##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended: June 30, 2007
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission
File Number: 1-8896
 CAPSTEAD MORTGAGE CORPORATION
  Maryland
    
    75-2027937(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)
 8401 North Central Expressway, Suite 800, Dallas, TX
    
    75225(Address of principal executive offices)
    
    (Zip Code)
 (214) 874-2323
 þ o
  o þ o
 o þ
 APPLICABLE ONLY TO CORPORATE ISSUERS:
  Common Stock ($0.01 par value)
    
    19,392,461 as of August 6, 2007




---



##### 



CAPSTEAD MORTGAGE CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2007
 INDEX
 PagePART I. 3⁄4 FINANCIAL INFORMATIONITEM 1. Financial StatementsConsolidated Balance Sheets 3⁄4 June 30, 2007 and December 31, 2006
    
    
    3Consolidated Statements of Operations 3⁄4 Quarter and Six Months Ended
June 30, 2007 and 2006
    
    
    4Consolidated Statements of Cash Flows 3⁄4 Six Months Ended
June 30, 2007 and 2006
    
    
    5Notes to Consolidated Financial Statements
    
    
    6ITEM 2. Managements Discussion and Analysis of
Financial Condition and Results of Operations
    
    
    16ITEM 3. Qualitative and Quantitative Disclosure of Market Risk
    
    
    31ITEM 4. Controls and Procedures
    
    
    32PART II. 3⁄4 OTHER INFORMATIONITEM 6. Exhibits and Reports on Form 8-K
    
    
    32SIGNATURES
    
    
    33Computation of Ratio of Income from Continuing OperationsCertification Pursuant to Section 302(a)Certification Pursuant to Section 302(a)Certification Pursuant to Section 906
  -2-




---



##### Table of Contents



ITEM 1. FINANCIAL STATEMENTS
 
 PART I. 3⁄4 FINANCIAL INFORMATION
 CAPSTEAD MORTGAGE CORPORATION
 
 CONSOLIDATED BALANCE SHEETS
 (in thousands, except per share amounts)
 June 30, 2007
    
    
    December 31, 2006(unaudited)
    
    
    (NOTE 2)Assets:Mortgage securities and similar investments
($5.3 billion pledged under repurchase arrangements)
    
    $
    5,490,449
    
    
    $
    5,252,399Investments in unconsolidated affiliates
    
    
    10,523
    
    
    
    20,073Receivables and other assets
    
    
    78,556
    
    
    
    69,869Cash and cash equivalents
    
    
    6,560
    
    
    
    5,661$
    5,586,088
    
    
    $
    5,348,002Liabilities:Repurchase arrangements and similar borrowings
    
    $
    5,115,170
    
    
    $
    4,876,134Unsecured borrowings
    
    
    103,095
    
    
    
    103,095Common stock dividend payable
    
    
    775
    
    
    
    385Accounts payable and accrued expenses
    
    
    22,400
    
    
    
    28,4265,241,440
    
    
    
    5,008,040Stockholders equity:Preferred stock  $0.10 par value; 100,000 shares authorized:$1.60 Cumulative Preferred Stock, Series A,
202 shares issued and outstanding at
June 30, 2007 and December 31, 2006
($3,317 aggregate liquidation preference)
    
    
    2,828
    
    
    
    2,828$1.26 Cumulative Convertible Preferred Stock, Series B,
15,819 shares issued and outstanding at
June 30, 2007 and December 31, 2006
($180,025 aggregate liquidation preference)
    
    
    176,705
    
    
    
    176,705Common stock  $0.01 par value; 100,000 shares authorized:19,392 and 19,253 shares issued and outstanding at
June 30, 2007 and December 31, 2006, respectively
    
    
    194
    
    
    
    192Paid-in capital
    
    
    498,208
    
    
    
    497,418Accumulated deficit
    
    
    (352,809
    )
    
    
    (354,617
    )Accumulated other comprehensive income
    
    
    19,522
    
    
    
    17,436344,648
    
    
    
    339,962$
    5,586,088
    
    
    $
    5,348,002
 See accompanying notes to consolidated financial statements.
 -3-




---



##### Table of Contents



CAPSTEAD MORTGAGE CORPORATION
 
 CONSOLIDATED STATEMENTS OF INCOME
 (in thousands, except per share amounts)
 (unaudited)
 Quarter Ended June 30
    
    
    Six Months Ended June 302007
    
    
    2006
    
    
    2007
    
    
    2006Mortgage securities and similar investments:Interest income
    
    $
    75,795
    
    
    $
    57,349
    
    
    $
    147,937
    
    
    $
    110,275Interest expense
    
    
    (67,107
    )
    
    
    (54,685
    )
    
    
    (130,696
    )
    
    
    (102,228
    )8,688
    
    
    
    2,664
    
    
    
    17,241
    
    
    
    8,047Other revenue (expense):Other revenue
    
    
    237
    
    
    
    200
    
    
    
    1,108
    
    
    
    366Interest expense on unsecured borrowings
    
    
    (2,187
    )
    
    
    (1,621
    )
    
    
    (4,374
    )
    
    
    (3,208
    )Other operating expense
    
    
    (1,539
    )
    
    
    (1,576
    )
    
    
    (3,213
    )
    
    
    (3,249
    )(3,489
    )
    
    
    (2,997
    )
    
    
    (6,479
    )
    
    
    (6,091
    )Income (loss) before equity in earnings of
unconsolidated affiliates
    
    
    5,199
    
    
    
    (333
    )
    
