EXHIBIT 13
 CAPSTEAD MORTGAGE CORPORATION
 PORTIONS OF THE
 ANNUAL REPORT TO STOCKHOLDERS
 FOR THE YEAR ENDED DECEMBER 31, 2008




---



##### 



Capstead Mortgage Corporation
 Consolidated Statements of Income
 (In thousands, except per share amounts)
 Year Ended December 312008
    
    
    2007
    
    
    2006Interest income:Mortgage securities and similar investments
    
    $
    398,285
    
    
    $
    310,698
    
    
    $
    242,859Other
    
    
    2,204
    
    
    
    945
    
    
    
    413400,489
    
    
    
    311,643
    
    
    
    243,272Interest expense:Repurchase arrangements and similar borrowings
    
    
    (249,706
    )
    
    
    (266,901
    )
    
    
    (228,379
    )Unsecured borrowings
    
    
    (8,747
    )
    
    
    (8,747
    )
    
    
    (7,142
    )(258,453
    )
    
    
    (275,648
    )
    
    
    (235,521
    )142,036
    
    
    
    35,995
    
    
    
    7,751Other revenue (expense):Loss from portfolio restructurings
    
    
    (1,484
    )
    
    
    (7,683
    )
    
    
    Miscellaneous other revenue (expense)
    
    
    (109
    )
    
    
    1,289
    
    
    
    178Incentive compensation expense
    
    
    (6,000
    )
    
    
    
    
    
    
    General and administrative expense
    
    
    (8,779
    )
    
    
    (6,671
    )
    
    
    (6,454
    )(16,372
    )
    
    
    (13,065
    )
    
    
    (6,276
    )Income before equity in earnings of unconsolidated
affiliates
    
    
    125,664
    
    
    
    22,930
    
    
    
    1,475Equity in earnings of unconsolidated affiliates
    
    
    259
    
    
    
    1,783
    
    
    
    2,368Net income
    
    $
    125,923
    
    
    $
    24,713
    
    
    $
    3,843Net income available (loss attributable) to common
stockholders:Net income
    
    $
    125,923
    
    
    $
    24,713
    
    
    $
    3,843Less cash dividends paid on preferred shares
    
    
    (20,251
    )
    
    
    (20,256
    )
    
    
    (20,256
    )$
    105,672
    
    
    $
    4,457
    
    
    $
    (16,413
    )Earnings (loss) per common share:Basic
    
    $
    1.96
    
    
    $
    0.19
    
    
    $
    (0.87
    )Diluted
    
    
    1.94
    
    
    
    0.19
    
    
    
    (0.87
    )
 See accompanying notes to consolidated financial statements.
 6




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##### 



Capstead Mortgage Corporation
 Consolidated Balance Sheets
 (In thousands, except per share amounts)
 December 312008
    
    
    2007Assets:Mortgage securities and similar investments
($7.30 billion pledged under repurchase arrangements)
    
    $
    7,499,530
    
    
    $
    7,108,719Cash collateral receivable from interest rate swap counterparties
    
    
    53,676
    
    
    
    1,800Cash and cash equivalents
    
    
    96,839
    
    
    
    6,653Receivables and other assets
    
    
    76,200
    
    
    
    88,637Investments in unconsolidated affiliates
    
    
    3,117
    
    
    
    3,117$
    7,729,362
    
    
    $
    7,208,926Liabilities:Repurchase arrangements and similar borrowings
    
    $
    6,751,500
    
    
    $
    6,500,362Unsecured borrowings
    
    
    103,095
    
    
    
    103,095Interest rate swap agreements at fair value
    
    
    46,679
    
    
    
    2,384Common stock dividend payable
    
    
    22,728
    
    
    
    9,786Accounts payable and accrued expenses
    
    
    44,910
    
    
    
    32,3826,968,912
    
    
    
    6,648,009Stockholders equity:Preferred stock  $0.10 par value; 100,000 shares authorized:$1.60 Cumulative Preferred Stock, Series A,
197 and 202 shares issued and outstanding at
December 31, 2008 and December 31, 2007
($3,232 aggregate liquidation preference)
    
    
    2,755
    
    
    
    2,828$1.26 Cumulative Convertible Preferred Stock, Series B,
15,819 shares issued and outstanding at
December 31, 2008 and December 31, 2007
($180,025 aggregate liquidation preference)
    
    
    176,705
    
    
    
    176,705Common stock  $0.01 par value; 250,000 shares authorized;
63,135 and 40,819 shares issued and outstanding at
December 31, 2008 and December 31, 2007, respectively
    
    
    631
    
    
    
    408Paid-in capital
    
    
    975,893
    
    
    
    702,170Accumulated deficit
    
    
    (358,155
    )
    
    
    (358,155
    )Accumulated other comprehensive income (loss)
    
    
    (37,379
    )
    
    
    36,961760,450
    
    
    
    560,917$
    7,729,362
    
    
    $
    7,208,926
 See accompanying notes to consolidated financial statements.
 7




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##### 



Capstead Mortgage Corporation
 Consolidated Statements of Stockholders equity
 (In thousands, except per share amounts)
 AccumulatedOther
    
    
    TotalPreferred
    
    
    Common
    
    
    Paid-in
    
    
    Accumulated
    
    
    Comprehensive
    
    
    StockholdersStock
    
    
    Stock
    
    
    Capital
    
    
    Deficit
    
    
    Income (Loss)
    
    
    EquityBalance at December 31, 2005
    
    $
    179,533
    
    
    $
    190
    
    
    $
    512,933
    
    
    $
    (352,803
    )
    
    $
    4,996
    
    
    $
    344,849Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,843
    
    
    
    
    
    
    
    3,843Other comprehensive income:Amounts related to cash flow
hedges, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (55
    )
    
    
    (55
    )Change in unrealized gain on
mortgage securities, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,495
    
    
    
    12,495Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16,283Cash dividends:Common  $0.08 per share
    
    
    
    
    
    
    
    
    
    
    (1,527
    )
    
    
    
    
    
    
    
    
    
    
    (1,527
    )Preferred
    
    
    
    
    
    
    
    
    
    
    (14,599
    )
    
    
    (5,657
    )
    
    
    
    
    
    
    (20,256
    )Additions to capital
    
    
    
    
    
    
    2
    
    
    
    611
    
    
    
    
    
    
    
    
    
    
    
    613Balance at December 31, 2006
    
    
    179,533
    
    
    
    192
    
    
    
    497,418
    
    
    
    (354,617
    )
    
    
    17,436
    
    
    
    339,962Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    24,713
    
    
    
    
    
    
    
    24,713Other comprehensive income:Amounts related to cash flow
hedges, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,608
    )
    
    
    (2,608
    )Change in unrealized gain on
mortgage securities, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    22,133
    
    
    
    22,133Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    44,238Cash dividends:Common  $0.34 per share
    
    
    
    
    
    
    
    
    
    
    (1,152
    )
    
    
    (10,571
    )
    
    
    
    
    
    
    (11,723
    )Preferred
    
    
    
    
    
    
    
    
    
    
    (2,576
    )
    
    
    (17,680
    )
    
    
    
    
    
    
    (20,256
    )Additions to capital
    
    
    
    
    
    
    216
    
    
    
    208,480
    
    
    
    
    
    
    
    
    
    
    
    208,696Balance at December 31, 2007
    
    
    179,533
    
    
    
    408
    
    
    
    702,170
    
    
    
    (358,155
    )
    
    
    36,961
    
    
    
    560,917Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    125,923
    
    
    
    
    
    
    
    125,923Other comprehensive income:Amounts related to cash flow
hedges, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (45,100
    )
    
    
    (45,100
    )Change in unrealized gain on
mortgage securities, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (29,240
    )
    
    
    (29,240
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    51,583Cash dividends:Common  $2.02 per share
    
    
    
    
    
    
    
    
    
    
    (8,119
    )
    
    
    (105,672
    )
    
    
    
    
    
    
    (113,791
    )Preferred
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (20,251
    )
    
    
    
    
    
    
    (20,251
    )Conversion of preferred stock
    
    
    (73
    )
    
    
    
    
    
    
    73
    
    
    
    
    
    
    
    
    
    
    
    Additions to capital
    
    
    
    
    
    
    223
    
    
    
    281,769
    
    
    
    
    
    
    
    
    
    
    
    281,992Balance at December 31, 2008
    
    $
    179,460
    
    
    $
    631
    
    
    $
    975,893
    
    
    $
    (358,155
    )
    
    $
    (37,379
    )
    
    $
    760,450
 See accompanying notes to consolidated financial statements.
 8




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##### 



Capstead Mortgage Corporation
 Consolidated Statements of Cash Flows
 (In thousands)
 Year Ended December 312008
    
