##### 



EXHIBIT 13
 CAPSTEAD MORTGAGE CORPORATION
 PORTIONS OF THE
 ANNUAL REPORT TO STOCKHOLDERS
 FOR THE YEAR ENDED DECEMBER 31, 2006




---



##### 



Capstead Mortgage Corporation
 Consolidated Statements of Income
 (In thousands, except per share amounts)
 Year Ended December 312006
    
    
    2005
    
    
    2004Mortgage securities and similar investments:Interest income
    
    $
    242,859
    
    
    $
    130,333
    
    
    $
    91,121Interest expense
    
    
    (228,379
    )
    
    
    (105,937
    )
    
    
    (44,939
    )14,480
    
    
    
    24,396
    
    
    
    46,182Other revenue (expense):Other revenue
    
    
    591
    
    
    
    1,082
    
    
    
    813Interest expense on unsecured borrowings
    
    
    (7,142
    )
    
    
    (972
    )
    
    
    Other operating expense
    
    
    (6,454
    )
    
    
    (7,301
    )
    
    
    (7,126
    )(13,005
    )
    
    
    (7,191
    )
    
    
    (6,313
    )Income before equity in earnings (loss) of unconsolidated
affiliates and discontinued operation
    
    
    1,475
    
    
    
    17,205
    
    
    
    39,869Equity in earnings (loss) of unconsolidated affiliates
    
    
    2,368
    
    
    
    (10
    )
    
    
    Income from continuing operations
    
    
    3,843
    
    
    
    17,195
    
    
    
    39,869Income from discontinued operation, net of taxes
    
    
    
    
    
    
    39,997
    
    
    
    1,936Net income
    
    $
    3,843
    
    
    $
    57,192
    
    
    $
    41,805Net income available (loss attributable) to common
stockholders:Net income
    
    $
    3,843
    
    
    $
    57,192
    
    
    $
    41,805Less cash dividends paid on preferred shares
    
    
    (20,256
    )
    
    
    (20,256
    )
    
    
    (20,259
    )$
    (16,413
    )
    
    $
    36,936
    
    
    $
    21,546Basic earnings (loss) per common share:Income (loss) from continuing operations
    
    $
    (0.87
    )
    
    $
    (0.16
    )
    
    $
    1.22Income from discontinued operation
    
    
    
    
    
    
    2.12
    
    
    
    0.12$
    (0.87
    )
    
    $
    1.96
    
    
    $
    1.34Diluted earnings (loss) per common share:Income (loss) from continuing operations
    
    $
    (0.87
    )
    
    $
    (0.16
    )
    
    $
    1.21Income from discontinued operation
    
    
    
    
    
    
    2.12
    
    
    
    0.12$
    (0.87
    )
    
    $
    1.96
    
    
    $
    1.33
 See accompanying notes to consolidated financial statements.
 6




---



##### 



Capstead Mortgage Corporation
 Consolidated Balance Sheets
 (In thousands, except per share amounts)
 December 312006
    
    
    2005Assets:Mortgage securities and similar investments
($5.1 billion pledged under repurchase arrangements)
    
    $
    5,252,399
    
    
    $
    4,368,025Investments in unconsolidated affiliates
    
    
    20,073
    
    
    
    9,246Receivables and other assets
    
    
    69,869
    
    
    
    53,040Cash and cash equivalents
    
    
    5,661
    
    
    
    33,937$
    5,348,002
    
    
    $
    4,464,248Liabilities:Repurchase arrangements and similar borrowings
    
    $
    4,876,134
    
    
    $
    4,023,686Unsecured borrowings
    
    
    103,095
    
    
    
    77,321Liabilities of discontinued operation
    
    
    
    
    
    
    2,884Common stock dividend payable
    
    
    385
    
    
    
    381Accounts payable and accrued expenses
    
    
    28,426
    
    
    
    15,1275,008,040
    
    
    
    4,119,399Stockholders 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, 2006 and December 31, 2005
($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, 2006 and December 31, 2005
($180,025 aggregate liquidation preference)
    
    
    176,705
    
    
    
    176,705Common stock  $0.01 par value; 100,000 shares authorized;
19,253 and 19,043 shares issued and outstanding at
December 31, 2006 and December 31, 2005, respectively
    
    
    192
    
    
    
    190Paid-in capital
    
    
    497,418
    
    
    
    512,933Accumulated deficit
    
    
    (354,617
    )
    
    
    (352,803
    )Accumulated other comprehensive income
    
    
    17,436
    
    
    
    4,996339,962
    
    
    
    344,849$
    5,348,002
    
    
    $
    4,464,248
 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, 2004
    
    $
    179,664
    
    
    $
    139
    
    
    $
    456,198
    
    
    $
    (387,718
    )
    
    $
    28,755
    
    
    $
    277,038Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    41,805
    
    
    
    
    
    
    
    41,805Other comprehensive loss:Amounts related to cash flow
hedges, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (450
    )
    
    
    (450
    )Change in unrealized gain on
mortgage securities, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,473
    )
    
    
    (4,473
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    36,882Cash dividends:Common  $1.58 per share
    
    
    
    
    
    
    
    
    
    
    (4,219
    )
    
    
    (21,546
    )
    
    
    
    
    
    
    (25,765
    )Preferred
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (20,259
    )
    
    
    
    
    
    
    (20,259
    )Conversion of preferred stock
    
    
    (131
    )
    
    
    
    
    
    
    131
    
    
    
    
    
    
    
    
    
    
    
    Additions to capital
    
    
    
    
    
    
    49
    
    
    
    64,594
    
    
    
    
    
    
    
    
    
    
    
    64,643Balance at December 31, 2004
    
    
    179,533
    
    
    
    188
    
    
    
    516,704
    
    
    
    (387,718
    )
    
    
    23,832
    
    
    
    332,539Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    57,192
    
    
    
    
    
    
    
    57,192Other comprehensive income (loss):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 (loss):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
    
    
    $
    339,962
 See accompanying notes to consolidated financial statements.
 8




---



##### 



Capstead Mortgage Corporation
 Consolidated Statements of Cash Flows
 (In thousands)
 Year Ended December 312006
    
    
    2005
    
    
    2004Operating activities:Net income
    
    $
    3,843
    
    
    $
    57,192
    
    
    $
    41,805Noncash items:Amortization of investment premiums
    
    
    23,108
    
    
    
    21,813
    
    
    
