##### 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: September 30, 2005
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the transition period fromto
 Commission File Number: 1-8996
 CAPSTEAD MORTGAGE CORPORATION
  Maryland
    
    75-2027937(State or other jurisdiction of
incorporation or organization)
    
    (I.R.S. Employer
Identification No.)8401 North Central Expressway, Suite 800, Dallas, TX
(Address of principal executive offices)
    
    75225
(Zip Code)
 (214) 874-2323
 þ o
 þ o
 o þ
 APPLICABLE ONLY TO CORPORATE ISSUERS:
  Common Stock ($0.01 par value)
    
    19,043,297 as of November 7, 2005




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CAPSTEAD MORTGAGE CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2005
 INDEX
 PagePART I. 3⁄4 FINANCIAL INFORMATIONITEM 1.Financial StatementsConsolidated Balance Sheets 3⁄4 September 30, 2005 and December 31, 2004
    
    
    3Consolidated Statements of Operations 3⁄4 Quarter and Nine Months Ended
September 30, 2005 and 2004
    
    
    4Consolidated Statements of Cash Flows 3⁄4 Nine Months Ended September 30, 2005 and 2004
    
    
    5Notes to Consolidated Financial Statements
    
    
    6ITEM 2. Managements Discussion and Analysis of
Financial Condition and Results of Operations
    
    
    15ITEM 3. Qualitative and Quantitative Disclosure of Market Risk
    
    
    31ITEM 4. Controls and Procedures
    
    
    31PART II. 3⁄4 OTHER INFORMATIONITEM 6. Exhibits and Reports on Form 8-K
    
    
    31SIGNATURES
    
    
    32Computation of Ratio of Earnings to Combined Fixed ChargesCertification Pursuant to Section 302(a)Certification Pursuant to Section 302(a)Certification Pursuant to Section 906
  -2-




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ITEM 1. FINANCIAL STATEMENTS
 
 PART I. 3⁄4 FINANCIAL INFORMATION
 CAPSTEAD MORTGAGE CORPORATION
 
 CONSOLIDATED BALANCE SHEETS
 (in thousands, except per share amounts)
 September 30, 2005
    
    
    December 31, 2004(unaudited)
    
    
    (NOTE 2)AssetsMortgage securities and similar investments
($3.5 billion pledged under repurchase arrangements in 2005)
    
    $
    3,664,616
    
    
    $
    3,438,559Real estate held for lease, net of accumulated depreciation
    
    
    126,924
    
    
    
    129,705Investments in unconsolidated affiliates
    
    
    4,501
    
    
    
    Receivables and other assets
    
    
    60,508
    
    
    
    46,688Cash and cash equivalents
    
    
    4,334
    
    
    
    73,030$
    3,860,883
    
    
    $
    3,687,982LiabilitiesRepurchase arrangements and similar borrowings
    
    $
    3,374,321
    
    
    $
    3,221,794Other borrowings
    
    
    155,913
    
    
    
    120,001Common stock dividend payable
    
    
    381
    
    
    
    4,151Accounts payable and accrued expenses
    
    
    12,525
    
    
    
    9,4973,543,140
    
    
    
    3,355,443Stockholders equityPreferred stock  $0.10 par value; 100,000 shares authorized:$1.60 Cumulative Preferred Stock, Series A,
202 shares issued and outstanding at September 30, 2005 and
December 31, 2004
($3,317 aggregate liquidation preference)
    
    
    2,827
    
    
    
    2,827$1.26 Cumulative Convertible Preferred Stock, Series B,
15,819 shares issued and outstanding at September 30, 2005
and December 31, 2004
($180,025 aggregate liquidation preference)
    
    
    176,705
    
    
    
    176,705Common stock  $0.01 par value; 100,000 shares authorized;
19,043 and 18,867 shares issued and outstanding at September
30, 2005 and December 31, 2004, respectively
    
    
    191
    
    
    
    189Paid-in capital
    
    
    514,223
    
    
    
    516,704Accumulated deficit
    
    
    (387,718
    )
    
