##### 



EXHIBIT 13
 CAPSTEAD MORTGAGE CORPORATION
 PORTIONS OF THE
 ANNUAL REPORT TO STOCKHOLDERS
 FOR THE YEAR ENDED DECEMBER 31, 2005




---



##### 



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
   3




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##### 



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, LLPDallas, TexasFebruary 24, 2006
 4




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##### 



Capstead Mortgage Corporation
 Report of Independent Registered Public Accounting Firm on
Audit of the Consolidated Financial Statements
 
     /s/ ERNST & YOUNG, LLPDallas, TexasFebruary 24, 2006
 5




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##### 



Capstead Mortgage Corporation
 Consolidated Statements of Income
 (In thousands, except per share amounts)
 Year Ended December 312005
    
    
    2004
    
    
    2003Mortgage securities and similar investments:Interest income
    
    $
    130,333
    
    
    $
    91,121
    
    
    $
    119,444Interest expense
    
    
    (105,937
    )
    
    
    (44,939
    )
    
    
    (58,924
    )24,396
    
    
    
    46,182
    
    
    
    60,520Other revenue (expense):Gain on asset sales and redemptions of structured financings
    
    
    156
    
    
    
    
    
    
    
    4,560Other revenue
    
    
    926
    
    
    
    813
    
    
    
    1,784Interest expense on unsecured borrowings
    
    
    (972
    )
    
    
    
    
    
    
    Other operating expense
    
    
    (7,301
    )
    
    
    (7,126
    )
    
    
    (8,198
    )(7,191
    )
    
    
    (6,313
    )
    
    
    (1,854
    )Income before equity in loss of unconsolidated affiliates
and discontinued operation
    
    
    17,205
    
    
    
    39,869
    
    
    
    58,666Equity in loss of unconsolidated affiliates
    
    
    (10
    )
    
    
    
    
    
    
    Income from continuing operations
    
    
    17,195
    
    
    
    39,869
    
    
    
    58,666Income from discontinued operation, net of taxes
    
    
    39,997
    
    
    
    1,936
    
    
    
    1,993Net income
    
    $
    57,192
    
    
    $
    41,805
    
    
    $
    60,659Net income available to common stockholders:Net income
    
    $
    57,192
    
    
    $
    41,805
    
    
    $
    60,659Less cash dividends paid on preferred shares
    
    
    (20,256
    )
    
    
    (20,259
    )
    
    
    (20,273
    )$
    36,936
    
    
    $
    21,546
    
    
    $
    40,386Basic earnings per common share:Income (loss) from continuing operations
    
    $
    (0.16
    )
    
    $
    1.22
    
    
    $
    2.75Income from discontinued operation
    
    
    2.12
    
    
    
    0.12
    
    
    
    0.14$
    1.96
    
    
    $
    1.34
    
    
    $
    2.89Diluted earnings per common share:Income (loss) from continuing operations
    
    $
    (0.16
    )
    
    $
    1.21
    
    
    $
    2.51Income from discontinued operation
    
    
    2.12
    
    
    
    0.12
    
    
    
    0.09$
    1.96
    
    
    $
    1.33
    
    
    $
    2.60
 See accompanying notes to consolidated financial statements.
 6




---



##### 



Capstead Mortgage Corporation
 Consolidated Balance Sheets
 (In thousands, except per share amounts)
 December 312005
    
    
    2004Assets:Mortgage securities and similar investments
($4.2 billion pledged under repurchase arrangements)
    
    $
    4,368,025
    
    
    $
    3,438,559Assets of discontinued operation (real estate held for lease)
    
    
    
    
    
    
    141,037Investments in unconsolidated affiliates
    
    
    9,246
    
    
    
    Receivables and other assets
    
    
    53,040
    
    
    
    35,356Cash and cash equivalents
    
    
    33,937
    
    
    
    73,030$
    4,464,248
    
    
    $
    3,687,982Liabilities:Repurchase arrangements and similar borrowings
    
    $
    4,023,686
    
    
    $
    3,221,794Unsecured borrowings
    
    
    77,321
    
    
    
    Liabilities of discontinued operation
    
    
    2,884
    
    
    
    120,116Common stock dividend payable
    
    
    381
    
    
    
    4,151Accounts payable and accrued expenses
    
    
    15,127
    
    
    
    9,3824,119,399
    
    
    
    3,355,443Stockholders 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, 2005 and December 31, 2004
($3,317 aggregate liquidation preference)
    
    
    2,827
    
    
    
    2,827$1.26 Cumulative Convertible Preferred Stock, Series B,
15,819 shares issued and outstanding at
December 31, 2005 and December 31, 2004
($180,025 aggregate liquidation preference)
    
    
    176,705
    
    
    
    176,705Common stock  $0.01 par value; 100,000 shares authorized;
19,043 and 18,867 shares issued and outstanding at
December 31, 2005 and December 31, 2004, respectively
    
    
    191
    
    
    
    189Paid-in capital
    
    
    512,933
    
    
    
    516,704Accumulated deficit
    
    
    (352,803
    )
    
    
    (387,718
    )Accumulated other comprehensive income
    
    
    4,996
    
    
    
    23,832344,849
    
    
    
    332,539$
    4,464,248
    
    
    $
    3,687,982
 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, 2003
    
    $
    179,766
    
    
    $
    140
    
    
    $
    458,919
    
    
    $
    (387,718
    )
    
    $
    47,471
    
    
    $
    298,578Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    60,659
    
    
    
    
    
    
    
    60,659Other comprehensive loss:Amounts related to cash flow
hedges, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (371
    )
    
    
    (371
    )Change in unrealized gain on
mortgage securities, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (18,345
    )
    
    
    (18,345
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    41,943Cash dividends:Common  $3.10 per share
    
    
    
    
    
    
    
    
    
    
    (3,018
    )
    
    
    (40,386
    )
    
    
    
    
    
    
    (43,404
    )Preferred
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (20,273
    )
    
    
    
    
    
    
    (20,273
    )Conversion of preferred stock
    
    
    (103
    )
    
    
    
    
    
    
    103
    
    
    
    
    
    
    
    
    
    
    
    Additions to capital
    
    
    
    
    
    
    
    
    
    
    194
    
    
    
    
    
    
    
    
    
    
    
    194Balance at December 31, 2003
    
    
    179,663
    
    
    
    140
    
    
    
    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
    
    
    179,532
    
    
    
    189
    
    
    
    516,704
    
    
    
    (387,718
    )
    
    
    23,832
    
    
    
    332,539Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    57,192
    
    
    
    
    
    
    
    57,192Other comprehensive 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
    
    $
    179,532
    
    
    $
    191
    
    
    $
    512,933
    
    
    $
    (352,803
    )
    
    $
    4,996
    
    
    $
    344,849
 See accompanying notes to consolidated financial statements.
 8




---



##### 



Capstead Mortgage Corporation
 Consolidated Statements of Cash Flows
 (In thousands)
 Year Ended December 312005
    
    
    2004
    
    
    2003Operating activities:Net income
    
    $
    57,192
    
    
    $
    41,805
    
    
    $
    60,659Noncash items:Amortization of investment premiums
    
    
    21,813
    
    
    
    14,961
    
    
    