    
    2007
    
    
    2006Operating activities:Net income
    
    $
    125,923
    
    
    $
    24,713
    
    
    $
    3,843Noncash items:Amortization of investment premiums
    
    
    29,336
    
    
    
    24,091
    
    
    
    23,108Depreciation and other amortization
    
    
    252
    
    
    
    225
    
    
    
    183Equity-based compensation costs
    
    
    1,277
    
    
    
    921
    
    
    
    529Undistributed earnings of unconsolidated affiliates
    
    
    
    
    
    
    
    
    
    
    (116
    )Amounts related to interest rate swap agreements
    
    
    1,475
    
    
    
    (121
    )
    
    
    Loss from portfolio restructurings
    
    
    1,484
    
    
    
    7,683
    
    
    
    Net change in receivables, other assets, accounts payable and
accrued expenses
    
    
    32,694
    
    
    
    1,137
    
    
    
    6,442Net cash provided by operating activities
    
    
    192,441
    
    
    
    58,649
    
    
    
    33,989Investing activities:Purchases of mortgage securities and similar investments
    
    
    (2,851,297
    )
    
    
    (4,447,054
    )
    
    
    (2,628,826
    )Proceeds from sales of mortgage securities and similar investments
    
    
    881,054
    
    
    
    845,151
    
    
    
    Principal collections on mortgage securities and similar investments
    
    
    1,511,362
    
    
    
    1,751,046
    
    
    
    1,724,316Investments in unconsolidated affiliates:Investment in statutory trusts formed to issue unsecured borrowings
    
    
    
    
    
    
    
    
    
    
    (774
    )Investment in commercial real estate loan limited partnership
    
    
    
    
    
    
    (5,892
    )
    
    
    (12,749
    )Return of investment in real estate loan limited partnership
    
    
    
    
    
    
    9,519
    
    
    
    2,812Net cash used in investing activities of continuing operations
    
    
    (458,881
    )
    
    
    (1,847,230
    )
    
    
    (915,221
    )State and federal tax payments related to the 2005 sale of a
discontinued operation
    
    
    
    
    
    
    
    
    
    
    (2,884
    )Net cash used in investing activities
    
    
    (458,881
    )
    
    
    (1,847,230
    )
    
    
    (918,105
    )Financing activities:Proceeds from repurchase arrangements and similar borrowings
    
    
    63,296,211
    
    
    
    46,208,141
    
    
    
    40,818,254Principal payments on repurchase arrangements and similar borrowings
    
    
    (63,045,065
    )
    
    
    (44,599,642
    )
    
    
    (39,965,780
    )Payment on early termination of repurchase arrangement
    
    
    
    
    
    
    (2,335
    )
    
    
    Payment on early termination of interest rate swap agreement
    
    
    (2,275
    )
    
    
    
    
    
    
    Increase in cash collateral receivable from interest rate swap
counterparties
    
    
    (51,876
    )
    
    
    (1,800
    )
    
    
    Unsecured borrowings, net of issue costs
    
    
    
    
    
    
    
    
    
    
    25,061Capital stock transactions
    
    
    280,731
    
    
    
    207,787
    
    
    
    84Dividends paid
    
    
    (121,100
    )
    
    
    (22,578
    )
    
    
    (21,779
    )Net cash provided by financing activities
    
    
    356,626
    
    
    
    1,789,573
    
    
    
    855,840Net change in cash and cash equivalents
    
    
    90,186
    
    
    
    992
    
    
    
    (28,276
    )Cash and cash equivalents at beginning of year
    
    
    6,653
    
    
    
    5,661
    
    
    
    33,937Cash and cash equivalents at end of year
    
    $
    96,839
    
    
    $
    6,653
    
    
    $
    5,661
 See accompanying notes to consolidated financial statements.
 9




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##### 



Capstead Mortgage Corporation
 Notes to Consolidated Financial Statements
 December 31, 2008
 NOTE 1  BUSINESS
  NOTE 2  ACCOUNTING POLICIES
 Basis of Presentation
  Mortgage Securities and similar
investments Repurchase arrangements and similar borrowings
 10




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##### 



Capstead Mortgage Corporation
 Accounting for Seller-financed Acquisitions of Mortgage Securities
 Mortgage securities and similar investments Accumulated other comprehensive income (loss).
 Fair Value Measurements
 Fair Value Measurements
 The Fair Value Option for Financial
Assets and Financial Liabilities  Including an amendment of FASB Statement No. 115
  11




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##### 



Capstead Mortgage Corporation
 Equity-based Compensation
 General and administrative expense
 Use of Estimates
  Cash and Cash Equivalents
 Cash and cash equivalents
 Financial Assets
 Accumulated other comprehensive income (loss)
 12




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##### 



Capstead Mortgage Corporation
 Loss from portfolio restructurings
 Other revenue (expense).
 Borrowings
 Receivables and other assets
 Derivative Financial Instruments (Derivatives)
 Accumulated other comprehensive income (loss) Miscellaneous other
revenue (expense)
  13




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##### 



Capstead Mortgage Corporation
   Cash collateral receivable from interest rate swap counterparties Mortgage
securities and similar investments
 Dividend Classification
 Accumulated deficit Stockholders equity Paid-in capital Net
income
 Income Taxes
   14




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##### 



Capstead Mortgage Corporation
 General and administrative expense.
 NOTE 3  EARNINGS (LOSS) PER COMMON SHARE
  Year Ended December 312008
    
    
    2007
    
    
    2006Numerator for basic earnings (loss) per common share:Net income
    
    $
    125,923
    
    
    $
    24,713
    
    
    $
    3,843Less Series A and B preferred share dividends
    
    
    (20,251
    )
    
    
    (20,256
    )
    
    
    (20,256
    )Income available (loss attributable) to common stockholders
    
    $
    105,672
    
    
    $
    4,457
    
    
    $
    (16,413
    )Weighted average common shares outstanding
    
    
    54,007
    
    
    
    22,947
    
    
    
    18,902Basic earnings (loss) per common share
    
    $
    1.96
    
    
    $
    0.19
    
    
    $
    (0.87
    )Numerator for diluted earnings (loss) per common share:Net income
    
    $
    125,923
    
    
    $
    24,713
    
    
    $
    3,843Less dividends on antidilutive convertible preferred shares
    
    
    (19,932
    )
    
    
    (20,256
    )
    
    
    (20,256
    )Income available (loss attributable) to common stockholders
    
    $
    105,991
    
    
    $
    4,457
    
    
    $
    (16,413
    )Denominator for diluted earnings (loss) per common share:Weighted average common shares outstanding
    
    
    54,007
    
    
    
    22,947
    
    
    
    18,902Net effect of dilutive equity awards
    
    
    278
    
    
    
    247
    
    
    
    Net effect of dilutive convertible preferred shares
    
    
    312
    
    
    
    
    
    
    
    54,597
    
    
    
    23,194
    
    
    
    18,902Diluted earnings (loss) per common share
    
    $
    1.94
    
    
    $
    0.19
    
    
    $
    (0.87
    )
  Year Ended December 312008
    
    2007
    
    2006Antidilutive equity awards:Shares issuable under option awards
    
    
    40
    
    
    
    363
    
    
    
    856Nonvested stock awards
    
    
    
    
    
    
    
    
    
    
    322Antidilutive convertible preferred shares:Series A
    
    
    
    
    
    
    202
    
    
    
    202Series B
    
    
    15,819
    
    
    
    15,819
    
    
    
    15,819
 15




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##### 



Capstead Mortgage Corporation
 NOTE 4  MORTGAGE SECURITIES AND SIMILAR INVESTMENTS
 Mortgage securities and similar investments
 InvestmentPrincipal
    
    
    Premiums
    
    
    
    
    
    
    Carrying
    
    
    Net
    
    
    AverageBalance
    
    
    (Discounts)
    
    
    Basis
    
    
    Amount (a)
    
    
    WAC (b)
    
    
    Yield (b)December 31, 2008Agency Securities:Fannie Mae/Freddie Mac:Fixed-rate
    
    $
    9,991
    
    
    $
    31
    
    
    $
    10,022
    
    
    $
    10,041
    
    
    
    6.64
    %
    
    
    6.47
    %ARMs
    
    
    6,928,385
    
    
    
    90,942
    
    
    
    7,019,327
    
    
    
    7,029,002
    
    
    
    5.29
    
    
    
    5.19Ginnie Mae ARMs
    
    
    394,909
    
    
    
    2,056
    
    
    
    396,965
    
    
    
    397,443
    
    
    
    4.94
    
    
    
    5.157,333,285
    
    
    
    93,029
    
    
    
    7,426,314
    
    
    
    7,436,486
    
    
    
    5.27
    
    
    
    5.19Residential mortgage loans:Fixed-rate
    
    
    5,880
    
    
    
    (8
    )
    
    
    5,872
    
    
    
    5,872
    
    
    