    
    (387,718
    )Accumulated other comprehensive income
    
    
    11,515
    
    
    
    23,832317,743
    
    
    
    332,539$
    3,860,883
    
    
    $
    3,687,982
 See accompanying notes to consolidated financial statements.
 -3-




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CAPSTEAD MORTGAGE CORPORATION
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 (in thousands, except per share amounts)
 (unaudited)
 Quarter Ended
    
    
    Nine Months EndedSeptember 30
    
    
    September 302005
    
    
    2004
    
    
    2005
    
    
    2004Mortgage securities and similar investments:Interest income
    
    $
    32,826
    
    
    $
    21,688
    
    
    $
    91,938
    
    
    $
    64,777Interest expense
    
    
    (27,542
    )
    
    
    (11,326
    )
    
    
    (71,369
    )
    
    
    (28,190
    )Net margin on financial assets
    
    
    5,284
    
    
    
    10,362
    
    
    
    20,569
    
    
    
    36,587Real estate held for lease:Lease income
    
    
    2,838
    
    
    
    2,535
    
    
    
    8,378
    
    
    
    7,494Interest expense
    
    
    (1,443
    )
    
    
    (1,107
    )
    
    
    (4,221
    )
    
    
    (3,253
    )Depreciation
    
    
    (927
    )
    
    
    (927
    )
    
    
    (2,781
    )
    
    
    (2,781
    )Net margin on real estate held for lease
    
    
    468
    
    
    
    501
    
    
    
    1,376
    
    
    
    1,460Other revenue (expense):Gain on collateralized mortgage obligation
(CMO) redemption
    
    
    156
    
    
    
    
    
    
    
    156
    
    
    
    Other revenue
    
    
    321
    
    
    
    200
    
    
    
    732
    
    
    
    516Other interest expense
    
    
    (41
    )
    
    
    
    
    
    
    (41
    )
    
    
    Other operating expense
    
    
    (1,531
    )
    
    
    (1,576
    )
    
    
    (4,543
    )
    
    
    (4,907
    )Total other revenue (expense)
    
    
    (1,095
    )
    
    
    (1,376
    )
    
    
    (3,696
    )
    
    
    (4,391
    )Net income before equity in earnings
(losses) of unconsolidated affiliates
    
    
    4,657
    
    
    
    9,487
    
    
    
    18,249
    
    
    
    33,656Equity in earnings (losses) of unconsolidated
affiliates
    
    
    (42
    )
    
    
    
    
    
    
    (42
    )
    
    
    Net income
    
    $
    4,615
    
    
    $
    9,487
    
    
    $
    18,207
    
    
    $
    33,656Net income available (loss attributable) to
common stockholders:Net income
    
    $
    4,615
    
    
    $
    9,487
    
    
    $
    18,207
    
    
    $
    33,656Less cash dividends paid on preferred shares
    
    
    (5,064
    )
    
    
    (5,064
    )
    
    
    (15,192
    )
    
    
    (15,195
    )$
    (449
    )
    
    $
    4,423
    
    
    $
    3,015
    
    
    $
    18,461Net income (loss) per common share:Basic
    
    $
    (0.02
    )
    
    $
    0.27
    
    
    $
    0.16
    
    
    $
    1.20Diluted
    
    
    (0.02
    )
    
    
    0.27
    
    
    
    0.16
    
    
    
    1.19Cash dividends declared per share:Common
    
    $
    0.020
    
    
    $
    0.330
    
    
    $
    0.300
    
    
    $
    1.360Series A Preferred
    
    
    0.400
    
    
    
    0.400
    
    
    
    1.200
    
    
    
    1.200Series B Preferred
    
    
    0.315
    
    
    
    0.315
    
    
    
    0.945
    
    
    
    0.945
 See accompanying notes to consolidated financial statements.
 -4-




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CAPSTEAD MORTGAGE CORPORATION
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (in thousands)
 (unaudited)
 Nine Months EndedSeptember 302005
    
    
    2004Operating activities:Net income
    
    $
    18,207
    
    
    $
    33,656Noncash items:Amortization of discount and premium
    
    
    15,864
    
    
    
