UPDATE: Jon Paul Morosi of FOXSports is reporting the deal includes a $1M incentive package.

Jim Bowden is reporting via twitter that Chris Capuano has nearly agreed to terms with the Dodgers for a 2-year, $10M deal. Jon Heyman is confirming the deal is done via twitter.

Capuano, 33, had something of a bounce-back season in 2011, going 11-12 with a 4.55 ERA in 31 starts. This follows missing out on 2008 and 2009 following Tommy John surgery, and only pitching 66 innings in 2010. Adam Rubin of ESPN NY points out that Capuano was able to increase his value following the surgery by signing a low, $1.5M deal with the Mets, but was able to get that up to almost $4M through innings pitched incentives.

The Cubs were mentioned as interested in Capuano, as were the Twins. The rumors with the Dodgers' potential interest dates back to at least mid-November:

• Dodgers Targeting Starter On Limited Budget - MLB Daily Dish
  Jon Heyman and Mike DiGiovanna are reporting via Twitter that the Los Angeles Dodgers have narrowed their search for a starting pitcher down to several names, including Hiroki Kuroda, Aaron Harang, Chris Capuano and Jeff Francis. The team is clearly working on a limited budget, and Heyman suggests that they only have $10 million to spend to find someone behind Clayton Kershaw, Chad Billingsley , and Ted Lilly.

If Heyman's earlier report is true, then the Dodgers may have just spent half of their available budget, leaving $5M for other purposes.