    14,961Depreciation and other amortization
    
    
    183
    
    
    
    119
    
    
    
    192Equity-based compensation costs
    
    
    529
    
    
    
    249
    
    
    
    122Undistributed earnings of unconsolidated affiliates
    
    
    (116
    )
    
    
    18
    
    
    
    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
    
    
    6,442
    
    
    
    (3,749
    )
    
    
    (308
    )Net cash provided by operating activities of continuing operations
    
    
    33,989
    
    
    
    37,290
    
    
    
    56,772Net cash provided by operating activities of discontinued operation
    
    
    
    
    
    
    3,104
    
    
    
    2,900Net cash provided by operating activities
    
    
    33,989
    
    
    
    40,394
    
    
    
    59,672Investing activities:Purchases of mortgage securities and similar investments
    
    
    (2,628,826
    )
    
    
    (2,474,812
    )
    
    
    (2,095,002
    )Principal collections on mortgage securities and similar investments
    
    
    1,724,316
    
    
    
    1,494,220
    
    
    
    991,020Investments in unconsolidated affiliates:Investment in statutory trusts formed to issue unsecured
borrowings
    
    
    (774
    )
    
    
    (2,321
    )
    
    
    Investment in commercial real estate loan limited partnership
    
    
    (12,749
    )
    
    
    (6,943
    )
    
    
    Return of investment in real estate loan limited partnership
    
    
    2,812
    
    
    
    
    
    
    
    Net cash used in investing activities of continuing operations
    
    
    (915,221
    )
    
    
    (989,856
    )
    
    
    (1,103,982
    )Net cash (used in) provided by investing activities of discontinued
operation including net proceeds from its sale
    
    
    (2,884
    )
    
    
    56,759
    
    
    
    6,112Net cash used in investing activities
    
    
    (918,105
    )
    
    
    (933,097
    )
    
    
    (1,097,870
    )Financing activities:Net increase in repurchase arrangements and similar borrowings
    
    
    852,474
    
    
    
    802,867
    
    
    
    1,081,274Unsecured borrowings, net of issue costs
    
    
    25,061
    
    
    
    75,038
    
    
    
    Release of restricted cash
    
    
    
    
    
    
    5,996
    
    
    
    Capital stock transactions
    
    
    84
    
    
    
    24
    
    
    
    64,521Dividends paid
    
    
    (21,779
    )
    
    
    (30,089
    )
    
    
    (50,702
    )Net cash provided by financing activities of continuing operations
    
    
    855,840
    
    
    
    853,836
    
    
    
    1,095,093Net cash used in financing activities of discontinued operation
    
    
    
    
    
    
    (226
    )
    
    
    (205
    )Net cash provided by financing activities
    
    
    855,840
    
    
    
    853,610
    
    
    
    1,094,888Net change in cash and cash equivalents
    
    
    (28,276
    )
    
    
    (39,093
    )
    
    
    56,690Cash and cash equivalents at beginning of year
    
    
    33,937
    
    
    
    73,030
    
    
    
    16,340Cash and cash equivalents at end of year
    
    $
    5,661
    
    
    $
    33,937
    
    
    $
    73,030
 See accompanying notes to consolidated financial statements.
 9




---



##### 



Capstead Mortgage Corporation
 Notes to Consolidated Financial Statements
 December 31, 2006
 NOTE 1  BUSINESS
  NOTE 2  ACCOUNTING POLICIES
 Basis of Presentation
    Accounting for Uncertain Tax Positions
  10




---



##### 



Capstead Mortgage Corporation
  Accounting for Acquisitions of Mortgage Securities Seller-financed using Repurchase Arrangements
 Other comprehensive income (loss)
   Equity-based Compensation
  Other operating expense
 11




---



##### 



Capstead Mortgage Corporation
  Use of Estimates
  Accumulated other comprehensive income Stockholders equity
 Cash and Cash Equivalents
 Cash and cash equivalents
 Derivatives
 Interest income
 Financial Assets
  12




---



##### 



Capstead Mortgage Corporation
  Interest income Other revenue (expense) Other revenue (expense)
 Borrowings
 Receivables and other assets Interest expense
 Income Taxes
   Incentive Compensation
  13




---



##### 



Capstead Mortgage Corporation
  Stockholders Equity
 Stockholders Equity
 NOTE 3  EARNINGS (LOSS) PER COMMON SHARE
 Income from continuing operations Income from discontinued operation
 Year Ended December 312006
    
    2005
    
    2004Equity awards:Shares issuable under option
awards
    
    
    856
    
    
    
    778
    
    
    
    275Nonvested stock awards
    
    
    322
    
    
    
    173
    
    
    
    Convertible preferred shares:Series A shares
    
    
    202
    
    
    
    202
    
    
    
    Series B shares
    
    
    15,819
    
    
    
    15,819
    
    
    
    15,819
 14




---



##### 



Capstead Mortgage Corporation
  Year Ended December 312006
    
    
    2005
    
    
    2004Numerators for basic earnings (loss) per common share:Income (loss) from continuing operations
    
    $
    3,843
    
    
    $
    17,195
    
    
    $
    39,869Less Series A and B preferred share dividends
    
    
    (20,256
    )
    
    
    (20,256
    )
    
    
    (20,259
    )Income from continuing operations available (loss attributable)
to common stockholders
    
    
    (16,413
    )
    
    
    (3,061
    )
    
    
    19,610Income from discontinued operation
    
    
    
    
    
    
    39,997
    
    
    
    1,936$
    (16,413
    )
    
    $
    36,936
    
    
    $
    21,546Weighted average common shares outstanding
    
    
    18,902
    
    
    
    18,868
    
    
    
    16,100Basic earnings (loss) per common share:Income (loss) from continuing operations
    
    $
    (0.87
    )
    
    $
    (0.16
    )
    
    $
    1.22Income from discontinued operation
    
    
    
    
    
    
    2.12
    
    
    
    0.12$
    (0.87
    )
    
    $
    1.96
    
    
    $
    1.34Numerators for diluted earnings (loss) per common share:Income (loss) from continuing operations
    
    $
    3,843
    
    
    $
    17,195
    
    
    $
    39,869Less dividends on antidilutive convertible preferred shares
    
    
    (20,256
    )
    
    
    (20,256
    )
    
    
    (19,932
    )Income from continuing operations available (loss attributable)
to common stockholders
    
