##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q/A
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended: June 30, 2008
 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: 001-08896
 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
  Large accelerated filer
o
    
    Accelerated filer
þ
    
    Non-accelerated filer   o
(Do not check if a smaller reporting company)
    
    Smaller reporting company o
 o þ
 APPLICABLE ONLY TO CORPORATE ISSUERS:
  Common Stock ($0.01 par value)
    
    56,388,583 as of August 6, 2008




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##### 



CAPSTEAD MORTGAGE CORPORATION
FORM 10-Q/A
FOR THE QUARTER ENDED JUNE 30, 2008
 INDEX
 PagePART I.  FINANCIAL INFORMATIONEXPLANATORY NOTE  RECLASSIFYING RESTATEMENT
    
    
    3ITEM 1. Financial Statements (unaudited)Consolidated Balance Sheets  June 30, 2008 and December 31, 2007
    
    
    5Consolidated Statements of Income  Quarter and Six Months Ended
June 30, 2008 and 2007
    
    
    6Consolidated Statements of Cash Flows Quarter and Six Months Ended
June 30, 2008 and 2007
    
    
    7Notes to Consolidated Financial Statements
    
    
    8ITEM 2. Managements Discussion and Analysis of
Financial Condition and Results of Operations
    
    
    21ITEM 3. Qualitative and Quantitative Disclosure of Market Risk
    
    
    42ITEM 4. Controls and Procedures
    
    
    42PART II.  OTHER INFORMATIONITEM 6. Exhibits and Reports on Form 8-K
    
    
    43SIGNATURES
    
    
    44First Amendment to Sales AgreementComputation of Ratio of Income from Continuing OperationsCertification Pursuant to Section 302(a)Certification Pursuant to Section 302(a)Certification Pursuant to Section 906EX-1.1EX-12EX-31.1EX-31.2EX-32
  -2-




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EXPLANATORY NOTE  RECLASSIFYING RESTATEMENT
    Quarter Ended June 30
    
    
    Six Months Ended June 302008
    
    
    2007
    
    
    2008
    
    
    2007Interest income:As previously reported
    
    $
    97,332
    
    
    $
    75,795
    
    
    $
    203,683
    
    
    $
    147,937Reclassification
    
    
    782
    
    
    
    39
    
    
    
    1,586
    
    
    
    101As amended
    
    $
    98,114
    
    
    $
    75,834
    
    
    $
    205,269
    
    
    $
    148,038Interest expense:As previously reported
    
    $
    (55,019
    )
    
    $
    (67,107
    )
    
    $
    (124,325
    )
    
    $
    (130,696
    )Reclassification
    
    
    (2,187
    )
    
    
    (2,187
    )
    
    
    (4,374
    )
    
    
    (4,374
    )As amended
    
    $
    (57,206
    )
    
    $
    (69,294
    )
    
    $
    (128,699
    )
    
    $
    (135,070
    )Net interest income:As previously reported
    
    $
    42,313
    
    
    $
    8,688
    
    
    $
    79,358
    
    
    $
    17,241Reclassification
    
    
    (1,405
    )
    
    
    (2,148
    )
    
    
    (2,788
    )
    
    
    (4,273
    )As amended
    
    $
    40,908
    
    
    $
    6,540
    
    
    $
    76,570
    
    
    $
    12,968Other revenue (expense):As previously reported
    
    $
    (5,650
    )
    
    $
    (3,489
    )
    
    $
    (12,613
    )
    
    $
    (6,479
    )Reclassification
    
    
    1,405
    
    
    
    2,148
    
    
    
    2,788
    
    
    
    4,273As amended
    
    $
    (4,245
    )
    
    $
    (1,341
    )
    
    $
    (9,825
    )
    
    $
    (2,206
    )Impact on net income from
these restatements
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
 -3-




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-4-




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ITEM 1. FINANCIAL STATEMENTS
 
 PART I.  FINANCIAL INFORMATION
 CAPSTEAD MORTGAGE CORPORATION
 
 CONSOLIDATED BALANCE SHEETS
 (in thousands, except per share amounts)
 June 30, 2008
    
    
    December 31, 2007(unaudited)Assets:Mortgage securities and similar investments
($7.4 billion pledged under repurchase arrangements)
    
    $
    7,861,295
    
    
    $
    7,108,719Investments in unconsolidated affiliates
    
    
    3,117
    
    
    
    3,117Interest rate swap agreements at fair value
    
    
    7,328
    
    
    
    Receivables and other assets
    
    
    110,385
    
    
    
    90,437Cash and cash equivalents
    
    
    42,134
    
    
    
    6,653$
    8,024,259
    
    
    $
    7,208,926Liabilities:Repurchase arrangements and similar borrowings
    
    $
    7,067,368
    
    
    $
    6,500,362Unsecured borrowings
    
    
    103,095
    
    
    
    103,095Interest rate swap agreements at fair value
    
    
    9,468
    
    
    
    2,384Common stock dividend payable
    
    
    33,082
    
    
    
    9,786Accounts payable and accrued expenses
    
    
    43,441
    
    
    
    32,3827,256,454
    
    
    
    6,648,009Stockholders equity:Preferred stock  $0.10 par value; 100,000 shares authorized:$1.60 Cumulative Preferred Stock, Series A,
199 and 202 shares issued and outstanding at
June 30, 2008 and December 31, 2007, respectively
($3,269 aggregate liquidation preference)
    
    
    2,786
    
    
    
    2,828$1.26 Cumulative Convertible Preferred Stock, Series B,
15,819 shares issued and outstanding at
June 30, 2008 and December 31, 2007
($180,025 aggregate liquidation preference)
    
    
    176,705
    
    
    
    176,705Common stock  $0.01 par value; 250,000 shares authorized:56,071 and 40,819 shares issued and outstanding at
June 30, 2008 and December 31, 2007, respectively
    
    
    561
    
    
    
    408Paid-in capital
    
    
    908,905
    
    
    
    702,170Accumulated deficit
    
    
    (358,155
    )
    
    
    (358,155
    )Accumulated other comprehensive income
    
    
    37,003
    
    
    
    36,961767,805
    
    
    
    560,917$
    8,024,259
    
    
    $
    7,208,926
 See accompanying notes to consolidated financial statements.
 -5-




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CAPSTEAD MORTGAGE CORPORATION
 
 CONSOLIDATED STATEMENTS OF INCOME
 (in thousands, except per share amounts)
 (unaudited)
 Quarter Ended
    
    
    Six Months EndedJune 30
    
    
    June 302008
    
    
    2007
    
    
    2008
    
    
    2007(as Restated, see NOTE 13)Interest income:Mortgage securities and similar investments
    
