##### 



EXHIBIT 13
 CAPSTEAD MORTGAGE CORPORATION
 PORTIONS OF THE
 ANNUAL REPORT TO STOCKHOLDERS
 FOR THE YEAR ENDED DECEMBER 31, 2007




---



##### 



Capstead Mortgage Corporation
 Consolidated Statements of Income
 (In thousands, except per share amounts)
 Year Ended December 312007
    
    
    2006
    
    
    2005Mortgage securities and similar investments:Interest income
    
    $
    310,698
    
    
    $
    242,859
    
    
    $
    130,333Interest expense
    
    
    (266,901
    )
    
    
    (228,379
    )
    
    
    (105,937
    )43,797
    
    
    
    14,480
    
    
    
    24,396Other revenue (expense):Loss from portfolio restructuring
    
    
    (7,683
    )
    
    
    
    
    
    
    Other revenue
    
    
    2,234
    
    
    
    591
    
    
    
    1,082Interest expense on unsecured borrowings
    
    
    (8,747
    )
    
    
    (7,142
    )
    
    
    (972
    )Other operating expense
    
    
    (6,671
    )
    
    
    (6,454
    )
    
    
    (7,301
    )(20,867
    )
    
    
    (13,005
    )
    
    
    (7,191
    )Income before equity in earnings (loss) of unconsolidated
affiliates and discontinued operation
    
    
    22,930
    
    
    
    1,475
    
    
    
    17,205Equity in earnings (loss) of unconsolidated affiliates
    
    
    1,783
    
    
    
    2,368
    
    
    
    (10
    )Income from continuing operations
    
    
    24,713
    
    
    
    3,843
    
    
    
    17,195Income from discontinued operation, net of taxes
    
    
    
    
    
    
    
    
    
    
    39,997Net income
    
    $
    24,713
    
    
    $
    3,843
    
    
    $
    57,192Net income available (loss attributable) to common
stockholders:Net income
    
    $
    24,713
    
    
    $
    3,843
    
    
    $
    57,192Less cash dividends paid on preferred shares
    
    
    (20,256
    )
    
    
    (20,256
    )
    
    
    (20,256
    )$
    4,457
    
    
    $
    (16,413
    )
    
    $
    36,936Basic and diluted earnings (loss) per common share:Income (loss) from continuing operations
    
    $
    0.19
    
    
    $
    (0.87
    )
    
    $
    (0.16
    )Income from discontinued operation
    
    
    
    
    
    
    
    
    
    
    2.12$
    0.19
    
    
    $
    (0.87
    )
    
    $
    1.96
 See accompanying notes to consolidated financial statements.
 6




---



##### 



Capstead Mortgage Corporation
 Consolidated Balance Sheets
 (In thousands, except per share amounts)
 December 312007
    
    
    2006Assets:Mortgage securities and similar investments
($6.7 billion pledged under repurchase arrangements)
    
    $
    7,108,719
    
    
    $
    5,252,399Investments in unconsolidated affiliates
    
    
    3,117
    
    
    
    20,073Receivables and other assets
    
    
    90,437
    
    
    
    69,869Cash and cash equivalents
    
    
    6,653
    
    
    
    5,661$
    7,208,926
    
    
    $
    5,348,002Liabilities:Repurchase arrangements and similar borrowings
    
    $
    6,500,362
    
    
    $
    4,876,134Unsecured borrowings
    
    
    103,095
    
    
    
    103,095Interest rate swap agreements at fair value
    
    
    2,384
    
    
    
    Common stock dividend payable
    
    
    9,786
    
    
    
    385Accounts payable and accrued expenses
    
    
    32,382
    
    
    
    28,4266,648,009
    
    
    
    5,008,040Stockholders equity:Preferred stock  $0.10 par value; 100,000 shares authorized:$1.60 Cumulative Preferred Stock, Series A,
202 shares issued and outstanding at
December 31, 2007 and December 31, 2006
($3,317 aggregate liquidation preference)
    
    
    2,828
    
    
    
    2,828$1.26 Cumulative Convertible Preferred Stock, Series B,
15,819 shares issued and outstanding at
December 31, 2007 and December 31, 2006
($180,025 aggregate liquidation preference)
    
    
    176,705
    
    
    
    176,705Common stock  $0.01 par value; 100,000 shares authorized;
40,819 and 19,253 shares issued and outstanding at
December 31, 2007 and December 31, 2006, respectively
    
    
    408
    
    
    
    192Paid-in capital
    
    
    702,170
    
    
    
    497,418Accumulated deficit
    
    
    (358,155
    )
    
    
    (354,617
    )Accumulated other comprehensive income
    
    
    36,961
    
    
    
    17,436560,917
    
    
    
    339,962$
    7,208,926
    
    
    $
    5,348,002
 See accompanying notes to consolidated financial statements.
 7




---



##### 



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
    
    
    EquityBalance at January 1, 2005
    
    $
    179,533
    
    
    $
    188
    
    
    $
    516,704
    
    
    $
    (387,718
    )
    
    $
    23,832
    
    
    $
    332,539Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    57,192
    
    
    
    
    
    
    
    57,192Other comprehensive income:Amounts related to cash flow
hedges, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    403
    
    
    
    403Change in unrealized gain on
mortgage securities, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (19,239
    )
    
    
    (19,239
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    38,356Cash dividends:Common  $0.32 per share
    
    
    
    
    
    
    
    
    
    
    (2,217
    )
    
    
    (3,846
    )
    
    
    
    
    
    
    (6,063
    )Preferred
    
    
    
    
    
    
    
    
    
    
    (1,825
    )
    
    
    (18,431
    )
    
    
    
    
    
    
    (20,256
    )Additions to capital
    
    
    
    
    
    
    2
    
    
    
    271
    
    
    
    
    
    
    
    
    
    
    
    273Balance 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
    
    
    $
    560,917
 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 312007
    
    
    2006
    
    
    2005Operating activities:Net income
    
    $
    24,713
    
    
    $
    3,843
    
    
    $
    57,192Noncash items:Amortization of investment premiums
    
    
    24,091
    
    
    
    23,108
    
    
    
    21,813Depreciation and other amortization
    
    
    225
    
    
    
    183
    
    
    
    119Equity-based compensation costs
    
    
    921
    
    
    
    529
    
    
    
    249Undistributed earnings of unconsolidated affiliates
    
    
    
    
    
    
    (116
    )
    
    
    18Amounts related to interest rate swap agreements
    
    
    (121
    )
    
    
    
    
    