    
    10,762
    
    
    
    1,956Equity in earnings of unconsolidated affiliates
    
    
    575
    
    
    
    608
    
    
    
    1,239
    
    
    
    1,030Net income
    
    $
    5,774
    
    
    $
    275
    
    
    $
    12,001
    
    
    $
    2,986Net income available (loss attributable) to common
stockholders:Net income
    
    $
    5,774
    
    
    $
    275
    
    
    $
    12,001
    
    
    $
    2,986Less cash dividends paid on preferred stock
    
    
    (5,064
    )
    
    
    (5,064
    )
    
    
    (10,128
    )
    
    
    (10,128
    )$
    710
    
    
    $
    (4,789
    )
    
    $
    1,873
    
    
    $
    (7,142
    )Basic and diluted earnings (loss) per common
share
    
    $
    0.04
    
    
    $
    (0.25
    )
    
    $
    0.10
    
    
    $
    (0.38
    )Cash dividends declared per share:Common
    
    $
    0.040
    
    
    $
    0.020
    
    
    $
    0.060
    
    
    $
    0.040Series A Preferred
    
    
    0.400
    
    
    
    0.400
    
    
    
    0.800
    
    
    
    0.800Series B Preferred
    
    
    0.315
    
    
    
    0.315
    
    
    
    0.630
    
    
    
    0.630
 See accompanying notes to consolidated financial statements.
 -4-




---



##### Table of Contents



CAPSTEAD MORTGAGE CORPORATION
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (in thousands)
 (unaudited)
 Six Months Ended June 302007
    
    
    2006Operating activities:Net income
    
    $
    12,001
    
    
    $
    2,986Noncash items:Amortization of investment premiums
    
    
    11,808
    
    
    
    11,737Depreciation and other amortization
    
    
    117
    
    
    
    50Stock-based compensation
    
    
    437
    
    
    
    244Undistributed earnings of unconsolidated affiliates
    
    
    
    
    
    
    (181
    )Net change in receivables, other assets, accounts payable and
accrued expenses
    
    
    (10,378
    )
    
    
    (13,418
    )Net cash provided by operating activities
    
    
    13,985
    
    
    
    1,418Investing activities:Purchases of mortgage securities and similar investments
    
    
    (1,153,451
    )
    
    
    (1,306,819
    )Principal collections on mortgage securities and similar investments
    
    
    901,280
    
    
    
    855,293Distributions from (investments in) unconsolidated affiliates -
commercial real estate loan limited partnership
    
    
    9,550
    
    
    
    (9,218
    )Net cash used in investing activities of continuing operations
    
    
    (242,621
    )
    
    
    (460,744
    )Net cash used in investing activities of discontinued operation
    
    
    
    
    
    
    (2,884
    )Net cash used in investing activities
    
    
    (242,621
    )
    
    
    (463,628
    )Financing activities:Net increase (decrease) in repurchase arrangements and
similar borrowings:Borrowings based on 30-day rates
    
    
    4,175
    
    
    
    509,331Borrowings based on greater than 30-day rates
    
    
    234,862
    
    
    
    (70,161
    )Capital stock transactions
    
    
    1,396
    
    
    
    (8
    )Dividends paid
    
    
    (10,898
    )
    
    
    (10,889
    )Net cash provided by financing activities
    
    
    229,535
    
    
    
    428,273Net change in cash and cash equivalents
    
    
    899
    
    
    
    (33,937
    )Cash and cash equivalents at beginning of period
    
    
    5,661
    
    
    
    33,937Cash and cash equivalents at end of period
    
    $
    6,560
    
    
    $
    
 See accompanying notes to consolidated financial statements.
 -5-




---



##### Table of Contents



CAPSTEAD MORTGAGE CORPORATION
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 JUNE 30, 2007 (unaudited)
 NOTE 1 3⁄4 BUSINESS
  NOTE 2 3⁄4 BASIS OF PRESENTATION
 Interim Financial Reporting
  Reclassifications
  Accounting for Uncertainty in Income Taxes
  Accounting for Acquisitions of Mortgage Securities Seller-Financed using Repurchase Arrangements
  -6-




---



##### Table of Contents



Other
comprehensive income
  Fair Value Accounting Rule Changes
 Fair Value Measurements
 The Fair Value Option for Financial Assets and
Financial Liabilities  Including an amendment of FASB Statement No. 115
 Clarification of the Scope of the Audit and Accounting Guide Investment Companies and
Accounting by Parent Companies and Equity Method Investors for Investments in Investment Companies Stockholders equity
 -7-




---



##### Table of Contents



NOTE 3 3⁄4 EARNINGS (LOSS) PER COMMON SHARE
  Quarter Ended
    
    
    Six Months EndedJune 30
    
    
    June 302007
    
    
    2006
    
    
    2007
    
    
    2006Numerators for basic earnings (loss) per common share:Net income
    
    $
    5,774
    
    
    $
    275
    
    
    $
    12,001
    
    
    $
    2,986Less Series A and B preferred share dividends
    
    
    (5,064
    )
    
    
    (5,064
    )
    
    
    (10,128
    )
    
    
    (10,128
    )Income available (loss attributable) to common stockholders
    
    $
    710
    
    
    $
    (4,789
    )
    
    $
    1,873
    
    
    $
    (7,142
    )Weighted average common shares outstanding
    
    
    19,013
    
    
    
    18,894
    
    
    
    18,973
    
    
    
    18,883Basic earnings (loss) per common share
    
    $
    0.04
    
    
    $
    (0.25
    )
    