    11,088Depreciation and other amortization
    
    
    368
    
    
    
    314
    
    
    
    840Undistributed earnings of unconsolidated affiliates
    
    
    18
    
    
    
    
    
    
    
    Gain on asset sales and redemptions of structured financings
    
    
    (156
    )
    
    
    
    
    
    
    (4,560
    )Gain on sale of discontinued operation (real estate held for lease)
    
    
    (38,196
    )
    
    
    
    
    
    
    Change in incentive fee payable to former affiliate
    
    
    
    
    
    
    
    
    
    
    (4,982
    )Net change in receivables, other assets, accounts payable and
accrued expenses
    
    
    (3,749
    )
    
    
    (308
    )
    
    
    15,295Net cash provided by operating activities of continuing operations
    
    
    37,290
    
    
    
    56,772
    
    
    
    78,340Net cash provided by operating activities of discontinued operation
    
    
    3,104
    
    
    
    2,900
    
    
    
    4,699Net cash provided by operating activities
    
    
    40,394
    
    
    
    59,672
    
    
    
    83,039Investing activities:Purchases of mortgage securities and similar investments
    
    
    (2,474,812
    )
    
    
    (2,095,002
    )
    
    
    (518,090
    )Principal collections on mortgage securities and similar investments
    
    
    1,494,220
    
    
    
    991,020
    
    
    
    1,515,271Proceeds from asset sales
    
    
    
    
    
    
    
    
    
    
    125,020Investments in unconsolidated affiliates:Investment in statutory trusts formed to issue other borrowings
    
    
    (2,321
    )
    
    
    
    
    
    
    Investment in commercial real estate loan limited partnership
    
    
    (6,943
    )
    
    
    
    
    
    
    Net cash (used in) provided by investing activities of continuing
operations
    
    
    (989,856
    )
    
    
    (1,103,982
    )
    
    
    1,122,201Net cash provided by investing activities of discontinued operation
including net proceeds from its sale
    
    
    56,759
    
    
    
    6,112
    
    
    
    Net cash (used in) provided by investing activities
    
    
    (933,097
    )
    
    
    (1,097,870
    )
    
    
    1,122,201Financing activities:Net increase (decrease) in repurchase arrangements and similar
borrowings
    
    
    802,867
    
    
    
    1,081,274
    
    
    
    (1,076,343
    )Unsecured borrowings, net of issue costs
    
    
    75,038
    
    
    
    
    
    
    
    Release of restricted cash
    
    
    5,996
    
    
    
    
    
    
    
    Capital stock transactions
    
    
    24
    
    
    
    64,521
    
    
    
    67Dividends paid
    
    
    (30,089
    )
    
    
    (50,702
    )
    
    
    (171,433
    )Net cash provided by (used in) financing activities of continuing
operations
    
    
    853,836
    
    
    
    1,095,093
    
    
    
    (1,247,709
    )Net cash used in financing activities of discontinued operation
    
    
    (226
    )
    
    
    (205
    )
    
    
    (194
    )Net cash provided by (used in) financing activities
    
    
    853,610
    
    
    
    1,094,888
    
    
    
    (1,247,903
    )Net change in cash and cash equivalents
    
    
    (39,093
    )
    
    
    56,690
    
    
    
    (42,663
    )Cash and cash equivalents at beginning of year
    
    
    73,030
    
    
    
    16,340
    
    
    
    59,003Cash and cash equivalents at end of year
    
    $
    33,937
    
    
    $
    73,030
    
    
    $
    16,340
 See accompanying notes to consolidated financial statements.
 9




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##### 



Capstead Mortgage Corporation
 Notes to Consolidated Financial Statements
 December 31, 2005
 NOTE 1 3⁄4 BUSINESS
  NOTE 2 3⁄4 ACCOUNTING POLICIES
 Basis of Presentation
   Mortgage securities and similar investments
 10




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##### 



Capstead Mortgage Corporation
 Use of Estimates
  Accumulated other comprehensive income Stockholders equity
 Cash and Cash Equivalents
 Cash and cash equivalents
 Derivative Financial Instruments
  Other revenue (expense) Interest income Interest income
 11




---



##### 



Capstead Mortgage Corporation
 Financial Assets
  Interest income Other revenue (expense) Other revenue (expense)
 Borrowings
 Receivables and other assets Interest expense
 Income Taxes
   12




---



##### 



Capstead Mortgage Corporation
 Incentive Compensation, Including 2003 Payments to a Former Affiliate
 Stockholders Equity
 Other operating expense
 Stock-Based Compensation
 Other operating expense
  13




---



##### 



Capstead Mortgage Corporation
 NOTE 3 3⁄4 EARNINGS PER COMMON SHARE
 Income from continuing operations Income from discontinued operation
 Year Ended December 312005
    
    
    2004
    
    
    2003Numerators for basic earnings per common share:Income from continuing operations
    
    $
    17,195
    
    
    $
    39,869
    
    
    $
    58,666Less Series A and B preferred share dividends
    
    
    (20,256
    )
    
    
    (20,259
    )
    
    
    (20,273
    )Income from continuing operations available (loss attributable)
to common stockholders
    
    
    (3,061
    )
    
    
    19,610
    
    
    
    38,393Income from discontinued operation
    
    
    39,997
    
    
    
    1,936
    
    
    
    1,993$
    36,936
    
    
    $
    21,546
    
    
    $
    40,386Weighted average common shares outstanding
    
    
    18,868
    
    
    
    16,100
    
    
    
    13,977Basic earnings per common share:Income (loss) from continuing operations
    
    $
    (0.16
    )
    
    $
    1.22
    
    
    $
    2.75Income from discontinued operation
    
    
    2.12
    
    
    
    0.12
    
    
    
    0.14$
    1.96
    
    
    $
    1.34
    
    
    $
    2.89Numerators for diluted earnings per common share:Income from continuing operations
    
    $
    17,195
    
    
    $
    39,869
    
    
    $
    58,666Less dividends on antidilutive convertible preferred shares
    
    
    (20,256
    )
    
    
    (19,932
    )
    
    
    Income from continuing operations available (loss attributable)
to common stockholders
    
    
    (3,061
    )
    
    
    19,937
    
    
    
    58,666Income from discontinued operation
    
    
    39,997
    
    
    
    1,936
    
    
    
    1,993$
    36,936
    
    
    $
    21,873
    
    
    $
    60,659Denominator for diluted earnings per common share:Weighted average common shares outstanding
    
    
    18,868
    
    
    
    16,100
    
    
    
    13,977Net effect of dilutive stock options
    
    
    
    
    
    
    29
    
    
    
    35Net effect of dilutive convertible preferred shares
    
    
    
    
    
    
    308
    
    
    
    9,28318,868
    
    
    
    16,437
    
    
    
    23,295Diluted earnings per common share:Income (loss) from continuing operations
    
    $
    (0.16
    )
    
    $
    1.21
    
    
    $
    2.51Income from discontinued operation
    
    
    2.12
    
    
    
    0.12
    
    
    
    0.09$
    1.96
    
    
    $
    1.33
    
    
    $
    2.60Antidilutive securities excluded from the calculation
of diluted earnings per common share:Nonvested stock grants and shares issuable under stock
options
    
