnerships are geographically located as follows: (i) two in North Carolina; and, (ii) one each in Ohio, Florida, Michigan, Virginia and Illinois.
CS Properties I, Inc., which is owned by the General Partners, serves as the Special Limited Partner for the Operating Partnerships. The Special Limited Partner has the power, among other things, to remove the general partners of the Operating Partnerships under certain circumstances and to consent to the sale of the Operating Partnerships' assets. CS Properties I, Inc. also serves as the general partner of Misty Springs Apartments, Waterman's Crossing and Fox Hollow Apartments and as a co-general partner of The Ponds at Georgetown.
The Partnership will terminate subsequent to the sale of all properties but in no event will the Partnership continue beyond December 31, 2030.
2.	Summary of Significant Accounting Policies
A) Financial Statement Presentation The financial statements of the Partnership are prepared on the accrual basis of accounting in accordance with generally accepted accounting principles.
				The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
	B)	Investment in Mortgage-Backed Securities Investment securities are classified as held-to-maturity, available-for-sale, or trading. Investments classified as held-to-maturity are carried at amortized cost. Investments classified as available-for-sale are reported at fair value, as determined by reference 				to published sources. Any unrealized gains or losses are excluded from 				earnings and reflected in other comprehensive income.		Subsequent increases 			 and decreases in the net unrealized gain/loss on the available-for-sale 			 securities are reflected as adjustments to the carrying value of the 				portfolio and in other comprehensive income. The Partnership does not have 			 investment securities classified as trading.
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	C)	Investment in Operating Partnerships The investment in Operating Partnerships consists of interests in limited partnerships which own properties underlying the mortgage-backed securities and are accounted for using the equity method. The investments 				by the Partnership in the Operating Partnerships were recorded at the cost 				to acquire such interests. Subsequently, losses were recorded by the 				Partnership as they were realized by the Operating Partnerships. The 				Partnership suspended recognizing losses in the Operating Partnerships 				when its entire initial investment had been consumed by such losses. 				Subsequently, losses have been recognized only to the extent of additional 				contributions, net of distributions received, to the Operating Partnerships 			 by the Partnership. The	Operating Partnerships are not insured or 				guaranteed. The value of these investments is a function of the value of 			 the real estate underlying the Operating Partnerships. With regard to the 			 Operating Partnerships, the Partnership is not the general partner and it 				has no legal obligation to provide additional cash support, nor has it 			 indicated any commitment to provide this support; accordingly it has 				not reduced its investment in these Operating Partnerships below zero.
D) Income Taxes No provision has been made for income taxes since BAC Holders are required to report their share of the Partnership's income for federal and state income tax purposes. The book basis of the Partnerships' assets and liabilities exceeded the tax basis by $10,331,740 and $9,517,551 at December 31, 1998, and December 31, 1997, respectively.
E)	Temporary Cash Investments Temporary cash investments are invested in short-term debt securities purchased with an original maturity of three months or less.
F) Net Income per Beneficial Assignment Certificate (BAC) Net income per BAC is based on the number of BACs outstanding (3,374,222) during each year presented.
G) Comprehensive Income 			 In 1998, the Partnership adopted Statement of Financial Accounting 			 Standards No. 130, "Reporting Comprehensive Income" (SFAS 130). SFAS 130 			 requires the display and reporting of comprehensive income, which includes 			 all changes in Partners' Capital with the exception of additional 				investments by partners or distributions to partners. Comprehensive income 			 for the Partnership includes net income and the change in net unrealized 			 holding gains (losses) on investments. The adoption of SFAS 130 had no 				impact on total Partners' Capital.
H) Segment Reporting 				In 1998, the Partnership adopted Statement of Financial Accounting 				Standards No. 131, "Disclosures about Segments of an Enterprise and 				Related Information" (SFAS 131). SFAS 131 requires that a public business 				enterprise report financial and descriptive information about its 				reportable operating segments. The adoption of SFAS 131 did not have an 				impact on the financial reporting of the Partnership as it is engaged 				solely in the business of owning mortgages and holding equity interests in 				real estate limited partnerships.
I) New Accounting Pronouncements 				In June, 1998, the Financial Accounting Standards Board issued Statement of 			 Financial Accounting Standards No. 133, "Accounting for Derivative 				Instruments and Hedging Activities" (SFAS 133). This statement provides new 			 accounting and reporting standards for the use of derivative instruments. 				Adoption of this statement is required by the Partnership effective 			 January 1, 2000. Management believes that the impact of such adoption 				will not be material to the financial statements.