    $
    97,332
    
    
    $
    75,795
    
    
    $
    203,683
    
    
    $
    147,937Other
    
    
    782
    
    
    
    39
    
    
    
    1,586
    
    
    
    10198,114
    
    
    
    75,834
    
    
    
    205,269
    
    
    
    148,038Interest expense:Repurchase arrangements and similar borrowings
    
    
    (55,019
    )
    
    
    (67,107
    )
    
    
    (124,325
    )
    
    
    (130,696
    )Unsecured borrowings
    
    
    (2,187
    )
    
    
    (2,187
    )
    
    
    (4,374
    )
    
    
    (4,374
    )(57,206
    )
    
    
    (69,294
    )
    
    
    (128,699
    )
    
    
    (135,070
    )40,908
    
    
    
    6,540
    
    
    
    76,570
    
    
    
    12,968Other revenue (expense):Loss from portfolio restructuring
    
    
    
    
    
    
    
    
    
    
    (1,408
    )
    
    
    Other revenue (expense)
    
    
    (55
    )
    
    
    198
    
    
    
    (16
    )
    
    
    1,007Incentive compensation
    
    
    (2,270
    )
    
    
    
    
    
    
    (4,520
    )
    
    
    Other operating expense
    
    
    (1,920
    )
    
    
    (1,539
    )
    
    
    (3,881
    )
    
    
    (3,213
    )(4,245
    )
    
    
    (1,341
    )
    
    
    (9,825
    )
    
    
    (2,206
    )Income before equity in earnings of
unconsolidated affiliates
    
    
    36,663
    
    
    
    5,199
    
    
    
    66,745
    
    
    
    10,762Equity in earnings of unconsolidated affiliates
    
    
    65
    
    
    
    575
    
    
    
    130
    
    
    
    1,239Net income
    
    $
    36,728
    
    
    $
    5,774
    
    
    $
    66,875
    
    
    $
    12,001Net income available to common stockholders:Net income
    
    $
    36,728
    
    
    $
    5,774
    
    
    $
    66,875
    
    
    $
    12,001Less cash dividends paid on preferred stock
    
    
    (5,063
    )
    
    
    (5,064
    )
    
    
    (10,127
    )
    
    
    (10,128
    )$
    31,665
    
    
    $
    710
    
    
    $
    56,748
    
    
    $
    1,873Net income per common share:Basic
    
    $
    0.59
    
    
    $
    0.04
    
    
    $
    1.14
    
    
    $
    0.10Diluted
    
    
    0.58
    
    
    
    0.04
    
    
    
    1.11
    
    
    
    0.10Cash dividends declared per share:Common
    
    $
    0.590
    
    
    $
    0.040
    
    
    $
    1.110
    
    
    $
    0.060Series 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.
 -6-




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CAPSTEAD MORTGAGE CORPORATION
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (in thousands, unaudited)
 Six Months Ended June 302008
    
    
    2007Operating activities:Net income
    
    $
    66,875
    
    
    $
    12,001Noncash items:Amortization of investment premiums
    
    
    15,032
    
    
    
    11,808Depreciation and other amortization
    
    
    117
    
    
    
    117Equity-based compensation costs
    
    
    628
    
    
    
    437Amounts related to interest rate swap agreements
    
    
    163
    
    
    
    Loss from portfolio restructuring
    
    
    1,408
    
    
    
    Net change in receivables, other assets, accounts payable and
accrued expenses
    
    
    (2,015
    )
    
    
    (10,378
    )Net cash provided by operating activities
    
    
    82,208
    
    
    
    13,985Investing activities:Purchases of mortgage securities and similar investments
    
    
    (2,332,970
    )
    
    
    (1,153,451
    )Proceeds from sales of mortgage securities and similar investments
    
    
    766,800
    
    
    
    Principal collections on mortgage securities and similar investments
    
    
    792,063
    
    
    
    901,280Investment in unconsolidated affiliates
    
    
    
    
    
    
    9,550Net cash used in investing activities
    
    
    (774,107
    )
    
    
    (242,621
    )Financing activities:Proceeds from repurchase arrangements and similar borrowings
    
    
    32,658,780
    
    
    
    22,889,594Principal payments on repurchase arrangements and similar borrowings
    
    
    (32,091,771
    )
    
    
    (22,650,557
    )Early termination payment on interest rate swap agreement
    
    
    (2,275
    )
    
    
    Capital stock transactions
    
    
    208,516
    
    
    
    1,396Dividends paid
    
    
    (45,870
    )
    
    
    (10,898
    )Net cash provided by financing activities
    
    
    727,380
    
    
    
    229,535Net change in cash and cash equivalents
    
    
    35,481
    
    
    
    899Cash and cash equivalents at beginning of period
    
    
    6,653
    
    
    
    5,661Cash and cash equivalents at end of period
    
    $
    42,134
    
    
    $
    6,560
 See accompanying notes to consolidated financial statements.
 -7-




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CAPSTEAD MORTGAGE CORPORATION
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 JUNE 30, 2008
 (unaudited)
 NOTE 1  BUSINESS
  NOTE 2  BASIS OF PRESENTATION
 Interim Financial Reporting and Reclassifications
  Accounting for Seller-financed Acquisitions of Mortgage Securities
 Mortgage securities and similar investments Accumulated other comprehensive income.
  -8-




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Fair Value Accounting Rule Changes
 Fair Value
Measurements
 
    
    Level One Inputs  Quoted prices for identical instruments in active markets.
    
    Level Two Inputs  Quoted prices for similar instruments in active markets; quoted prices
for identical or similar instruments in markets that are not active; and model-derived
valuations whose inputs are observable or whose significant value drivers are observable.
    