    $
    0.10
    
    
    $
    (0.38
    )Numerators for diluted earnings (loss) per common share:Net income
    
    $
    5,774
    
    
    $
    275
    
    
    $
    12,001
    
    
    $
    2,986Less dividends on antidilutive convertible preferred shares
    
    
    (5,064
    )
    
    
    (5,064
    )
    
    
    (10,128
    )
    
    
    (10,128
    )Income available (loss attributable) to common stockholders
    
    $
    710
    
    
    $
    (4,789
    )
    
    $
    1,873
    
    
    $
    (7,142
    )Denominator for diluted earnings (loss) per common share:Weighted average common shares outstanding
    
    
    19,013
    
    
    
    18,894
    
    
    
    18,973
    
    
    
    18,883Net effect of dilutive equity awards
    
    
    244
    
    
    
    
    
    
    
    182
    
    
    
    19,257
    
    
    
    18,894
    
    
    
    19,155
    
    
    
    18,883Diluted earnings (loss) per common share
    
    $
    0.04
    
    
    $
    (0.25
    )
    
    $
    0.10
    
    
    $
    (0.38
    )
  Quarter Ended June 30
    
    Six Months Ended June 302007
    
    2006
    
    2007
    
    2006Equity awards:Shares issuable under option awards
    
    
    406
    
    
    
    836
    
    
    
    406
    
    
    
    836Nonvested stock awards
    
    
    
    
    
    
    112
    
    
    
    
    
    
    
    112Convertible preferred shares:Series A shares
    
    
    202
    
    
    
    202
    
    
    
    202
    
    
    
    202Series B shares
    
    
    15,819
    
    
    
    15,819
    
    
    
    15,819
    
    
    
    15,819
 -8-




---



##### Table of Contents



NOTE 4 3⁄4 MORTGAGE SECURITIES AND SIMILAR INVESTMENTS
 Mortgage securities and similar investments
 Principal
    
    
    Investment
    
    
    
    
    
    
    Carrying
    
    
    Net
    
    
    AverageBalance
    
    
    Premiums
    
    
    Basis
    
    
    Amount(a)
    
    
    WAC(b)
    
    
    Yield(b)June 30, 2007Agency Securities:Fannie Mae/Freddie Mac:Fixed-rate
    
    $
    14,654
    
    
    $
    43
    
    
    $
    14,697
    
    
    $
    14,719
    
    
    
    6.63
    %
    
    
    6.36
    %ARMs
    
    
    4,715,121
    
    
    
    65,873
    
    
    
    4,780,994
    
    
    
    4,795,189
    
    
    
    6.30
    
    
    
    5.56Ginnie Mae ARMs
    
    
    623,079
    
    
    
    2,698
    
    
    
    625,777
    
    
    
    630,656
    
    
    
    5.66
    
    
    
    5.455,352,854
    
    
    
    68,614
    
    
    
    5,421,468
    
    
    
    5,440,564
    
    
    
    6.23
    
    
    
    5.55Non-agency Securities:Fixed-rate
    
    
    14,873
    
    
    
    28
    
    
    
    14,901
    
    
    
    14,932
    
    
    
    7.22
    
    
    
    6.91ARMs
    
    
    25,842
    
    
    
    242
    
    
    
    26,084
    
    
    
    26,345
    
    
    
    7.22
    
    
    
    6.5840,715
    
    
    
    270
    
    
    
    40,985
    
    
    
    41,277
    
    
    
    7.22
    
    
    
    6.70Commercial loans
    
    
    2,881
    
    
    
    
    
    
    
    2,881
    
    
    
    2,881
    
    
    
    18.00
    
    
    
    18.00Collateral for structured
financings
    
    
    5,638
    
    
    
    89
    
    
    
    5,727
    
    
    
    5,727
    
    
    
    8.06
    
    
    
    7.96$
    5,402,088
    
    
    $
    68,973
    
    
    $
    5,471,061
    
    
    $
    5,490,449
    
    
    
    6.25
    
    
    
    5.57December 31, 2006Agency Securities:Fannie Mae/Freddie Mac:Fixed-rate
    
    $
    16,819
    
    
    $
    52
    
    
    $
    16,871
    
    
    $
    16,895
    
    
    
    6.63
    %
    
    
    6.29
    %ARMs
    
    
    4,343,740
    
    
    
    61,381
    
    
    
    4,405,121
    
    
    
    4,418,446
    
    
    
    6.14
    
    
    
    5.36Ginnie Mae ARMs
    
    
    752,301
    
    
    
    2,757
    
    
    
    755,058
    
    
    
    758,660
    
    
    
    5.23
    
    
    
    5.205,112,860
    
    
    
    64,190
    
    
    
    5,177,050
    
    
    
    5,194,001
    
    
    
    6.01
    
    
    
    5.34Non-agency Securities:Fixed-rate
    
    
    17,734
    
    
    
    41
    
    
    
    17,775
    
    
    
    17,804
    
    
    
    7.19
    
    
    
    6.83ARMs
    
    
    31,562
    
    
    
    303
    
    
    
    31,865
    
    
    
    32,164
    
    
    
    6.99
    
    
    
    6.8149,296
    
    
    
    344
    
    
    
    49,640
    
    
    
    49,968
    
    
    
    7.06
    
    
    
    6.81Commercial loans
    
    
    2,635
    
    
    
    
    
    
    
    2,635
    
    
    
    2,635
    
    
    
    18.00
    
    
    