    7.16
    
    
    
    7.06ARMs
    
    
    9,053
    
    
    
    79
    
    
    
    9,132
    
    
    
    9,132
    
    
    
    5.58
    
    
    
    6.3814,933
    
    
    
    71
    
    
    
    15,004
    
    
    
    15,004
    
    
    
    6.20
    
    
    
    6.65Commercial real estate loans
    
    
    43,444
    
    
    
    
    
    
    
    43,444
    
    
    
    43,444
    
    
    
    7.03
    
    
    
    9.61Collateral for structured
financings
    
    
    4,523
    
    
    
    73
    
    
    
    4,596
    
    
    
    4,596
    
    
    
    8.09
    
    
    
    7.90$
    7,396,185
    
    
    $
    93,173
    
    
    $
    7,489,358
    
    
    $
    7,499,530
    
    
    
    5.29
    
    
    
    5.22December 31, 2007Agency Securities:Fannie Mae/Freddie Mac:Fixed-rate
    
    $
    13,079
    
    
    $
    36
    
    
    $
    13,115
    
    
    $
    13,138
    
    
    
    6.63
    %
    
    
    6.39
    %ARMs
    
    
    6,382,773
    
    
    
    89,017
    
    
    
    6,471,790
    
    
    
    6,507,447
    
    
    
    6.36
    
    
    
    5.63Ginnie Mae ARMs
    
    
    515,091
    
    
    
    2,465
    
    
    
    517,556
    
    
    
    521,288
    
    
    
    5.87
    
    
    
    5.506,910,943
    
    
    
    91,518
    
    
    
    7,002,461
    
    
    
    7,041,873
    
    
    
    6.33
    
    
    
    5.61Residential mortgage loans:Fixed-rate
    
    
    7,412
    
    
    
    (3
    )
    
    
    7,409
    
    
    
    7,409
    
    
    
    7.05
    
    
    
    6.98ARMs
    
    
    11,097
    
    
    
    96
    
    
    
    11,193
    
    
    
    11,193
    
    
    
    7.18
    
    
    
    6.8218,509
    
    
    
    93
    
    
    
    18,602
    
    
    
    18,602
    
    
    
    7.13
    
    
    
    6.88Commercial real estate loans
    
    
    43,435
    
    
    
    (439
    )
    
    
    42,996
    
    
    
    42,996
    
    
    
    10.46
    
    
    
    13.88Collateral for structured
financings
    
    
    5,162
    
    
    
    86
    
    
    
    5,248
    
    
    
    5,248
    
    
    
    8.14
    
    
    
    7.97$
    6,978,049
    
    
    $
    91,258
    
    
    $
    7,069,307
    
    
    $
    7,108,719
    
    
    
    6.36
    
    
    
    5.64
 
 (a)
    
    Includes unrealized gains and losses for securities classified as available-for-sale, if
applicable (see NOTE 8).(b)
    
    Net WAC, or weighted average coupon, is presented net of servicing and other fees as of the
indicated balance sheet date. Average yield is presented for the year then ended, calculated
including the amortization of investment premiums (discounts) and excluding unrealized gains
and losses.  16




---



##### 



Capstead Mortgage Corporation
  Receivables and other assets
 NOTE 5  INVESTMENTS IN UNCONSOLIDATED AFFILIATES
 Unsecured borrowings Unsecured borrowings
  17




---



##### 



Capstead Mortgage Corporation
 NOTE 6  REPURCHASE ARRANGEMENTS AND SIMILAR
BORROWINGS, INCLUDING RELATED HEDGING ACTIVITY
 Mortgage securities and similar investments Repurchase arrangements and
similar borrowings
 December 31, 2008
    
    
    December 31, 2007Borrowings
    
    
    Average
    
    
    Borrowings
    
    
    AverageCollateral Type
    
    Outstanding
    
    
    Rate *
    
    
    Outstanding
    
    
    Rate *Borrowings with maturities of 30 days or less:Agency Securities
    
    $
    5,179,137
    
    
    
    2.74
    %
    
    $
    4,963,674
    
    
    
    4.93
    %Residential mortgage loans
    
    
    
    
    
    
    
    
    
    
    14,352
    
    
    
    6.125,179,137
    
    
    
    2.74
    
    
    
    4,978,026
    
    
    
    4.93Borrowings with maturities greater than 30 days:Agency Securities (31 to 90 days)
    
    
    835,628
    
    
    
    2.87
    
    
    
    
    
    
    
    Agency Securities (91 to 360 days)
    
    
    732,139
    
    
    
    5.13
    
    
    
    368,694
    
    
    
    4.92Agency Securities (greater than 360 days)
    
    
    
    
    
    
    
    
    
    
    1,127,420
    
    
    
    5.051,567,767
    
    
    
    3.93
    
    
    
    1,496,114
    
    
    
    5.02Similar borrowings:Commercial real estate loans
    
    
    
    
    
    
    
    
    
    
    20,974
    
    
    
    6.88Collateral for structured financings
    
    
    4,596
    
    
    
    8.09
    
    
    
    5,248
    
    
    
    8.14$
    6,751,500
    
    
    
    3.02
    
    
    $
    6,500,362
    
    
    
    4.96
 
 *
    
    Average rate is presented as of the indicated balance sheet date and does not include the
effects of interest rate swap agreements held as cash flow hedges on a designated portion of
30- to 90-day borrowings (see below). After giving effect to these cash flow hedges, the
average rate was 3.55% and 4.47% at December 31, 2008 and 2007, respectively.  18




---



##### 



Capstead Mortgage Corporation
  December 312008
    
    
    2007Balance sheet-relatedCash collateral receivable from swap counterparties
    
    $
    53,676
    
    
    $
    1,800Agency Securities on deposit with swap counterparties
    
    
    2,866
    
    
    
    Liabilities representing the fair value of swap agreements
    
    
    (46,679
    )
    
    
    (2,384
    )Net interest (payable) receivable
    
    
    (12,909
    )
    
    
    901Net exposure (to) from swap counterparties
    
    $
    (3,046
    )
    
    $
    317Amounts included in Accumulated other comprehensive income (loss):Unrealized gains
    
    $
    
    
    
    $
    243Unrealized losses
    
    
    (46,318
    )
    
    
    (2,748
    )Unamortized balance of terminated swap agreement *
    
    
    (1,282
    )
    
    
    Income statement-relatedComponents of effect on interest expense:Net cash (outflows) inflows, including accruals
    
    $
    (9,759
    )
    
    $
    901Measured hedge ineffectiveness (loss) gain
    
    
    (563
    )
    
    
    2Amortization of terminated swap agreement *
    
    
    (993
    )
    
    
    (Increase) decrease in interest expense
    
    
    (11,315
    )
    
    
    903Holding gains realized prior to designation as cash flow hedges
    
    
    81
    
    
    
    119(Decrease) increase in Net incomeas a result of the use of interest rate
swap agreements
    
    $
    (11,234
    )
    
    $
    1,022
 
 *
    
    In March 2008 a swap agreement with a $100 million notional amount was terminated for a
realized loss of $2.3 million which is being amortized to earnings over the original two-year
term of the derivative (through January 2010). Repurchase arrangements and similar borrowings
 NOTE 7  UNSECURED BORROWINGS
 Unsecured borrowings Receivables and other
assets
 19




---



##### 



Capstead Mortgage Corporation
  Borrowings
    
    
    AverageOutstanding
    
    
    RateJunior subordinated notes:Capstead Mortgage Trust I
    
    $
    36,083
    
    
    
    8.31
    %Capstead Mortgage Trust II
    
    
    41,238
    
    
    
    8.46Capstead Mortgage Trust III
    
    
    25,774
    
    
    
    8.78$
    103,095
    
    
    
    8.49
  Unsecured borrowings
 NOTE 8  DISCLOSURES REGARDING FAIR VALUES
OF FINANCIAL INSTRUMENTS
 Cash and cash
equivalents Cash collateral receivable from interest rate swap counterparties
 Unsecured borrowings
 20




---



##### 



Capstead Mortgage Corporation
  December 31, 2008
    
    December 31, 2007Carrying
    
    Fair
    
    Carrying
    
    FairAmount
    
    Value
    
    Amount
    
    ValueFinancial Assets:Residential mortgage loans
    
    $
    15,004
    
    
    $
    15,000
    
    
    $
    18,602
    
    
    $
    18,900Commercial real estate loans
    
    
    43,444
    
    
    
    25,500
    
    
    
    42,996
    
    
    
    42,200Financial Liabilities:Repurchase arrangements with initial
terms of greater than 90 days
    
    
    1,127,420
    
    
    
    1,142,900
    
    
    
    1,496,114
    
    
    
    1,514,100Commercial real estate loan
borrowing
    
    
    
    
    
    
    
    
    