    
    Loss on portfolio restructuring
    
    
    7,683
    
    
    
    
    
    
    
    Gain on redemption of structured financing
    
    
    
    
    
    
    
    
    
    
    (156
    )Gain on sale of discontinued operation (real estate held for lease)
    
    
    
    
    
    
    
    
    
    
    (38,196
    )Net change in receivables, other assets, accounts payable and
accrued expenses
    
    
    (663
    )
    
    
    6,442
    
    
    
    (3,749
    )Net cash provided by operating activities of continuing operations
    
    
    56,849
    
    
    
    33,989
    
    
    
    37,290Net cash provided by operating activities of discontinued operation
    
    
    
    
    
    
    
    
    
    
    3,104Net cash provided by operating activities
    
    
    56,849
    
    
    
    33,989
    
    
    
    40,394Investing activities:Purchases of mortgage securities and similar investments
    
    
    (4,447,054
    )
    
    
    (2,628,826
    )
    
    
    (2,474,812
    )Proceeds from sales of mortgage securities and similar investments
    
    
    845,151
    
    
    
    
    
    
    
    Principal collections on mortgage securities and similar investments
    
    
    1,751,046
    
    
    
    1,724,316
    
    
    
    1,494,220Investments in unconsolidated affiliates:Investment in statutory trusts formed to issue unsecured borrowings
    
    
    
    
    
    
    (774
    )
    
    
    (2,321
    )Investment in commercial real estate loan limited partnership
    
    
    (5,892
    )
    
    
    (12,749
    )
    
    
    (6,943
    )Return of investment in real estate loan limited partnership
    
    
    9,519
    
    
    
    2,812
    
    
    
    Net cash used in investing activities of continuing operations
    
    
    (1,847,230
    )
    
    
    (915,221
    )
    
    
    (989,856
    )Net cash (used in) provided by investing activities of discontinued
operation including net proceeds from its sale
    
    
    
    
    
    
    (2,884
    )
    
    
    56,759Net cash used in investing activities
    
    
    (1,847,230
    )
    
    
    (918,105
    )
    
    
    (933,097
    )Financing activities:Proceeds from repurchase arrangements and similar borrowings
    
    
    46,208,141
    
    
    
    40,818,254
    
    
    
    31,196,605Principal payments on repurchase arrangements and similar borrowings
    
    
    (44,599,642
    )
    
    
    (39,965,780
    )
    
    
    (30,393,738
    )Early termination payment on repurchase arrangements
    
    
    (2,335
    )
    
    
    
    
    
    
    Unsecured borrowings, net of issue costs
    
    
    
    
    
    
    25,061
    
    
    
    75,038Release of restricted cash
    
    
    
    
    
    
    
    
    
    
    5,996Capital stock transactions
    
    
    207,787
    
    
    
    84
    
    
    
    24Dividends paid
    
    
    (22,578
    )
    
    
    (21,779
    )
    
    
    (30,089
    )Net cash provided by financing activities of continuing operations
    
    
    1,791,373
    
    
    
    855,840
    
    
    
    853,836Net cash used in financing activities of discontinued operation
    
    
    
    
    
    
    
    
    
    
    (226
    )Net cash provided by financing activities
    
    
    1,791,373
    
    
    
    855,840
    
    
    
    853,610Net change in cash and cash equivalents
    
    
    992
    
    
    
    (28,276
    )
    
    
    (39,093
    )Cash and cash equivalents at beginning of year
    
    
    5,661
    
    
    
    33,937
    
    
    
    73,030Cash and cash equivalents at end of year
    
    $
    6,653
    
    
    $
    5,661
    
    
    $
    33,937
 See accompanying notes to consolidated financial statements.
 9




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##### 



Capstead Mortgage Corporation
 Notes to Consolidated Financial Statements
 December 31, 2007
 NOTE 1  BUSINESS
  NOTE 2  ACCOUNTING POLICIES
 Basis of Presentation
   Accounting for Seller-financed Acquisitions of Mortgage Securities
 Mortgage securities and similar investments Accumulated other comprehensive income.
 10




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##### 



Capstead Mortgage Corporation
  Fair Value Accounting Rule Changes
 Fair
Value Measurements The Fair Value Option for Financial Assets and Financial Liabilities 
Including an amendment of FASB Statement No. 115
 Accounting for Uncertainty in Income Taxes
 Other revenue (expense).
 Equity-based Compensation
  11




---



##### 



Capstead Mortgage Corporation
 Other operating expense
 Use of Estimates
 Accumulated other comprehensive income Stockholders equity.
 Cash and Cash Equivalents
 Cash and cash equivalents
 Financial Assets
 Accumulated other comprehensive income
 12




---



##### 



Capstead Mortgage Corporation
 Other revenue (expense). Interest income Other revenue (expense)
 Borrowings
 Receivables and other assets Interest expense
 Dividend Classification
 Accumulated deficit Stockholders equity Paid-in capital Net income,
 Derivative Financial Instruments (Derivatives)
 Accumulated other comprehensive income Other revenue (expense)
  13




---



##### 



Capstead Mortgage Corporation
  Interest expense Interest expense
 Income Taxes
  Incentive Compensation
 Stockholders equity Accumulated
other comprehensive income
  14




---



##### 



Capstead Mortgage Corporation
 Accumulated other comprehensive income
 NOTE 3  EARNINGS (LOSS) PER COMMON SHARE
  Year Ended December 312007
    
    
    2006
    
    
    2005Numerators for basic earnings (loss) per common share:Income from continuing operations
    
    $
    24,713
    
    
    $
    3,843
    
    
    $
    17,195Less Series A and B preferred share dividends
    
    
    (20,256
    )
    
    
    (20,256
    )
    
    
    (20,256
    )Income from continuing operations available (loss attributable)
to common stockholders
    
    
    4,457
    
    
    
    (16,413
    )
    
    
    (3,061
    )Income from discontinued operation
    
    
    
    
    
    
    
    
    
    
    39,997$
    4,457
    
    
    $
    (16,413
    )
    
    $
    36,936Weighted average common shares outstanding
    
    
    22,947
    
    
    
    18,902
    
    
    
    18,868Basic earnings (loss) per common share:Income (loss) from continuing operations
    
    $
    0.19
    
    
    $
    (0.87
    )
    
    $
    (0.16
    )Income from discontinued operation
    
    
    
    
    
    
    
    
    
    
    2.12$
    0.19
    
    
    $
    (0.87
    )
    
    $
    1.96Numerators for diluted earnings (loss) per common share:Income from continuing operations
    