    10,071Depreciation and other amortization
    
    
    3,406
    
    
    
    3,411Undistributed (earnings) losses of unconsolidated affiliates
    
    
    42
    
    
    
    Gain on CMO redemption
    
    
    (156
    )
    
    
    Net change in receivables, other assets,
accounts payable and accrued expenses
    
    
    (11,919
    )
    
    
    (419
    )Net cash provided by operating activities
    
    
    25,444
    
    
    
    46,719Investing activities:Purchases of mortgage securities and similar investments
    
    
    (1,291,614
    )
    
    
    (1,474,723
    )Principal collections on mortgage securities and similar
investments:Other mortgage securities and similar investments
    
    
    998,607
    
    
    
    616,953CMO collateral
    
    
    33,786
    
    
    
    102,008Investments in unconsolidated affiliates:Investment in statutory trust
    
    
    (1,083
    )
    
    
    Investment in subordinate commercial real estate
loan partnership
    
    
    (3,460
    )
    
    
    Net cash used in investing activities
    
    
    (263,764
    )
    
    
    (755,762
    )Financing activities:Net increase (decrease) in repurchase arrangements
and similar borrowings:Repurchase arrangements
    
    
    198,323
    
    
    
    791,491CMOs
    
    
    (44,829
    )
    
    
    (101,427
    )Net increase (decrease) in other borrowings
    
    
    34,753
    
    
    
    (154
    )Release of restricted cash
    
    
    5,996
    
    
    
    Capital stock transactions
    
    
    26
    
    
    
    50,714Dividends paid
    
    
    (24,645
    )
    
    
    (39,825
    )Net cash provided by financing activities
    
    
    169,624
    
    
    
    700,799Net change in cash and cash equivalents
    
    
    (68,696
    )
    
    
    (8,244
    )Cash and cash equivalents at beginning of period
    
    
    73,030
    
    
    
    16,340Cash and cash equivalents at end of period
    
    $
    4,334
    
    
    $
    8,096
 See accompanying notes to consolidated financial statements.
 -5-




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CAPSTEAD MORTGAGE CORPORATION
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER 30, 2005
 (unaudited)
 NOTE 1 3⁄4 BUSINESS
   NOTE 2 3⁄4 BASIS OF PRESENTATION
 Interim Financial Reporting
  Stock-Based Compensation
 Other operating
 -6-




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expense
 Reclassifications
  NOTE 3 3⁄4 NET INCOME PER COMMON SHARE
  Quarter Ended
    
    
    Nine Months EndedSeptember 30
    
    
    September 302005
    
    
    2004
    
    
    2005
    
    
    2004Numerator for basic net income (loss) per common
share:Net income
    
    $
    4,615
    
    
    $
    9,487
    
    
    $
    18,207
    
    
    $
    33,656Less Series A and B preferred share dividends
    
    
    (5,064
    )
    
    
    (5,064
    )
    
    
    (15,192
    )
    
    
    (15,195
    )$
    (449
    )
    
    $
    4,423
    
    
    $
    3,015
    
    
    $
    18,461Weighted average common shares outstanding
    
    
    18,871
    
    
    
    16,645
    
    
    
    18,867
    
    
    
    15,387Basic net income (loss) per common share
    
    $
    (0.02
    )
    
    $
    0.27
    
    
    $
    0.16
    
    
    $
    1.20Numerator for diluted net income (loss) per common share:Net income
    
    $
    4,615
    
    
    $
    9,487
    
    
    $
    18,207
    
    
    $
    33,656Less dividends on antidilutive convertible
preferred shares
    
    
    (5,064
    )
    
    
    (5,064
    )
    
    
    (15,192
    )
    
    
    (14,949
    )$
    (449
    )
    
    $
    4,423
    
    
    $
    3,015
    
    
    $
    18,707Denominator for diluted net income (loss) per common share:Weighted average common shares outstanding
    
    
    18,871
    
    
    
    16,645
    
    
    
    18,867
    
    
    
    15,387Net effect of dilutive stock options
    
    
    