    Level Three Inputs  Instruments with primarily unobservable value drivers.
 The Fair Value Option for Financial Assets and
Financial Liabilities  Including an amendment of FASB Statement No. 115
   -9-




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NOTE 3  EARNINGS PER COMMON SHARE
   Quarter Ended
    
    
    Six Months EndedJune 30
    
    
    June 302008
    
    
    2007
    
    
    2008
    
    
    2007Numerators for basic earnings per common share:Net income
    
    $
    36,728
    
    
    $
    5,774
    
    
    $
    66,875
    
    
    $
    12,001Less Series A and B preferred share dividends
    
    
    (5,063
    )
    
    
    (5,064
    )
    
    
    (10,127
    )
    
    
    (10,128
    )Income available to common stockholders
    
    $
    31,665
    
    
    $
    710
    
    
    $
    56,748
    
    
    $
    1,873Weighted average common shares outstanding
    
    
    53,453
    
    
    
    19,013
    
    
    
    49,803
    
    
    
    18,973Basic earnings per common share
    
    $
    0.59
    
    
    $
    0.04
    
    
    $
    1.14
    
    
    $
    0.10Numerators for diluted earnings per common share:Net income
    
    $
    36,728
    
    
    $
    5,774
    
    
    $
    66,875
    
    
    $
    12,001Less dividends on antidilutive convertible
preferred shares
    
    
    
    
    
    
    (5,064
    )
    
    
    
    
    
    
    (10,128
    )Income available to common stockholders
    
    $
    36,728
    
    
    $
    710
    
    
    $
    66,875
    
    
    $
    1,873Denominator for diluted earnings per common share:Weighted average common shares outstanding
    
    
    53,453
    
    
    
    19,013
    
    
    
    49,803
    
    
    
    18,973Net effect of dilutive equity awards
    
    
    275
    
    
    
    244
    
    
    
    367
    
    
    
    182Net effect of dilutive convertible preferred shares
    
    
    9,829
    
    
    
    
    
    
    
    9,824
    
    
    
    63,557
    
    
    
    19,257
    
    
    
    59,994
    
    
    
    19,155Diluted earnings per common share
    
    $
    0.58
    
    
    $
    0.04
    
    
    $
    1.11
    
    
    $
    0.10
  Quarter Ended June 30
    
    Six Months Ended June 302008
    
    2007
    
    2008
    
    2007Shares issuable under option awards
    
    
    40
    
    
    
    406
    
    
    
    10
    
    
    
    406Convertible preferred shares:Series A shares
    
    
    
    
    
    
    202
    
    
    
    
    
    
    
    202Series B shares
    
    
    
    
    
    
    15,819
    
    
    
    
    
    
    
    15,819
 -10-




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NOTE 4  MORTGAGE SECURITIES AND SIMILAR INVESTMENTS
 Mortgage securities and similar investments
 InvestmentPrincipal
    
    
    Premiums
    
    
    
    
    
    
    Carrying
    
    
    Net
    
    
    AverageBalance
    
    
    (Discounts)
    
    
    Basis
    
    
    Amount(a)
    
    
    WAC(b)
    
    
    Yield(b)June 30, 2008Agency Securities:Fannie Mae/Freddie Mac:Fixed-rate
    
    $
    11,295
    
    
    $
    31
    
    
    $
    11,326
    
    
    $
    11,350
    
    
    
    6.65
    %
    
    
    6.42
    %ARMs
    
    
    7,207,397
    
    
    
    100,218
    
    
    
    7,307,615
    
    
    
    7,345,330
    
    
    
    5.72
    
    
    
    5.27Ginnie Mae ARMs
    
    
    434,379
    
    
    
    2,217
    
    
    
    436,596
    
    
    
    440,184
    
    
    
    5.45
    
    
    
    5.247,653,071
    
    
    
    102,466
    
    
    
    7,755,537
    
    
    
    7,796,864
    
    
    
    5.71
    
    
    
    5.27Residential mortgage loans:Fixed-rate
    
    
    6,638
    
    
    
    (6
    )
    
    
    6,632
    
    
    
    6,632
    
    
    
    7.08
    
    
    
    7.13ARMs
    
    
    9,726
    
    
    
    87
    
    
    
    9,813
    
    
    
    9,813
    
    
    
    6.32
    
    
    
    6.6916,364
    
    
    
    81
    
    
    
    16,445
    
    
    
    16,445
    
    
    
    6.63
    
    
    
    6.87Commercial real estate loans
    
    
    43,083
    
    
    
    (152
    )
    
    
    42,931
    
    
    
    42,931
    
    
    
    8.09
    
    
    
    9.68Collateral for structured
financings
    
    
    4,973
    
    
    
    82
    
    
    
    5,055
    
    
    
    5,055
    
    
    
    8.14
    
    
    
    8.00$
    7,717,491
    
    
    $
    102,477
    
    
    $
    7,819,968
    
    
    $
    7,861,295
    
    
    
    5.72
    
    
    
    5.30December 31, 2007Agency Securities:Fannie Mae/Freddie Mac:Fixed-rate
    
    $
    13,079
    
    
    $
    36
    
    
    $
    13,115
    
    
    $
    13,138
    
    
    
    6.63
    %
    
    
    6.43
    %ARMs
    
    
    6,382,773
    
    
    
    89,017
    
    
    
    6,471,790
    
    
    
    6,507,447
    
    
    
    6.36
    
    
    
    5.78Ginnie Mae ARMs
    
    
    515,091
    
    
    
    2,465
    
    
    
    517,556
    
    
    
    521,288
    
    
    
    5.87
    
    
    
    5.626,910,943
    
    
    
    91,518
    
    
    
    7,002,461
    
    
    
    7,041,873
    
    
    
    6.33
    
    
    
    5.77Residential mortgage loans:Fixed-rate
    
    
    7,412
    
    
    
    (3
    )
    
    
    7,409
    
    
    
    7,409
    
    
    
    7.05
    
    
    
    7.14ARMs
    
    
    11,097
    
    
    
    96
    
    
    
    11,193
    
    
    
    11,193
    
    
    
    7.18
    
    
    
    7.0518,509
    
    
    
    93
    
    
    
    18,602
    
    
    
    18,602
    
    
    
    7.13
    
    
    
    7.08Commercial real estate loans
    
    
    43,435
    
    
    
    (439
    )
    
    
    42,996
    
    
    
    42,996
    
    
    
    10.46
    
    
    
    12.21Collateral for structured
financings
    
    
    5,162
    
    
    
    86
    
    
    
    5,248
    
    
    
    5,248
    
    
    
    8.14
    
    
    
    8.07$
    6,978,049
    
    
    $
    91,258
    
    
    $
    7,069,307
    
    
    $
    7,108,719
    
    
    
    6.36
    
    
    
    5.80
 
 (a)
    
    Includes mark-to-market for securities classified as available-for-sale, if applicable (see
NOTE 10).(b)
    
    Net WACs, or weighted average coupons, net of servicing and other fees, are presented as of
the indicated balance sheet date. Average Yields are presented for the quarter then ended
calculated including the amortization of investment premiums and excluding unrealized gains
and losses.  -11-




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NOTE 5  INVESTMENTS IN UNCONSOLIDATED AFFILIATES
 Unsecured borrowings Unsecured borrowings
 NOTE 6  REPURCHASE ARRANGEMENTS AND SIMILAR
BORROWINGS, INCLUDING RELATED HEDGING ACTIVITY
 Repurchase arrangements and similar borrowings
 June 30, 2008
    