    $
    24,713
    
    
    $
    3,843
    
    
    $
    17,195Less dividends on antidilutive convertible preferred shares
    
    
    (20,256
    )
    
    
    (20,256
    )
    
    
    (20,256
    )Income from continuing operations available (loss attributable)
to common stockholders
    
    
    4,457
    
    
    
    (16,413
    )
    
    
    (3,061
    )Income from discontinued operation
    
    
    
    
    
    
    
    
    
    
    39,997$
    4,457
    
    
    $
    (16,413
    )
    
    $
    36,936Denominator for diluted earnings (loss) per common share:Weighted average common shares outstanding
    
    
    22,947
    
    
    
    18,902
    
    
    
    18,868Net effect of dilutive equity awards
    
    
    247
    
    
    
    
    
    
    
    Net effect of dilutive convertible preferred shares
    
    
    
    
    
    
    
    
    
    
    23,194
    
    
    
    18,902
    
    
    
    18,868Diluted earnings (loss) per common share:Income (loss) from continuing operations
    
    $
    0.19
    
    
    $
    (0.87
    )
    
    $
    (0.16
    )Income from discontinued operation
    
    
    
    
    
    
    
    
    
    
    2.12$
    0.19
    
    
    $
    (0.87
    )
    
    $
    1.96
 15




---



##### 



Capstead Mortgage Corporation
  Year Ended December 312007
    
    2006
    
    2005Equity awards:Shares issuable under option awards
    
    
    363
    
    
    
    856
    
    
    
    778Nonvested stock awards
    
    
    
    
    
    
    322
    
    
    
    173Convertible preferred shares:Series A shares
    
    
    202
    
    
    
    202
    
    
    
    202Series B shares
    
    
    15,819
    
    
    
    15,819
    
    
    
    15,819
 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, 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
    
    
    
    5.64December 31, 2006Agency Securities:Fannie Mae/Freddie Mac:Fixed-rate
    
    $
    16,819
    
    
    $
    52
    
    
    $
    16,871
    
    
    $
    16,895
    
    
    
    6.63
    
    
    
    6.30ARMs
    
    
    4,343,740
    
    
    
    61,381
    
    
    
    4,405,121
    
    
    
    4,418,446
    
    
    
    6.14
    
    
    
    4.94Ginnie Mae ARMs
    
    
    752,301
    
    
    
    2,757
    
    
    
    755,058
    
    
    
    758,660
    
    
    
    5.23
    
    
    
    4.785,112,860
    
    
    
    64,190
    
    
    
    5,177,050
    
    
    
    5,194,001
    
    
    
    6.01
    
    
    
    4.92Non-agency Securities:Fixed-rate
    
    
    17,734
    
    
    
    41
    
    
    
    17,775
    
    
    
    17,804
    
    
    
    7.19
    
    
    
    6.57ARMs
    
    
    31,562
    
    
    
    303
    
    
    
    31,865
    
    
    
    32,164
    
    
    
    6.99
    
    
    
    6.0049,296
    
    
    
    344
    
    
    
    49,640
    
    
    
    49,968
    
    
    
    7.06
    
    
    
    6.21Commercial real estate loans
    
    
    2,635
    
    
    
    
    
    
    
    2,635
    
    
    
    2,635
    
    
    
    18.00
    
    
    
    18.00Collateral for structured
financings
    
    
    5,705
    
    
    
    90
    
    
    
    5,795
    
    
    
    5,795
    
    
    
    8.06
    
    
    
    7.36$
    5,170,496
    
    
    $
    64,624
    
    
    $
    5,235,120
    
    
    $
    5,252,399
    
    
    
    6.03
    
    
    
    4.94
 
 (a)
    
    Includes mark-to-market for securities classified as available-for-sale, if applicable (see
NOTE 9).(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 and mortgage insurance costs on Non-agency
Securities and excluding unrealized gains and losses. 16




---



##### 



Capstead Mortgage Corporation
    NOTE 5  INVESTMENTS IN UNCONSOLIDATED AFFILIATES
 Unsecured borrowings Unsecured borrowings
  17




---



##### 



Capstead Mortgage Corporation
 NOTE 6  SALE OF DISCONTINUED OPERATION
  NOTE 7  REPURCHASE ARRANGEMENTS AND SIMILAR BORROWINGS, INCLUDING RELATED HEDGING ACTIVITY
 Mortgage securities and similar investments Repurchase
arrangements and similar borrowings
 December 31, 2007
    
    
    December 31, 2006Borrowings
    
    
    Average
    
    
    Borrowings
    
    
    AverageCollateral Type
    
    Outstanding
    
    
    Rate*
    
    
    Outstanding
    
    
    Rate*Borrowings with maturities of 30 days or less:Agency Securities
    
    $
    4,963,674
    
    
    
    4.93
    %
    
    $
    2,048,151
    
    
    
    5.30
    %Residential mortgage loans
    
    
    14,352
    
    
    
    6.12
    
    
    
    45,764
    
    
    
    5.854,978,026
    
    
    
    4.93
    
    
    
    2,093,915
    
    
    
    5.32Borrowings with maturities greater than 30 days:Agency Securities (31 to 90 days)
    
    
    
    
    
    
    
    
    
    
    1,741,751
    
    
    
    5.16Agency Securities (91 to 360 days)
    
    
    368,694
    
    
    
    4.92
    
    
    
    
    
    
    
    Agency Securities (greater than 360 days)
    
    
    1,127,420
    
    
    
    5.05
    
    
    
    1,034,673
    
    
    
    4.981,496,114
    
    
    
    5.02
    
    
    
    2,776,424
    
    
    
    5.09Similar borrowings:Commercial real estate loans
    
    
    20,974
    
    
    
    6.88
    
    
    
    
    
    
    
    Collateral for structured financings
    
    
    5,248
    
    
    
    8.14
    
    
    
    5,795
    
    
    
    7.58$
    6,500,362
    
    
    
    4.96
    
    
    $
    4,876,134
    
    
    
    5.19
 
 *
    
    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-day
borrowings (see below). After giving effect to these cash flow hedges,
the Average rate was 4.47% at December 31, 2007. 18




---



##### 



Capstead Mortgage Corporation
    Other revenue
(expense) Accumulated other comprehensive income Interest expense
 Repurchase arrangements and similar borrowings
 NOTE 8  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 9  DISCLOSURES REGARDING FAIR VALUES
OF FINANCIAL INSTRUMENTS
 Cash and cash
equivalents
 Mortgage securities and similar investments Unsecured borrowings
 20