    
    950
    
    
    
    275
    
    
    
    392Series A preferred shares
    
    
    202
    
    
    
    
    
    
    
    Series B preferred shares
    
    
    15,819
    
    
    
    15,819
    
    
    
    
 14




---



##### 



Capstead Mortgage Corporation
 NOTE 4 3⁄4 MORTGAGE SECURITIES AND SIMILAR INVESTMENTS
 Mortgage securities and similar investments
 Average
    
    
    AveragePrincipal
    
    
    Investment
    
    
    
    
    
    
    Carrying
    
    
    Coupon
    
    
    EffectiveBalance
    
    
    Premiums
    
    
    Basis
    
    
    Amount(a)
    
    
    Rate(b)
    
    
    Rate(b)December 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
    
    
    
    3.68December 31, 2004Agency Securities:Fannie Mae/Freddie Mac:Fixed-rate
    
    $
    35,538
    
    
    $
    146
    
    
    $
    35,684
    
    
    $
    35,739
    
    
    
    6.63
    %
    
    
    6.13
    %ARMs
    
    
    2,116,454
    
    
    
    39,572
    
    
    
    2,156,026
    
    
    
    2,170,766
    
    
    
    3.96
    
    
    
    3.01Ginnie Mae ARMs
    
    
    1,017,517
    
    
    
    7,583
    
    
    
    1,025,100
    
    
    
    1,033,506
    
    
    
    3.87
    
    
    
    3.153,169,509
    
    
    
    47,301
    
    
    
    3,216,810
    
    
    
    3,240,011
    
    
    
    3.96
    
    
    
    3.10Non-agency Securities:Fixed-rate
    
    
    34,338
    
    
    
    24
    
    
    
    34,362
    
    
    
    34,415
    
    
    
    6.78
    
    
    
    6.20ARMs
    
    
    55,615
    
    
    
    646
    
    
    
    56,261
    
    
    
    56,739
    
    
    
    4.12
    
    
    
    3.2489,953
    
    
    
    670
    
    
    
    90,623
    
    
    
    91,154
    
    
    
    5.14
    
    
    
    4.61CMBS  adjustable-rate
    
    
    51,159
    
    
    
    10
    
    
    
    51,169
    
    
    
    51,207
    
    
    
    3.44
    
    
    
    2.47Collateral for structured
financings
    
    
    54,739
    
    
    
    1,195
    
    
    
    55,934
    
    
    
    56,187
    
    
    
    8.63
    
    
    
    6.44$
    3,365,360
    
    
    $
    49,176
    
    
    $
    3,414,536
    
    
    $
    3,438,559
    
    
    
    4.06
    
    
    
    3.28
 
 (a)
    
    Includes mark-to-market for securities classified as available-for-sale, if applicable
(see NOTE 9).(b)
    
    Average Coupon Rate is presented net of servicing and other fees as of the indicated balance
sheet date. Average Effective Rate 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.  15




---



##### 



Capstead Mortgage Corporation
   NOTE 5 3⁄4 INVESTMENTS IN UNCONSOLIDATED AFFILIATES
   16




---



##### 



Capstead Mortgage Corporation
   NOTE 6 3⁄4 SALE OF DISCONTINUED OPERATION (REAL ESTATE HELD FOR LEASE)
  NOTE 7 3⁄4 REPURCHASE ARRANGEMENTS
AND SIMILAR BORROWINGS
 Mortgage securities and similar investments
 17




---



##### 



Capstead Mortgage Corporation
  December 31, 2005
    
    
    December 31, 2004Borrowings
    
    
    Average
    
    
    Borrowings
    
    
    AverageOutstanding
    
    
    Rate
    
    
    Outstanding
    
    
    RateBorrowings with maturities of 30 days or less:Agency Securities
    
    $
    3,133,090
    
    
    
    4.23
    %
    
    $
    2,340,755
    
    
    
    2.28
    %Non-agency Securities
    
    
    63,734
    
    
    
    4.88
    
    
    
    71,140
    
    
    
    2.76CMBS
    
    
    
    
    
    
    
    
    
    
    48,416
    
    
    
    2.543,196,824
    
    
    
    4.24
    
    
    
    2,460,311
    
    
    
    2.30Borrowings with maturities greater than 30 days:Agency Securities (31 to 90 days)
    
    
    25,000
    
    
    
    3.25
    
    
    
    54,021
    
    
    
    1.98Agency Securities (91 to 360 days)
    
    
    331,907
    
    
    
    2.79
    
    
    
    204,983
    
    
    
    2.19Agency Securities (greater than 360 days)
    
    
    460,857
    
    
    
    4.50
    
    
    
    446,744
    
    
    
    2.61817,764
    
    
    
    3.77
    
    
    
    705,748
    
    
    
    2.44Collateral for structured financings
    
    
    9,098
    
    
    
    7.49
    
    
    
    55,735
    
    
    
    5.96$
    4,023,686
    
    
    
    4.15
    
    
    $
    3,221,794
    
    
    
    2.39
 Repurchase
arrangements and similar borrowings
 NOTE 8 3⁄4 UNSECURED BORROWINGS
 Unsecured borrowings
 December 31, 2005Borrowings
    
    
    AverageOutstanding
    
    
    RateJunior subordinated notes:Capstead Mortgage Trust I
    
    $
    36,083
    
    
    
    8.31
    %Capstead Mortgage Trust II
    
    
    41,238
    
    
    
    8.45$
    77,321
    
    
    
    8.39
  18




---



##### 



Capstead Mortgage Corporation
 Receivables
and other assets Unsecured borrowings
 NOTE 9 3⁄4 DISCLOSURES REGARDING FAIR VALUES
OF FINANCIAL INSTRUMENTS
 Cash and cash equivalents Mortgage
securities and similar investments Unsecured borrowings
 December 31, 2005
    
    
    December 31, 2004Carrying
    
    
    Fair
    
    
    Carrying
    
    
    FairAmount
    
    
    Value
    
    
    Amount
    
    
    ValueRepurchase arrangements based on:30-day LIBOR
    
    $
    3,102,114
    
    
    $
    3,102,114
    
    
    $
    2,460,311
    
    
    $
    2,460,311Greater than 30-day LIBOR
    
    
    912,474
    
    
    
    908,320
    
    
    
    705,748
    
    
    
    701,408Structured financings
    
    
    9,098
    
    
    
    9,098
    
    
    
    55,735
    
    
    
    56,879Unsecured borrowings
    
    
    77,321
    
    
    
    77,670
    
    
    
    
    
    
    
    
  December 31, 2005
    
    
    December 31, 2004Fair
    
    
    Unrealized
    
    
    Fair
    
    
    UnrealizedValue
    
    
    Loss
    
    
    Value
    
    
    LossSecurities in unrealized loss position:One year or greater
    
    $
    472,584
    
    
    $
    6,313
    
    
    $
    84,437
    
    
    $
    492Less than one year
    
    
    1,431,465
    
    
    
    8,611
    
    
    
    775,143
    
    
    