    
    (16,413
    )
    
    
    (3,061
    )
    
    
    19,937Income from discontinued operation
    
    
    
    
    
    
    39,997
    
    
    
    1,936$
    (16,413
    )
    
    $
    36,936
    
    
    $
    21,873Denominator for diluted earnings (loss) per common share:Weighted average common shares outstanding
    
    
    18,902
    
    
    
    18,868
    
    
    
    16,100Net effect of dilutive equity awards
    
    
    
    
    
    
    
    
    
    
    29Net effect of dilutive convertible preferred shares
    
    
    
    
    
    
    
    
    
    
    30818,902
    
    
    
    18,868
    
    
    
    16,437Diluted earnings (loss) per common share:Income (loss) from continuing operations
    
    $
    (0.87
    )
    
    $
    (0.16
    )
    
    $
    1.21Income from discontinued operation
    
    
    
    
    
    
    2.12
    
    
    
    0.12$
    (0.87
    )
    
    $
    1.96
    
    
    $
    1.33
 NOTE 4  MORTGAGE SECURITIES AND SIMILAR INVESTMENTS
  15




---



##### 



Capstead Mortgage Corporation
 Mortgage securities and similar investments
 Principal
    
    
    
    
    
    
    
    
    
    
    Carrying
    
    
    Net
    
    
    AverageBalance
    
    
    Investment Premiums
    
    
    Basis
    
    
    Amount(a)
    
    
    WAC(b)
    
    
    Yield(b)December 31, 2006Agency Securities:Fannie Mae/Freddie Mac:Fixed-rate
    
    $
    16,819
    
    
    $
    52
    
    
    $
    16,871
    
    
    $
    16,895
    
    
    
    6.63
    %
    
    
    6.30
    %ARMs
    
    
    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 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
    
    
    
    4.94December 31, 2005Agency Securities:Fannie Mae/Freddie Mac:Fixed-rate
    
    $
    23,547
    
    
    $
    87
    
    
    $
    23,634
    
    
    $
    23,670
    
    
    
    6.63
    %
    
    
    6.21
    %ARMs
    
    
    3,268,374
    
    
    
    54,792
    
    
    
    3,323,166
    
    
    
    3,324,118
    
    
    
    5.13
    
    
    
    3.63Ginnie Mae ARMs
    
    
    933,897
    
    
    
    4,222
    
    
    
    938,119
    
    
    
    941,542
    
    
    
    4.46
    
    
    
    3.544,225,818
    
    
    
    59,101
    
    
    
    4,284,919
    
    
    
    4,289,330
    
    
    
    4.99
    
    
    
    3.62Non-agency Securities:Fixed-rate
    
    
    26,493
    
    
    
    114
    
    
    
    26,607
    
    
    
    26,689
    
    
    
    7.12
    
    
    
    6.40ARMs
    
    
    42,150
    
    
    
    467
    
    
    
    42,617
    
    
    
    42,908
    
    
    
    5.33
    
    
    
    4.3368,643
    
    
    
    581
    
    
    
    69,224
    
    
    
    69,597
    
    
    
    6.02
    
    
    
    5.09CMBS  adjustable-rate
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4.27Collateral for structured
financings
    
    
    8,960
    
    
    
    138
    
    
    
    9,098
    
    
    
    9,098
    
    
    
    7.80
    
    
    
    5.76$
    4,303,421
    
    
    $
    59,820
    
    
    $
    4,363,241
    
    
    $
    4,368,025
    
    
    
    5.01
    
    
    
    3.68
 
 (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, mortgage insurance costs on Non-agency
Securities and excluding unrealized gains and losses.  16




---



##### 



Capstead Mortgage Corporation
  NOTE 5  INVESTMENTS IN UNCONSOLIDATED AFFILIATES
    NOTE 6  SALE OF DISCONTINUED OPERATION
  17




---



##### 



Capstead Mortgage Corporation
  NOTE 7  REPURCHASE ARRANGEMENTS
AND SIMILAR BORROWINGS
 Mortgage securities and similar investments
 Repurchase arrangements and similar borrowings
 December 31, 2006
    
    
    December 31, 2005Borrowings
    
    
    Average
    
    
    Borrowings
    
    
    AverageOutstanding
    
    
    Rate
    
    
    Outstanding
    
    
    RateBorrowings with maturities of 30 days or less:Agency Securities
    
    $
    2,048,151
    
    
    
    5.30
    %
    
    $
    3,133,090
    
    
    
    4.23
    %Non-agency Securities
    
    
    45,764
    
    
    
    5.85
    
    
    
    63,734
    
    
    
    4.882,093,915
    
    
    
    5.32
    
    
    
    3,196,824
    
    
    
    4.24Borrowings with maturities greater than 30 days:Agency Securities (31 to 90 days)
    
    
    1,741,751
    
    
    
    5.16
    
    
    
    25,000
    
    
    
    3.25Agency Securities (91 to 360 days)
    
    
    
    
    
    
    
    
    
    
    331,907
    
    
    
    2.79Agency Securities (greater than 360 days)
    
    
    1,034,673
    
    
    
    4.98
    
    
    
    460,857
    
    
    
    4.502,776,424
    
    
    
    5.09
    
    
    
    817,764
    
    
    
    3.77Structured financings
    
    
    5,795
    
    
    
    7.58
    
    
    
    9,098
    
    
    
    7.49$
    4,876,134
    
    
    
    5.19
    
    
    $
    4,023,686
    
    
    
    4.15
 Repurchase
arrangements and similar borrowings
 18




---



##### 



Capstead Mortgage Corporation
 NOTE 8  UNSECURED BORROWINGS
 Unsecured borrowings
 December 31, 2006
    
    
    December 31, 2005Borrowings
    
    
    Average
    
    
    Borrowings
    
    
    AverageOutstanding
    
    
    Rate
    
    
    Outstanding
    
    
    RateJunior subordinated notes:Capstead Mortgage Trust I
    
    $
    36,083
    
    
    
    8.31
    %
    
    $
    36,083
    
    
    
    8.31
    %Capstead Mortgage Trust II
    
    
    41,238
    
    
    
    8.46
    
    
    
    41,238
    
    
    
    8.45Capstead Mortgage Trust III
    
    
    25,774
    
    
    
    8.78
    
    
    
    
    
    
    
    $
    103,095
    
    
    
    8.49
    
    
    $
    77,321
    
    
    