---



##### 



Capstead Mortgage Corporation
  December 31, 2007
    
    December 31, 2006Carrying
    
    Fair
    
    Carrying
    
    FairAmount
    
    Value
    
    Amount
    
    ValueFinancial Assets:Residential mortgage loans
    
    $
    18,602
    
    
    $
    18,860
    
    
    $
    
    
    
    $
    Commercial real estate loans
    
    
    42,996
    
    
    
    42,248
    
    
    
    2,635
    
    
    
    2,635Financial Liabilities:Repurchase arrangements with initial
terms of greater than 60 days
    
    
    1,496,114
    
    
    
    1,514,143
    
    
    
    1,244,744
    
    
    
    1,241,775Commercial real estate loan borrowing
    
    
    20,974
    
    
    
    21,364
    
    
    
    
    
    
    
    Unsecured borrowings
    
    
    103,095
    
    
    
    91,404
    
    
    
    103,095
    
    
    
    102,485Interest rate swap agreements
    
    
    2,384
    
    
    
    2,384
    
    
    
    
    
    
    
    
  Gross
    
    
    GrossUnrealized
    
    
    Unrealized
    
    
    FairBasis
    
    
    Gains
    
    
    Losses
    
    
    ValueAs of December 31, 2007Agency Securities
    
    $
    6,989,619
    
    
    $
    42,023
    
    
    $
    2,611
    
    
    $
    7,029,031As of December 31, 2006Agency Securities
    
    $
    5,160,508
    
    
    $
    25,160
    
    
    $
    8,209
    
    
    $
    5,177,459Non-agency Securities
    
    
    25,292
    
    
    
    334
    
    
    
    6
    
    
    
    25,620$
    5,185,800
    
    
    $
    25,494
    
    
    $
    8,215
    
    
    $
    5,203,079
  Gross
    
    
    GrossUnrealized
    
    
    Unrealized
    
    
    FairBasis
    
    
    Gains
    
    
    Losses
    
    
    ValueAs of December 31, 2007Collateral released from structured
financings:Agency Securities
    
    $
    12,842
    
    
    $
    340
    
    
    $
    
    
    
    $
    13,182Collateral for structured financings
    
    
    5,248
    
    
    
    
    
    
    
    
    
    
    
    5,248$
    18,090
    
    
    $
    340
    
    
    $
    
    
    
    $
    18,430As of December 31, 2006Collateral released from structured
financings:Agency Securities
    
    $
    16,542
    
    
    $
    306
    
    
    $
    1
    
    
    $
    16,847Non-agency Securities
    
    
    24,348
    
    
    
    328
    
    
    
    15
    
    
    
    24,661Collateral for structured financings
    
    
    5,795
    
    
    
    
    
    
    
    
    
    
    
    5,795$
    46,685
    
    
    $
    634
    
    
    $
    16
    
    
    $
    47,303
 Mortgage securities and similar investments
 21




---



##### 



Capstead Mortgage Corporation
  Mortgage securities and similar investments
 December 31, 2007
    
    
    December 31, 2006Fair
    
    
    Unrealized
    
    
    Fair
    
    
    UnrealizedValue
    
    
    Loss
    
    
    Value
    
    
    LossSecurities in an unrealized loss position:One year or greater
    
    $
    323,751
    
    
    $
    1,856
    
    
    $
    837,123
    
    
    $
    6,392Less than one year
    
    
    382,482
    
    
    
    755
    
    
    
    487,144
    
    
    
    1,839$
    706,233
    
    
    $
    2,611
    
    
    $
    1,324,267
    
    
    $
    8,231Commercial and residential loans in
an unrealized loss position:One year or greater
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Less than one year
    
    
    42,248
    
    
    
    748
    
    
    
    
    
    
    
    $
    42,248
    
    
    $
    748
    
    
    $
    
    
    
    $
    
   22




---



##### 



Capstead Mortgage Corporation
  NOTE 10  INCOME TAXES
  Year Ended December 312007
    
    
    2006
    
    
    2005Income taxes computed at the federal statutory rate
on income from continuing operations
    
    $
    8,650
    
    
    $
    1,345
    
    
    $
    6,018Benefit of REIT status
    
    
    (8,038
    )
    
    
    (1,205
    )
    
    
    (5,925
    )Income taxes computed on income of taxable
REIT subsidiaries
    
    
    612
    
    
    
    140
    
    
    
    93Change in net deferred income tax assets
    
    
    (421
    )
    
    
    (191
    )
    
    
    (74
    )Other
    
    
    (6
    )
    
    
    51
    
    
    
    (19
    )Income tax provision of taxable REIT subsidiaries
    
    $
    185
    
    
    $
    
    
    
    $
    
 Other revenue (expense) Additional paid-in capital
  23




---



##### 



Capstead Mortgage Corporation
  December 312007
    
    
    2006Deferred income tax assets:Alternative minimum tax credit (a)
    
    $
    1,963
    
    
    $
    1,921Net operating loss carryforwards (b)
    
    
    
    
    
    
    354Other
    
    
    39
    
    
    
    1502,002
    
    
    
    2,425Deferred income tax liabilities
    
    
    
    
    
    
    Net deferred tax assets
    
    $
    2,002
    
    
    $
    2,425Valuation allowance (c)
    
    $
    2,002
    
    
    $
    2,425
 
 (a)
    
    Alternative tax credit carryforwards can be utilized
to offset payment of federal income taxes on future taxable income,
if any, earned by this 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 this subsidiary is not currently expected to
earn significant amounts of taxable income, related net deferred tax
assets are fully reserved at December 31, 2007. NOTE 11  STOCKHOLDERS EQUITY
  Preferred
    
    Annual
    
    Conversion
    
    Redemption
    
    LiquidationSeries
    
    Dividend
    
    Rate*
    
    Price
    
    PreferenceA
    
    $
    1.60
    
    
    
    1.5579
    
    
    $
    16.40
    
    
    $
    16.40B
    
    
    1.26
    
    
    
    0.6007
    
    
    
    12.50
    
    
    
    11.38
 
 *
    
    Reflects the number of common shares to be received for each
preferred share converted.  24




---



##### 



Capstead Mortgage Corporation
  Accumulated other comprehensive income Stockholders equity
 Year Ended December 312007
    
    
    2006
    
    
    2005Net income
    
    $
    24,713
    
    
    $
    3,843
    
    
    $
    57,192Other comprehensive income (loss):Amounts related to cash flow hedges:Change in net unrealized losses
    