    3,063$
    1,904,049
    
    
    $
    14,924
    
    
    $
    859,580
    
    
    $
    3,555
 19




---



##### 



Capstead Mortgage Corporation
  Gross
    
    
    GrossCost
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairBasis
    
    
    Gains
    
    
    Losses
    
    
    ValueAs 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
    
    
    $
    4,300,496As of December 31, 2004Agency Securities:Fixed-rate
    
    $
    606
    
    
    $
    55
    
    
    $
    
    
    
    $
    661ARMs
    
    
    3,181,126
    
    
    
    26,570
    
    
    
    3,424
    
    
    
    3,204,2723,181,732
    
    
    
    26,625
    
    
    
    3,424
    
    
    
    3,204,933Non-agency Securities
    
    
    41,166
    
    
    
    564
    
    
    
    33
    
    
    
    41,697CMBS
    
    
    51,169
    
    
    
    39
    
    
    
    1
    
    
    
    51,207Collateral for structured financings
    
    
    12,214
    
    
    
    253
    
    
    
    
    
    
    
    12,467$
    3,286,281
    
    
    $
    27,481
    
    
    $
    3,458
    
    
    $
    3,310,304
  Gross
    
    
    GrossCost
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairBasis
    
    
    Gains
    
    
    Losses
    
    
    ValueAs of December 31, 2005Collateral released from structured
financings:Agency Securities
    
    $
    23,194
    
    
    $
    636
    
    
    $
    
    
    
    $
    23,830Non-agency Securities
    
    
    35,237
    
    
    
    590
    
    
    
    9
    
    
    
    35,818Collateral for structured financings
    
    
    9,098
    
    
    
    
    
    
    
    
    
    
    
    9,098$
    67,529
    
    
    $
    1,226
    
    
    $
    9
    
    
    $
    68,746As of December 31, 2004Collateral released from structured
financings:Agency Securities
    
    $
    35,078
    
    
    $
    1,723
    
    
    $
    
    
    
    $
    36,801Non-agency Securities
    
    
    49,457
    
    
    
    1,345
    
    
    
    97
    
    
    
    50,705Collateral for structured financings
    
    
    43,720
    
    
    
    84
    
    
    
    
    
    
    
    43,804$
    128,255
    
    
    $
    3,152
    
    
    $
    97
    
    
    $
    131,310
  20




---



##### 



Capstead Mortgage Corporation
 NOTE 10 3⁄4 INCOME TAXES
   Year Ended December 312005
    
    
    2004
    
    
    2003Income taxes computed at the federal statutory rate
on income from continuing operations
    
    $
    6,018
    
    
    $
    14,632
    
    
    $
    21,230Capital gain generated by Capstead REIT
    
    
    
    
    
    
    
    
    
    
    (946
    )Benefit of REIT status
    
    
    (5,925
    )
    
    
    (14,526
    )
    
    
    (19,203
    )Income taxes computed on income of taxable
REIT subsidiaries
    
    
    93
    
    
    
    106
    
    
    
    1,081Change in net deferred income tax assets
    
    
    (74
    )
    
    
    (20
    )
    
    
    (1,336
    )Other
    
    
    (19
    )
    
    
    (84
    )
    
    
    267Income tax provision of taxable REIT subsidiaries
    
    $
    
    
    
    $
    2
    
    
    $
    12
  December 312005
    
    
    2004Deferred income tax assets:Alternative minimum tax credit
    
    $
    1,921
    
    
    $
    1,921Capital loss carryforwards
    
    
    55
    
    
    
    11Net operating loss carryforwards
    
    
    411
    
    
    
    466Other
    
    
    229
    
    
    
    3392,616
    
    
    
    2,737Deferred income tax liabilities
    
    
    
    
    
    
    (47
    )Net deferred tax assets
    
    $
    2,616
    
    
    $
    2,690Valuation allowance
    
    $
    2,616
    
    
    $
    2,690
 21




---



##### 



Capstead Mortgage Corporation
 NOTE 11 3⁄4 STOCKHOLDERS EQUITY
  Preferred
    
    Annual
    
    
    Conversion
    
    
    Redemption
    
    
    LiquidationSeries
    
    Dividend
    
    
    Rate*
    
    
    Price
    
    
    PreferenceA
    
    $
    1.60
    
    
    
    1.5351
    
    
    $
    16.40
    
    
    $
    16.40B
    
    
    1.26
    
    
    
    0.5918
    
    
    
    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. During
2003, 7,300 Series A shares and 100 Series B shares were
converted into 10,651 and 56 common shares, respectively.   Year Ended December 312005
    
    
    2004
    
    
    2003Net income
    
    $
    57,192
    
    
    $
    41,805
    
    
    $
    60,659Other comprehensive income (loss):Amounts related to cash flow hedges:Reclassification adjustment for amounts
included in net income
    
    
    (118
    )
    
    
    (162
    )
    
    
    (101
    )Amounts related to discontinued operation
    
    
    521
    
    
    
    (288
    )
    
    
    (270
    )Amounts related to available-for-sale securities:Change in unrealized gain
    
    
    (19,239
    )
    
    
    (4,473
    )
    
    
    (16,319
    )Reclassification adjustment for amounts
included in net income
    
    
    
    
    
    
    
    
    
    
    (2,026
    )Other comprehensive loss
    
    
    (18,836
    )
    
    
    (4,923
    )
    
    
    (18,716
    )Comprehensive income
    
    $
    38,356
    
    
    $
    36,882
    
    
    $
    41,943
 22




---



##### 



Capstead Mortgage Corporation
  NOTE 12 3⁄4 LONG-TERM INCENTIVE AND OTHER PLANS
     23




---



##### 



Capstead Mortgage Corporation
  Stock Option Activity for the Three Years ended December 31, 2005
 Number of
    
    
    Weighted AverageShares
    
    
    Exercise PriceAs of January 1, 2003 (255,685 exercisable)
    
    
    300,358
    
    
    $
    33.89DER grants (average fair value: $19.75 per share)
    
    
    2,870
    
    
    
    Exercises
    
    
    (70,042
    )
    
    
    5.36Cancellations *
    
    
    (308,543
    )
    
    
    33.51Grants in connection with recapitalization *
    
    
    473,051
    
    
    
    21.43As of December 31, 2003 (all exercisable)
    
    
    397,694
    
    
    
    24.15DER grants (average fair value: $16.78 per share)
    
    
    3,744
    
    
    
    Ordinary grants (average fair value: $0.58 per share)
    
    
    10,000
    
    
    
    14.41Exercises
    
    
    (1,336
    )
    
    
    9.59Cancellations
    
    
    (62,433
    )
    
    
    19.17As of December 31, 2004 (all exercisable)
    
    
    347,669
    
    
    
    24.57Ordinary grants (average fair value: $0.61 per share)
    
    
    430,000
    
    
    
    7.85As of December 31, 2005 (419,782 exercisable)
    
    
    777,669
    
    
    
    15.33
 
 *
    
    In January 2003 a significant amount of capital was returned to the common
stockholders via a special dividend distribution resulting in a recapitalization
of the Company. Accordingly, all existing options were cancelled and replaced
with new option grants for an increased number of shares at a reduced exercise
price that retained the same vesting and expiration characteristics as the
cancelled grants such that each optionholders economic position remained
unchanged subsequent to the recapitalization. The new grants are accounted for as
non-compensatory. Stock Option Grants as of December 31, 2005
 Outstanding
    