    18.00Collateral for structured
financings
    
    
    5,705
    
    
    
    90
    
    
    
    5,795
    
    
    
    5,795
    
    
    
    8.06
    
    
    
    7.58$
    5,170,496
    
    
    $
    64,624
    
    
    $
    5,235,120
    
    
    $
    5,252,399
    
    
    
    6.03
    
    
    
    5.36
 
 (a)
    
    Includes mark-to-market for securities classified as available-for-sale, if applicable (see
NOTE 8).(b)
    
    Net WAC, or weighted average coupon, is presented net of servicing and other fees as of the
indicated balance sheet date. Average Yield is presented for the quarter then ended,
calculated including the amortization of investment premiums, mortgage insurance costs on
Non-agency Securities and excluding unrealized gains and losses. Yields averaged 5.53% for
the six months ended June 30, 2007. -9-




---



##### Table of Contents



NOTE 5 3⁄4 INVESTMENTS IN UNCONSOLIDATED AFFILIATES
    NOTE 6 3⁄4 REPURCHASE ARRANGEMENTS AND SIMILAR BORROWINGS
 Mortgage securities and similar investments
 -10-




---



##### Table of Contents



Repurchase arrangements and similar borrowings
 June 30, 2007
    
    
    December 31, 2006Borrowings
    
    
    Average
    
    
    Borrowings
    
    
    AverageOutstanding
    
    
    Rate(a)
    
    
    Outstanding
    
    
    Rate(a)Borrowings with maturities of 30 days or less:Agency Securities
    
    $
    2,769,761
    
    
    
    5.28
    %
    
    $
    2,048,151
    
    
    
    5.30
    %Non-agency Securities
    
    
    36,858
    
    
    
    5.82
    
    
    
    45,764
    
    
    
    5.852,806,619
    
    
    
    5.29
    
    
    
    2,093,915
    
    
    
    5.32Borrowings with maturities greater than 30 days:Agency Securities (31 to 90 days)
    
    
    823,151
    
    
    
    5.29
    
    
    
    1,741,751
    
    
    
    5.16Agency Securities (91 to 360 days)
    
    
    25,025
    
    
    
    4.76
    
    
    
    
    
    
    
    Agency Securities (greater than 360 days)
    
    
    1,454,648
    
    
    
    4.98
    
    
    
    1,034,673
    
    
    
    4.982,302,824
    
    
    
    5.09
    
    
    
    2,776,424
    
    
    
    5.09Structured financings
    
    
    5,727
    
    
    
    7.96
    
    
    
    5,795
    
    
    
    7.58$
    5,115,170
    
    
    
    5.20
    
    
    $
    4,876,134
    
    
    
    5.19
 
 (a)
    
    Average rate is presented as of the indicated balance sheet date. Repurchase arrangements and similar borrowings
 NOTE 7 3⁄4 UNSECURED BORROWINGS
 Unsecured borrowings
 June 30, 2007
    
    
    December 31, 2006Borrowings
    
    
    Average
    
    
    Borrowings
    
    
    AverageOutstanding
    
    
    Rate(a)
    
    
    Outstanding
    
    
    Rate(a)Junior subordinated notes:Capstead Mortgage Trust I
    
    $
    36,083
    
    
    
    8.31
    %
    
    $
    36,083
    
    
    
    8.31
    %Capstead Mortgage Trust II
    
    
    41,238
    
    
    
    8.46
    
    
    
    41,238
    
    
    
    8.46Capstead Mortgage Trust III
    
    
    25,774
    
    
    
    8.78
    
    
    
    25,774
    
    
    
    8.78$
    103,095
    
    
    
    8.49
    
    
    $
    103,095
    
    
    
    8.49
 
 (a)
    
    Average rate is presented as of the indicated balance sheet date.  -11-




---



##### Table of Contents



Receivables and other assets Unsecured
borrowings
 NOTE 8 3⁄4 DISCLOSURES REGARDING FAIR VALUES OF FINANCIAL INSTRUMENTS
 Accumulated other comprehensive
income
 Gross
    
    
    GrossUnrealized
    
    
    Unrealized
    
    
    FairBasis
    
    
    Gains
    
    
    Losses
    
    
    ValueAs of June 30, 2007Agency Securities
    
    $
    5,407,057
    
    
    $
    25,080
    
    
    $
    5,984
    
    
    $
    5,426,153Non-agency Securities
    
    
    21,084
    
    
    
    298
    
    
    
    6
    
    
    
    21,376$
    5,428,141
    
    
    $
    25,378
    
    
    $
    5,990
    
    
    $
    5,447,529As of December 31, 2006Agency Securities
    
    $
    5,160,508
    
    
    $
    25,160
    
    
    $
    8,209
    
    
    $
    5,177,459Non-agency Securities
    
    
    25,292
    
    
    
    334
    
    
    
    6
    
    
    
    25,620$
    5,185,800
    
    
    $
    25,494
    
    
    $
    8,215
    
    
    $
    5,203,079
  Gross
    
    
    GrossUnrealized
    
    
    Unrealized
    
    
    FairBasis
    
    
    Gains
    
    
    Losses
    
    
    ValueAs of June 30, 2007Collateral released from structured
financings:Agency Securities
    
    $
    14,411
    
    
    $
    202
    
    
    $
    3
    
    
    $
    14,610Non-agency Securities
    
    
    19,901
    
    
    
    296
    
    
    
    32
    
    
    
    20,165Collateral for structured financings
    
    
    5,727
    
    
    
    
    