    
    (2,505
    )
    
    
    
    
    
    
    Reclassification adjustment for amounts
included in net income
    
    
    (103
    )
    
    
    (55
    )
    
    
    (118
    )Amounts related to discontinued operation
    
    
    
    
    
    
    
    
    
    
    521Amounts related to available-for-sale securities:Reclassification adjustments for amounts
included in net income
    
    
    5,348
    
    
    
    
    
    
    
    Change in net unrealized gains
    
    
    16,785
    
    
    
    12,495
    
    
    
    (19,239
    )Other comprehensive income (loss)
    
    
    19,525
    
    
    
    12,440
    
    
    
    (18,836
    )Comprehensive income
    
    $
    44,238
    
    
    $
    16,283
    
    
    $
    38,356
  NOTE 12  LONG-TERM INCENTIVE AND OTHER PLANS
  25




---



##### 



Capstead Mortgage Corporation
   Weighted AverageNumber of
    
    Grant DateShares
    
    Fair ValueStock awards outstanding as of December 31, 2006
    
    
    321,550
    
    
    $
    8.02Grants *
    
    
    156,000
    
    
    
    12.93Forfeitures
    
    
    (6,250
    )
    
    
    7.97Vested
    
    
    (40,100
    )
    
    
    7.74Stock awards outstanding as of December 31, 2007
    
    
    431,200
    
    
    
    9.82
 
 *
    
    In May 2007, stock awards totaling 6,000 common shares were issued to
directors that vest April 15, 2008 (grant date fair value $9.81). In December
2007, stock awards totaling 150,000 common shares were issued to employees that
vest in six annual installments beginning January 2, 2009 (grant date fair value
$13.05). These grants are subject to certain restrictions, including continuous
service.   26




---



##### 



Capstead Mortgage Corporation
  Number of
    
    
    Weighted AverageShares
    
    
    Exercise PriceOption awards outstanding as of December 31, 2006
    
    
    855,552
    
    
    $
    13.02Grants (average fair value $0.89) *
    
    
    220,500
    
    
    
    10.46Forfeitures
    
    
    (42,944
    )
    
    
    13.31Expirations
    
    
    (53,520
    )
    
    
    33.77Exercises
    
    
    (30,932
    )
    
    
    6.05Option awards outstanding as of December 31, 2007
    
    
    948,656
    
    
    $
    11.47
 
 *
    
    Option awards granted during 2007 to directors and employees were valued with
average expected terms of four years, volatility factors of 27%, dividend yields of
10% and risk-free rates of 4.60%.  NOTE 13  NET INTEREST INCOME ANALYSIS (UNAUDITED)
 Mortgage securities and similar investments
 2007
    
    
    2006
    
    
    2005Average
    
    
    
    
    
    
    Average
    
    
    
    
    
    
    AverageEffective
    
    
    
    
    
    
    Effective
    
    
    
    
    
    
    EffectiveAmount
    
    
    Rate
    
    
    Amount
    
    
    Rate
    
    
    Amount
    
    
    RateInterest income
    
    $
    310,698
    
    
    
    5.64
    %
    
    $
    242,859
    
    
    
    4.94
    %
    
    $
    130,333
    
    
    
    3.68
    %Interest expense
    
    
    (266,901
    )
    
    
    5.12
    
    
    
    (228,379
    )
    
    
    4.92
    
    
    
    (105,937
    )
    
    
    3.17$
    43,797
    
    
    
    0.52
    
    
    $
    14,480
    
    
    
    0.02
    
    
    $
    24,396
    
    
    
    0.51
  Rate*
    
    
    Volume*
    
    
    Total*2007/2006Interest income
    
    $
    36,660
    
    
    $
    31,178
    
    
    $
    67,838Interest expense
    
    
    9,437
    
    
    
    29,084
    
    
    
    38,521$
    27,223
    
    
    $
    2,094
    
    
    $
    29,3172006/2005Interest income
    
    $
    52,702
    
    
    $
    59,824
    
    
    $
    112,526Interest expense
    
    
    70,768
    
    
    
    51,674
    
    
    
    122,442$
    (18,066
    )
    
    $
    8,150
    
    
    $
    (9,916
    )
 
 *
    
    The change in interest income and interest expense due to both
volume and rate has been allocated to volume and rate changes in proportion to
the relationship of the absolute dollar amounts of the change in each. 27




---



##### 



Capstead Mortgage Corporation
 NOTE 14  MARKET AND DIVIDEND INFORMATION (UNAUDITED)
  Year Ended December 31, 2007
    
    Year Ended December 31, 2006Sales Prices
    
    Dividends
    
    Sales Prices
    
    DividendsHigh
    
    Low
    
    Declared
    
    High
    
    Low
    
    DeclaredFirst quarter
    
    $
    10.02
    
    
    $
    7.75
    
    
    $
    0.02
    
    
    $
    7.66
    
    
    $
    6.30
    
    
    $
    0.02Second quarter
    
    
    10.73
    
    
    
    9.01
    
    
    
    0.04
    
    
    
    8.10
    
    
    
    6.56
    
    
    
    0.02Third quarter
    
    
    10.68
    
    
    
    8.01
    
    
    
    0.04
    
    
    
    8.75
    
    
    
    6.77
    
    
    
    0.02Fourth quarter
    
    
    13.84
    
    
    
    10.06
    
    
    
    0.24
    
    
    
    8.70
    
    
    
    7.82
    
    
    
    0.02
 NOTE 15  QUARTERLY RESULTS (UNAUDITED)
  1stQuarter
    
    
    2ndQuarter
    
    
    3rdQuarter
    
    
    4thQuarterYear Ended December 31, 2007Mortgage securities and similar investments:Interest income
    
    $
    72,142
    
    
    $
    75,795
    
    
    $
    74,949
    
    
    $
    87,812Interest expense
    
    
    (63,589
    )
    
    
    (67,107
    )
    
    
    (66,478
    )
    
    
    (69,727
    )8,553
    
    
    
    8,688
    
    
    
    8,471
    
    
    
    18,085Gain (loss) from portfolio restructuring
    
    
    
    
    
    
    
    
    
    
    (8,276
    )
    
    
    593Interest expense on unsecured borrowings
    
    
    (2,187
    )
    
    
    (2,187
    )
    
    
    (2,186
    )
    
    
    (2,187
    )Other revenue (expense)
    
    
    (803
    )
    
    
    (1,302
    )
    
    
    (1,404
    )
    