    
    
    
    25
    
    
    
    48
    
    
    
    33Net effect of dilutive Series A preferred shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    30918,871
    
    
    
    16,670
    
    
    
    18,915
    
    
    
    15,729Diluted net income (loss) per common share
    
    $
    (0.02
    )
    
    $
    0.27
    
    
    $
    0.16
    
    
    $
    1.19
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NOTE 4 3⁄4 MORTGAGE SECURITIES AND SIMILAR INVESTMENTS
  Mortgage securities and similar investments
 Average
    
    
    AveragePrincipal
    
    
    Premiums
    
    
    
    
    
    
    Carrying
    
    
    Coupon
    
    
    EffectiveBalance
    
    
    (Discounts)
    
    
    Basis
    
    
    Amount(a)
    
    
    Rate(b)
    
    
    Rate(b)September 30, 2005Agency Securities:Fannie Mae/Freddie Mac:Fixed-rate
    
    $
    25,646
    
    
    $
    97
    
    
    $
    25,743
    
    
    $
    25,783
    
    
    
    6.62
    %
    
    
    6.26
    %ARMs
    
    
    2,528,245
    
    
    
    48,252
    
    
    
    2,576,497
    
    
    
    2,581,707
    
    
    
    4.78
    
    
    
    3.65Ginnie Mae ARMs
    
    
    907,718
    
    
    
    5,442
    
    
    
    913,160
    
    
    
    919,257
    
    
    
    4.22
    
    
    
    3.633,461,609
    
    
    
    53,791
    
    
    
    3,515,400
    
    
    
    3,526,747
    
    
    
    4.65
    
    
    
    3.67Non-agency Securities:Fixed-rate
    
    
    28,201
    
    
    
    84
    
    
    
    28,285
    
    
    
    28,372
    
    
    
    7.09
    
    
    
    6.36ARMs
    
    
    47,983
    
    
    
    545
    
    
    
    48,528
    
    
    
    48,861
    
    
    
    5.04
    
    
    
    4.4676,184
    
    
    
    629
    
    
    
    76,813
    
    
    
    77,233
    
    
    
    5.80
    
    
    
    5.15CMBS  adjustable-rate
    
    
    50,665
    
    
    
    6
    
    
    
    50,671
    
    
    
    50,697
    
    
    
    4.80
    
    
    
    4.55CMO collateral
    
    
    9,787
    
    
    
    152
    
    
    
    9,939
    
    
    
    9,939
    
    
    
    8.09
    
    
    
    13.37$
    3,598,245
    
    
    $
    54,578
    
    
    $
    3,652,823
    
    
    $
    3,664,616
    
    
    
    4.69
    
    
    
    3.75
 -8-




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Average
    
    
    AveragePrincipal
    
    
    Premiums
    
    
    
    
    
    
    Carrying
    
    
    Coupon
    
    
    EffectiveBalance
    
    
    (Discounts)
    
    
    Basis
    
    
    Amount(a)
    
    
    Rate(b)
    
    
    Rate(b)December 31, 2004Agency Securities:Fannie Mae/Freddie Mac:Fixed-rate
    
    $
    35,538
    
    
    $
    146
    
    
    $
    35,684
    
    
    $
    35,739
    
    
    
    6.63
    %
    
    
    6.19
    %ARMs
    
    
    2,116,454
    
    
    
    39,572
    
    
    
    2,156,026
    
    
    
    2,170,766
    
    
    
    3.96
    
    
    
    3.11Ginnie Mae ARMs
    
    
    1,017,517
    
    
    
    7,583
    
    
    
    1,025,100
    
    
    
    1,033,506
    
    
    
    3.87
    
    
    
    3.013,169,509
    
    
    
    47,301
    
    
    
    3,216,810
    
    
    
    3,240,011
    
    
    
    3.96
    
    
    
    3.11Non-agency Securities:Fixed-rate
    
    
    34,338
    
    
    
    24
    
    
    
    34,362
    
    
    
    34,415
    
    
    
    6.78
    
    
    
    6.27ARMs
    
    
    55,615
    
    
    