    
    
    
    
    
    
    5,727$
    40,039
    
    
    $
    498
    
    
    $
    35
    
    
    $
    40,502As of December 31, 2006Collateral released from structured
financings:Agency Securities
    
    $
    16,542
    
    
    $
    306
    
    
    $
    1
    
    
    $
    16,847Non-agency Securities
    
    
    24,348
    
    
    
    328
    
    
    
    15
    
    
    
    24,661Collateral for structured financings
    
    
    5,795
    
    
    
    
    
    
    
    
    
    
    
    5,795$
    46,685
    
    
    $
    634
    
    
    $
    16
    
    
    $
    47,303
 -12-




---



##### Table of Contents



June 30, 2007
    
    
    December 31, 2006Fair
    
    
    Unrealized
    
    
    Fair
    
    
    UnrealizedValue
    
    
    Loss
    
    
    Value
    
    
    LossSecurities in an unrealized loss position:One year or greater
    
    $
    948,684
    
    
    $
    4,997
    
    
    $
    837,123
    
    
    $
    6,392Less than one year
    
    
    794,876
    
    
    
    1,028
    
    
    
    487,144
    
    
    
    1,839$
    1,743,560
    
    
    $
    6,025
    
    
    $
    1,324,267
    
    
    $
    8,231
 NOTE 9 3⁄4 COMPREHENSIVE INCOME (LOSS)
 Accumulated other comprehensive income Stockholders equity
 Quarter Ended
    
    
    Six Months EndedJune 30
    
    
    June 302007
    
    
    2006
    
    
    2007
    
    
    2006Net income
    
    $
    5,774
    
    
    $
    275
    
    
    $
    12,001
    
    
    $
    2,986Other comprehensive income (loss):Amounts related to cash flow hedges:Reclassification adjustment for amounts
included in net income
    
    
    (11
    )
    
    
    (14
    )
    
    
    (23
    )
    
    
    (30
    )Amounts related to securities held
available-for-sale:Change in valuation of mortgage securities
held available-for-sale
    
    
    (7,357
    )
    
    
    (8,456
    )
    
    
    2,109
    
    
    
    (15,974
    )Other comprehensive income (loss)
    
    
    (7,368
    )
    
    
    (8,470
    )
    
    
    2,086
    
    
    
    (16,004
    )Comprehensive income (loss)
    
    $
    (1,594
    )
    
    $
    (8,195
    )
    
    $
    14,087
    
    
    $
    (13,018
    )
 NOTE 10 3⁄4 LONG-TERM INCENTIVE AND OTHER PLANS
  -13-




---



##### Table of Contents



Weighted AverageNumber of
    
    
    Grant DateShares
    
    
    Fair ValueStock awards outstanding as of December 31, 2006
    
    
    321,550
    
    
    $
    8.02Grants issued directors
    
    
    6,000
    
    
    
    9.81Forfeitures
    
    
    (6,250
    )
    
    
    7.97Vested
    
    
    (35,100
    )
    
    
    7.87Stock awards outstanding as of June 30, 2007
    
    
    286,200
    
    
    
    8.07
   Number of
    
    
    Weighted AverageShares
    
    
    Exercise PriceOption awards outstanding as of December 31, 2006
    
    
    855,552
    
    
    $
    13.02Grants (average fair value $0.89) (a)
    
    
    220,500
    
    
    
    10.46Expirations
    
    
    (53,520
    )
    
    
    33.77Exercises
    
    
    (2,500
    )
    
    
    7.82Option awards outstanding as of June 30, 2007
    
    
    1,020,032
    
    
    $
    11.39
 
 (a)
    
    Option awards granted during 2007 were valued with average expected terms of
four years, volatility factors of 27%, dividend yields of 10% and risk-free rates
of 4.60%.  -14-




---



##### Table of Contents



NOTE 11 3⁄4 CAPITAL RAISING ACTIVITIES
   NOTE 12 3⁄4 NET INTEREST INCOME ANALYSIS
 Mortgage securities and similar investments
 Quarter Ended June 302007
    
    
    2006
    
    
    Related Changes inAverage
    
    
    
    
    
    
    Average
    
    
    AverageAmount
    
    
    Rate
    
    
    Amount
    
    
    Rate
    
    
    Rate*
    
    
    Volume*Interest income
    
    $
    75,795
    
    
    
    5.57
    %
    
    $
    57,349
    
    
    
    4.77
    %
    
    $
    10,323
    
    
    $
    8,123Interest expense
    
    
    (67,107
    )
    
    
    5.21
    
    
    
    (54,685
    )
    
    
    4.83
    
    
    
    4,462
    
    
    
    7,960$
    8,688
    
    
    
    0.36
    
    
    $
    2,664
    
    
    
    (0.06
    )
    
    $
    5,861
    
    
    $
    163
 Six Months Ended June 302007
    
    
    2006
    
    
    Related Changes inAverage
    
    
    
    
    
    
    Average
    
    
    AverageAmount
    
    
    Rate
    
    
    Amount
    
    
    Rate
    
    
    Rate*
    
    
    Volume*Interest income
    
    $
    147,937
    
    
    
    5.53
    %
    
    $
    110,275
    
    
    
    4.65
    %
    
    $
    22,459
    
    
    $
    15,203Interest expense
    
    
    (130,696
    )
    
    
    5.20
    
    
    
    (102,228
    )
    
    
    4.61
    
    
    
    13,851
    
    
    
    14,617$
    17,241
    
    
    