    
    December 31, 2007Borrowings
    
    
    Average
    
    
    Borrowings
    
    
    AverageCollateral Type
    
    Outstanding
    
    
    Rate*
    
    
    Outstanding
    
    
    Rate*Borrowings with maturities of 30 days or less:Agency Securities
    
    $
    4,649,208
    
    
    
    2.40
    %
    
    $
    4,963,674
    
    
    
    4.93
    %Residential mortgage loans
    
    
    8,484
    
    
    
    3.98
    
    
    
    14,352
    
    
    
    6.124,657,692
    
    
    
    2.40
    
    
    
    4,978,026
    
    
    
    4.93Borrowings with maturities greater than 30 days:Agency Securities (31 to 90 days)
    
    
    991,516
    
    
    
    2.64
    
    
    
    
    
    
    
    Agency Securities (91 to 360 days)
    
    
    849,134
    
    
    
    4.90
    
    
    
    368,694
    
    
    
    4.92Agency Securities (greater than 360 days)
    
    
    556,980
    
    
    
    5.17
    
    
    
    1,127,420
    
    
    
    5.052,397,630
    
    
    
    4.03
    
    
    
    1,496,114
    
    
    
    5.02Similar borrowings:Commercial real estate loans
    
    
    6,991
    
    
    
    4.32
    
    
    
    20,974
    
    
    
    6.88Collateral for structured financings
    
    
    5,055
    
    
    
    8.14
    
    
    
    5,248
    
    
    
    8.14$
    7,067,368
    
    
    
    2.96
    
    
    $
    6,500,362
    
    
    
    4.96
 
 *
    
    Average rate is presented as of the indicated balance sheet date and does not include the
effects of interest rate swap agreements held as cash flow hedges on a designated portion of
30-day borrowings (see below). After giving effect to these cash flow hedges, the Average
rate was 3.22% at June 30, 2008. -12-




---



##### Table of Contents



Mortgage securities and similar investments
  Other
revenue Accumulated other comprehensive
income Accumulated
other comprehensive income Interest expense
 Repurchase arrangements and similar borrowings
 -13-




---



##### Table of Contents



NOTE 7  UNSECURED BORROWINGS
 Unsecured borrowings Receivables and other assets
 Borrowings
    
    
    AverageOutstanding
    
    
    RateJunior subordinated notes:Capstead Mortgage Trust I
    
    $
    36,083
    
    
    
    8.31
    %Capstead Mortgage Trust II
    
    
    41,238
    
    
    
    8.46Capstead Mortgage Trust III
    
    
    25,774
    
    
    
    8.78$
    103,095
    
    
    
    8.49
 Unsecured
borrowings
 NOTE 8  RECENT COMMON EQUITY RAISES
  -14-




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##### Table of Contents



NOTE 9  COMPREHENSIVE INCOME (LOSS)
 Accumulated other comprehensive income Stockholders equity
 Quarter Ended
    
    
    Six Months EndedJune 30
    
    
    June 302008
    
    
    2007
    
    
    2008
    
    
    2007Net income
    
    $
    36,728
    
    
    $
    5,774
    
    
    $
    66,875
    
    
    $
    12,001Other comprehensive income (loss):Amounts related to cash flow hedges:Change in net unrealized losses
    
    
    27,700
    
    
    
    
    
    
    
    157
    
    
    
    Early termination of interest rate swap
agreement
    
    
    
    
    
    
    
    
    
    
    (2,275
    )
    
    
    Reclassification adjustment for amounts
included in net income
    
    
    184
    
    
    
    (11
    )
    
    
    245
    
    
    
    (23
    )Amounts related to available-for-sale securities:Reclassification adjustments for amounts
included in net income
    
    
    
    
    
    
    
    
    
    
    1,408
    
    
    
    Change in net unrealized gains
    
    
    10,972
    
    
    
    (7,357
    )
    
    
    507
    
    
    
    2,109Other comprehensive income (loss)
    
    
    38,856
    
    
    
    (7,368
    )
    
    
    42
    
    
    
    2,086Comprehensive income (loss)
    
    $
    75,584
    
    
    $
    (1,594
    )
    
    $
    66,917
    
    
    $
    14,087
 NOTE 10  DISCLOSURES REGARDING FAIR VALUES OF MORTGAGE SECURITIES AND SIMILAR INVESTMENTS
 Mortgage securities and similar investments Accumulated other comprehensive income Stockholders equity.
  Gross
    
    GrossUnrealized
    
    Unrealized
    
    FairBasis
    
    Gains
    
    Losses
    
    ValueAs of June 30, 2008Agency Securities
    
    $
    7,744,469
    
    
    $
    45,875
    
    
    $
    4,548
    
    
    $
    7,785,796As of December 31, 2007Agency Securities
    
    $
    6,989,619
    
    
    $
    42,023
    
    
    $
    2,611
    
    
    $
    7,029,031
 -15-




---



##### Table of Contents



Gross
    
    
    GrossUnrealized
    
    
    Unrealized
    
    
    FairBasis
    
    
    Gains
    
    
    Losses
    
    
    ValueAs of June 30, 2008Collateral released from structured
financings (Agency Securities)
    
    $
    11,067
    
    
    $
    397
    
    
    $
    
    
    
    $
    11,464Collateral for structured financings
    
    
    5,055
    
    
    
    
    
    
    
    
    
    
    
    5,055$
    16,122
    
    
    $
    397
    
    
    $
    
    
    
    $
    16,519As of December 31, 2007Collateral released from structured
financings (Agency Securities)
    
    $
    12,842
    
    
    $
    340
    
    
    $
    
    
    
    $
    13,182Collateral for structured financings
    
    
    5,248
    
    
    
    
    
    
    
    
    
    
    
    5,248$
    18,090
    
    
    $
    340
    
    
    $
    
    
    
    $
    18,430
  June 30, 2008
    
    
    December 31, 2007Fair
    
    
    Unrealized
    
    
    Fair
    
    
    UnrealizedValue
    
    
    Loss
    
    
    Value
    
    
    LossSecurities in an unrealized loss position:One year or greater
    
    $
    224,733
    
    
    $
    2,093
    
    
    $
    323,751
    
    
    $
    1,856Less than one year
    
    
    1,097,393
    
    
    
    2,455
    
    
    
    382,482
    
    
    
    755$
    1,322,126
    
    
    $
    4,548
    
    
    $
    706,233
    
    
    $
    2,611Commercial and residential loans in
an unrealized loss position:One year or greater
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Less than one year
    