    8.39
 Receivables and other assets Unsecured borrowings
 NOTE 9  DISCLOSURES REGARDING FAIR VALUES
OF FINANCIAL INSTRUMENTS
 Cash and cash equivalents Mortgage securities
and similar investments Unsecured borrowings
 19




---



##### 



Capstead Mortgage Corporation
  December 31, 2006
    
    December 31, 2005Carrying
    
    Fair
    
    Carrying
    
    FairAmount
    
    Value
    
    Amount
    
    ValueRepurchase arrangements based on:One-month LIBOR
    
    $
    3,625,595
    
    
    $
    3,625,595
    
    
    $
    3,102,114
    
    
    $
    3,102,114Greater than one-month LIBOR
    
    
    1,244,744
    
    
    
    1,241,775
    
    
    
    912,474
    
    
    
    908,320Structured financings
    
    
    5,795
    
    
    
    5,795
    
    
    
    9,098
    
    
    
    9,098Unsecured borrowings
    
    
    103,095
    
    
    
    102,485
    
    
    
    77,321
    
    
    
    77,670
  December 31, 2006
    
    
    December 31, 2005Fair
    
    
    Unrealized
    
    
    Fair
    
    
    UnrealizedValue
    
    
    Losses
    
    
    Value
    
    
    LossesSecurities in unrealized loss position:One year or greater
    
    $
    837,123
    
    
    $
    6,392
    
    
    $
    472,584
    
    
    $
    6,313Less than one year
    
    
    487,144
    
    
    
    1,839
    
    
    
    1,431,465
    
    
    
    8,611$
    1,324,267
    
    
    $
    8,231
    
    
    $
    1,904,049
    
    
    $
    14,924
  Gross
    
    
    GrossCost
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairBasis
    
    
    Gains
    
    
    Losses
    
    
    ValueAs of December 31, 2006Agency Securities:Fixed-rate
    
    $
    329
    
    
    $
    24
    
    
    $
    
    
    
    $
    353ARMs
    
    
    5,160,179
    
    
    
    25,136
    
    
    
    8,209
    
    
    
    5,177,1065,160,508
    
    
    
    25,160
    
    
    
    8,209
    
    
    
    5,177,459Non-agency Securities
    
    
    25,292
    
    
    
    334
    
    
    
    6
    
    
    
    25,620$
    5,185,800
    
    
    $
    25,494
    
    
    $
    8,215
    
    
    $
    5,203,079As of December 31, 2005Agency Securities:Fixed-rate
    
    $
    440
    
    
    $
    36
    
    
    $
    
    
    
    $
    476ARMs
    
    
    4,261,285
    
    
    
    19,273
    
    
    
    14,898
    
    
    
    4,265,6604,261,725
    
    
    
    19,309
    
    
    
    14,898
    
    
    
    4,266,136Non-agency Securities
    
    
    33,987
    
    
    
    390
    
    
    
    17
    
    
    
    34,360$
    4,295,712
    
    
    $
    19,699
    
    
    $
    14,915
    
    
    $
    4,300,496
 20




---



##### 



Capstead Mortgage Corporation
  Gross
    
    
    GrossCost
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairBasis
    
    
    Gains
    
    
    Losses
    
    
    ValueAs 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
    
    
    $
    47,303As of December 31, 2005Collateral released from structured
financings:Agency Securities
    
    $
    23,194
    
    
    $
    635
    
    
    $
    
    
    
    $
    23,829Non-agency Securities
    
    
    35,237
    
    
    
    590
    
    
    
    9
    
    
    
    35,818Collateral for structured financings
    
    
    9,098
    
    
    
    
    
    
    
    
    
    
    
    9,098$
    67,529
    
    
    $
    1,225
    
    
    $
    9
    
    
    $
    68,745
 NOTE 10  INCOME TAXES
   Year Ended December 312006
    
    
    2005
    
    
    2004Income taxes computed at the federal statutory rate
on income from continuing operations
    
    $
    1,345
    
    
    $
    6,018
    
    
    $
    14,632Benefit of REIT status
    
    
    (1,205
    )
    
    
    (5,925
    )
    
    
    (14,526
    )Income taxes computed on income of taxable
REIT subsidiaries
    
    
    140
    
    
    
    93
    
    
    
    106Change in net deferred income tax assets
    
    
    (191
    )
    
    
    (74
    )
    
    
    (20
    )Other
    
    
    51
    
    
    
    (19
    )
    
    
    (84
    )Income tax provision of taxable REIT subsidiaries
    
    $
    
    
    
    $
    
    
    
    $
    2
  21




---



##### 



Capstead Mortgage Corporation
  December 312006
    
    
    2005Deferred income tax assets:Alternative minimum tax credit
    
    $
    1,921
    
    
    $
    1,921Capital loss carryforwards
    
    
    
    
    
    
    55Net operating loss carryforwards
    
    
    354
    
    
    
    411Other
    
    
    150
    
    
    
    2292,425
    
    
    
    2,616Deferred income tax liabilities
    
    
    
    
    
    
    Net deferred tax assets
    
    $
    2,425
    
    
    $
    2,616Valuation allowance
    
    $
    2,425
    
    
    $
    2,616
 NOTE 11  STOCKHOLDERS EQUITY
  Preferred
    
    Annual
    
    Conversion
    
    Redemption
    
    LiquidationSeries
    
    Dividend
    
    Rate*
    
    Price
    
    PreferenceA
    
    $
    1.60
    
    
    
    1.5512
    
    
    $
    16.40
    
    
    $
    16.40B
    
    
    1.26
    
    
    
    0.5980
    
    
    
    12.50
    
    
    
    11.38
 
 *
    
    Reflects the number of common shares to be
received for each preferred share converted. During 2004, 9,200
Series A shares were converted into 13,702 common shares.   22




---



##### 



Capstead Mortgage Corporation
  Year Ended December 312006
    
    
    2005
    
    
    2004Net income
    
    $
    3,843
    
    
    $
    57,192
    
    
    $
    41,805Other comprehensive income (loss):Amounts related to cash flow hedges:Reclassification adjustment for amounts
included in net income
    
    
    (55
    )
    
    
    (118
    )
    
    
    (162
    )Amounts related to discontinued operation
    
    
    
    
    
    
    521
    
    
    
    (288
    )Amounts related to available-for-sale securities:Change in net unrealized gains
    
    
    12,495
    
    
    