    
    20,974
    
    
    
    21,400Unsecured borrowings
    
    
    103,095
    
    
    
    85,900
    
    
    
    103,095
    
    
    
    91,400Interest rate swap agreements
    
    
    46,679
    
    
    
    46,679
    
    
    
    2,384
    
    
    
    2,384
  Gross UnrealizedBasis
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueAs of December 31, 2008Agency securities
    
    $
    7,416,520
    
    
    $
    49,904
    
    
    $
    39,732
    
    
    $
    7,426,692Mortgage securities classified as held-to-maturity:Agency Securities released from structured
financings
    
    $
    9,794
    
    
    $
    332
    
    
    $
    
    
    
    $
    10,126Collateral for structured financings *
    
    
    4,596
    
    
    
    
    
    
    
    
    
    
    
    4,596$
    14,390
    
    
    $
    332
    
    
    $
    
    
    
    $
    14,722As of December 31, 2007Agency Securities classified as available-for-sale
    
    $
    6,989,619
    
    
    $
    42,023
    
    
    $
    2,611
    
    
    $
    7,029,031Mortgage securities classified as held-to-maturity:Agency Securities released from structured
financings
    
    $
    12,842
    
    
    $
    340
    
    
    $
    
    
    
    $
    13,182Collateral for structured financings *
    
    
    5,248
    
    
    
    
    
    
    
    
    
    
    
    5,248$
    18,090
    
    
    $
    340
    
    
    $
    
    
    
    $
    18,430
 
 *
    
    The Company does not have any economic interest in remaining collateral for structured
financings held by the Company at December 31, 2008 and 2007. As a result, the Companys cost
basis in this collateral, as well as related borrowings under structured financings, is deemed
to approximate fair value.  December 31, 2008
    
    
    December 31, 2007Fair
    
    
    Unrealized
    
    
    Fair
    
    
    UnrealizedValue
    
    
    Loss
    
    
    Value
    
    
    LossSecurities in an unrealized loss position:One year or greater
    
    $
    157,675
    
    
    $
    2,454
    
    
    $
    323,751
    
    
    $
    1,856Less than one year
    
    
    2,762,619
    
    
    
    37,278
    
    
    
    382,482
    
    
    
    755$
    2,920,294
    
    
    $
    39,732
    
    
    $
    706,233
    
    
    $
    2,611
 21




---



##### 



Capstead Mortgage Corporation
   Loss from portfolio restructurings
 NOTE 9 3⁄4 INCOME TAXES
  22




---



##### 



Capstead Mortgage Corporation
  Year Ended December 312008
    
    
    2007
    
    
    2006Income taxes computed at the federal statutory rate
    
    $
    44,073
    
    
    $
    8,650
    
    
    $
    1,345Benefit of REIT status
    
    
    (44,078
    )
    
    
    (8,038
    )
    
    
    (1,205
    )Income taxes computed on income of Capsteads sole
taxable REIT subsidiary
    
    
    (5
    )
    
    
    612
    
    
    
    140Change in net deferred income tax assets
    
    
    (19
    )
    
    
    (421
    )
    
    
    (191
    )Other
    
    
    24
    
    
    
    (6
    )
    
    
    51Income tax provision of taxable REIT subsidiary
    
    $
    
    
    
    $
    185
    
    
    $
    
 General and Administrative expense. Additional paid-in capital
  December 312008
    
    
    2007Deferred income tax assets:Alternative minimum tax credit (a)
    
    $
    1,941
    
    
    $
    1,963Net operating loss carryforwards (b)
    
    
    8
    
    
    
    Other
    
    
    34
    
    
    
    391,983
    
    
    
    2,002Deferred income tax liabilities
    
    
    
    
    
    
    Net deferred tax assets
    
    $
    1,983
    
    
    $
    2,002Valuation allowance (c)
    
    $
    1,983
    
    
    $
    2,002
 
 (a)
    
    Alternative tax credit carryforwards can be
utilized to offset payment of federal income taxes on future
taxable income, if any, earned by the Companys taxable REIT
subsidiary subject to certain limitations.(b)
    
    Excludes $3.4 million in remaining net
operating loss carryforwards that arose through the issuance
of stock compensation which expire after 2019.(c)
    
    Because the Companys taxable REIT subsidiary
is not currently expected to earn significant amounts of
taxable income, related net deferred tax assets are fully
reserved at December 31, 2008. 23




---



##### 



Capstead Mortgage Corporation
 NOTE 10 3⁄4 STOCKHOLDERS EQUITY
  Annual
    
    Conversion
    
    Redemption
    
    LiquidationSeries
    
    Dividend
    
    Rate*
    
    Price
    
    PreferenceA
    
    $
    1.60
    
    
    
    1.5773
    
    
    $
    16.40
    
    
    $
    16.40B
    
    
    1.26
    
    
    
    0.6082
    
    
    
    12.50
    
    
    
    11.38
 
 *
    
    Reflects the number of common shares to be
received for each preferred share converted. During 2008, 5,200
Series A shares were converted into 8,114 common shares.   24




---



##### 



Year Ended December 312008
    
    
    2007
    
    
    2006Net income:
    
    $
    125,923
    
    
    $
    24,713
    
    
    $
    3,843Other comprehensive income (loss):Amounts related to available-for-sale securities:Reclassification adjustments for amounts
included in net income
    
    
    1,484
    
    
    
    5,348
    
    
    
    Change in net unrealized gains
    
    
    (30,724
    )
    
    
    16,785
    
    
    
    12,495Amounts related to cash flow hedges:Change in net unrealized losses
    
    
    (43,813
    )
    
    
    (2,505
    )
    
    
    Early termination of interest rate swap agreement
    
    
    (2,275
    )
    
    
    
    
    
    
    Reclassification adjustment for amounts
included in net income
    
    
    988
    
    
    
    (103
    )
    
    
    (55
    )Other comprehensive income (loss)
    
    
    (74,340
    )
    
    
    19,525
    
    
    
    12,440Comprehensive income
    
    $
    51,583
    
    
    $
    44,238
    
    
    $
    16,283
 Accumulated other comprehensive income (loss) Stockholders equity
 NOTE 11 3⁄4 COMPENSATION PROGRAMS
  General and administrative expense
  25




---



##### 



Capstead Mortgage Corporation
 Net income available to common
stockholders, Incentive compensation expense Accumulated other comprehensive income (loss)
 Net income Incentive compensation expense Unsecured borrowings Investments in unconsolidated
affiliates Stockholders equity ( ccumulated other comprehensive income (loss) Unsecured borrowings
    26




---



##### 



Capstead Mortgage Corporation
  Weighted AverageNumber of
    
    Grant DateShares
    
    Fair ValueStock awards outstanding at beginning of year
    
    
    431,200
    
    
    $
    9.82Grants
    
    
    146,658
    
    
    
    10.29Forfeitures
    
    
    (3,875
    )
    
    
    10.70Vested
    
    
    (94,851
    )
    
    
    8.10Stock awards outstanding at end of year
    
    
    479,132
    
    
    
    10.30
   Number of
    
    Weighted AverageShares
    
    Exercise PriceOption awards outstanding at beginning of year
    
    
    948,656
    
    
    $
    11.47Grants (average fair value $2.08) *
    
    
    30,000
    
    
    
    12.87Forfeitures
    
    
    (1,875
    )
    
    
    10.06Expirations
    
    
    (133,224
    )
    
    
    29.91Exercises
    
    
    (287,807
    )
    
    
    7.62Option awards outstanding at end of year
    
    
    555,750
    
    
    
    9.12
 
 *
    
    Option awards granted during 2008 to directors were valued with average expected
terms of four years, volatility factors of 50%, dividend yields of 12% and risk-free
rates of 2.91%. 27




---



##### 



Capstead Mortgage Corporation
  General and administrative expense
 NOTE 12 3⁄4 MARKET AND DIVIDEND INFORMATION (UNAUDITED)
  Year Ended December 31, 2008
    
    Year Ended December 31, 2007Sales Prices
    
    Dividends
    
    Sales Prices
    
    DividendsHigh
    
    Low
    
    Declared
    
    High
    
    Low
    
    DeclaredFirst quarter
    
    $
    18.62
    
    
    $
    8.69
    
    
    $
    0.52
    
    
    $
    10.02
    
    
    $
    7.75
    
    
    $
    0.02Second quarter
    
    
    13.83
    
    
    
    10.71
    
    
    
    0.59
    
    
    
    10.73
    
    
    
    9.01
    
    
    
    0.04Third quarter
    
    
    13.35
    
    
    
    9.08
    
    
    
    0.55
    
    
    
    10.68
    
    
    
    8.01
    
    
    
    0.04Fourth quarter
    
    
    10.93
    
    
    
    7.52
    
    
    
    0.36
    
    
    