    
    (928
    )Equity in earnings of unconsolidated affiliates
    
    
    664
    
    
    
    575
    
    
    
    247
    
    
    
    297Net income (loss)
    
    $
    6,227
    
    
    $
    5,774
    
    
    $
    (3,148
    )
    
    $
    15,860Basic and diluted income (loss) per common share
    
    $
    0.06
    
    
    $
    0.04
    
    
    $
    (0.43
    )
    
    $
    0.31Year Ended December 31, 2006Mortgage securities and similar investments:Interest income
    
    $
    52,926
    
    
    $
    57,349
    
    
    $
    62,230
    
    
    $
    70,354Interest expense
    
    
    (47,543
    )
    
    
    (54,685
    )
    
    
    (61,066
    )
    
    
    (65,085
    )5,383
    
    
    
    2,664
    
    
    
    1,164
    
    
    
    5,269Interest expense on unsecured borrowings
    
    
    (1,587
    )
    
    
    (1,621
    )
    
    
    (1,747
    )
    
    
    (2,187
    )Other revenue (expense)
    
    
    (1,507
    )
    
    
    (1,376
    )
    
    
    (1,564
    )
    
    
    (1,416
    )Equity in earnings of unconsolidated affiliates
    
    
    422
    
    
    
    608
    
    
    
    654
    
    
    
    684Net income (loss)
    
    $
    2,711
    
    
    $
    275
    
    
    $
    (1,493
    )
    
    $
    2,350Basic and diluted loss per common share
    
    $
    (0.12
    )
    
    $
    (0.25
    )
    
    $
    (0.35
    )
    
    $
    (0.14
    )
 28




---



##### 



Capstead Mortgage Corporation
 Selected Financial Data  and  Managements Discussion and Analysis of Financial  Condition and Results of Operations
 29




---



##### 



Capstead Mortgage Corporation
 Selected Financial Data  (In thousands, except per share amounts)
 Year Ended December 312007
    
    
    2006
    
    
    2005
    
    
    2004
    
    
    2003Selected statement of income and per share data:Mortgage securities and similar investments:Interest income
    
    $
    310,698
    
    
    $
    242,859
    
    
    $
    130,333
    
    
    $
    91,121
    
    
    $
    119,444Interest expense
    
    
    (266,901
    )
    
    
    (228,379
    )
    
    
    (105,937
    )
    
    
    (44,939
    )
    
    
    (58,924
    )43,797
    
    
    
    14,480
    
    
    
    24,396
    
    
    
    46,182
    
    
    
    60,520Loss from portfolio restructuring (a)
    
    
    (7,683
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Gain on asset sales
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,560Interest expense on unsecured borrowings
    
    
    (8,747
    )
    
    
    (7,142
    )
    
    
    (972
    )
    
    
    
    
    
    
    Other revenue (expense) items, net
    
    
    (4,437
    )
    
    
    (5,863
    )
    
    
    (6,219
    )
    
    
    (6,313
    )
    
    
    (6,414
    )Equity in earnings (losses) of unconsolidated affiliates
    
    
    1,783
    
    
    
    2,368
    
    
    
    (10
    )
    
    
    
    
    
    
    Income from continuing operations
    
    
    24,713
    
    
    
    3,843
    
    
    
    17,195
    
    
    
    39,869
    
    
    
    58,666Income from discontinued operation, net of taxes (b)
    
    
    
    
    
    
    
    
    
    
    39,997
    
    
    
    1,936
    
    
    
    1,993Net income
    
    $
    24,713
    
    
    $
    3,843
    
    
    $
    57,192
    
    
    $
    41,805
    
    
    $
    60,659Net income available (loss attributable) to
common stockholders, after payment of
preferred share dividends
    
    $
    4,457
    
    
    $
    (16,413
    )
    
    $
    36,936
    
    
    $
    21,546
    
    
    $
    40,386Basic earnings (loss) per common share:Income (loss) from continuing operations
    
    $
    0.19
    
    
    $
    (0.87
    )
    
    $
    (0.16
    )
    
    $
    1.22
    
    
    $
    2.75Income from discontinued operation
    
    
    
    
    
    
    
    
    
    
    2.12
    
    
    
    0.12
    
    
    
    0.14$
    0.19
    
    
    $
    (0.87
    )
    
    $
    1.96
    
    
    $
    1.34
    
    
    $
    2.89Diluted earnings (loss) per common share:Income (loss) from continuing operations
    
    $
    0.19
    
    
    $
    (0.87
    )
    
    $
    (0.16
    )
    
    $
    1.21
    
    
    $
    2.51Income from discontinued operation
    
    
    
    
    
    
    
    
    
    
    2.12
    
    
    
    0.12
    
    
    
    0.09$
    0.19
    
    
    $
    (0.87
    )
    
    $
    1.96
    
    
    $
    1.33
    
    
    $
    2.60Cash dividends per common share
    
    $
    0.34
    
    
    $
    0.08
    
    
    $
    0.32
    
    
    $
    1.58
    
    
    $
    3.10Book value per common share
    
    
    9.25
    
    
    
    8.13
    
    
    
    8.48
    
    
    
    7.91
    
    
    
    6.67Average number of common shares outstanding: (c)Basic
    
    
    22,947
    
    
    
    18,902
    
    
    
    18,868
    
    
    
    16,100
    
    
    
    13,977Diluted
    
    
    23,194
    
    
    
    18,902
    
    
    
    18,868
    
    
    
    16,437
    
    
    
    23,295Selected balance sheet data:Mortgage securities and similar investments
    
    $
    7,108,719
    
    
    $
    5,252,399
    
    
    $
    4,368,025
    
    
    $
    3,438,559
    
    
    $
    2,362,688Assets of discontinued operation (b)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    141,037
    
    
    
    150,317Total assets
    
    
    7,208,926
    
    
    
    5,348,002
    
    
    
    4,464,248
    
    
    
    3,687,982
    
    
    
    2,554,322Repurchase arrangements and similar borrowings
    
    
    6,500,362
    
    
    
    4,876,134
    
    
    
    4,023,686
    
    
    
    3,221,794
    
    
    
    2,141,985Long-term investment capital: (c)Unsecured borrowings, net of related statutory
trusts accounted for as unconsolidated affiliates
    
    
    99,978
    
    
    
    99,978
    
    
    
    74,980
    
    
    
    
    
    
    
    Stockholders equity
    
    
    560,917
    
    
    
    339,962
    
    
    
    344,849
    
    
    
    332,539
    
    
    