    (19,239
    )
    
    
    (4,473
    )Other comprehensive income (loss)
    
    
    12,440
    
    
    
    (18,836
    )
    
    
    (4,923
    )Comprehensive income
    
    $
    16,283
    
    
    $
    38,356
    
    
    $
    36,882
  NOTE 12  LONG-TERM INCENTIVE AND OTHER PLANS
   23




---



##### 



Capstead Mortgage Corporation
  Weighted AverageNumber of
    
    Grant DateShares
    
    Fair ValueStock awards outstanding as of December 31, 2005
    
    
    172,600
    
    
    $
    7.86Grants
    
    
    218,957
    
    
    
    8.06Forfeitures
    
    
    (20,800
    )
    
    
    7.82Vested
    
    
    (49,207
    )
    
    
    7.75Stock awards outstanding as of December 31, 2006
    
    
    321,550
    
    
    
    8.02
   WeightedNumber of
    
    AverageShares
    
    Exercise PriceOption awards outstanding as of December 31, 2005
    
    
    777,669
    
    
    $
    15.33Grants (average fair value: $0.78) (a)
    
    
    258,000
    
    
    
    7.43Forfeitures
    
    
    (91,269
    )
    
    
    9.37Expirations
    
    
    (76,348
    )
    
    
    22.86Exercises
    
    
    (12,500
    )
    
    
    7.82Option awards outstanding as of December 31, 2006
(445,927 shares exercisable at an average price of $17.99)
    
    
    855,552
    
    
    
    13.02
 
 (a)
    
    Option awards granted during 2006 were valued with average expected terms of four years,
volatility factors of 31%, dividend yields of 10% and risk-free rates of 4.91%.  24




---



##### 



Capstead Mortgage Corporation
  NOTE 13  NET INTEREST INCOME ANALYSIS (UNAUDITED)
 Mortgage securities and similar investments
 2006
    
    
    2005
    
    
    2004Average
    
    
    
    
    
    
    Average
    
    
    
    
    
    
    AverageEffective
    
    
    
    
    
    
    Effective
    
    
    
    
    
    
    EffectiveAmount
    
    
    Rate
    
    
    Amount
    
    
    Rate
    
    
    Amount
    
    
    RateInterest income
    
    $
    242,859
    
    
    
    4.94
    %
    
    $
    130,333
    
    
    
    3.68
    %
    
    $
    91,121
    
    
    
    3.28
    %Interest expense
    
    
    (228,379
    )
    
    
    4.92
    
    
    
    (105,937
    )
    
    
    3.17
    
    
    
    (44,939
    )
    
    
    1.72$
    14,480
    
    
    
    0.02
    
    
    $
    24,396
    
    
    
    0.51
    
    
    $
    46,182
    
    
    
    1.56
  Rate *
    
    
    Volume *
    
    
    Total *2006/2005Interest income
    
    $
    52,702
    
    
    $
    59,824
    
    
    $
    112,526Interest expense
    
    
    70,768
    
    
    
    51,674
    
    
    
    122,442$
    (18,066
    )
    
    $
    8,150
    
    
    $
    (9,916
    )2005/2004Interest income
    
    $
    12,016
    
    
    $
    27,196
    
    
    $
    39,212Interest expense
    
    
    45,101
    
    
    
    15,897
    
    
    
    60,998$
    (33,085
    )
    
    $
    11,299
    
    
    $
    (21,786
    )
 
 *
    
    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. NOTE 14  MARKET AND DIVIDEND INFORMATION (UNAUDITED)
  Year Ended December 31, 2006
    
    Year Ended December 31, 2005Sales Prices
    
    Dividends
    
    Sales Prices
    
    DividendsHigh
    
    Low
    
    Declared
    
    High
    
    Low
   
    DeclaredFirst quarter
    
    $
    7.66
    
    
    $
    6.30
    
    
    $
    0.02
    
    
    $
    10.40
    
    
    $
    8.26
    
    
    $
    0.18Second quarter
    
    
    8.10
    
    
    
    6.56
    
    
    
    0.02
    
    
    
    9.54
    
    
    
    7.10
    
    
    
    0.10Third quarter
    
    
    8.75
    
    
    
    6.77
    
    
    
    0.02
    
    
    
    8.95
    
    
    
    6.71
    
    
    
    0.02Fourth quarter
    
    
    8.70
    
    
    
    7.82
    
    
    
    0.02
    
    
    
    6.97
    
    
    
    5.42
    
    
    
    0.02
 25




---



##### 



Capstead Mortgage Corporation
 NOTE 15  QUARTERLY RESULTS (UNAUDITED)
  1st Quarter
    
    
    2nd Quarter
    
    
    3rd Quarter
    
    
    4th QuarterYear 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
    
    
    
    684Income (loss) from continuing operations
    
    
    2,711
    
    
    
    275
    
    
    
    (1,493
    )
    
    
    2,350Income from discontinued operation, net of taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income (loss)
    
    $
    2,711
    
    
    $
    275
    
    
    $
    (1,493
    )
    
    $
    2,350Basic and diluted loss per common share:Loss from continuing operations
    
    $
    (0.12
    )
    
    $
    (0.25
    )
    
    $
    (0.35
    )
    
    $
    (0.14
    )Income from discontinued operation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (0.12
    )
    
    $
    (0.25
    )
    
    $
    (0.35
    )
    
    $
    (0.14
    )Year Ended December 31, 2005Mortgage securities and similar investments:Interest income
    
    $
    28,523
    
    
    $
    30,589
    
    
    $
    32,826
    
    
    $
    38,395Interest expense
    
    
    (20,033
    )
    
    
    (23,794
    )
    
    
    (27,542
    )
    
    
    (34,568
    )8,490
    
    
    
    6,795
    
    
    
    5,284
    
    
    
    3,827Interest expense on unsecured borrowings
    
    
    
    
    
    
    
    
    
    
    (41
    )
    
    
    (918
    )Other revenue (expense)
    
    
    (1,334
    )
    
    
    (1,267
    )
    
    
    (1,054
    )
    
    
    (2,577
    )Equity in earnings (losses) of unconsolidated
affiliates
    
    
    
    
    
    
    
    
    
    
    (42
    )
    
    
    32Income from continuing operations
    
    
    7,156
    
    
    
    5,528
    
    
    
    4,147
    
    
    