    
    ExercisableWeighted
    
    
    
    
    
    
    
    
    
    
    WeightedAverage
    
    
    Remaining
    
    
    
    
    
    
    AverageExercise Price Group
    
    Shares
    
    
    Exercise Price
    
    
    Life (Years)
    
    
    Shares
    
    
    Exercise PriceLess than $10
    
    
    456,864
    
    
    $
    7.62
    
    
    
    9
    
    
    
    96,864
    
    
    $
    6.87Greater than $10
but less than $15
    
    
    55,234
    
    
    
    13.58
    
    
    
    6
    
    
    
    55,234
    
    
    
    13.58Greater than $15
    
    
    265,571
    
    
    
    28.95
    
    
    
    1
    
    
    
    267,684
    
    
    
    29.01777,669
    
    
    
    15.33
    
    
    
    6
    
    
    
    419,782
    
    
    
    21.87
 
 *
    
    Exercise prices for option grants outstanding ranged from $3.52 to $35.37 as of
December 31, 2005.  24




---



##### 



Capstead Mortgage Corporation
 NOTE 13 3⁄4 NET INTEREST INCOME ANALYSIS (UNAUDITED)
  2005
    
    
    2004
    
    
    2003Average
    
    
    
    
    
    
    Average
    
    
    
    
    
    
    AverageEffective
    
    
    
    
    
    
    Effective
    
    
    
    
    
    
    EffectiveAmount
    
    
    Rate
    
    
    Amount
    
    
    Rate
    
    
    Amount
    
    
    RateInterest income
    
    $
    130,333
    
    
    
    3.68
    %
    
    $
    91,121
    
    
    
    3.28
    %
    
    $
    119,444
    
    
    
    4.42
    %Interest expense
    
    
    (105,937
    )
    
    
    3.17
    
    
    
    (44,939
    )
    
    
    1.72
    
    
    
    (58,924
    )
    
    
    2.30$
    24,396
    
    
    
    0.51
    
    
    $
    46,182
    
    
    
    1.56
    
    
    $
    60,520
    
    
    
    2.12
  Rate *
    
    
    Volume *
    
    
    Total *2005/2004Total interest income
    
    $
    12,016
    
    
    $
    27,196
    
    
    $
    39,212Total interest expense
    
    
    45,101
    
    
    
    15,897
    
    
    
    60,998$
    (33,085
    )
    
    $
    11,299
    
    
    $
    (21,786
    )2004/2003Total interest income
    
    $
    (18,302
    )
    
    $
    (10,021
    )
    
    $
    (28,323
    )Total interest expense
    
    
    4,913
    
    
    
    (18,898
    )
    
    
    (13,985
    )$
    (23,215
    )
    
    $
    8,877
    
    
    $
    (14,338
    )
 
 *
    
    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 3⁄4 MARKET AND DIVIDEND INFORMATION (UNAUDITED)
  Year Ended December 31, 2005
    
    
    Year Ended December 31, 2004Sales Prices
    
    
    Dividends
    
    
    Sales Prices
    
    
    DividendsHigh
    
    
    Low
    
    
    Declared
    
    
    High
    
    
    Low
    
    
    DeclaredFirst quarter
    
    $
    10.40
    
    
    $
    8.26
    
    
    $
    0.18
    
    
    $
    18.75
    
    
    $
    15.51
    
    
    $
    0.53Second quarter
    
    
    9.54
    
    
    
    7.10
    
    
    
    0.10
    
    
    
    18.10
    
    
    
    11.25
    
    
    
    0.50Third quarter
    
    
    8.95
    
    
    
    6.71
    
    
    
    0.02
    
    
    
    14.85
    
    
    
    12.18
    
    
    
    0.33Fourth quarter
    
    
    6.97
    
    
    
    5.42
    
    
    
    0.02
    
    
    
    12.64
    
    
    
    10.34
    
    
    
    0.22
 25




---



##### 



Capstead Mortgage Corporation
 NOTE 15 3⁄4 QUARTERLY RESULTS (UNAUDITED)
  1stQuarter
    
    

2ndQuarter
    
    

3rdQuarter
    
    

4thQuarterYear 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
    
    
    
    3,827Other revenue (expense)
    
    
    (1,334
    )
    
    
    (1,267
    )
    
    
    (1,095
    )
    
    
    (3,495
    )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 earnings 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
    )
    
    $
    1.80Diluted earnings 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
    )
    
    $
    1.80Year Ended December 31, 2004Mortgage securities and similar investments:Interest income
    
    $
    21,943
    
    
    $
    21,145
    
    
    $
    21,688
    
    
    $
    26,345Interest expense
    
    
    (8,170
    )
    
    
    (8,693
    )
    
    
    (11,326
    )
    
    
    (16,750
    )13,773
    
    
    
    12,452
    
    
    
    10,362
    
    
    
    9,595Other revenue (expense)
    
    
    (1,932
    )
    
    
    (1,083
    )
    
    
    (1,376
    )
    
    
    (1,922
    )Income from continuing operations
    
    
    11,841
    
    
    
    11,369
    
    
    
    8,986
    
    
    
    7,673Income from discontinued operation
    
    
    513
    
    
    
    446
    
    
    
    501
    
    
    
    476Net income
    
    $
    12,354
    
    
    $
    11,815
    
    
    $
    9,487
    
    
    $
    8,149Basic earnings per common share:Income from continuing operations
    
    $
    0.47
    
    
    $
    0.41
    
    
    $
    0.24
    
    
    $
    0.14Income from discontinued operation
    
    
    0.04
    
    
    
    0.03
    
    
    
    0.03
    
    
    
    0.03$
    0.51
    
    
    $
    0.44
    
    
    $
    0.27
    
    
    $
    0.17Diluted earnings per common share:Income from continuing operations
    
    $
    0.47
    
    
    $
    0.41
    
    
    $
    0.24
    
    
    $
    0.14Income from discontinued operation
    
    
    0.03
    
    
    
    0.03
    
    
    
    0.03
    
    
    
    0.03$
    0.50
    
    
    $
    0.44
    
    
    $
    0.27
    
    
    $
    0.17
 
 *
    
    In December 2005 the Company sold its real estate held for lease for a gain of $38.2
million, net of taxes. This gain on sale and related earnings of this operation have been
classified as a discontinued operation. 26




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##### 



Capstead Mortgage Corporation
 THIS PAGE INTENTIONALLY LEFT BLANK
 27




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##### 



Capstead Mortgage Corporation
 Selected Financial Data
 (In thousands, except per share amounts)
 Year Ended December 312005
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001Selected statement of income and per share data:Mortgage securities and similar investments:Interest income
    
    $
    130,333
    
    
    $
    91,121
    
    
    $
    119,444
    
    
    $
    264,655
    
    
    $
    472,696Interest expense
    
    
    (105,937
    )
    
    
    (44,939
    )
    
    
    (58,924
    )
    
    
    (164,994
    )
    
    
    (363,317
    )24,396
    
    
    
    46,182
    
    
    
    60,520
    
    
    
    99,661
    
    
    
    109,379Gain on asset sales and redemptions of
structured
financings
    
    
    156
    
    
    