    
    51,131
    
    
    
    1,613
    
    
    
    42,248
    
    
    
    748$
    51,131
    
    
    $
    1,613
    
    
    $
    42,248
    
    
    $
    748
   -16-




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##### Table of Contents



NOTE 11  LONG-TERM INCENTIVE AND OTHER PLANS
    Weighted AverageNumber of
    
    Grant DateShares
    
    Fair ValueStock awards outstanding as of December 31, 2007
    
    
    431,200
    
    
    $
    9.82Grants*
    
    
    6,000
    
    
    
    12.90Forfeitures
    
    
    (3,875
    )
    
    
    10.70Vested
    
    
    (89,851
    )
    
    
    8.17Stock awards outstanding as of June 30, 2008
    
    
    343,474
    
    
    
    10.29
 
 *
    
    In May 2008, stock awards totaling 6,000 common shares were issued to directors
that vest April 15, 2009.  -17-




---



##### Table of Contents



Number of
    
    Weighted AverageShares
    
    Exercise PriceOption awards outstanding as of December 31, 2007
    
    
    948,656
    
    
    
    $11.47Grants (average fair value $2.08)*
    
    
    30,000
    
    
    
    12.87Forfeitures
    
    
    (1,875
    )
    
    
    10.06Expirations
    
    
    (133,224
    )
    
    
    29.91Exercises
    
    
    (287,807
    )
    
    
    7.62Option awards outstanding as of June 30, 2008
    
    
    555,750
    
    
    
    $  9.12
 
 *
    
    Option awards granted during 2008 to directors were valued with average expected terms of
four years, volatility factors of 50%, dividend yields of 12% and risk-free rates of
2.91%.  -18-




---



##### Table of Contents



NOTE 12 NET INTEREST INCOME ANALYSIS
  Quarter Ended June 302008
    
    
    2007
    
    
    Related Changes inAverage
    
    
    
    
    
    
    Average
    
    
    AverageAmount
    
    
    Rate
    
    
    Amount
    
    
    Rate
    
    
    Rate*
    
    
    Volume*Interest income:Mortgage securities and
similar investments
    
    $
    97,332
    
    
    
    5.30
    %
    
    $
    75,795
    
    
    
    5.57
    %
    
    $
    (3,833
    )
    
    $
    25,370Other
    
    
    782
    
    
    
    2.74
    
    
    
    39
    
    
    
    5.14
    
    
    
    (27
    )
    
    
    77098,114
    
    
    
    5.26
    
    
    
    75,834
    
    
    
    5.57
    
    
    
    (3,860
    )
    
    
    26,140Interest expense:Repurchase arrangements
and similar borrowings
    
    $
    (55,019
    )
    
    
    3.25
    
    
    $
    (67,107
    )
    
    
    5.21
    
    
    $
    (29,257
    )
    
    $
    17,169Unsecured borrowings
    
    
    (2,187
    )
    
    
    8.49
    
    
    
    (2,187
    )
    
    
    8.49
    
    
    
    
    
    
    
    (57,206
    )
    
    
    3.33
    
    
    
    (69,294
    )
    
    
    5.27
    
    
    
    (29,257
    )
    
    
    17,169$
    40,908
    
    
    
    1.93
    
    
    $
    6,540
    
    
    
    0.30
    
    
    $
    25,397
    
    
    $
    8,971
 Six Months Ended June 302008
    
    
    2007
    
    
    Related Changes inAverage
    
    
    
    
    
    
    Average
    
    
    AverageAmount
    
    
    Rate
    
    
    Amount
    
    
    Rate
    
    
    Rate*
    
    
    Volume*Interest income:Mortgage securities and
similar investments
    
    $
    203,683
    
    
    
    5.49
    %
    
    $
    147,937
    
    
    
    5.53
    %
    
    $
    (1,077
    )
    
    $
    56,823Other
    
    
    1,586
    
    
    
    3.22
    
    
    
    101
    
    
    
    5.20
    
    
    
    (53
    )
    
    
    1,538205,269
    
    
    
    5.46
    
    
    
    148,038
    
    
    
    5.53
    
    
    
    (1,130
    )
    
    
    58,361Interest expense:Repurchase arrangements
and similar borrowings
    
    $
    (124,325
    )
    
    
    3.61
    
    
    $
    (130,696
    )
    
    
    5.20
    
    
    $
    (46,348
    )
    
    $
    39,977Unsecured borrowings
    
    
    (4,374
    )
    
    
    8.49
    
    
    
    (4,374
    )
    
    
    8.49
    
    
    
    
    
    
    
    (128,699
    )
    
    
    3.68
    
    
    
    (135,070
    )
    
    
    5.26
    
    
    $
    (46,348
    )
    
    $
    39,977$
    76,570
    
    
    
    1.78
    
    
    $
    12,968
    
    
    
    0.27
    
    
    $
    45,218
    
    
    $
    18,384
 
 *
    
    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 13  RESTATEMENT TO RECLASSIFY INTEREST INCOME,
INTEREST EXPENSE AND OTHER INCOME (EXPENSE)
 Other revenue (expense).
 -19-




---



##### Table of Contents



Interest income Interest expense. Mortgage securities and similar investments
  -20-




---



##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
 Explanatory Note  See NOTE 13 to the consolidated financial statements for an
 explanation of the reclassifying restatement of interest income, interest expense and other
 revenue (expense) reflected throughout this filing.
 FINANCIAL CONDITION
 Overview
      -21-




---



##### Table of Contents



Risk Factors and Critical Accounting Policies
  Recent Common Equity Offerings
  Book Value per Common Share
  -22-




---



##### Table of Contents



Six MonthsQuarter Ended
    
    
    EndedMarch 31
    
    
    June 30
    
    
    June 30Book value per common share, beginning of period
    
    $
    9.25
    
    
    $
    9.40
    
    
    $
    9.25Accretion attributed to capital transactions
    
    
    0.95
    
    
    
    0.35
    
    
    
    1.21Dividend distributions in excess of earnings
    
    
    (0.02
    )
    
    
    (0.02
    )
    
    
    (0.04
    )Other comprehensive income items:Change in value of mortgage investments
    
    
    (0.18
    )
    
    
    0.20
    
    
    
    0.04Change in value of interest rate swap agreements
held as cash flow hedges
    
    
    (0.55
    )
    
    
    0.49
    
    
    
    Termination of cash flow hedge
    
    
    (0.05
    )
    
    
    
    
    