    364Income from discontinued operation, net of taxes
    
    
    446
    
    
    
    462
    
    
    
    468
    
    
    
    38,621
    *Net income
    
    $
    7,602
    
    
    $
    5,990
    
    
    $
    4,615
    
    
    $
    38,985Basic and diluted earnings (loss) per common
share:Income (loss) from continuing operations
    
    $
    0.11
    
    
    $
    0.02
    
    
    $
    (0.05
    )
    
    $
    (0.24
    )Income from discontinued operation
    
    
    0.02
    
    
    
    0.03
    
    
    
    0.03
    
    
    
    2.04$
    0.13
    
    
    $
    0.05
    
    
    $
    (0.02
    )
    
    $
    1.80
 
 *
    
    In December 2005 the Company sold its real estate held for lease for a gain of $38.2
million, net of taxes. The gain on sale and related earnings of this operation have been
classified as a discontinued operation. 26




---



##### 



Capstead Mortgage Corporation
 Selected Financial Data  and  Managements Discussion and Analysis of Financial  Condition and Results of Operations
 27




---



##### 



Capstead Mortgage Corporation
 Selected Financial Data
 (In thousands, except per share amounts)
 Year Ended December 312006
    
    
    2005
    
    
    2004
    
    
    2003
    
    
    2002Selected statement of income and per share data:Mortgage securities and similar investments:Interest income
    
    $
    242,859
    
    
    $
    130,333
    
    
    $
    91,121
    
    
    $
    119,444
    
    
    $
    264,655Interest expense
    
    
    (228,379
    )
    
    
    (105,937
    )
    
    
    (44,939
    )
    
    
    (58,924
    )
    
    
    (164,994
    )14,480
    
    
    
    24,396
    
    
    
    46,182
    
    
    
    60,520
    
    
    
    99,661Gain on asset sales and redemptions of structured
financings
    
    
    
    
    
    
    156
    
    
    
    
    
    
    
    4,560
    
    
    
    4,725Interest expense on unsecured borrowings
    
    
    (7,142
    )
    
    
    (972
    )
    
    
    
    
    
    
    
    
    
    
    Other revenue (expense)
    
    
    (5,863
    )
    
    
    (6,375
    )
    
    
    (6,313
    )
    
    
    (6,414
    )
    
    
    (9,140
    )Equity in earnings (losses) of unconsolidated
affiliates
    
    
    2,368
    
    
    
    (10
    )
    
    
    
    
    
    
    
    
    
    
    Income from continuing operations
    
    
    3,843
    
    
    
    17,195
    
    
    
    39,869
    
    
    
    58,666
    
    
    
    95,246Income from discontinued operation, net of taxes
(a)
    
    
    
    
    
    
    39,997
    
    
    
    1,936
    
    
    
    1,993
    
    
    
    877Net income
    
    $
    3,843
    
    
    $
    57,192
    
    
    $
    41,805
    
    
    $
    60,659
    
    
    $
    96,123Net income available (loss attributable) to
common stockholders, after payment of
preferred share dividends
    
    $
    (16,413
    )
    
    $
    36,936
    
    
    $
    21,546
    
    
    $
    40,386
    
    
    $
    75,761Basic earnings (loss) per common share:Income (loss) from continuing operations
    
    $
    (0.87
    )
    
    $
    (0.16
    )
    
    $
    1.22
    
    
    $
    2.75
    
    
    $
    5.41Income from discontinued operation
    
    
    
    
    
    
    2.12
    
    
    
    0.12
    
    
    
    0.14
    
    
    
    0.06$
    (0.87
    )
    
    $
    1.96
    
    
    $
    1.34
    
    
    $
    2.89
    
    
    $
    5.47Diluted earnings (loss) per common share:Income (loss) from continuing operations
    
    $
    (0.87
    )
    
    $
    (0.16
    )
    
    $
    1.21
    
    
    $
    2.51
    
    
    $
    4.81Income from discontinued operation
    
    
    
    
    
    
    2.12
    
    
    
    0.12
    
    
    
    0.09
    
    
    
    0.04$
    (0.87
    )
    
    $
    1.96
    
    
    $
    1.33
    
    
    $
    2.60
    
    
    $
    4.85Regular cash dividends per common share
    
    $
    0.08
    
    
    $
    0.32
    
    
    $
    1.58
    
    
    $
    3.10
    
    
    $
    5.56Book value per common share
    
    
    8.13
    
    
    
    8.48
    
    
    
    7.91
    
    
    
    6.67
    
    
    
    8.23Average number of common shares outstanding:Basic
    
    
    18,902
    
    
    
    18,868
    
    
    
    16,100
    
    
    
    13,977
    
    
    
    13,858Diluted
    
    
    18,902
    
    
    
    18,868
    
    
    
    16,437
    
    
    
    23,295
    
    
    
    19,827Selected balance sheet data:Mortgage securities and similar investments
    
    $
    5,252,399
    
    
    $
    4,368,025
    
    
    $
    3,438,559
    
    
    $
    2,362,688
    
    
    $
    3,514,940Assets of discontinued operation (a)
    
    
    
    
    
    
    
    
    
    
    141,037
    
    
    
    150,317
    
    
    
    154,768Total assets
    
    
    5,348,002
    
    
    
    4,464,248
    
    
    
    3,687,982
    
    
    
    2,554,322
    
    
    
    3,766,928Repurchase arrangements and similar borrowings
    
    
    4,876,134
    
    
    
    4,023,686
    
    
    
    3,221,794
    
    
    
    2,141,985
    
    
    
    3,220,435Long-term investment capital: (b)Unsecured borrowings, net of related statutory
trusts accounted for as unconsolidated
affiliates
    
    
    100,000
    
    
    
    75,000
    
    
    
    
    
    
    
    
    
    
    
    Stockholders equity
    
    
    339,962
    
    
    
    344,849
    
    
    
    332,539
    
    
    
    277,038
    
    
    
    298,578
 
 NOTE:
    
    See Managements Discussion and Analysis of Financial Condition and Results of
Operations and Notes to Consolidated Financial Statements for discussion of changes to
the Companys operations that are expected to impact future operating results.(a)
    
    In December 2005 the Company sold its real estate held for lease for a gain of $38.2
million, net of taxes. The gain on sale and related earnings of this operation have been
classified as a discontinued operation.(b)
    