    277,038
 
 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 market liquidity conditions, during the latter part of 2007
Capstead reduced its balance sheet leverage through 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)
    
    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. During the fourth quarter of 2007, the Company
raised $206 million in common equity capital. At December 31, 2007 there were 40,819,493
common shares issued and outstanding. 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*
    
    
    WAC
    
    
    WAC
    
    
    Margins
    
    
    Caps
    
    
    Caps
    
    
    RollCurrent-reset ARMs:Agency Securities:Fannie
Mae/Freddie
Mac
    
    $
    3,035,857
    
    
    
    6.49
    %
    
    
    5.50
    %
    
    
    1.82
    %
    
    
    4.55
    %
    
    
    10.35
    %
    
    
    3.4Ginnie Mae
    
    
    517,556
    
    
    
    5.87
    
    
    
    4.91
    
    
    
    1.53
    
    
    
    1.00
    
    
    
    9.91
    
    
    
    5.7Residential
mortgage loans
    
    
    11,193
    
    
    
    7.18
    
    
    
    6.62
    
    
    
    2.05
    
    
    
    1.55
    
    
    
    11.23
    
    
    
    5.03,564,606
    
    
    
    6.40
    
    
    
    5.41
    
    
    
    1.78
    
    
    
    4.02
    
    
    
    10.29
    
    
    
    3.7Longer-to-reset ARMs:Agency Securities:Fannie
Mae/Freddie
Mac
    
    
    3,435,933
    
    
    
    6.25
    
    
    
    5.99
    
    
    
    1.69
    
    
    
    2.81
    
    
    
    11.71
    
    
    
    47.5$
    7,000,539
    
    
    
    6.33
    
    
    
    5.69
    
    
    
    1.74
    
    
    
    3.43
    
    
    
    10.99
    
    
    
    25.2
 
 *
    
    Basis represents the Companys investment before unrealized gains and losses. As of December
31, 2007, the ratio of basis to related unpaid principal balance for the Companys ARM
securities was 101.33. This table excludes $7 million in fixed-rate residential mortgage
loans, $13 million in fixed-rate Agency Securities and $5 million in non-agency securities
held as collateral for structured financings. 33




---



##### 



Capstead Mortgage Corporation
     Commercial Real Estate-related Assets
  34




---



##### 



Capstead Mortgage Corporation
    Recent Common Equity Offerings
   Book Value per Common Share
  35




---



##### 



Capstead Mortgage Corporation
  Utilization of Long-term Investment Capital and Potential Liquidity
  Related
    
    
    Capital
    
    
    PotentialInvestments(a)
    
    
    Borrowings
    
    
    Employed(a)
    
    
    Liquidity(a)Residential mortgage securities
    
    $
    7,065,723
    
    
    $
    6,479,388
    
    
    $
    586,335
    
    
    $
    381,320Commercial real estate-related assets
    
    
    42,996
    
    
    
    20,974
    
    
    
    22,022
    
    
    
    (6,991
    )$
    7,108,719
    
    
    $
    6,500,362
    
    
    
    608,357
    
    
    
    374,329Other assets, net of other liabilities
    
    
    
    
    
    
    
    
    
    
    62,324
    
    
    
    6,653Fourth quarter common dividend
    
    
    
    
    
    
    
    
    
    
    (9,786
    )
    
    
    (9,786
    )(b)$
    660,895
    
    
    $
    371,196Balances as of December 31, 2006
    
    $
    5,269,355
    
    
    $
    4,876,134
    
    
    $
    439,940
    
    
    $
    226,330
 
 (a)
    
    Investments are stated at carrying amounts on the Companys balance sheet. Potential
liquidity is based on maximum amounts of borrowings available under existing uncommitted
repurchase arrangements considering managements estimate of the fair value of related
collateral as of the indicated dates adjusted for other sources (uses) of liquidity such as
near-term scheduled payments on related borrowings not expected to be immediately replaced,
unrestricted cash and cash equivalents, and dividends payable.(b)
    
    The fourth quarter 2007 common dividend was declared December 13, 2007 and paid January 18,
2008 to stockholders of record as of December 31, 2007.   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
    
    $
    6,637,275
    
    
    $
    5,475,147
    
    
    $
    1,160,925
    
    
    $
    795
    
    
    $
    408Unsecured borrowings
    
    
    235,604
    
    
    
    8,382
    
    
    
    16,765
    
    
    
    16,765
    
    
    
    193,692Corporate office lease
    
    
    578
    
    
    
    289
    
    
    
    289
    
    
    
    
    
    
    
    $
    6,873,457
    
    
    $
    5,483,818
    
    
    $
    1,177,979
    
    
    $
    17,560
    
    
    $
    194,100
  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*
    
    Income*
    
    Capital*2007:Common
    
    $
    0.34
    
    
    
    
    %
    
    
    79.85
    %
    
    
    20.15
    %Preferred A
    
    
    1.60
    
    
    
    
    
    
    
    100.00
    
    
    
    Preferred B
    
    
    1.26
    
    
    
    
    
    
    
    100.00
    
    
    
    2006:Common
    
    
    0.08
    
    
    
    
    
    
    
    
    
    
    
    100.00Preferred A
    
    
    1.60
    
    
    
    
    
    
    
    16.00
    
    
    
    84.00Preferred B
    
    
    1.26
    
    
    
    
    
    
    
    16.19
    
    
    
    83.812005:Common
    
    
    0.32
    
    
    
    
    
    
    
    100.00
    
    
    
    Preferred A
    
    
    1.60
    
    
    
    
    
    
    
    100.00
    
    
    
    Preferred B
    
    
    1.26
    
    
    
    
    
    
    
    100.00
    
    
    
    
 
 *
    
    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
2005 is available in the investor relations section of our website at
www.capstead.com. 38




---



##### 



Capstead Mortgage Corporation
 RESULTS OF OPERATIONS
  Year Ended December 312007
    
    
    2006
    
    
    2005Income statement data:Mortgage securities and similar investments:Residential mortgage investments
    
    $
    42,755
    
    
    $
    14,298
    
    
    $
    23,850Commercial real estate investments
    
    
    1,042
    
    
    
    182
    
    
    
    54643,797
    
    
    
    14,480
    
    
    
    24,396Other revenue (expense):Loss on portfolio restructuring
    
    
    (7,683
    )
    
    
    
    
    
    
    Other revenue
    
    
    2,234
    
    
    
    591
    
    
    
    1,082Interest on unsecured borrowings
    
    
    (8,747
    )
    
    
    (7,142
    )
    