    
    (0.04
    )Book value per common share, end of period
    
    $
    9.40
    
    
    $
    10.42
    
    
    $
    10.42
  Company Response to Recent Credit Market Conditions
  -23-




---



##### Table of Contents



Earnings Guidance
   -24-




---



##### Table of Contents



Residential Mortgage Investments
    -25-




---



##### Table of Contents



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
    
    $
    4,008,847
    
    
    
    5.43
    %
    
    
    4.50
    %
    
    
    1.85
    %
    
    
    4.10
    %
    
    
    10.37
    %
    
    
    4.5Ginnie Mae
    
    
    436,596
    
    
    
    5.45
    
    
    
    3.91
    
    
    
    1.53
    
    
    
    1.00
    
    
    
    9.96
    
    
    
    5.5Residential
mortgage loans
    
    
    9,813
    
    
    
    6.32
    
    
    
    5.17
    
    
    
    2.05
    
    
    
    1.50
    
    
    
    11.17
    
    
    
    5.24,455,256
    
    
    
    5.43
    
    
    
    4.44
    
    
    
    1.82
    
    
    
    3.79
    
    
    
    10.33
    
    
    
    4.6Longer-to-reset ARMs:Agency Securities:Fannie
Mae/Freddie
Mac
    
    
    3,298,768
    
    
    
    6.09
    
    
    
    4.83
    
    
    
    1.66
    
    
    
    2.74
    
    
    
    11.58
    
    
    
    40.2$
    7,754,024
    
    
    
    5.71
    
    
    
    4.61
    
    
    
    1.75
    
    
    
    3.34
    
    
    
    10.87
    
    
    
    19.7
 
 *
    
    Basis represents the Companys investment (unpaid principal balance plus unamortized
investment premium) before unrealized gains and losses. As of June 30, 2008, the ratio of
basis to related unpaid principal balance for the Companys ARM securities was 101.34. This
table excludes $7 million in fixed-rate residential mortgage loans, $11 million in fixed-rate
Agency Securities and $5 million in private residential mortgage pass-through securities held
as collateral for structured financings.    -26-




---



##### Table of Contents



Commercial Real Estate-related Assets
   Utilization of Long-term Investment Capital and Potential Liquidity
  -27-




---



##### Table of Contents



Related
    
    
    Capital
    
    
    PotentialInvestments(a)
    
    
    Borrowings
    
    
    Employed(a)
    
    
    Liquidity(a)Residential mortgage securities
    
    $
    7,818,364
    
    
    $
    7,060,377
    
    
    $
    757,987
    
    
    $
    375,543Commercial real estate-related assets
    
    
    42,931
    
    
    
    6,991
    
    
    
    35,940
    
    
    
    (6,991
    )$
    7,861,295
    
    
    $
    7,067,368
    
    
    
    793,927
    
    
    
    368,552Other assets, net of other liabilities
    
    
    
    
    
    
    
    
    
    
    106,938
    
    
    
    42,134Second quarter common dividend
    
    
    
    
    
    
    
    
    
    
    (33,082
    )
    
    
    (33,082
    ) (b)$
    867,783
    
    
    $
    377,604Balances as of December 31, 2007
    
    $
    7,108,719
    
    
    $
    6,500,362
    
    
    $
    660,895
    
    
    $
    371,196
 
 (a)
    
    Investments are stated at carrying amounts on the Companys balance sheet which generally
reflects managements estimate of fair value as of the indicated dates. Potential liquidity
is based on maximum amounts of borrowings available under existing uncommitted repurchase
arrangements as of the indicated dates considering managements estimate of the fair value of
related collateral adjusted for other sources (uses) of liquidity such as near-term scheduled
payments on related borrowings not expected to be immediately replaced, cash and cash
equivalents, and dividends payable.(b)
    
    The second quarter common dividend was declared June 12, 2008 and paid July 21, 2008 to
stockholders of record as of June 30, 2008.  Accounting for Seller-Financed Acquisitions of Mortgage Securities
  -28-




---



##### Table of Contents



RESULTS OF OPERATIONS
  Quarter Ended
    
    
    Six Months EndedJune 30
    
    
    June 302008
    
    
    2007
    
    
    2008
    
    
    2007(as Restated. See Explanatory Note)Income statement data:Mortgage securities and similar investments
(interest income, net of directly-related
interest expense):Residential mortgage investments
    
    $
    41,456
    
    
    $
    8,560
    
    
    $
    77,703
    
    
    $
    16,993Commercial real estate investments
    
    
    857
    
    
    
    128
    
    
    
    1,655
    
    
    
    24842,313
    
    
    
    8,688
    
    
    
    79,358
    
    
    
    17,241Other interest income
    
    
    782
    
    
    
    39
    
    
    
    1,586
    
    
    
    101Interest expense on unsecured borrowings
    
    
    (2,187
    )
    
    
    (2,187
    )
    
    
    (4,374
    )
    
    
    (4,374
    )40,908
    
    
    
    6,540
    
    
    
    76,570
    
    
    
    12,968Other revenue (expense):Loss from portfolio restructuring
    
    
    
    
    
    
    
    
    
    
    (1,408
    )
    
    
    Other revenue (expense)
    
    
    (55
    )
    
    
    198
    
    
    
    (16
    )
    
    
    1,007Incentive compensation
    
    
    (2,270
    )
    
    
    
    
    
    
    (4,520
    )
    
    
    Other operating expense
    
    
    (1,920
    )
    
    
    (1,539
    )
    
    
    (3,881
    )
    
    
    (3,213
    )36,663
    
    
    
    5,199
    
    
    
    66,745
    
    
    
    10,762Equity in earnings of unconsolidated affiliates
    
    
    65
    
    
    
    575
    
    
    
    130
    
    
    
    1,239Net income
    
    $
    36,728
    
    
    $
    5,774
    
    
    $
    66,875
    
    
    $
    12,001Net income available to common stockholders,
after payment of preferred share dividends
    
    $
    31,665
    
    
    $
    710
    
    
    $
    56,748
    
    
    $
    1,873Net income per common share:Basic
    
    $
    0.59
    
    
    $
    0.04
    
    
    $
    1.14
    
    
    $
    0.10Diluted
    
    
    0.58
    
    
    
    0.04
    
    
    
    1.11
    
    
    
    0.10Weighted average common shares outstanding:Basic
    
    
    53,453
    
    
    
    19,013
    
    
    
    49,803
    
    
    
    18,973Diluted
    
    
    63,557
    
    
    
    19,257
    
    
    
    59,994
    
    
    
    19,155Key portfolio statistics(excludes overnight balances
and unsecured borrowings):Average yields:Residential mortgage investments
    