    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. 28




---



##### 



Capstead Mortgage Corporation
 Managements Discussion and Analysis of Financial  Condition and Results of Operations
 FINANCIAL CONDITION
 Overview
     29




---



##### 



Capstead Mortgage Corporation
   Risk Factors and Critical Accounting Policies
  Residential Mortgage Securities
   30




---



##### 



Capstead Mortgage Corporation
      Commercial Real Estate-related Assets
  31




---



##### 



Capstead Mortgage Corporation
    Book Value per Common Share
   32




---



##### 



Capstead Mortgage Corporation
  Utilization of Long-term Investment Capital and Potential Liquidity
   Related
    
    
    Capital
    
    
    PotentialInvestments(a)
    
    
    Borrowings
    
    
    Employed
    
    
    Liquidity (a)Residential mortgage securities
    
    $
    5,249,764
    
    
    $
    4,876,134
    
    
    $
    373,630
    
    
    $
    220,864Commercial real estate-related assets:Commercial loans
    
    
    2,635
    
    
    
    
    
    
    
    2,635
    
    
    
    Investment in Redtail Capital
    
    
    16,956
    
    
    
    
    
    
    
    16,956
    
    
    
    190$
    5,269,355
    
    
    $
    4,876,134
    
    
    
    393,221
    
    
    
    221,054Other assets, net of other liabilities
    
    
    
    
    
    
    
    
    
    
    47,126
    
    
    
    5,661Fourth quarter common dividend
    
    
    
    
    
    
    
    
    
    
    (385
    )
    
    
    (385
    )(b)$
    439,962
    
    
    $
    226,330Balances as of December 31, 2005
    
    $
    4,374,929
    
    
    $
    4,023,686
    
    
    $
    419,849
    
    
    $
    249,861
 
 (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 the fair value of related collateral as of the
indicated dates adjusted for other sources (uses) of liquidity such as cash and cash
equivalents, cash flow (requirements) distributions from Redtail Capital and dividends
payable.(b)
    
    The fourth quarter 2006 common dividend was paid January 22, 2007 to stockholders of record
as of December 29, 2006. 33




---



##### 



Capstead Mortgage Corporation
  Off-balance Sheet Arrangements and Contractual Obligations
  Payments Due by Period12 Months
    
    
    13  36
    
    
    
    37  60
    
    
    >ThanContractual Obligations
    
    Total
    
    
    or Less
    
    
    Months
    
    
    Months
    
    
    60 MonthsRepurchase arrangements
and similar borrowings
    
    $
    5,024,679
    
    
    $
    3,948,188
    
    
    $
    1,075,162
    
    
    $
    877
    
    
    $
    452Unsecured borrowings
    
    
    343,986
    
    
    
    8,382
    
    
    
    16,765
    
    
    
    16,765
    
    
    
    302,074Corporate office lease
    
    
    846
    
    
    
    282
    
    
    
    564
    
    
    
    
    
    
    
    $
    5,369,511
    
    
    $
    3,956,852
    
    
    $
    1,092,491
    
    
    $
    17,642
    
    
    $
    302,526
  Accounting for Acquisitions of Mortgage Securities Seller-financed using Repurchase Arrangements
  34




---



##### 



Capstead Mortgage Corporation
 Tax Considerations of Dividends Paid on Capstead Common and Preferred Shares
   Capital
    
    Ordinary
    
    Return ofDividends
    
    Gain *
    
    Income *
    
    Capital *2006:Common
    
    $
    0.08
    
    
    
    
    %
    
    
    
    %
    
    
    100.00
    %Preferred A
    
    
    1.60
    
    
    
    
    
    
    
    16.00
    
    
    
    84.00Preferred B
    
    
    1.26
    
    
    
    
    
    
    
    16.00
    
    
    
    84.002005:Common
    
    
    0.32
    
    
    
    
    
    
    
    100.00
    
    
    
    Preferred A
    
    
    1.60
    
    
    
    
    
    
    
    100.00
    
    
    
    Preferred B
    
    
    1.26
    
    
    
    
    
    
    
    100.00
    
    
    
    2004:Common
    
    
    1.58
    
    
    
    
    
    
    
    86.08
    
    
    
    13.92Preferred 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 2004 is available in the investor relations section of our website at
www.capstead.com. 35




---



##### 



Capstead Mortgage Corporation
 RESULTS OF OPERATIONS
  Year Ended December 312006
    
    
    2005
    
    
    2004Income statement data:Mortgage securities and similar investments:Agency Securities
    
    $
    13,702
    
    
    $
    22,001
    
    
    $
    40,824Non-agency Securities
    
    
    596
    
    
    
    1,503
    
    
    
    4,011CMBS and other commercial loans
    
    
    182
    
    
    
    546
    
    
    
    640Collateral for structured financings
    
    
    
    
    
    
    346
    
    
    
    70714,480
    
    
    
    24,396
    
    
    
    46,182Other revenue (expense):Other revenue
    
    
    591
    
    
    
    1,082
    
    
    
    813Interest on unsecured borrowings
    
    
    (7,142
    )
    
    
    (972
    )
    
    
    Other operating expense
    
    
    (6,454
    )
    
    
    (7,301
    )
    
    
    (7,126
    )Equity in earnings (losses) of unconsolidated affiliates
    
    
    2,368
    
    
    
    (10
    )
    
    
    Income from continuing operations
    
    
    3,843
    
    
    
    17,195
    
    
    
    39,869Income from discontinued operation, net of taxes
    
    
    
    
    
    
    39,997
    
    
    
    1,936Net income
    
    $
    3,843
    
    
    $
    57,192
    
    
    $
    41,805Net income available (loss attributable) to
common stockholders, after payment of
preferred share dividends
    
    $
    (16,413
    )
    
    $
    36,936
    
    
    $
    21,546Diluted earnings (loss) per common share:Income (loss) from continuing operations
    
    $
    (0.87
    )
    
    $
    (0.16
    )
    
    $
    1.21Income from discontinued operation
    
    
    
    
    
    
    2.12
    
    
    
    0.12$
    (0.87
    )
    
    $
    1.96
    
    
    $
    1.33Key portfolio statistics:Average yields:Agency Securities
    
    
    4.92
    %
    
    
    3.62
    %
    
    
    3.10
    %Non-agency Securities
    
    
    6.21
    
    
    
    5.09
    
    
    
    4.61CMBS and other commercial loans
    
    
    18.00
    
    
    
    4.27
    
    
    