    
    
    
    
    4,560
    
    
    
    4,725
    
    
    
    7,956Other revenue (expense)
    
    
    (7,347
    )
    
    
    (6,313
    )
    
    
    (6,414
    )
    
    
    (9,140
    )
    
    
    (11,059
    )Equity in loss of unconsolidated affiliates
    
    
    (10
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Income from continuing operations
    
    
    17,195
    
    
    
    39,869
    
    
    
    58,666
    
    
    
    95,246
    
    
    
    106,276Income from discontinued operation,
net of taxes (a)
    
    
    39,997
    
    
    
    1,936
    
    
    
    1,993
    
    
    
    877
    
    
    
    Net income
    
    $
    57,192
    
    
    $
    41,805
    
    
    $
    60,659
    
    
    $
    96,123
    
    
    $
    106,276Basic earnings per common share:Income (loss) from continuing operations
    
    $
    (0.16
    )
    
    $
    1.22
    
    
    $
    2.75
    
    
    $
    5.41
    
    
    $
    6.43Income from discontinued operation
    
    
    2.12
    
    
    
    0.12
    
    
    
    0.14
    
    
    
    0.06
    
    
    
    $
    1.96
    
    
    $
    1.34
    
    
    $
    2.89
    
    
    $
    5.47
    
    
    $
    6.43Diluted earnings per common share:Income (loss) from continuing operations
    
    $
    (0.16
    )
    
    $
    1.21
    
    
    $
    2.51
    
    
    $
    4.81
    
    
    $
    5.68Income from discontinued operation
    
    
    2.12
    
    
    
    0.12
    
    
    
    0.09
    
    
    
    0.04
    
    
    
    $
    1.96
    
    
    $
    1.33
    
    
    $
    2.60
    
    
    $
    4.85
    
    
    $
    5.68Cash dividends per common share:Regular
    
    $
    0.32
    
    
    $
    1.58
    
    
    $
    3.10
    
    
    $
    5.56
    
    
    $
    5.54Special (b)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7.19
    
    
    
    14.60Book value per common share (b)
    
    
    8.48
    
    
    
    7.91
    
    
    
    6.67
    
    
    
    8.23
    
    
    
    15.87Average number of common shares outstanding:Basic
    
    
    18,868
    
    
    
    16,100
    
    
    
    13,977
    
    
    
    13,858
    
    
    
    13,351Diluted
    
    
    18,868
    
    
    
    16,437
    
    
    
    23,295
    
    
    
    19,827
    
    
    
    16,956Selected balance sheet data:Mortgage securities and similar investments
    
    $
    4,368,025
    
    
    $
    3,438,559
    
    
    $
    2,362,688
    
    
    $
    3,514,940
    
    
    $
    5,717,524Assets of discontinued operation (a)
    
    
    
    
    
    
    141,037
    
    
    
    150,317
    
    
    
    154,768
    
    
    
    Total assets
    
    
    4,464,248
    
    
    
    3,687,982
    
    
    
    2,554,322
    
    
    
    3,766,928
    
    
    
    5,895,425Repurchase arrangements and similar
borrowings
    
    
    4,023,686
    
    
    
    3,221,794
    
    
    
    2,141,985
    
    
    
    3,220,435
    
    
    
    5,452,083Unsecured borrowings
    
    
    77,321
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stockholders equity (b)
    
    
    344,849
    
    
    
    332,539
    
    
    
    277,038
    
    
    
    298,578
    
    
    
    404,728
 
 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
million, net of taxes. This gain on sale and related earnings of this operation have
been classified as a discontinued operation.(b)
    
    In 2002 and 2001 Capstead declared special common dividends of $100 million and $201
million, respectively, which significantly reduced stockholders equity and book value
per common share. Both special dividends were recorded as reductions to Paid-in Capital. 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
  Book Value Per Common Share
   Mortgage Securities and Similar Investments
  30




---



##### 



Capstead Mortgage Corporation
   Projected
    
    
    Lifetime2005 Average
    
    
    As of December 31, 2005
    
    

1stQuarter
    
    
    RunoffBasis(a)
    
    
    Yield/Cost
    
    
    Runoff
    
    
    Premiums
    
    
    Basis(a)
    
    
    Yield/Cost(b)
    
    
    AssumptionsAgency Securities:Fannie Mae/Freddie Mac:Fixed-rate
    
    $
    28,778
    
    
    
    6.21
    %
    
    
    33
    %
    
    $
    87
    
    
    $
    23,634
    
    
    
    6.33
    %
    
    
    38
    %ARMs
    
    
    2,392,530
    
    
    
    3.63
    
    
    
    34
    
    
    
    54,792
    
    
    
    3,323,166
    
    
    
    4.53
    
    
    
    32Ginnie Mae ARMs
    
    
    965,697
    
    
    
    3.54
    
    
    
    34
    
    
    
    4,222
    
    
    
    938,119
    
    
    
    4.34
    
    
    
    293,387,005
    
    
    
    3.62
    
    
    
    34
    
    
    
    59,101
    
    
    
    4,284,919
    
    
    
    4.50
    
    
    
    31Non-agency Securities:Fixed-rate
    
    
    29,265
    
    
    
    6.40
    
    
    
    32
    
    
    
    114
    
    
    
    26,607
    
    
    
    6.67
    
    
    
    37ARMs
    
    
    50,359
    
    
    
    4.33
    
    
    
    32
    
    
    
    467
    
    
    
    42,617
    
    
    
    5.06
    
    
    
    3879,624
    
    
    
    5.09
    
    
    
    32
    
    
    
    581
    
    
    
    69,224
    
    
    
    5.68
    
    
    
    38CMBS  adjustable rate
    
    
    48,059
    
    
    
    4.27
    
    
    
    100
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Collateral for
structured financings
    
    
    23,189
    
    
    
    5.76
    
    
    
    31
    
    
    
    138
    
    
    
    9,098
    
    
    
    7.49
    
    
    
    303,537,877
    
    
    
    3.68
    
    
    
    33
    
    
    $
    59,820
    
    
    
    4,363,241
    
    
    
    4.52
    
    
    
    31Related borrowings:30-day LIBOR
    
    
    2,537,069
    
    
    
    3.30
    
    
    
    
    
    
    
    
    
    
    
    3,102,114
    
    
    
    4.52>30-day LIBOR
    
    
    729,694
    
    
    
    2.70
    
    
    
    
    
    
    
    
    
    
    
    912,474
    
    
    
    3.92Structured financings
    
    
    23,138
    
    
    
    4.26
    
    
    
    
    
    
    
    
    
    
    
    9,098
    
    
    
    7.493,289,901
    
    
    
    3.17
    
    
    
    
    
    
    
    
    
    
    
    4,023,686
    
    
    
    4.38Capital employed/
financing spread
    
    $
    247,976
    
    
    
    0.51
    
    
    
    
    
    
    
    
    
    
    $
    339,555
    
    
    
    0.14Return on assets (c)
    
    
    
    
    
    
    0.69
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.47
 
 (a)
    
    Basis represents the Companys investment before unrealized gains and losses.(b)
    