    0.33
    
    
    $
    8,047
    
    
    
    0.04
    
    
    $
    8,608
    
    
    $
    586
 
 *
    
    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. -15-




---



##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
 FINANCIAL CONDITION
 Overview
      -16-




---



##### Table of Contents



Risk Factors and Critical Accounting Policies
  Accounting for Acquisitions of Mortgage Securities Seller-Financed using Repurchase Arrangements
  Fair Value Accounting Rule Changes
 Fair Value Measurements
 The Fair Value Option for Financial Assets and
Financial Liabilities  Including an amendment of FASB Statement No. 115
 Stockholders equity
 -17-




---



##### Table of Contents



Residential Mortgage Investments
    Commercial Real Estate-related Assets
 -18-




---



##### Table of Contents



Book Value per Common Share
   -19-




---



##### Table of Contents



Mortgage Securities and Similar Investments Yield and Cost Analysis
  Projected
    
    
    Lifetime2ndQuarter Average
    
    
    As of June 30, 2007
    
    
    3rdQuarter
    
    
    RunoffBasis(a)
    
    
    Yield/Cost
    
    
    Runoff
    
    
    Premiums
    
    
    Basis(a)
    
    
    Yield/Cost(b)
    
    
    AssumptionsAgency Securities:Fannie Mae/Freddie Mac:Fixed-rate
    
    $
    15,294
    
    
    
    6.36
    %
    
    
    24
    %
    
    $
    43
    
    
    $
    14,697
    
    
    
    6.42
    %
    
    
    38
    %ARMs
    
    
    4,722,469
    
    
    
    5.56
    
    
    
    29
    
    
    
    65,873
    
    
    
    4,780,994
    
    
    
    5.70
    
    
    
    31Ginnie Mae ARMs
    
    
    657,306
    
    
    
    5.45
    
    
    
    36
    
    
    
    2,698
    
    
    
    625,777
    
    
    
    5.60
    
    
    
    295,395,069
    
    
    
    5.55
    
    
    
    30
    
    
    
    68,614
    
    
    
    5,421,468
    
    
    
    5.69
    
    
    
    31Non-agency Securities:Fixed-rate
    
    
    15,754
    
    
    
    6.91
    
    
    
    34
    
    
    
    28
    
    
    
    14,901
    
    
    
    6.99
    
    
    
    37ARMs
    
    
    27,561
    
    
    
    6.58
    
    
    
    37
    
    
    
    242
    
    
    
    26,084
    
    
    
    6.91
    
    
    
    3843,315
    
    
    
    6.70
    
    
    
    36
    
    
    
    270
    
    
    
    40,985
    
    
    
    6.94
    
    
    
    38Commercial loans
    
    
    2,838
    
    
    
    18.00
    
    
    
    
    
    
    
    
    
    
    
    2,881
    
    
    
    18.68
    
    
    
    Collateral for
structured
financings
    
    
    5,701
    
    
    
    7.96
    
    
    
    2
    
    
    
    89
    
    
    
    5,727
    
    
    
    7.96
    
    
    
    305,446,923
    
    
    
    5.57
    
    
    
    30
    
    
    $
    68,973
    
    
    
    5,471,061
    
    
    
    5.70
    
    
    
    31Related borrowings:30-day LIBOR
    
    
    3,652,138
    
    
    
    5.29
    
    
    
    
    
    
    
    
    
    
    
    3,629,770
    
    
    
    5.29>30-day LIBOR
    
    
    1,438,464
    
    
    
    4.98
    
    
    
    
    
    
    
    
    
    
    
    1,479,673
    
    
    
    4.99Structured financings
    
    
    5,701
    
    
    
    7.96
    
    
    
    
    
    
    
    
    
    
    
    5,727
    
    
    
    7.965,096,303
    
    
    
    5.21
    
    
    
    
    
    
    
    
    
    
    
    5,115,170
    
    
    
    5.20Capital employed/
financing spread
    
    $
    350,620
    
    
    
    0.36
    
    
    
    
    
    
    
    
    
    
    $
    355,891
    
    
    
    0.50Return on assets (c)
    
    
    
    
    
    
    0.64
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.72
 
 (a)
    
    Basis represents the Companys investment before unrealized gains and losses. Asset
yields, runoff rates, borrowing rates and resulting financing spread are presented on an
annualized basis.(b)
    
    Projected annualized yields and borrowing rates reflect anticipated ARM coupon resets and
runoff rates, assuming no change in the federal funds rate during the forecast period and a
gradual rise in the One-Year Treasury Rate, as adjusted for expected third quarter portfolio
acquisitions as of July 26, 2007, the date second quarter earnings were released. Actual
yields realized in future periods largely depend upon (i) changes in portfolio composition,
(ii) actual ARM coupon resets, which can fluctuate from projections based on changes to the
underlying indexes, (iii) actual runoff and (iv) any changes in lifetime runoff assumptions.
Interest rates on borrowings that reset monthly based on 30-day LIBOR largely depend on
changes or anticipated changes in the federal funds rate. As of July 26, 2007, projected
average portfolio yields, borrowing rates, financing spreads and runoff rates over the next
four quarters for Capsteads existing portfolio, (adjusted for expected portfolio
acquisitions through September 30, 2007 only), were as follows: Ending
    
    Ending
    
    Portfolio AveragesFederal
    
    One-Year
    
    
    
    
    