    2.47Collateral for structured financings
    
    
    7.36
    
    
    
    5.76
    
    
    
    6.44Total average yields
    
    
    4.94
    
    
    
    3.68
    
    
    
    3.28Average rate of related borrowings
    
    
    4.92
    
    
    
    3.17
    
    
    
    1.72Average financing spread
    
    
    0.02
    
    
    
    0.51
    
    
    
    1.56Average portfolio balances:Agency Securities
    
    $
    4,850
    
    
    $
    3,387
    
    
    $
    2,476Non-agency Securities
    
    
    59
    
    
    
    80
    
    
    
    125CMBS and other commercial loans
    
    
    1
    
    
    
    48
    
    
    
    63Collateral for structured financings
    
    
    7
    
    
    
    23
    
    
    
    1054,917
    
    
    
    3,538
    
    
    
    2,769Related average borrowings
    
    
    4,579
    
    
    
    3,290
    
    
    
    2,570Average capital deployed
    
    $
    338
    
    
    $
    248
    
    
    $
    199Average portfolio runoff rate:Agency Securities
    
    
    30
    %
    
    
    34
    %
    
    
    28
    %Total
    
    
    30
    
    
    
    33
    
    
    
    30
 36




---



##### 



Capstead Mortgage Corporation
 2006 Compared to 2005
      37




---



##### 



Capstead Mortgage Corporation
 2005 Compared to 2004
       LIQUIDITY AND CAPITAL RESOURCES
  38




---



##### 



Capstead Mortgage Corporation
     39




---



##### 



Capstead Mortgage Corporation
   RISK FACTORS
 General Discussion of Effects of Interest Rate Changes
  Fully
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    MonthsNet
    
    
    Indexed
    
    
    Net
    
    
    Periodic
    
    
    Lifetime
    
    
    ToARM Type
    
    Basis *
    
    
    WAC
    
    
    WAC
    
    
    Margins
    
    
    Caps
    
    
    Caps
    
    
    RollCurrent-reset ARMs:Agency Securities:Fannie
Mae/Freddie Mac
    
    $
    2,904,415
    
    
    
    6.15
    %
    
    
    6.81
    %
    
    
    1.83
    %
    
    
    3.96
    %
    
    
    10.69
    %
    
    
    5.0Ginnie Mae
    
    
    755,058
    
    
    
    5.23
    
    
    
    6.54
    
    
    
    1.54
    
    
    
    1.00
    
    
    
    9.85
    
    
    
    5.9Non-agency Securities
    
    
    31,865
    
    
    
    6.99
    
    
    
    7.48
    
    
    
    2.11
    
    
    
    1.72
    
    
    
    11.31
    
    
    
    5.13,691,338
    
    
    
    5.97
    
    
    
    6.76
    
    
    
    1.78
    
    
    
    3.33
    
    
    
    10.52
    
    
    
    5.2Longer-to-reset ARMs:Agency Securities:Fannie Mae/Freddie Mac
    
    
    1,500,706
    
    
    
    6.12
    
    
    
    7.13
    
    
    
    1.80
    
    
    
    3.96
    
    
    
    11.96
    
    
    
    44.0$
    5,192,044
    
    
    
    6.01
    
    
    
    6.87
    
    
    
    1.78
    
    
    
    3.51
    
    
    
    10.94
    
    
    
    16.4
 
 *
    
    Basis represents the Companys investment before unrealized gains and losses. 40




---



##### 



Capstead Mortgage Corporation
     Interest Rate Sensitivity on Operating Results
  41




---



##### 



Capstead Mortgage Corporation
  30-day
    
    10-year U.S.LIBOR
    
    TreasuryRate
    
    Rate
    
    Immediate Change In:*One-month to one-year
    
    
    
    
    
    
    
    
    
    Down
    
    Down
    
    
    
    
    
    Up
    
    Upinterest rates
    
    
    
    
    
    
    
    
    
    
    1.00
    %
    
    
    1.00
    %
    
    Flat
    
    
    1.00
    %
    
    
    1.00
    %10-year U.S. Treasury rate
    
    
    
    
    
    
    
    
    
    Down
    
    
    
    
    
    Down
    
    
    
    
    
    Up1.00
    %
    
    Flat
    
    
    1.00
    %
    
    Flat
    
    
    1.00
    %Projected 12-month earnings change:December 31, 2006
    
    
    5.32
    %
    
    
    4.70
    %
    
    $
    11,900
    
    
    $
    14,300
    
    
    $
    (5,500
    )
    
    $
    (24,700
    )
    
    $
    (21,700
    )December 31, 2005
    
    
    4.39
    
    
    
    4.40
    
    
    
    12,400
    
    
    
    14,300
    
    
    
    (4,300
    )
    
    
    (21,000
    )
    
    
    (19,600
    )
 
 *
    
    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.  Risks Associated with Commercial Real Estate-related Assets
   42




---



##### 



Capstead Mortgage Corporation
       43




---



##### 



Capstead Mortgage Corporation
 Tax Status
    Investment Company Act of 1940
   44




---



##### 



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 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. 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.
 45




---



##### 



Capstead Mortgage Corporation
 FORWARD-LOOKING STATEMENTS
  46




---



##### 



Capstead Mortgage Corporation
 PERFORMANCE GRAPH
  
 Cumulative Total Stockholder Return as of December 312001
    
    2002
    
    2003
    
    2004
    
    2005
    
    2006Capstead
    
    $
    100.00
    
    
    $
    129.82
    
    
    $
    185.63
    
    
    $
    130.37
    
    
    $
    74.73
    
    
    $
    107.86S&P 500
    
    
    100.00
    
    
    
    77.91
    
    
    
    100.24
    
    
    
    111.14
    
    
    
    116.59
    
    
    
    134.99NAREIT Mortgage
    
    
    100.00
    
    
    
    114.23
    
    
    
    157.86
    
    
    
    170.36
    
    
    
    117.77
    
    
    
    127.69
 47




---



##### 



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
   48




---



##### 



Capstead Mortgage Corporation
 Report of Independent Registered Public Accounting Firm on
Audit of Managements Assessment of Internal Control Over Financial Reporting
 
       /s/ ERNST & YOUNG, LLP 
 49




---



##### 



Report of Independent Registered Public Accounting Firm on
Audit of the Consolidated Financial Statements
 
      /s/ ERNST & YOUNG, LLP 
 50