    
    5.28
    %
    
    
    5.56
    %
    
    
    5.46
    %
    
    
    5.52
    %Commercial real estate investments
    
    
    9.68
    
    
    
    18.00
    
    
    
    10.25
    
    
    
    18.00Total average yields
    
    
    5.30
    
    
    
    5.57
    
    
    
    5.49
    
    
    
    5.53Average rate of related borrowings
    
    
    3.25
    
    
    
    5.21
    
    
    
    3.61
    
    
    
    5.20Average financing spread
    
    
    2.05
    
    
    
    0.36
    
    
    
    1.88
    
    
    
    0.33Average portfolio balances:Residential mortgage investments
    
    $
    7,306
    
    
    $
    5,444
    
    
    $
    7,384
    
    
    $
    5,346Commercial real estate investments
    
    
    43
    
    
    
    3
    
    
    
    43
    
    
    
    37,349
    
    
    
    5,447
    
    
    
    7,427
    
    
    
    5,349Average related borrowings
    
    
    6,704
    
    
    
    5,096
    
    
    
    6,819
    
    
    
    4,999Average capital deployed
    
    $
    645
    
    
    $
    351
    
    
    $
    608
    
    
    $
    350Average portfolio runoff rate
    
    
    20
    %
    
    
    30
    %
    
    
    20
    %
    
    
    29
    %
 -29-




---



##### Table of Contents



-30-




---



##### Table of Contents



Interest Rate Sensitivity on Operating Results
   Federal
    
    10-year U.S.Funds
    
    TreasuryRate
    
    Rate
    
    Immediate Change In:*Down
    
    
    Down
    
    
    
    
    
    
    Up
    
    
    Up30-day to one-year rates
    
    
    
    
    
    
    
    
    
    
    1.00
    %
    
    
    1.00
    %
    
    Flat
    
    
    
    1.00
    %
    
    
    1.00
    %Down
    
    
    
    
    
    
    Down
    
    
    
    
    
    
    Up10-year U.S. Treasury rate
    
    
    
    
    
    
    
    
    
    
    1.00
    %
    
    Flat
    
    
    
    1.00
    %
    
    Flat

    
    
    
    1.00
    %Projected 12-month
earnings change:June 30, 2008
    
    
    2.00
    %
    
    
    3.97
    %
    
    $
    8,006
    
    
    $
    13,296
    
    
    $
    (10,822
    )
    
    $
    (14,320
    )
    
    $
    (8,819
    )December 31, 2007
    
    
    4.25
    
    
    
    4.60
    
    
    
    10,800
    
    
    
    15,600
    
    
    
    (9,800
    )
    
    
    (17,300
    )
    
    
    (12,400
    )
 
 *
    
    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.  -31-




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LIQUIDITY AND CAPITAL RESOURCES
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RISK FACTORS
 An investment in debt or equity securities issued by Capstead involves various risks. An investor
should carefully consider the following risk factors in conjunction with the other information
contained in this document before purchasing the Companys debt or equity securities. The risks
discussed herein can adversely affect the Companys business, liquidity, operating results,
prospects and financial condition, causing the market price of the Companys debt or equity
securities to decline, which could cause an investor to lose all or part of his/her investment. The
risk factors described below are not the only risks that may affect the Company. Additional risks
and uncertainties not presently known to the Company also may adversely affect its business,
liquidity, operating results, prospects and financial condition.
 Risks Related to Capsteads Business
 Loss of the implied AAA rating of Agency Securities could negatively affect Capsteads financial
condition and earnings.
  Periods of illiquidity in the mortgage markets may reduce amounts available to be borrowed under
Capsteads repurchase arrangements, which could negatively impact the Companys financial condition
and earnings.
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Periods of rising interest rates may reduce amounts available to be borrowed under Capsteads
repurchase arrangements, which could negatively impact the Companys financial condition and
earnings.
 If Capstead is unable to negotiate favorable terms and conditions on future repurchase arrangements
with one or more of the Companys counterparties, the Companys financial condition and earnings
could be negatively impacted.
   Capsteads use of repurchase arrangements to borrow money may give the Companys lenders greater
rights in the event of bankruptcy.
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Capstead may sell assets for various reasons, including a change in the Companys investment focus,
which could increase earnings volatility.
 Changes in interest rates, whether increases or decreases, may adversely affect Capsteads
earnings.
 The average life of Capsteads longer-to-reset ARM securities could extend beyond the life of
related longer-dated fixed-rate borrowings and interest rate swap positions more than anticipated.
 An increase in prepayments may adversely affect Capsteads earnings.
 The lack of availability of suitable investments at attractive pricing may adversely affect
Capsteads earnings.
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Capstead may invest in Derivatives such as interest rate swap agreements to mitigate or hedge the
Companys interest rate risk on its longer-to-reset ARM securities, which may negatively affect the
Companys liquidity, financial condition or earnings.
 Derivatives held may fail to qualify for hedge accounting introducing potential volatility to
Capsteads earnings.
 Capstead may be unable to invest the net proceeds raised in a debt or equity securities offering on
acceptable terms, which could affect the Companys earnings.
 Capstead is dependent on its executives and employees and the loss of one or more of its executive
officers could harm the Companys business and its prospects.
 Commercial real estate-related assets may expose investors to greater risks of loss than
residential mortgage investments.
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Additionally, Capstead may leverage its commercial real estate-related assets through the use of
secured borrowing arrangements, the availability of which may be predicated on the fair value of
the underlying collateral.
 Risks Related to Capsteads Status as a REIT and Other Tax Matters
 If Capstead does not qualify as a REIT, the Company will be subject to tax as a regular corporation
and face substantial tax liability.
 
    
    The Company would be taxed as a regular domestic corporation, which, among other things,
means that the Company would be unable to deduct dividends paid to its stockholders in
computing taxable income and would be subject to federal income tax on its taxable income at
regular corporate rates.
    
    Any resulting tax liability could be substantial and would reduce the amount of cash
available for distribution to stockholders, and Capstead would not be required to make
distributions of the Companys income.
    
    Unless Capstead were entitled to relief under applicable statutory provisions, the
Company would be disqualified from treatment as a REIT for the subsequent four taxable years
following the year during which the Company lost its qualification, and, thus, the Companys
cash available for distribution to stockholders would be reduced for each of the years
during which the Company did not qualify as a REIT.
 Even if Capstead remains qualified as a REIT, the Company may face other tax liabilities that
reduce its earnings.
 
    
    The Company will be required to pay tax on any undistributed REIT taxable income.
    