    
    (972
    )Other operating expense
    
    
    (6,671
    )
    
    
    (6,454
    )
    
    
    (7,301
    )Equity in earnings (losses) of unconsolidated
affiliates
    
    
    1,783
    
    
    
    2,368
    
    
    
    (10
    )Income from continuing operations
    
    
    24,713
    
    
    
    3,843
    
    
    
    17,195Income from discontinued operation, net of taxes
    
    
    
    
    
    
    
    
    
    
    39,997Net income
    
    $
    24,713
    
    
    $
    3,843
    
    
    $
    57,192Net income available (loss attributable) to
common stockholders, after payment of
preferred share dividends
    
    $
    4,457
    
    
    $
    (16,413
    )
    
    $
    36,936Diluted earnings (loss) per common share:Income (loss) from continuing operations
    
    $
    0.19
    
    
    $
    (0.87
    )
    
    $
    (0.16
    )Income from discontinued operation
    
    
    
    
    
    
    
    
    
    
    2.12$
    0.19
    
    
    $
    (0.87
    )
    
    $
    1.96Key portfolio statistics:Average yields:Residential mortgage investments
    
    
    5.62
    %
    
    
    4.94
    %
    
    
    3.67
    %Commercial real estate investments
    
    
    13.88
    
    
    
    18.00
    
    
    
    4.27Total average yields
    
    
    5.64
    
    
    
    4.94
    
    
    
    3.68Average rate of related borrowings
    
    
    5.12
    
    
    
    4.92
    
    
    
    3.17Average financing spread
    
    
    0.52
    
    
    
    0.02
    
    
    
    0.51Average portfolio balances:Residential mortgage investments
    
    $
    5,501
    
    
    $
    4,916
    
    
    $
    3,490Commercial real estate investments
    
    
    9
    
    
    
    1
    
    
    
    485,510
    
    
    
    4,917
    
    
    
    3,538Related average borrowings
    
    
    5,140
    
    
    
    4,579
    
    
    
    3,290Average capital deployed
    
    $
    370
    
    
    $
    338
    
    
    $
    248Average portfolio runoff rate
    
    
    28
    %
    
    
    30
    %
    
    
    33
    %
 39




---



##### 



Capstead Mortgage Corporation
 2007 Compared to 2006
       40




---



##### 



Capstead Mortgage Corporation
   2006 Compared to 2005
     41




---



##### 



Capstead Mortgage Corporation
  Interest Rate Sensitivity on Operating Results
   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
earnings change:December 31, 2007
    
    
    4.25
    %
    
    
    4.60
    %
    
    $
    10,800
    
    
    $
    15,600
    
    
    $
    (9,800
    )
    
    $
    (17,300
    )
    
    $
    (12,400
    )December 31, 2006
    
    
    5.25
    
    
    
    4.70
    
    
    
    11,900
    
    
    
    14,300
    
    
    
    (5,500
    )
    
    
    (24,700
    )
    
    
    (21,700
    )
 
 *
    
    Sensitivity of earnings to changes in interest rates is determined relative to the actual
rates at the applicable date. Note that the projected 12-month earnings 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.  42




---



##### 



Capstead Mortgage Corporation
 LIQUIDITY AND CAPITAL RESOURCES
      43




---



##### 



Capstead Mortgage Corporation
     RISK FACTORS
  Risks Related to Capsteads Business
 Loss of the implied AAA rating of Agency Securities could negatively affect Capsteads
financial condition and earnings.
 44




---



##### 



Capstead Mortgage Corporation
  Periods of illiquidity in the mortgage markets may reduce amounts available to be borrowed
under Capsteads repurchase arrangements, which could negatively impact the Companys financial
condition and earnings.
 Periods of rising interest rates may reduce amounts available to be borrowed under Capsteads
repurchase arrangements, 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.
  45




---



##### 



Capstead Mortgage Corporation
   Capsteads use of repurchase arrangements to borrow money 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.
 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.
 46




---



##### 



Capstead Mortgage Corporation
  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 .
 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.
 47




---



##### 



Capstead Mortgage Corporation
 Capstead may be unable to invest the net proceeds raised in a debt or equity securities
offering on acceptable terms, which could affect the Company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.
 Additionally, Capstead may leverage its commercial real estate-related assets through the use
of secured borrowing arrangements, the availability of which may be predicated on the fair value of
the underlying collateral.
 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.
 48




---



##### 



Capstead Mortgage Corporation
  
    
    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.
 Complying with REIT requirements may limit Capsteads ability to hedge effectively.
 49




---



##### 



Capstead Mortgage Corporation
 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.
 Capstead may be subject to adverse legislative or regulatory tax changes that could reduce the
market price of the Companys securities.
 50




---



##### 



Capstead Mortgage Corporation
 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.
  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.
 51




---



##### 



Capstead Mortgage Corporation
  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 of directors in
the Companys 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 .
 CRITICAL ACCOUNTING POLICIES
  52




---



##### 



Capstead Mortgage Corporation
  
    
    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 the
interest rate 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 held
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. 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
interpreting market data to develop estimated fair values, particularly in circumstances of
deteriorating credit quality and market liquidity (see NOTE 9 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 an individual asset 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.
 
    
    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 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
incomeand 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).
  53




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##### 



Capstead Mortgage Corporation
 Interest expense Interest expense
 FORWARD-LOOKING STATEMENTS
  54




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##### 



Capstead Mortgage Corporation
 PERFORMANCE GRAPH
  
 Cumulative Total Stockholder Return as of December 312002
    
    2003
    
    2004
    
    2005
    
    2006
    
    2007Capstead
    
    $
    100.00
    
    
    $
    145.27
    
    
    $
    102.03
    
    
    $
    58.49
    
    
    $
    84.41
    
    
    $
    137.95S&P 500
    
    
    100.00
    
    
    
    128.63
    
    
    
    142.58
    
    
    
    149.57
    
    
    
    173.14
    
    
    
    182.63NAREIT Mortgage
    
    
    100.00
    
    
    
    138.19
    
    
    
    149.13
    
    
    
    103.10
    
    
    
    111.78
    
    
    
    58.48
 55




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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 Effectiveness of Disclosure Controls and Procedures
  Related Certifications by Management
   56




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##### 



Capstead Mortgage Corporation
 Report of Independent Registered Public Accounting Firm on
Audit of Internal Control Over Financial Reporting
 
     .
   
 57




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##### 



Report of Independent Registered Public Accounting Firm on
Audit of the Consolidated Financial Statements
 
       
 58