				In April 1998, the Accounting Standards Executive Committee issued 				Statement of Position 98-5, "Reporting on the Costs of 				Start-Up Activities" (SOP 98-5). This statement requires costs of start-up 			 activities and organization costs to be expensed as incurred. Adoption of 			 this statement is required by the Partnership effective January 1, 1999. 				Management intends to adopt the statement as required in fiscal 1999. 	 				Management believes that the impact of such adoption will not have an 				impact to the financial statements.
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CAPITAL SOURCE L.P. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1998
3.	Partnership Reserve Account
The Partnership maintains a reserve account which consisted of the following at December 31, 1998:
The reserve account was established to maintain working capital for the Partnership and is available for distribution to BAC Holders and for any contingencies related to mortgage-backed securities and the operation of the Partnership. See Note 5 regarding the investment in mortgage backed securities.
4. Partnership Income, Expenses and Cash Distributions
Profits and losses from continuing operations and cash available for distribution will be allocated 99% to the investors and 1% to the General Partners. Certain fees payable to the General Partners will not become due until investors have received certain priority returns. Cash distributions included in the financial statements represent the actual cash distributions made during each year and the change in cash distributions accrued at the end of each year.
The General Partners will also receive 1% of the net proceeds from any sale of Partnership assets. The General Partners will receive a termination fee equal to 3% of all sales proceeds less actual costs incurred in connection with all sales transactions, payable only after the investors have received a return of their capital contributions and a 13% annual return on a cumulative basis. The General Partners will also receive a fee equal to 9.1% of all cash available for distribution and sales proceeds (after deducting from cash available or sales proceeds any termination fee paid therefrom) after investors have received a return of their capital contributions and a 13% annual return on a cumulative basis.
5.	Investment in Mortgage-Backed Securities
The mortgage-backed securities held by the Partnership represent Government National Mortgage Association (GNMA) Certificates and Federal Housing Administration (FHA) Loans. The GNMA Certificates are backed by first mortgage loans on multifamily housing properties and pools of single-family properties. The GNMA Certificates are debt securities issued by a private mortgage lender and are guaranteed by GNMA as to the full and timely payment of principal and interest on the underlying loans. The FHA Loans are guaranteed as to the full and timely payment of principal and interest on the underlying loans.
At December 31, 1998, the total amortized cost, gross unrealized holding gains, and aggregate fair value of available-for-sale securities were $840,265, $38,917 and $879,182, respectively. The total amortized cost, gross unrealized holding gains and aggregate fair value of held-to-maturity securities were $35,004,714, $245,227 and $35,249,941, respectively.
At December 31, 1997, the total amortized cost, gross unrealized holding gains, and aggregate fair value of available-for-sale securities were $1,044,910, $43,616 and $1,088,526, respectively. The total amortized cost, gross unrealized holding gains and aggregate fair value of held-to-maturity securities were $35,010,659, $491,651 and $35,502,310, respectively.
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Descriptions of the Partnership's mortgage-backed securities held at December 31, 1998 are as follows:
		(1) During the fourth quarter of 1998, this GNMA Certificate was repaid and 						a new GNMA Certificate was issued. The interest rate on the reissued 						GNMA Certificate is 7.5% compared to 9.0% on the repaid GNMA Certificate. (2) Represents effective yield to the Partnership. (3) Reserve account asset - see Note 3.
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CAPITAL SOURCE L.P. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1998
Reconciliation of the carrying amount of the mortgage-backed securities is as follows:
6.	Investment in Operating Partnerships
The Partnership's Operating Partnerships consist of interests in limited partnerships which own multifamily properties financed by the GNMA Certificates and FHA Loans held by the Partnership. The limited partnership agreements originally provided for the payment of a base return on the equity provided to the limited partnerships and for the payment of additional amounts out of a portion of the net cash flow or net sale or refinancing proceeds of the properties, subject to various priority payments.
Descriptions of the Operating Partnerships held at December 31, 1998, are as follows:
- 25 - CAPITAL SOURCE L.P. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1998
Reconciliation of the carrying amount of the Operating Partnerships is as follows:
Combined Financial Statements of the Operating Partnerships are as follows:
CAPITAL SOURCE L.P. OPERATING PARTNERSHIPS BALANCE SHEETS
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CAPITAL SOURCE L.P. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1998
- 27 - CAPITAL SOURCE L.P. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1998
7.	Transactions with Related Parties
The General Partners, certain of their affiliates and the Operating Partnerships' general partners have received or may receive fees, compensation, income, distributions and payments from the Partnership in connection with the offering and the investment, management and sale of the Partnership's assets (other than disclosed elsewhere) as follows.