    13.84
    
    
    
    10.06
    
    
    
    0.24
 NOTE 13 3⁄4 NET INTEREST INCOME ANALYSIS (UNAUDITED)
  2008
    
    
    2007
    
    
    2006Average
    
    
    
    
    
    
    Average
    
    
    
    
    
    
    AverageAmount
    
    
    Rate
    
    
    Amount
    
    
    Rate
    
    
    Amount
    
    
    RateInterest income:Mortgage securities and
similar investments
    
    $
    398,285
    
    
    
    5.22
    %
    
    $
    310,698
    
    
    
    5.64
    %
    
    $
    242,859
    
    
    
    4.94
    %Other
    
    
    2,204
    
    
    
    2.57
    
    
    
    945
    
    
    
    4.76
    
    
    
    413
    
    
    
    4.79400,489
    
    
    
    5.19
    
    
    
    311,643
    
    
    
    5.64
    
    
    
    243,272
    
    
    
    4.94Interest expense:Repurchase
arrangements and
similar borrowings
    
    
    (249,706
    )
    
    
    3.53
    
    
    
    (266,901
    )
    
    
    5.12
    
    
    
    (228,379
    )
    
    
    4.92Unsecured borrowings
    
    
    (8,747
    )
    
    
    8.49
    
    
    
    (8,747
    )
    
    
    8.49
    
    
    
    (7,142
    )
    
    
    8.38(258,453
    )
    
    
    3.60
    
    
    
    (275,648
    )
    
    
    5.19
    
    
    
    (235,521
    )
    
    
    4.98$
    142,036
    
    
    
    1.59
    
    
    $
    35,995
    
    
    
    0.45
    
    
    $
    7,751
    
    
    
    (0.04
    )
 28




---



##### 



Capstead Mortgage Corporation
 Rate *
    
    
    Volume*
    
    
    Total *2008/2007Interest income:Mortgage securities and similar investments
    
    $
    (24,638
    )
    
    $
    112,225
    
    
    $
    87,587Other
    
    
    (613
    )
    
    
    1,872
    
    
    
    1,259(25,251
    )
    
    
    114,097
    
    
    
    88,846Interest expense:Repurchase arrangements and similar borrowings
    
    
    (95,362
    )
    
    
    78,167
    
    
    
    (17,195
    )Unsecured borrowings
    
    
    
    
    
    
    
    
    
    
    (95,362
    )
    
    
    78,167
    
    
    
    (17,195
    )$
    70,111
    
    
    $
    35,930
    
    
    $
    106,0412007/2006Interest income:Mortgage securities and similar investments
    
    $
    36,661
    
    
    $
    31,178
    
    
    $
    67,839Other
    
    
    (3
    )
    
    
    535
    
    
    
    53236,658
    
    
    
    31,713
    
    
    
    68,371Interest expense:Repurchase arrangements and similar borrowings
    
    
    9,437
    
    
    
    29,085
    
    
    
    38,522Unsecured borrowings
    
    
    95
    
    
    
    1,510
    
    
    
    1,6059,532
    
    
    
    30,595
    
    
    
    40,127$
    27,126
    
    
    $
    1,118
    
    
    $
    28,244
 
 *
    
    The change in interest income and interest expense due to both rate and volume has been
allocated to rate and volume changes in proportion to the relationship of the absolute
dollar amounts of the change in each. NOTE 14 3⁄4 QUARTERLY RESULTS (UNAUDITED)
  First
    
    
    Second
    
    
    Third
    
    
    FourthQuarter
    
    
    Quarter
    
    
    Quarter
    
    
    QuarterYear Ended December 31, 2008Interest income
    
    $
    107,155
    
    
    $
    98,114
    
    
    $
    99,551
    
    
    $
    95,669Interest expense
    
    
    (71,493
    )
    
    
    (57,206
    )
    
    
    (62,218
    )
    
    
    (67,536
    )35,662
    
    
    
    40,908
    
    
    
    37,333
    
    
    
    28,133Loss from portfolio restructurings
    
    
    (1,408
    )
    
    
    
    
    
    
    
    
    
    
    (76
    )Other revenue (expense)
    
    
    (4,172
    )
    
    
    (4,245
    )
    
    
    (2,651
    )
    
    
    (3,820
    )Equity in earnings of unconsolidated affiliates
    
    
    65
    
    
    
    65
    
    
    
    64
    
    
    
    65Net income
    
    $
    30,147
    
    
    $
    36,728
    
    
    $
    34,746
    
    
    $
    24,302Basic earnings per common share
    
    $
    0.54
    
    
    $
    0.59
    
    
    $
    0.53
    
    
    $
    0.32Diluted earnings per common share
    
    
    0.53
    
    
    
    0.58
    
    
    
    0.52
    
    
    
    0.32Year Ended December 31, 2007Interest income
    
    $
    72,204
    
    
    $
    75,834
    
    
    $
    75,161
    
    
    $
    88,444Interest expense
    
    
    (65,776
    )
    
    
    (69,294
    )
    
    
    (68,664
    )
    
    
    (71,914
    )6,428
    
    
    
    6,540
    
    
    
    6,497
    
    
    
    16,530Gain (loss) from portfolio restructurings
    
    
    
    
    
    
    
    
    
    
    (8,276
    )
    
    
    593Other revenue (expense)
    
    
    (865
    )
    
    
    (1,341
    )
    
    
    (1,616
    )
    
    
    (1,560
    )Equity in earnings of unconsolidated affiliates
    
    
    664
    
    
    
    575
    
    
    
    247
    
    
    
    297Net income (loss)
    
    $
    6,227
    
    
    $
    5,774
    
    
    $
    (3,148
    )
    
    $
    15,860Basic and diluted earnings (loss) per common
share
    
    $
    0.06
    
    
    $
    0.04
    
    
    $
    (0.43
    )
    
    $
    0.31
 29




---



##### 



Capstead Mortgage Corporation
 Selected Financial Data  (In thousands, except per share amounts)
 As of or for the year ended December 312008
    
    
    2007
    
    
    2006
    
    
    2005
    
    
    2004Selected statement of income and per share data:Interest income:Mortgage securities and similar investments
    
    $
    398,285
    
    
    $
    310,698
    
    
    $
    242,859
    
    
    $
    130,333
    
    
    $
    91,121Other
    
    
    2,204
    
    
    
    945
    
    
    
    413
    
    
    
    332
    
    
    
    323400,489
    
    
    
    311,643
    
    
    
    243,272
    
    
    
    130,665
    
    
    
    91,444Interest expense:Repurchase arrangements and similar borrowings
    
    
    (249,706
    )
    
    
    (266,901
    )
    
    
    (228,379
    )
    
    
    (105,937
    )
    
    
    (44,939
    )Unsecured borrowings
    
    
    (8,747
    )
    
    
    (8,747
    )
    
    
    (7,142
    )
    
    
    (972
    )
    
    
    (258,453
    )
    
    
    (275,648
    )
    
    
    (235,521
    )
    
    
    (106,909
    )
    
    
    (44,939
    )142,036
    
    
    
    35,995
    
    
    
    7,751
    
    
    
    23,756
    
    
    
    46,505Loss from portfolio restructurings (a)
    
    
    (1,484
    )
    
    
    (7,683
    )
    
    
    
    
    
    
    
    
    
    
    Other revenue (expense)
    
    
    (14,629
    )
    
    
    (3,599
    )
    
    
    (3,908
    )
    
    
    (6,561
    )
    
    
    (6,636
    )Income from continuing operations
    
    
    125,923
    
    
    
    24,713
    
    
    
    3,843
    
    
    
    17,195
    
    
    
    39,869Income from discontinued operation, net of taxes
(b)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    39,997
    
    
    
    1,936Net income
    
    $
    125,923
    
    
    $
    24,713
    
    
    $
    3,843
    
    
    $
    57,192
    
    
    $
    41,805Net income available (loss attributable) to
common stockholders, after payment of
preferred share dividends
    
    $
    105,672
    
    
    $
    4,457
    
    
    $
    (16,413
    )
    
    $
    36,936
    
    
    $
    21,546Basic earnings (loss) per common share:Income (loss) from continuing operations
    
    $
    1.96
    
    
    $
    0.19
    
    
    $
    (0.87
    )
    
    $
    (0.16
    )
    
    $
    1.22Income from discontinued operation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2.12
    
    
    
    0.12$
    1.96
    
    
    $
    0.19
    
    
    $
    (0.87
    )
    
    $
    1.96
    
    
    $
    1.34Diluted earnings (loss) per common share:Income (loss) from continuing operations
    
    $
    1.94
    
    
    $
    0.19
    
    
    $
    (0.87
    )
    
    $
    (0.16
    )
    
    $
    1.21Income from discontinued operation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2.12
    
    
    