    Borrowing
    
    Financing
    
    RunoffFunds Rates
    
    Treasury Rate
    
    Yields
    
    Rates
    
    Spreads
    
    RatesThird Quarter 2007
    
    
    5.25
    %
    
    
    5.07
    %
    
    
    5.70
    %
    
    
    5.20
    %
    
    
    0.50
    %
    
    
    28
    %Fourth Quarter 2007
    
    
    5.25
    
    
    
    5.17
    
    
    
    5.85
    
    
    
    5.20
    
    
    
    0.65
    
    
    
    27First Quarter 2008
    
    
    5.25
    
    
    
    5.30
    
    
    
    5.88
    
    
    
    5.20
    
    
    
    0.68
    
    
    
    29Second Quarter 2008
    
    
    5.25
    
    
    
    5.30
    
    
    
    5.95
    
    
    
    5.19
    
    
    
    0.76
    
    
    
    28
 
 (c)
    
    The Company generally 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. -20-




---



##### Table of Contents



Utilization of Long-term Investment Capital and Potential Liquidity
  -21-




---



##### Table of Contents



Related
    
    
    Capital
    
    
    PotentialInvestments(a)
    
    
    Borrowings
    
    
    Employed(a)
    
    
    Liquidity(a)Residential mortgage securities
    
    $
    5,487,568
    
    
    $
    5,115,170
    
    
    $
    372,398
    
    
    $
    212,208Commercial real estate-related assets:Commercial loans
    
    
    2,881
    
    
    
    
    
    
    
    2,881
    
    
    
    Investment in commercial
loan partnership
    
    
    7,406
    
    
    
    
    
    
    
    7,406
    
    
    
    60$
    5,497,855
    
    
    $
    5,115,170
    
    
    
    382,685
    
    
    
    212,268Other assets, net of other liabilities
    
    
    
    
    
    
    
    
    
    
    62,738
    
    
    
    6,560Second quarter common dividend
    
    
    
    
    
    
    
    
    
    
    (775
    )
    
    
    (775)
    (b)$
    444,648
    
    
    $
    218,053Balances as of December 31, 2006
    
    $
    5,269,355
    
    
    $
    4,876,134
    
    
    $
    439,962
    
    
    $
    226,330
 
 (a)
    
    Investments are stated at carrying amounts on the Companys balance sheet. Potential
liquidity is based on maximum amounts of borrowings available under existing uncommitted
repurchase arrangements considering the fair value of related collateral as of the indicated
dates adjusted for other sources (uses) of liquidity such as unrestricted cash and cash
equivalents, cash flow (requirements) distributions from the commercial loan partnership and
dividends payable.(b)
    
    The second quarter 2007 common dividend was declared June 14, 2007 and paid July 20, 2007
to stockholders of record as of June 29, 2007.  -22-




---



##### Table of Contents



RESULTS OF OPERATIONS
  Quarter Ended June 30
    
    
    Six Months Ended June 302007
    
    
    2006
    
    
    2007
    
    
    2006Income statement data:Mortgage securities and similar investments:Agency Securities
    
    $
    8,426
    
    
    $
    2,525
    
    
    $
    16,693
    
    
    $
    7,728Non-agency Securities
    
    
    134
    
    
    
    139
    
    
    
    300
    
    
    
    319Commercial loans
    
    
    128
    
    
    
    
    
    
    
    248
    
    
    
    8,688
    
    
    
    2,664
    
    
    
    7,241
    
    
    
    8,047Other revenue (expense):Other revenue
    
    
    237
    
    
    
    200
    
    
    
    1,108
    
    
    
    366Interest on unsecured borrowings
    
    
    (2,187
    )
    
    
    (1,621
    )
    
    
    (4,374
    )
    
    
    (3,208
    )Other operating expense
    
    
    (1,539
    )
    
    
    (1,576
    )
    
    
    (3,213
    )
    
    
    (3,249
    )5,199
    
    
    
    (333
    )
    
    
    10,762
    
    
    
    1,956Equity in earnings of unconsolidated affiliates
    
    
    575
    
    
    
    608
    
    
    
    1,239
    
    
    
    1,030Net income
    
    $
    5,774
    
    
    $
    275
    
    
    $
    12,001
    
    
    $
    2,986Diluted earnings (loss) per common share
    
    $
    0.04
    
    
    $
    (0.25
    )
    
    $
    0.10
    
    
    $
    (0.38
    )Key portfolio statistics:Average yields:Agency Securities
    
    
    5.55
    %
    
    
    4.75
    %
    
    
    5.51
    %
    
    
    4.63
    %Non-agency Securities
    
    
    6.70
    
    
    
    6.07
    
    
    
    6.76
    
    
    
    5.90Commercial loans
    
    
    18.00
    
    
    
    
    
    
    
    18.00
    
    
    
    Collateral for structured financings
    
    
    7.96
    
    
    
    6.87
    
    
    
    7.96
    
    
    
    7.13Total average yields
    
    
    5.57
    
    
    
    4.77
    
    
    
    5.53
    
    
    
    4.65Average related borrowing rates:30-day LIBOR
    
    
    5.29
    
    
    
    4.97
    
    
    
    5.30
    
    
    
    4.75Greater than 30-day LIBOR
    
    
    4.98
    
    
    
    4.34
    
    
    
    4.93
    
    
    
    4.13Structured financings
    
    
    7.96
    
    
    
    6.87
    
    
    
    7.96
    
    
    
    7.13Total related borrowing rates
    
    
    5.21
    
    
    
    4.83
    
    
    
    5.20
    
    
    
    4.61Average financing spreads
    
    
    0.36
    
    
    