    646
    
    
    
    56,261
    
    
    
    56,739
    
    
    
    4.12
    
    
    
    3.4989,953
    
    
    
    670
    
    
    
    90,623
    
    
    
    91,154
    
    
    
    5.14
    
    
    
    4.55CMBS  adjustable-rate
    
    
    51,159
    
    
    
    10
    
    
    
    51,169
    
    
    
    51,207
    
    
    
    3.44
    
    
    
    3.10CMO collateral
    
    
    54,739
    
    
    
    1,195
    
    
    
    55,934
    
    
    
    56,187
    
    
    
    8.63
    
    
    
    6.86$
    3,365,360
    
    
    $
    49,176
    
    
    $
    3,414,536
    
    
    $
    3,438,559
    
    
    
    4.06
    
    
    
    3.21
 
 (a)
    
    Includes mark-to-market for securities classified as available-for-sale, if applicable
(see NOTE 9).(b)
    
    Average Coupon Rate is presented net of servicing and other fees as of the indicated balance
sheet date. Average Effective Rate is presented for the quarter then ended, calculated
including the amortization of premiums (discounts), mortgage insurance costs on Non-agency
Securities and excluding unrealized gains and losses.
 NOTE 5 3⁄4 INVESTMENTS IN UNCONSOLIDATED AFFILIATES
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NOTE 6 3⁄4 REAL ESTATE HELD FOR LEASE
  Receivables and other assets
 September 30, 2005
    
    
    December 31, 2004Land
    
    $
    16,450
    
    
    $
    16,450Buildings
    
    
    119,550
    
    
    
    119,550Equipment and fixtures
    
    
    3,600
    
    
    
    3,600139,600
    
    
    
    139,600Accumulated depreciation
    
    
    (12,676
    )
    
    
    (9,895
    )$
    126,924
    
    
    $
    129,705
 NOTE 7 3⁄4 REPURCHASE ARRANGEMENTS AND SIMILAR BORROWINGS
 Mortgage securities and similar investments
 -10-




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Repurchase arrangements and similar borrowings
 September 30, 2005
    
    
    December 31, 2004Borrowings
    
    
    Average
    
    
    Borrowings
    
    
    AverageOutstanding
    
    
    Rate
    
    
    Outstanding
    
    
    RateBorrowings with maturities of 30 days
or less:Agency Securities
    
    $
    2,315,019
    
    
    
    3.69
    %
    
    $
    2,340,755
    
    
    
    2.28
    %Non-agency Securities
    
    
    70,124
    
    
    
    4.33
    
    
    
    71,140
    
    
    
    2.76CMBS
    
    
    47,951
    
    
    
    3.81
    
    
    
    48,416
    
    
    
    2.542,433,094
    
    
    
    3.71
    
    
    
    2,460,311
    
    
    
    2.30Borrowings with maturities greater than 30 days:Agency Securities (31 to 90 days)
    
    
    269,600
    
    
    
    3.24
    
    
    
    54,021
    
    
    
    1.98Agency Securities (91 to 360 days)
    
    
    421,464
    
    
    
    2.68
    
    
    
    204,983
    
    
    
    2.19Agency Securities (greater than 360 days)
    
    
    240,224
    
    
    
    4.13
    
    
    
    446,744
    
    
    
    2.61931,288
    
    
    
    3.22
    
    
    
    705,748
    
    
    
    2.44CMO collateral
    
    
    9,939
    
    
    
    7.29
    
    
    
    55,735
    
    
    
    5.96$
    3,374,321
    
    
    
    3.59
    
    
    $
    3,221,794
    
    
    
    2.39
 Repurchase arrangements and similar borrowings
 NOTE 8 3⁄4 OTHER BORROWINGS
 Other Borrowings
 September 30, 2005
    
    
    December 31, 2004Borrowings
    
    
    Average
    
    
    Borrowings
    
    
    AverageOutstanding
    
    
    Rate
    
    
    Outstanding
    
    
    RateBorrowings secured by real estate:Mortgage borrowings
    
    $
    18,989
    
    
    