The General Partners are entitled to receive an asset management and partnership administration fee equal to 0.5% of invested assets per annum, payable only during such years that an 8% return has been paid to investors on a noncumulative basis. Any unpaid amounts will accrue and be payable only after a 13% annual return to investors has been paid on a cumulative basis and the investors have received the return of their capital contributions. For the years ended December 31, 1998, 1997 and 1996, distributions to investors represented less than an 8% return; accordingly, no fees were paid or accrued during these years.
- 28 - CAPITAL SOURCE L.P. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1998
Substantially all of the Partnership's general and administrative expenses and certain costs capitalized by the Partnership are paid by a General Partner or an affiliate and reimbursed by the Partnership. The amount of such expenses reimbursed to the General Partner was $1,305,744, $533,419, and $347,522 for the years ended December 31, 1998, 1997 and 1996, respectively. These reimbursed expenses are presented on a cash basis and do not reflect accruals made at each year end.
An affiliate of the General Partners has been retained to provide property management services for Waterman's Crossing, Misty Springs Apartments, Fox Hollow Apartments and The Ponds at Georgetown (beginning in November 1996). The fees for services provided were $196,606, $183,069, and $165,721 for 1998, 1997 and 1996, respectively, and represented the lower of costs incurred in providing management of the property or customary fees for such services determined on a competitive basis.
8. Fair Value of Financial Instruments
The following methods and assumptions were used by the Partnership in estimating the fair value of its financial instruments:
Cash and temporary cash investments, interest receivable, other assets, 		 		accounts payable, distributions payable: Fair value approximates the 		carrying value of such assets.
Investment in FHA Loans and GNMA Certificates: Fair values are based on prices obtained from an independent pricing source, adjusted for estimated 		prepayments.
9. Proposed Merger
Due to significant changes in the United States equity and real estate markets in the Fall of 1998, the general partners of the Partnership have reevaluated the terms of the proposed merger of the Partnership and Capital Source, L.P. II-A into a newly formed corporation that would have made opportunistic, growth-oriented real estate investments that had the potential for higher than average returns with correspondingly greater risks. The general partners have decided to restructure the proposed transaction so that the resulting entity is a publicly-traded limited partnership that will primarily invest in residential apartment complexes and other commercial real estate. Therefore, the investment objectives of the new limited partnership will be substantially different than those of the originally proposed merger but similar to those of the Partnership. As a result of restructuring the proposed transaction, certain costs totaling approximately $767,000 that related to the previous transaction that would have been capitalized by the Partnership were expensed as of December 31, 1998.
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10. Legal Proceedings
The Partnership has been named as a defendant in a purported class action lawsuit filed in the Delaware Court of Chancery on February 3, 1999 by two BAC holders, Alvin M. Panzer and Sandra G. Panzer, against the Partnership, its general partners, America First and various of their affiliates (including Capital Source, L.P. II-A, a similar partnership with general partners that are affiliates of America First) and Lehman Brothers, Inc. The plaintiffs seek to have the lawsuit certified as a class action on behalf of all BAC holders of the Partnership and Capital Source, L.P. II-A. The lawsuit alleges, among other things, that a proposed merger transaction involving the Partnership and Capital Source, L.P. II-A is deficient and coercive, that the defendants have breached the terms of the Partnership agreement and that the defendants have acted in manners which violate their fiduciary duties to the BAC holders. The plaintiffs seek to enjoin the proposed merger transaction and to appoint an independent BAC holder representative to investigate alternative transactions. The lawsuit also requests a judicial dissolution of the Partnership, an accounting, and unspecified damages and costs. At this time, the general partners are unable to estimate the effect of the litigation on the financial statements of the Partnership.
11.	Summary of Unaudited Quarterly Results of Operations
(1) The Partnership incurred additional management time and expenses in 				connection with a review of various options for restructuring to improve 				total investment returns and provide liquidity to the Partnership's 				investors.
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	 SIGNATURES
	 Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
		 CAPITAL SOURCE L.P.
		 By	America First Capital 			 Source I, L.L.C., General 			 Partner of the Registrant
	 	By	/s/ Michael Thesing 			 Michael Thesing, 			 Vice President and Principal Financial Officer
Date: March 29, 1999
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	 Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Date: March 29, 1999										 		By	/s/ Michael B. Yanney* 			 Michael B. Yanney, 			 Chairman and Chief Executive Officer of the America First General Partner (Principal Executive Officer)
Chairman of the Board, President, Chief Executive Officer and Manager of America First Companies L.L.C.
Date: March 29, 1999									 	By	/s/ Michael Thesing 			 Michael Thesing, Vice 			 President, Secretary and 			 Treasurer (Principal Financial Officer) of the America First General Partner
Vice President, Secretary, Treasurer and Manager of America First Companies L.L.C.