    The Company may be required to pay the alternative minimum tax on any items of tax
preference.
    
    The Company may operate taxable REIT subsidiaries that are required to pay taxes on any
taxable income earned.
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Complying with REIT requirements may cause Capstead to forego otherwise attractive opportunities.
 Complying with REIT requirements may limit Capsteads ability to hedge effectively.
 Complying with REIT requirements may force Capstead to liquidate otherwise attractive investments.
 Complying with REIT requirements may force Capstead to borrow to make distributions to
stockholders.
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Capstead may be subject to adverse legislative or regulatory tax changes that could reduce the
market price of the Companys securities.
 An investment in Capsteads securities has various federal, state and local income tax risks that
could affect the value of an investors investment.
 Risk Factors Related to Capsteads Corporate Structure
 There are no assurances of Capsteads ability to pay dividends in the future.
 Failure to maintain an exemption from the Investment Company Act of 1940 would adversely affect
Capsteads results of operations.
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Pursuant to Capsteads charter, its board of directors has the ability to limit ownership of the
Companys capital stock, to the extent necessary to preserve its REIT qualification.
 Because provisions contained in Maryland law and Capsteads charter may have an anti-takeover
effect, investors may be prevented from receiving a control premium for their shares.
 
    
    Repurchase Rights.The repurchase rights granted to Capsteads board of directors in
the Companys charter limits related investors, including, among other things, any voting
group, from owning common stock if the concentration owned would jeopardize the Companys
REIT status.
    
    Classification of preferred stock:Capsteads charter authorizes the board to issue
preferred stock in one or more classes and to establish the preferences and rights of any
class of preferred stock issued. These actions can be taken without soliciting stockholder
approval. The issuance of preferred stock could have the effect of delaying or preventing
someone from taking control of the Company, even if a change in control were in its
stockholders best interests.
  Capstead may change its policies without stockholder approval.
 CRITICAL ACCOUNTING POLICIES
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
    
    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 available-for-sale and recorded at fair value on the balance sheet with unrealized gains
and losses recorded in Stockholders equityas a component of Accumulated other
comprehensive income. As such, these unrealized gains and losses enter into the calculation
of book value per common share, a key financial metric used by investors in evaluating the
Company. Fair values fluctuate with current and projected changes in interest rates,
prepayment expectations and other factors such as market liquidity conditions. Considerable
judgment is required interpreting market data to develop estimated fair values, particularly
in circumstances of deteriorating credit quality and market liquidity (see NOTE 10 to the
accompanying consolidated financial statements for discussion of how Capstead values its
financial assets). Generally, gains or losses are recognized in earnings only if sold;
however, if a decline in fair value of an individual asset below its amortized cost occurs
that is determined to be other than temporary, the difference between amortized cost and
fair value would be included in Other revenue (expense)as an impairment charge.
    
    Derivatives Accounting The Company uses Derivatives from time to time for risk
management purposes. When held, Derivatives are recorded as assets or liabilities and
carried at fair value. The accounting for changes in fair value of each Derivative held
depends on whether it has been designated as an accounting hedge, as well as the type of
hedging relationship identified. To qualify as cash flow hedges for accounting purposes, at
the inception of the hedge relationship the Company must anticipate and document that the
hedge relationship will be highly effective and monitor ongoing effectiveness on at least a
quarterly basis. As long as the hedge relationship remains effective, the effective portion
of changes in fair value of the Derivative are recorded in Accumulated other comprehensive
incomeand the ineffective portion is recorded in earnings. Changes in fair value of
Derivatives not held as accounting hedges, or for which the hedge relationship is deemed to
no longer be highly effective, are recorded in earnings as a component of Other revenue
(expense).Late in 2007 the Company began using interest rate swap agreements in hedge
relationships accounted for as cash flow hedges in order to hedge variability in
borrowing rates due to changes in the underlying benchmark interest rate related to a
designated portion of its current and anticipated future 30-day borrowings.
Variable-rate payments to be received on the swap agreements and any
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measured hedge ineffectiveness are recorded in Interest expenseas an offset to interest owed
on the hedged borrowings that reset to market rates generally on a monthly basis while
fixed-rate swap payments to be made are also recorded in Interest expenseresulting in an
effectively fixed borrowing rate on these borrowings, subject to certain adjustments. See
NOTE 6 to the accompanying consolidated financial statements and Financial
ConditionsResidential Mortgage Investments for additional information regarding the
Companys use of Derivatives and its related risk management policies.
 FORWARD LOOKING STATEMENTS
  
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISKS
  
 ITEM 4. CONTROLS AND PROCEDURES
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PART II. OTHER INFORMATION
 
 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
 (a)
    
    Exhibits: The following Exhibits are presented herewith:Exhibit 1.1  First Amendment to Sales Agreement dated August 4, 2008 by and between Capstead
and Brinson Patrick Securities Corporation to sell common shares under the Companys
continuous offering program.Exhibit 12  Computation of Ratio of Income from Continuing Operations (before fixed charges)
to Combined Fixed Charges and Preferred Stock Dividends.Exhibit 31.1  Certification pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002Exhibit 31.2  Certification pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002Exhibit 32  Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002(b)
    
    Reports on Form 8-K:Current Report on Form 8-K dated April 11, 2008 to file a legal opinion related to the
Companys continuous offering program.Current Report on Form 8-K dated April 14, 2008 to file under Item 8.01 a revised Recent
Developments section pertaining to the Companys prospectus supplement to its registration
statement on Form S-3 (File No. 333-143390) for its continuous offering program.Current Report on Form 8-K dated May 1, 2008 furnishing the press release announcing first
quarter 2008 results.Current Report on Form 8-K dated May 2, 2008 announcing a conference call and audio webcast to
discuss first quarter financial results with the investment community.Current Report on Form 8-K dated May 19, 2008 to file a presentation to the investment
community.Current Report on Form 8-K dated May 30, 2008 to file under Item 9.01 Articles of Amendment
of Articles of Incorporation of Capstead Mortgage Corporation dated as of May 29, 2008.Current Report on Form 8-K dated June 3, 2008 to file a presentation to the investment
community.Current Report on Form 8-K dated June 4, 2008 to file a legal opinion related to the Companys
continuous offering program.
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SIGNATURES
  CAPSTEAD MORTGAGE CORPORATIONRegistrantDate:  January 12, 2009
    By:
    /s/ ANDREW F. JACOBSAndrew F. JacobsPresident and Chief Executive OfficerDate:  January 12, 2009
    By:
    /s/ PHILLIP A. REINSCHPhillip A. ReinschExecutive Vice President and
Chief Financial Officer -44-