    (0.06
    )
    
    
    0.33
    
    
    
    0.04Average portfolio balances:Agency Securities
    
    $
    5,395
    
    
    $
    4,736
    
    
    $
    5,295
    
    
    $
    4,671Non-agency Securities
    
    
    43
    
    
    
    61
    
    
    
    45
    
    
    
    63Commercial loans
    
    
    3
    
    
    
    
    
    
    
    3
    
    
    
    Collateral for structured financings
    
    
    6
    
    
    
    7
    
    
    
    6
    
    
    
    85,447
    
    
    
    4,804
    
    
    
    5,349
    
    
    
    4,742Related average borrowings
    
    
    5,096
    
    
    
    4,472
    
    
    
    4,999
    
    
    
    4,406Average capital deployed
    
    $
    351
    
    
    $
    332
    
    
    $
    350
    
    
    $
    336Average portfolio runoff rates:Agency Securities
    
    
    30
    %
    
    
    32
    %
    
    
    29
    %
    
    
    31
    %Total
    
    
    30
    
    
    
    32
    
    
    
    29
    
    
    
    31
 -23-




---



##### Table of Contents



-24-




---



##### Table of Contents



LIQUIDITY AND CAPITAL RESOURCES
    -25-




---



##### Table of Contents



RISK FACTORS
 General Discussion of Effects of Interest Rate Changes
  Fully
    
    
    Average
    
    
    Average

    
    
    Average
    
    
    MonthsNet
    
    
    Indexed
    
    
    Net
    
    
    Periodic
    
    
    Lifetime
    
    
    ToARM Type
    
    Basis*
    
    
    WAC
    
    
    WAC
    
    
    Margins
    
    
    Caps
    
    
    Caps
    
    
    RollCurrent-reset ARMs:Agency Securities:Fannie Mae/Freddie Mac
    
    $
    2,825,534
    
    
    
    6.34
    %
    
    
    6.76
    %
    
    
    1.85
    %
    
    
    4.18
    %
    
    
    10.64
    %
    
    
    4.4Ginnie Mae
    
    
    625,777
    
    
    
    5.66
    
    
    
    6.41
    
    
    
    1.54
    
    
    
    1.00
    
    
    
    9.88
    
    
    
    5.5Non-agency Securities
    
    
    26,084
    
    
    
    7.22
    
    
    
    7.49
    
    
    
    2.11
    
    
    
    1.69
    
    
    
    11.30
    
    
    
    5.83,477,395
    
    
    
    6.22
    
    
    
    6.70
    
    
    
    1.80
    
    
    
    3.59
    
    
    
    10.51
    
    
    
    4.6Longer-to-reset ARMs:Agency Securities:Fannie Mae/Freddie Mac
    
    
    1,955,460
    
    
    
    6.25
    
    
    
    7.14
    
    
    
    1.79
    
    
    
    3.78
    
    
    
    12.01
    
    
    
    45.5$
    5,432,855
    
    
    
    6.23
    
    
    
    6.86
    
    
    
    1.79
    
    
    
    3.66
    
    
    
    11.05
    
    
    
    19.3
 
 *
    
    Basis represents the Companys investment before unrealized gains and losses. -26-




---



##### Table of Contents



Interest Rate Sensitivity on Operating Results
  -27-




---



##### Table of Contents



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
    
    
    
    
    
    
    
    
    
    Down
    
    
    
    
    
    Down
    
    
    
    
    
    

    Uprate
    
    
    
    
    
    
    
    
    
    
    1.00
    %
    
    Flat
    
    
    1.00
    %
    
    Flat
    
    
    1.00
    %Projected 12-month
earnings change:June 30, 2007
    
    
    5.32
    %
    
    
    5.03
    %
    
    $
    7,700
    
    
    $
    10,700
    
    
    $
    (6,700
    )
    
    $
    (18,000
    )
    
    $
    (14,700
    )December 31, 2006
    
    
    5.32
    
    
    
    4.70
    
    
    
    11,900
    
    
    
    14,300
    
    
    
    (5,500
    )
    
    
    (24,700
    )
    
    
    (21,700
    )
 
 *
    
    Sensitivity of earnings to changes in interest rates is determined relative to the actual
rates at the applicable date. Note that the projected 12-month earnings change is
predicated on acquisitions of similar assets sufficient to replace runoff. There can be no
assurance that suitable investments will be available for purchase at attractive prices or
if investments made will behave in the same fashion as assets currently held.  Risks Associated With Credit-Sensitive Investments
   -28-




---



##### Table of Contents



Tax Status
  -29-




---



##### Table of Contents



Investment Company Act of 1940
   CRITICAL ACCOUNTING POLICIES
  -30-




---



##### Table of Contents




    
    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 8 to the accompanying
unaudited 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.
 FORWARD LOOKING STATEMENTS
  
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISKS
  -31-




---



##### Table of Contents



ITEM 4. CONTROLS AND PROCEDURES
  
 PART II. 3⁄4 OTHER INFORMATION
 
 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
 Exhibits
     Reports on Form 8-K
      -32-




---



##### Table of Contents



SIGNATURES
  CAPSTEAD MORTGAGE CORPORATIONRegistrantDate: August 6, 2007
    
    By:
    
    /s/ ANDREW F. JACOBSAndrew F. JacobsPresident and Chief Executive OfficerDate: August 6, 2007
    
    By:
    
    /s/ PHILLIP A. REINSCHPhillip A. ReinschExecutive Vice President andChief Financial Officer
 -33-