    0.12$
    1.94
    
    
    $
    0.19
    
    
    $
    (0.87
    )
    
    $
    1.96
    
    
    $
    1.33Cash dividends per common share
    
    $
    2.02
    
    
    $
    0.34
    
    
    $
    0.08
    
    
    $
    0.32
    
    
    $
    1.58Average number of common shares
outstanding: (c)Basic
    
    
    54,007
    
    
    
    22,947
    
    
    
    18,902
    
    
    
    18,868
    
    
    
    16,100Diluted
    
    
    54,597
    
    
    
    23,194
    
    
    
    18,902
    
    
    
    18,868
    
    
    
    16,437Selected balance sheet data:Mortgage securities and similar investments
    
    $
    7,499,530
    
    
    $
    7,108,719
    
    
    $
    5,252,399
    
    
    $
    4,368,025
    
    
    $
    3,438,559Assets of discontinued operation (b)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    141,037Total assets
    
    
    7,729,362
    
    
    
    7,208,926
    
    
    
    5,348,002
    
    
    
    4,464,248
    
    
    
    3,687,982Repurchase arrangements and similar borrowings
    
    
    6,751,500
    
    
    
    6,500,362
    
    
    
    4,876,134
    
    
    
    4,023,686
    
    
    
    3,221,794Long-term investment capital: (d)Unsecured borrowings, net
    
    
    99,978
    
    
    
    99,978
    
    
    
    99,978
    
    
    
    74,980
    
    
    
    Stockholders equity (c)
    
    
    760,450
    
    
    
    560,917
    
    
    
    339,962
    
    
    
    344,849
    
    
    
    332,539Book value per common share (unaudited)
    
    
    9.14
    
    
    
    9.25
    
    
    
    8.13
    
    
    
    8.48
    
    
    
    7.91
 
 NOTE:
    
    This table summarizes selected financial information. For additional information, refer
to the audited financial statements and notes thereto and Managements Discussion and
Analysis of Financial Condition and Results of Operations.(a)
    
    In response to contracting liquidity conditions present at various times in 2008 and
2007, Capstead reduced its portfolio leverage through limited asset sales.(b)
    
    In December 2005 the Company sold its real estate held for lease resulting in
discontinued operation accounting treatment for this investment.(c)
    
    During 2008 and 2007, the Company raised $281 million and $207 million in common equity
capital, respectively. As of December 31, 2008, common shares issued and outstanding
totaled 63,135,033.(d)
    
    Long-term investment capital consists of long-term unsecured borrowings, net of related
investments in statutory trusts accounted for as unconsolidated affiliates, along with
preferred and common stockholders equity. 30




---



##### 



Capstead Mortgage Corporation
 Managements Discussion and Analysis of Financial  Condition and Results of Operations
 FINANCIAL CONDITION
 Overview
    31




---



##### 



Capstead Mortgage Corporation
   Risk Factors and Critical Accounting Policies
  Residential Mortgage Investments
   32




---



##### 



Capstead Mortgage Corporation
  Fully
    
    
    Average
    
    
    Average
    
    
    Average
    
    
    MonthsNet
    
    
    Indexed
    
    
    Net
    
    
    Periodic
    
    
    Lifetime
    
    
    ToARM Type
    
    Basis(a)
    
    
    WAC(b)
    
    
    WAC(b)
    
    
    Margins
    
    
    Caps
    
    
    Caps
    
    
    RollCurrent-reset ARMs:Agency Securities:Fannie Mae/Freddie Mac
    
    $
    4,120,536
    
    
    
    4.72
    %
    
    
    3.06
    %
    
    
    1.85
    %
    
    
    4.01
    %
    
    
    10.51
    %
    
    
    4.5Ginnie Mae
    
    
    396,965
    
    
    
    4.94
    
    
    
    2.03
    
    
    
    1.53
    
    
    
    1.00
    
    
    
    9.98
    
    
    
    5.7Residential mortgage loans
    
    
    9,132
    
    
    
    5.58
    
    
    
    3.80
    
    
    
    2.05
    
    
    
    1.52
    
    
    
    11.14
    
    
    
    5.24,526,633
    
    
    
    4.74
    
    
    
    2.97
    
    
    
    1.82
    
    
    
    3.74
    
    
    
    10.47
    
    
    
    4.6Longer-to-reset ARMs:Agency Securities:Fannie Mae/Freddie Mac
    
    
    2,898,791
    
    
    
    6.10
    
    
    
    3.46
    
    
    
    1.67
    
    
    
    2.75
    
    
    
    11.58
    
    
    
    35.1$
    7,425,424
    
    
    
    5.27
    
    
    
    3.16
    
    
    
    1.76
    
    
    
    3.35
    
    
    
    10.90
    
    
    
    16.5
 
 (a)
    
    Basis represents the Companys investment (unpaid principal balance plus unamortized
investment premium) before unrealized gains and losses. As of December 31, 2008, the ratio of
basis to related unpaid principal balance for the Companys ARM securities was 101.27. This
table excludes $6 million in fixed-rate residential mortgage loans, $10 million in fixed-rate
Agency Securities and $5 million in private residential mortgage pass-through securities held
as collateral for structured financings.(b)
    
    Net WAC, or weighted average coupon, is presented net of servicing and other fees. Fully
indexed WAC represents the coupon upon one or more resets using interest rate indexes as of
December 31, 2008 and the applicable net margin.   33




---



##### 



Capstead Mortgage Corporation
   Commercial Real Estate-related Assets
   34




---



##### 



Capstead Mortgage Corporation
  Common Equity Offerings
  Book Value per Common Share
   Per CommonShareBook value, beginning of year
    
    $
    9.25Accretion attributed to capital transactions
    
    
    1.20Dividend distributions in excess of earnings
    
    
    (0.13
    )Accumulated other comprehensive income items:Change in value of mortgage securities
    
    
    (0.46
    )Change in value of interest rate swap agreements held as cash flow
hedges
    
    
    (0.70
    )Termination of interest rate swap agreement held as a cash flow hedge
    
    
    (0.02
    )Book value, end of year
    
    $
    9.14
 35




---



##### 



Capstead Mortgage Corporation
  Utilization of Long-term Investment Capital and Potential Liquidity
  RepurchaseArrangementsand Similar
    
    
    Capital
    
    
    PotentialInvestments (a)
    
    
    Borrowings
    
    

Employed (a)
    
    

Liquidity (a)Residential mortgage securities
    
    $
    7,456,086
    
    
    $
    6,751,500
    
    
    $
    704,586
    
    
    $
    228,820Commercial real estate-related assets
    
    
    43,444
    
    
    
    
    
    
    
    43,444
    
    
    
    $
    7,499,530
    
    
    $
    6,751,500
    
    
    
    748,030
    
    
    
    228,820Other assets, net of other liabilities
    
    
    
    
    
    
    
    
    
    
    135,126
    
    
    
    96,839Fourth quarter common dividend
    
    
    
    
    
    
    
    
    
    
    (22,728
    )
    
    
    (22,728
    ) (b)$
    860,428
    
    
    $
    302,931Balances as of December 31, 2007
    
    $
    7,108,719
    
    
    $
    6,500,362
    
    
    $
    660,895
    
    
    $
    371,196
 
 (a)
    
    Investments are stated at carrying amounts on the Companys balance sheet, which generally
reflects managements estimate of fair value as of the indicated dates. Potential liquidity
is based on managements estimate of the fair value of unpledged mortgage securities as of
the indicated dates adjusted for other sources (uses) of liquidity, cash and cash
equivalents, and dividends payable.(b)
    
    The fourth quarter 2008 common dividend was declared December 11, 2008 and paid January 20,
2009 to stockholders of record as of December 31, 2008.  36




---



##### 



Capstead Mortgage Corporation
  Off-balance Sheet Arrangements and Contractual Obligations
  Payments Due by Period12 Months
    
    
    13  36
    
    
    37  60
    
    
    >ThanTotal
    
    
    or Less
    
    
    Months
    
    
    Months
    
    
    60 MonthsRepurchase arrangements
and similar borrowings
    
    $
    6,781,616
    
    
    $
    6,778,442
    
    
    $
    2,093
    
    
    $
    734
    
    
    $
    347Interest rate swap agreements, net
    
    
    36,580
    
    
    
    33,443
    
    
    
    3,137
    
    
    
    
    
    
    
    Unsecured borrowings
    
    
    329,394
    
    
    
    8,382
    
    
    
    16,765
    
    
    
    16,765
    
    
    
    287,482Corporate office lease
    
    
    289
    
    
    
    289
    
    
    
    
    
    
    
    
    
    
    
    Other
    
    
    1,040
    
    
    
    1,040
    
    
    
    
    
    
    
    
    
    
    