    Projected annualized yields for the first quarter of 2006 reflect portfolio activity as of
February 28, 2006 and ARM coupon resets and lifetime runoff assumptions as adjusted for
expected runoff for this quarter only. Actual yields realized in future periods will largely
depend upon (i) changes in portfolio composition, (ii) ARM coupon resets, (iii) actual runoff
and (iv) any changes in lifetime runoff assumptions. Projected interest rates on borrowings
that reset every 30 days at the 30-day London Interbank Offered Rate (LIBOR) reflect 25
basis point increases in the federal funds rate at the January 31 and March 28, 2006 Federal
Reserve meetings.(c)
    
    The Company uses its liquidity to pay down borrowings. Return on assets is calculated on an
annualized basis assuming the use of this liquidity to reduce borrowing costs (see
Utilization of Long-Term Investment Capital and Potential Liquidity). 31




---



##### 



Capstead Mortgage Corporation
  Portfolio AveragesFederalFunds Rate
    
    
    
    
    
    
    Borrowing
    
    
    Financing
    
    
    Runoff
    
    
    ContributionIncreases *
    
    
    Yields
    
    
    Rates
    
    
    Spreads
    
    
    Rates
    
    
    to Earnings2004:First quarter 2004
    
    
    
    %
    
    
    3.62
    %
    
    
    1.45
    %
    
    
    2.17
    %
    
    
    27
    %
    
    $
    13,773Second quarter 2004
    
    
    0.25
    
    
    
    3.25
    
    
    
    1.42
    
    
    
    1.83
    
    
    
    30
    
    
    
    12,452Third quarter 2004
    
    
    0.50
    
    
    
    3.10
    
    
    
    1.70
    
    
    
    1.40
    
    
    
    34
    
    
    
    10,362Fourth quarter 2004
    
    
    0.50
    
    
    
    3.22
    
    
    
    2.16
    
    
    
    1.06
    
    
    
    29
    
    
    
    9,5951.25
    
    
    
    3.28
    
    
    
    1.72
    
    
    
    1.56
    
    
    
    30
    
    
    $
    46,1822005:First quarter 2005
    
    
    0.50
    
    
    
    3.33
    
    
    
    2.51
    
    
    
    0.82
    
    
    
    22
    
    
    $
    8,490Second quarter 2005
    
    
    0.50
    
    
    
    3.53
    
    
    
    2.92
    
    
    
    0.61
    
    
    
    33
    
    
    
    6,795Third quarter 2005
    
    
    0.50
    
    
    
    3.75
    
    
    
    3.31
    
    
    
    0.44
    
    
    
    38
    
    
    
    5,285Fourth quarter 2005
    
    
    0.50
    
    
    
    4.07
    
    
    
    3.86
    
    
    
    0.21
    
    
    
    40
    
    
    
    3,8262.00
    
    
    
    3.68
    
    
    
    3.17
    
    
    
    0.51
    
    
    
    33
    
    
    $
    24,3962006 (projected):First quarter 2006**
    
    
    0.50
    
    
    
    4.52
    
    
    
    4.38
    
    
    
    0.14
    
    
    
    31
 
 *
    
    Represents actual and projected increases in the federal funds rate by the Federal
Reserve during the indicated period.**
    
    Projected as of February 28, 2006, as discussed on the previous page. A projected
first quarter contribution to earnings is not provided in accordance with current Company
policy on providing earnings guidance.   32




---



##### 



Capstead Mortgage Corporation
    Investment in Redtail Capital
  33




---



##### 



Capstead Mortgage Corporation
  Issuance of Long-term Unsecured Borrowings
   Sale of Real Estate Held for Lease
  34




---



##### 



Capstead Mortgage Corporation
 Utilization of Long-term Investment Capital and Potential Liquidity
  Related
    
    
    Capital
    
    
    PotentialInvestments(a)
    
    
    Borrowings
    
    
    Employed(a)
    
    
    Liquidity(a)Mortgage securities and similar
investments:Agency Securities
    
    $
    4,289,330
    
    
    $
    3,950,854
    
    
    $
    338,476
    
    
    $
    215,774Non-agency Securities
    
    
    69,597
    
    
    
    63,734
    
    
    
    5,863
    
    
    
    531CMO collateral
    
    
    9,098
    
    
    
    9,098
    
    
    
    
    
    
    
    4,368,025
    
    
    
    4,023,686
    
    
    
    344,339
    
    
    
    216,305Investment in Redtail Capital
    
    
    6,904
    
    
    
    
    
    
    
    6,904
    
    
    
    $
    4,374,929
    
    
    $
    4,023,686
    
    
    
    351,243
    
    
    
    216,305Other assets, net of other liabilities
    
    
    
    
    
    
    
    
    
    
    68,966
    
    
    
    33,937
    (b)Fourth quarter common dividend
    
    
    
    
    
    
    
    
    
    
    (381
    )
    
    
    (381)
    (c)Targeted liquidity reserves
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (208,000
    )$
    419,828
    
    
    $
    41,861Balances of as December 31, 2004
    
    $
    3,579,480
    
    
    $
    3,341,795
    
    
    $
    332,539
    
    
    $
    9,783
 
 (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 separately for targeted liquidity reserves.(b)
    
    Represents cash and cash equivalents.(c)
    
    The fourth quarter 2005 common dividend was declared December 15, 2005 and paid January 20,
2006 to stockholders of record as of December 30, 2005.  35




---



##### 



Capstead Mortgage Corporation
 Off-Balance Sheet Arrangements and Contractual Obligations
  Payments Due by Period12 Months
    
    
    12 - 36
    
    
    37 - 60
    
    
    >ThanContractual Obligations
    
    Total
    
    
    or Less
    
    
    Months
    
    
    Months
    
    
    60 MonthsRepurchase arrangements
and similar borrowings
    
    $
    4,082,801
    
    
    $
    3,590,720
    
    
    $
    489,979
    
    
    $
    1,385
    
    
    $
    717Unsecured borrowings
    
    
    260,601
    
    
    
    6,211
    
    
    
    12,422
    
    
    
    12,422
    
    
    
    229,546Pending acquisitions of investments
    
    
    2,977
    
    
    
    2,977
    
    
    
    
    
    
    
    
    
    
    
    Corporate office lease
    
    
    1,128
    
    
    
    282
    
    
    
    564
    
    
    
    282
    
    
    
    $
    4,347,507
    
    
    $
    3,600,190
    
    
    $
    502,965
    
    
    $
    14,089
    
    
    $
    230,263
  Tax Considerations of Dividends Paid on Capstead Shares
  Common
    
    Capital
    
    Ordinary
    
    Return ofTax Year
    
    Dividends
    
    Gain *
    
    Income *
    
    Capital *2005
    
    $
    0.32
    
    
    %
    
    
    100.00
    %
    
    
    
    %2004
    
    
    1.58
    
    
    
    
    
    86.08
    
    
    
    13.922003
    
    
    3.10
    
    
    
    
    
    100.00
    
    
    
    
 
 *
    
    The indicated characterization percentage is applicable to each
quarterly or special common 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 2003 is available at www.capstead.com. 36




---



##### 



Capstead Mortgage Corporation
 RESULTS OF OPERATIONS
  Year Ended December 312005
    