Date: 	March 29, 1999 													By	/s/ William S. Carter, M.D.* 			 William S. Carter, M.D. Manager of America First Companies L.L.C.
Date: March 29,	1999											 		By	/s/ Martin A. Massengale* 			 Martin A. Massengale Manager of America First Companies L.L.C.
Date: March 29, 1999				 	 By	/s/ Alan Baer* 			 Alan Baer Manager of America First Companies L.L.C.
Date: March 29, 1999			 		 By	/s/ Gail Walling Yanney* 			 Gail Walling Yanney Manager of America First Companies L.L.C.
Date: March 29, 1999				 		 By	/s/ Mariann Byerwalter* 			 Mariann Byerwalter Manager of America First Companies L.L.C.
*By Michael Thesing, Attorney in Fact
/s/ Michael Thesing Michael Thesing
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EXHIBIT 24
POWER OF ATTORNEY
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POWER OF ATTORNEY
The undersigned hereby appoints Michael Thesing as his agent and attorney-in-fact for the purpose of executing and filing all reports on Form 10-K relating to the year ending December 31, 1998, and any amendments thereto, required to be filed with the Securities and Exchange Commission by the following persons:
					America First Tax Exempt Investors, L.P. 					America First Tax Exempt Mortgage Fund Limited Partnership 					America First Apartment Investors, L.P. 					Capital Source L.P. 					Capital source II L.P.-A
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney as of the 1st day of February 1999.
		 /s/ Michael B. Yanney	 				 			Michael B. Yanney
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POWER OF ATTORNEY
The undersigned hereby appoints Michael Thesing as his agent and attorney-in-fact for the purpose of executing and filing all reports on Form 10-K relating to the year ending December 31, 1998, and any amendments thereto, required to be filed with the Securities and Exchange Commission by the following persons:
					America First Tax Exempt Investors, L.P. 					America First Tax Exempt Mortgage Fund Limited Partnership 					America First Apartment Investors, L.P. 					Capital Source L.P. 					Capital source II L.P.-A
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney as of the 1st day of February 1999.
		 /s/ William S. Carter, M.D.	 				 			William S. Carter, M.D.
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POWER OF ATTORNEY
The undersigned hereby appoints Michael Thesing as his agent and attorney-in-fact for the purpose of executing and filing all reports on Form 10-K relating to the year ending December 31, 1998, and any amendments thereto, required to be filed with the Securities and Exchange Commission by the following persons:
					America First Tax Exempt Investors, L.P. 					America First Tax Exempt Mortgage Fund Limited Partnership 					America First Apartment Investors, L.P. 					Capital Source L.P. 					Capital source II L.P.-A
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney as of the 1st day of February 1999.
		 /s/ Martin A. Massengale	 				 			Martin A. Massengale
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POWER OF ATTORNEY
The undersigned hereby appoints Michael Thesing as his agent and attorney-in-fact for the purpose of executing and filing all reports on Form 10-K relating to the year ending December 31, 1998, and any amendments thereto, required to be filed with the Securities and Exchange Commission by the following persons: 					 					America First Tax Exempt Investors, L.P. 					America First Tax Exempt Mortgage Fund Limited Partnership 					America First Apartment Investors, L.P. 					Capital Source L.P. 					Capital source II L.P.-A
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney as of the 1st day of February 1999.
		 /s/ Alan Baer	 				 			Alan Baer
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POWER OF ATTORNEY
The undersigned hereby appoints Michael Thesing as his agent and attorney-in-fact for the purpose of executing and filing all reports on Form 10-K relating to the year ending December 31, 1998, and any amendments thereto, required to be filed with the Securities and Exchange Commission by the following persons:
					America First Tax Exempt Investors, L.P. 					America First Tax Exempt Mortgage Fund Limited Partnership 					America First Apartment Investors, L.P. 					Capital Source L.P. 					Capital source II L.P.-A
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney as of the 1st day of February 1999.
		 /s/ Gail Walling Yanney	 				 			Gail Walling Yanney
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POWER OF ATTORNEY
The undersigned hereby appoints Michael Thesing as his agent and attorney-in-fact for the purpose of executing and filing all reports on Form 10-K relating to the year ending December 31, 1998, and any amendments thereto, required to be filed with the Securities and Exchange Commission by the following persons:
					America First Tax Exempt Investors, L.P. 					America First Tax Exempt Mortgage Fund Limited Partnership 					America First Apartment Investors, L.P. 					Capital Source L.P. 					Capital source II L.P.-A
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney as of the 1st day of February 1999.
		 /s/ Mariann Byerwalter	 				 			Mariann Byerwalter
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