    $
    7,148,919
    
    
    $
    6,821,596
    
    
    $
    21,995
    
    
    $
    17,499
    
    
    $
    287,829
  Accounting for Seller-financed Acquisitions of Mortgage Securities
  37




---



##### 



Capstead Mortgage Corporation
  Tax Considerations of Dividends Paid on Capstead Common and Preferred Shares
   Capital
    
    Ordinary
    
    Return ofDividends
    
    Gain (a)
    
    Income (b)
    
    Capital (a)2008Common
    
    $
    2.02
    
    
    
    
    %
    
    
    94.14
    %
    
    
    5.86
    %Series A Preferred
    
    
    1.60
    
    
    
    
    
    
    
    100.00
    
    
    
    Series B Preferred
    
    
    1.26
    
    
    
    
    
    
    
    100.00
    
    
    
    2007Common
    
    
    0.34
    
    
    
    
    
    
    
    79.85
    
    
    
    20.15Series A Preferred
    
    
    1.60
    
    
    
    
    
    
    
    100.00
    
    
    
    Series B Preferred
    
    
    1.26
    
    
    
    
    
    
    
    100.00
    
    
    
    2006Common
    
    
    0.08
    
    
    
    
    
    
    
    
    
    
    
    100.00Series A Preferred
    
    
    1.60
    
    
    
    
    
    
    
    16.00
    
    
    
    84.00Series B Preferred
    
    
    1.26
    
    
    
    
    
    
    
    16.19
    
    
    
    83.81
 
 (a)
    
    The indicated characterization percentage is applicable to each
dividend received with respect to a given tax year. This includes fourth
quarter dividends declared prior to year-end with a December record date and
paid in January of the following year in accordance with the Internal
Revenue Code spillover distribution provision (IRC Section 875(b)(9)).
Dividend characterization information for tax years prior to 2006 is
available in the investor relations section of the Companys website at
www.capstead.com.(b)
    
    In 2007, 4.87% of ordinary income distributions to common
stockholders and 3.89% of ordinary income distributions to preferred
stockholders were reported as qualified dividend income. No qualified
dividend income distributions were made in 2008 or 2006. 38




---



##### 



Capstead Mortgage Corporation
 RESULTS OF OPERATIONS
 Year Ended December 312008
    
    
    2007
    
    
    2006Income statement data:(dollars in thousands, except per share data)Interest income:Mortgage securities and similar investments
    
    $
    398,285
    
    
    $
    310,698
    
    
    $
    242,859Other
    
    
    2,204
    
    
    
    945
    
    
    
    413400,489
    
    
    
    311,643
    
    
    
    243,272Interest expense:Repurchase arrangements and similar borrowings
    
    
    (249,706
    )
    
    
    (266,901
    )
    
    
    (228,379
    )Unsecured borrowings
    
    
    (8,747
    )
    
    
    (8,747
    )
    
    
    (7,142
    )(258,453
    )
    
    
    (275,648
    )
    
    
    (235,521
    )142,036
    
    
    
    35,995
    
    
    
    7,751Other revenue (expense):Loss from portfolio restructurings
    
    
    (1,484
    )
    
    
    (7,683
    )
    
    
    Miscellaneous other revenue (expense)
    
    
    (109
    )
    
    
    1,289
    
    
    
    178Incentive compensation expense
    
    
    (6,000
    )
    
    
    
    
    
    
    General and administrative expense
    
    
    (8,779
    )
    
    
    (6,671
    )
    
    
    (6,454
    )(16,372
    )
    
    
    (13,065
    )
    
    
    (6,276
    )Equity in earnings of unconsolidated affiliates
    
    
    259
    
    
    
    1,783
    
    
    
    2,368Net income
    
    $
    125,923
    
    
    $
    24,713
    
    
    $
    3,843Net income available (loss attributable) to common
stockholders, after preferred share dividends
    
    $
    105,672
    
    
    $
    4,457
    
    
    $
    (16,413
    )Diluted earnings (loss) per common share
    
    $
    1.94
    
    
    $
    0.19
    
    
    $
    (0.87
    )Average diluted shares outstanding
    
    
    54,597
    
    
    
    23,194
    
    
    
    18,902Key operating statistics:(dollars in millions, unaudited)Average yields:Mortgage securities and similar investments
    
    
    5.22
    %
    
    
    5.64
    %
    
    
    4.94
    %Other
    
    
    2.57
    
    
    
    4.76
    
    
    
    4.79Total average yields
    
    
    5.19
    
    
    
    5.64
    
    
    
    4.94Average borrowing rates:Repurchase arrangements and similar borrowings
    
    
    3.53
    
    
    
    5.12
    
    
    
    4.92Unsecured borrowings
    
    
    8.49
    
    
    
    8.49
    
    
    
    8.38Total borrowing rates
    
    
    3.60
    
    
    
    5.19
    
    
    
    4.98Financing spreads
    
    
    1.59
    
    
    
    0.45
    
    
    
    (0.04
    )Net yield on total interest-earning assets
    
    
    1.84
    
    
    
    0.65
    
    
    
    0.16Average portfolio runoff rate
    
    
    18.44
    
    
    
    28.19
    
    
    
    30.43Average interest-earning assets and interest-bearing liabilities:Mortgage securities and similar investments
    
    $
    7,631
    
    
    $
    5,510
    
    
    $
    4,917Other interest-earning assets
    
    
    86
    
    
    
    20
    
    
    
    8Repurchase arrangements and similar borrowings
    
    
    6,961
    
    
    
    5,140
    
    
    
    4,579Unsecured borrowings
    
    
    103
    
    
    
    103
    
    
    
    85Average long-term investment capital
    
    
    813
    
    
    
    484
    
    
    
    418General and administrative and incentive compensation expense
as a percentage of average long-term investment
capital
    
    
    1.82
    %
    
    
    1.38
    %
    
    
    1.54
    %Return on average long-term investment capital
    
    
    15.48
    
    
    
    5.11
    
    
    
    0.92
 39




---



##### 



Capstead Mortgage Corporation
 2008 Compared to 2007
        40




---



##### 



Capstead Mortgage Corporation
    2007 Compared to 2006
    41




---



##### 



Capstead Mortgage Corporation
      LIQUIDITY AND CAPITAL RESOURCES
   42




---



##### 



Capstead Mortgage Corporation
    Interest Rate Sensitivity on Operating Results
   43




---



##### 



Capstead Mortgage Corporation
  Federal
    10-year U.S.Funds
    TreasuryRate
    Rate
    
    
    

    Immediate Change
In: *Down
    

    
    Down
    

    
    
    
    
    
    Up
    

    
    Up30-day to one-year rates
    
    
    
    
    
    
    
    
    
    
    1.00
    %
    
    
    1.00
    %
    
    Flat
    

    
    
    1.00
    %
    
    
    1.00
    %Down
    

    
    
    
    
    
    Down
    

    
    
    
    
    
    Up10-year U.S. Treasury rate
    
    
    
    
    
    
    
    
    
    
    1.00
    %
    
    Flat
    

    
    
    1.00
    %
    
    Flat
    

    
    
    1.00
    %Projected 12-month
income change:December 31, 2008
    
    
    <0.25
    %
    
    
    2.21
    %
    
    
    n/a
    
    
    
    n/a
    
    
    $
    (9,400
    )
    
    $
    (17,900
    )
    
    $
    (13,300
    )December 31, 2007
    
    
    4.25
    
    
    
    4.60
    
    
    
    10,800
    
    
    
    15,600
    
    
    
    (9,800
    )
    
    
    (17,300
    )
    
    
    (12,400
    )
 
 *
    
    Sensitivity of income to changes in interest rates is determined relative to the actual rates
at the applicable date. Note that the projected 12-month income change is predicated on
acquisitions of similar assets sufficient to replace runoff. There can be no assurance that
suitable investments will be available for purchase at attractive prices or if investments
made will behave in the same fashion as assets currently held. RISK FACTORS
  Risks Related to Capsteads Business
 Potential changes in the relationship between the federal government and the GSEs could
negatively affect Capsteads financial condition and earnings.
 44




---



##### 



Capstead Mortgage Corporation
  Government-supported mortgagor relief programs and future legislative action could negatively
affect Capsteads financial condition and earnings.
 Periods of illiquidity in the mortgage markets may reduce the number of counterparties willing
to lend to the Company or the amounts individual counterparties are willing to lend via repurchase
arrangements.
 Periods of illiquidity in the mortgage markets may reduce amounts available to be borrowed under
Capsteads repurchase arrangements due to declines in the value of related collateral, which could
negatively impact the Companys financial condition and earnings.
 45