    
    2004
    
    
    2003Income statement data:Mortgage securities and similar investments:Agency Securities
    
    $
    22,001
    
    
    $
    40,824
    
    
    $
    51,288Non-agency Securities
    
    
    1,503
    
    
    
    4,011
    
    
    
    6,091CMBS and other commercial loans
    
    
    546
    
    
    
    640
    
    
    
    3,099Collateral for structured financings
    
    
    346
    
    
    
    707
    
    
    
    4224,396
    
    
    
    46,182
    
    
    
    60,520Other revenue (expense):Gain on asset sales and redemptions of
structured financings
    
    
    156
    
    
    
    
    
    
    
    4,560Other revenue
    
    
    926
    
    
    
    813
    
    
    
    1,784Interest on unsecured borrowings
    
    
    (972
    )
    
    
    
    
    
    
    Other operating expense
    
    
    (7,301
    )
    
    
    (7,126
    )
    
    
    (8,198
    )Equity in loss of unconsolidated affiliates
    
    
    (10
    )
    
    
    
    
    
    
    Income from continuing operations
    
    
    17,195
    
    
    
    39,869
    
    
    
    58,666Income from discontinued operation, net of taxes
    
    
    39,997
    
    
    
    1,936
    
    
    
    1,993Net income
    
    $
    57,192
    
    
    $
    41,805
    
    
    $
    60,659Diluted earnings per common share:Income (loss) from continuing operations
    
    $
    (0.16
    )
    
    $
    1.21
    
    
    $
    2.51Income from discontinued operation
    
    
    2.12
    
    
    
    0.12
    
    
    
    0.09$
    1.96
    
    
    $
    1.33
    
    
    $
    2.60Key portfolio statistics:Average yields:Agency Securities
    
    
    3.62
    %
    
    
    3.10
    %
    
    
    3.88
    %Non-agency Securities
    
    
    5.09
    
    
    
    4.61
    
    
    
    4.63CMBS and other commercial loans
    
    
    4.27
    
    
    
    2.47
    
    
    
    4.44Collateral for structured financings
    
    
    5.76
    
    
    
    6.44
    
    
    
    6.20Total average yields
    
    
    3.68
    
    
    
    3.28
    
    
    
    4.42Average related borrowing rate
    
    
    3.17
    
    
    
    1.72
    
    
    
    2.30Average financing spread
    
    
    0.51
    
    
    
    1.56
    
    
    
    2.12Average portfolio balances:Agency Securities
    
    $
    3,387
    
    
    $
    2,476
    
    
    $
    1,867Non-agency Securities
    
    
    80
    
    
    
    125
    
    
    
    163CMBS and other commercial loans
    
    
    48
    
    
    
    63
    
    
    
    114Collateral for structured financings
    
    
    23
    
    
    
    105
    
    
    
    5503,538
    
    
    
    2,769
    
    
    
    2,694Related average borrowings
    
    
    3,290
    
    
    
    2,570
    
    
    
    2,528Average capital deployed
    
    $
    248
    
    
    $
    199
    
    
    $
    166Average portfolio runoff rate:Agency Securities
    
    
    34
    %
    
    
    28
    %
    
    
    32
    %Total
    
    
    33
    
    
    
    30
    
    
    
    43
 37




---



##### 



Capstead Mortgage Corporation
 2005 Compared to 2004
       38




---



##### 



Capstead Mortgage Corporation
   2004 Compared to 2003
    LIQUIDITY AND CAPITAL RESOURCES
  39




---



##### 



Capstead Mortgage Corporation
       40




---



##### 



Capstead Mortgage Corporation
 RISK FACTORS
 General Discussion of Effects of Interest Rate Changes
  Average
    
    
    Average
    
    
    Average
    
    
    MonthsCoupon
    
    
    Periodic
    
    
    Lifetime
    
    
    ToARM Type
    
    Basis *
    
    
    Rate
    
    
    Cap
    
    
    Cap
    
    
    RollCurrent-reset
ARMs:Agency Securities:Fannie
Mae/Freddie Mac
    
    $
    2,142,545
    
    
    
    5.05
    %
    
    
    2.92
    %
    
    
    10.92
    %
    
    
    5.4Ginnie Mae
    
    
    938,119
    
    
    
    4.46
    
    
    
    1.00
    
    
    
    9.86
    
    
    
    6.5Non-agency Securities
    
    
    42,617
    
    
    
    5.33
    
    
    
    1.73
    
    
    
    11.33
    
    
    
    5.23,123,281
    
    
    
    4.88
    
    
    
    2.33
    
    
    
    10.61
    
    
    
    5.7Longer-to-reset-ARMs:Agency Securities:Fannie
Mae/Freddie Mac
    
    
    1,180,621
    
    
    
    5.26
    
    
    
    4.07
    
    
    
    11.07
    
    
    
    28.7$
    4,303,902
    
    
    
    4.98
    
    
    
    2.80
    
    
    
    10.73
    
    
    
    12.0
 
 *
    
    Basis represents the Companys investment before unrealized gains and losses.  41




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Capstead Mortgage Corporation
    Interest Rate Sensitivity on Operating Results
 Other revenue (expense)
  42




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##### 



Capstead Mortgage Corporation
  10-year30-day
    
    
    U.S.LIBOR
    
    
    TreasuryRate
    
    
    Rate
    
    
    Immediate Change In: *30-day LIBOR rate
    
    
    
    
    
    
    
    
    
    Flat
    
    Up 1.00%
    
    Up 1.00%
    
    Up 2.00%10-year U.S. Treasury rate
    
    
    
    
    
    
    
    
    
    Down 1.00%
    
    Flat
    
    Up 1.00%
    
    Up 2.00%Projected 12-month
earnings change:December 31, 2005 **
    
    
    4.39
    %
    
    
    4.40
    %
    
    $
    (4,299
    )
    
    $
    (20,991
    )
    
    $
    (19,628
    )
    
    $
    (43,817
    )December 31, 2004
    
    
    2.40
    
    
    
    4.22
    
    
    
    (2,297
    )
    
    
    (12,760
    )
    
    
    (11,793
    )
    
    
    (29,259
    )
 
 *
    
    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.**
    
    Increased earnings sensitivity as of December 31, 2005 reflects the increased size of the
Companys mortgage securities and similar investments portfolio. Risks Associated with Credit-Sensitive Investments
     43




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##### 



Capstead Mortgage Corporation
      Tax Status
  44




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##### 



Capstead Mortgage Corporation
   Investment Company Act of 1940
   CRITICAL ACCOUNTING POLICIES
  45




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##### 



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. For instance,
based on interest rate expectations and portfolio composition as
of February 28, 2006, management anticipates an annualized
lifetime runoff rate of 31% for its mortgage securities and
similar investments portfolio, up from 28% two years ago due
largely to additions of newer-issue securities during the past two
years that have higher prepayment expectations than previous
investments. 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 mortgage securities and similar investments are
classified as held available-for-sale and recorded at fair value
on the balance sheet with unrealized gains and losses recorded in
stockholders equity as 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, and
a factor in determining incentive compensation and therefore
earnings of 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.
 46




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##### 



Capstead Mortgage Corporation
 FORWARD LOOKING STATEMENTS
  47