---



##### 



Capstead Mortgage Corporation
  Periods of rising interest rates may reduce amounts available to be borrowed under Capsteads
repurchase arrangements due to declines in the value of related collateral, which could negatively
impact the Companys financial condition and earnings.
 If Capstead is unable to negotiate favorable terms and conditions on future repurchase
arrangements with one or more of the Companys counterparties, the Companys financial condition
and earnings could be negatively impacted.
 Capsteads use of repurchase arrangements to finance its investments may give the Companys
lenders greater rights in the event of bankruptcy.
 Capstead may sell assets for various reasons, including a change in the Companys investment
focus, which could increase earnings volatility.
 46




---



##### 



Capstead Mortgage Corporation
 Changes in interest rates, whether increases or decreases, may adversely affect Capsteads
earnings.
 The average life of Capsteads longer-to-reset ARM securities could outstrip related
fixed-rate borrowings.
 An increase in prepayments may adversely affect Capsteads earnings.
 The lack of availability of suitable investments at attractive pricing may adversely affect
Capsteads earnings .
 47




---



##### 



Capstead Mortgage Corporation
  Capstead may invest in Derivatives such as interest rate swap agreements to mitigate or hedge
the Companys interest rate risk on its longer-to-reset ARM securities, which may negatively affect
the Companys liquidity, financial condition or earnings.
 Derivatives held may fail to qualify for hedge accounting introducing potential volatility to
Capsteads earnings.
 Capstead is dependent on its executives and employees and the loss of one or more of its
executive officers could harm the Companys business and its prospects.
 Commercial real estate-related assets may expose investors to greater risks of loss than
residential mortgage investments.
 48




---



##### 



Capstead Mortgage Corporation
  Risks Related to Capsteads Status as a REIT and Other Tax Matters
 If Capstead does not qualify as a REIT, the Company will be subject to tax as a regular
corporation and face substantial tax liability.
 
    
    The Company would be taxed as a regular domestic corporation, which, among other
things, means that the Company would be unable to deduct dividends paid to its
stockholders in computing taxable income and would be subject to federal income tax on its
taxable income at regular corporate rates.
    
    Any resulting tax liability could be substantial and would reduce the amount of cash
available for distribution to stockholders, and Capstead would not be required to make
distributions of the Companys income.
    
    Unless Capstead were entitled to relief under applicable statutory provisions, the
Company would be disqualified from treatment as a REIT for the subsequent four taxable
years following the year during which the Company lost its qualification, and, thus, the
Companys cash available for distribution to stockholders would be reduced for each of the
years during which the Company did not qualify as a REIT.
 Even if Capstead remains qualified as a REIT, the Company may face other tax liabilities that
reduce its earnings.
 
    
    The Company will be required to pay tax on any undistributed REIT taxable income.
    
    The Company may be required to pay the alternative minimum tax on any items of tax
preference.
    
    The Company may operate taxable REIT subsidiaries that are required to pay taxes on any
taxable income earned.
 Complying with REIT requirements may cause Capstead to forego otherwise attractive
opportunities.
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Capstead Mortgage Corporation
 Complying with REIT requirements may limit Capsteads ability to hedge effectively.
 Complying with REIT requirements may force Capstead to liquidate otherwise attractive
investments.
 Complying with REIT requirements may force Capstead to borrow to make distributions to
stockholders.
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Capstead Mortgage Corporation
 Capstead may be subject to adverse legislative or regulatory tax changes that could reduce the
market price of the Companys securities.
 An investment in Capsteads securities has various federal, state and local income tax risks
that could affect the value of an investors investment.
 Risk Factors Related to Capsteads Corporate Structure
 There are no assurances of Capsteads ability to pay dividends in the future.
 Failure to maintain an exemption from the Investment Company Act of 1940 would adversely
affect Capsteads results of operations.
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Capstead Mortgage Corporation
  Pursuant to Capsteads charter, its board of directors has the ability to limit ownership of
the Companys capital stock, to the extent necessary to preserve its REIT qualification.
 Because provisions contained in Maryland law and Capsteads charter may have an anti-takeover
effect, investors may be prevented from receiving a control premium for their shares.
 
    
    Repurchase Rights:  The repurchase rights granted to Capsteads board in its charter
limits related investors, including, among other things, any voting group, from owning
common stock if the concentration owned would jeopardize the Companys REIT status.
 
    
    Classification of preferred stock:  Capsteads charter authorizes the board to issue
preferred stock in one or more classes and to establish the preferences and rights of any
class of preferred stock issued. These actions can be taken without soliciting stockholder
approval. The issuance of preferred stock could have the effect of delaying or preventing
someone from taking control of the Company, even if a change in control were in its
stockholders best interests.
  Capstead may change its policies without stockholder approval .
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Capstead Mortgage Corporation
 CRITICAL ACCOUNTING POLICIES
  
    
    Amortization of Investment Premiums on Financial Assets Investment premiums on financial
assets are recognized in earnings as adjustments to interest income by the interest method
over the estimated lives of the related assets. For most of Capsteads financial assets,
estimates and judgments related to future levels of mortgage prepayments are critical to this
determination. Mortgage prepayment expectations can vary considerably from period to period
based on current and projected changes in interest rates and other factors such as portfolio
composition. Management estimates mortgage prepayments based on past experiences with
specific investments within the portfolio, and current market expectations for changes in
interest rates and the residential mortgage lending environment. Should actual runoff rates
differ materially from these estimates, investment premiums would be expensed at a different
pace.
    
    Fair Value and Impairment Accounting for Financial Assets Most of Capsteads investments
are financial assets held in the form of mortgage securities that are classified as
available-for-sale and recorded at fair value on the balance sheet with unrealized gains and
losses recorded in Stockholders equityas a component of Accumulated other comprehensive
income (loss). As such, these unrealized gains and losses enter into the calculation of book
value per common share, a key financial metric used by investors in evaluating the Company.
Fair values fluctuate with current and projected changes in interest rates, prepayment
expectations and other factors such as market liquidity conditions. Considerable judgment is
required to interpret market data and develop estimated fair values, particularly in
circumstances of deteriorating credit quality and market liquidity. See NOTE 2 and NOTE 8
to the accompanying consolidated financial statements for discussion of how Capstead values
its financial assets. Generally, gains or losses are recognized in earnings only if sold;
however, if a decline in fair value of a mortgage security below its amortized cost occurs
that is determined to be other than temporary, the difference between amortized cost and fair
value would be included in Other revenue (expense)as an impairment charge. Similarly,
considerable judgment is required in determining whether an impairment charge should be
recognized on an investment in an unsecuritized loan and the amount of any such charge which
is determined by estimating expected future cash flows discounted at the note rate.
    
    Derivatives Accounting The Company uses Derivatives from time to time for risk
management purposes. When held, Derivatives are recorded as assets or liabilities and carried
at fair value. The accounting for changes in fair value of each Derivative held
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depends on whether it has been designated as an accounting hedge, as well as the type of hedging
relationship identified. To qualify as cash flow hedges for accounting purposes, at the
inception of the hedge relationship the Company must anticipate and document that the hedge
relationship will be highly effective and monitor ongoing effectiveness on at least a quarterly
basis. As long as the hedge relationship remains effective, the effective portion of changes in
fair value of the Derivative are recorded in Accumulated other comprehensive income (loss)and
the ineffective portion is recorded in earnings. Changes in fair value of Derivatives not held
as accounting hedges, or for which the hedge relationship is deemed to no longer be highly
effective, are recorded in earnings as a component of Other revenue (expense).
  FORWARD-LOOKING STATEMENTS
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Capstead Mortgage Corporation
 PERFORMANCE GRAPH
  
 Cumulative Total Stockholder Return as of December 312003
    
    2004
    
    2005
    
    2006
    
    2007
    
    2008Capstead
    
    $
    100.00
    
    
    $
    70.23
    
    
    $
    40.26
    
    
    $
    58.10
    
    
    $
    94.96
    
    
    $
    92.78Russell 2000
    
    
    100.00
    
    
    
    118.39
    
    
    
    123.84
    
    
    
    146.64
    
    
    
    144.36
    
    
    
    95.59NAREIT Mortgage
    
    
    100.00
    
    
    
    107.92
    
    
    
    74.60
    
    
    
    80.89
    
    
    
    42.31
    
    
    
    25.19
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Capstead Mortgage Corporation
 Reports on Corporate Governance and  Reports of Independent Registered Public Accounting Firm
 Report of Management on Effectiveness of Internal Control
Over Financial Reporting
   Report of Management on Evaluation of Disclosure Controls and Procedures
  Related Certifications by Management
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Capstead Mortgage Corporation
 Report
of Independent Registered Public Accounting Firm on  Audit of Internal Control Over Financial Reporting
 
     .
  /s/ ERNST & YOUNG, LLPDallas, Texas
March 2, 2009
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Report
of Independent Registered Public Accounting Firm on  Audit of the Consolidated Financial Statements
 
     /s/ ERNST & YOUNG, LLPDallas, Texas
March 2, 2009
 58