    7.92
    %
    
    $
    19,160
    
    
    
    7.92
    %Tax-exempt bonds
    
    
    100,841
    
    
    
    4.39
    
    
    
    100,841
    
    
    
    2.98119,830
    
    
    
    4.95
    
    
    
    120,001
    
    
    
    3.77Junior subordinated notes
    
    
    36,083
    
    
    
    8.30
    
    
    
    
    
    
    
    $
    155,913
    
    
    
    5.73
    
    
    $
    120,001
    
    
    
    3.77
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Receivables and other assets Receivables and other assets
 Receivables and other assets
 Other borrowings
 NOTE 9 3⁄4 DISCLOSURES REGARDING FAIR VALUES OF DEBT SECURITIES
  Gross
    
    
    GrossCost
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairBasis
    
    
    Gains
    
    
    Losses
    
    
    ValueAs of September 30, 2005Agency Securities:Fixed-rate
    
    $
    479
    
    
    $
    40
    
    
    $
    
    
    
    $
    519ARMs
    
    
    3,489,657
    
    
    
    22,439
    
    
    
    11,132
    
    
    
    3,500,9643,490,136
    
    
    
    22,479
    
    
    
    11,132
    
    
    
    3,501,483Non-agency Securities
    
    
    37,683
    
    
    
    438
    
    
    
    18
    
    
    
    38,103CMBS
    
    
    50,671
    
    
    
    26
    
    
    
    
    
    
    
    50,697$
    3,578,490
    
    
    $
    22,943
    
    
    $
    11,150
    
    
    $
    3,590,283As of December 31, 2004Agency Securities:Fixed-rate
    
    $
    606
    
    
    $
    55
    
    
    $
    
    
    
    $
    661ARMs
    
    
    3,181,126
    
    
    
    26,467
    
    
    
    3,321
    
    
    
    3,204,2723,181,732
    
    
    
    26,522
    
    
    
    3,321
    
    
    
    3,204,933Non-agency Securities
    
    
    41,166
    
    
    
    564
    
    
    
    33
    
    
    
    41,697CMBS
    
    
    51,169
    
    
    
    39
    
    
    
    1
    
    
    
    51,207CMO collateral
    
    
    12,214
    
    
    
    253
    
    
    
    
    
    
    
    12,467$
    3,286,281
    
    
    $
    27,378
    
    
    $
    3,355
    
    
    $
    3,310,304
 -12-




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##### Table of Contents



Gross
    
    
    GrossCost
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairBasis
    
    
    Gains
    
    
    Losses
    
    
    ValueAs of September 30, 2005Released CMO collateral:Agency Securities
    
    $
    25,264
    
    
    $
    852
    
    
    $
    
    
    
    $
    26,116Non-agency Securities
    
    
    39,130
    
    
    
    852
    
    
    
    
    
    
    
    39,982CMO collateral
    
    
    9,939
    
    
    
    
    
    
    
    
    
    
    
    9,939$
    74,333
    
    
    $
    1,704
    
    
    $
    
    
    
    $
    76,037As of December 31, 2004Released CMO collateral:Agency Securities
    
    $
    35,078
    
    
    $
    1,723
    
    
    $
    
    
    
    $
    36,801Non-agency Securities
    
    
    49,457
    
    
    
    1,345
    
    
    
    97
    
    
    
    50,705CMO collateral
    
    
    43,720
    
    
    
    84
    
    
    
    
    
    
    
    43,804$
    128,255
    
    
    $
    3,152
    
    
    $
    97
    
    
    $
    131,310
  NOTE 10 3⁄4 COMPREHENSIVE INCOME (LOSS)
  Quarter Ended
    
    
    Nine Months EndedSeptember 30
    
    
    September 302005
    
    
    2004
    
    
    2005
    
    
    2004Net income
    
    $
    4,615
    
    
    $
    9,487
    
    
    $
    18,207
    
    
    $
    33,656Other comprehensive income (loss):Unrealized loss on derivative financial
instruments held as cash flow hedges:Change in unrealized loss during period
    
    
    23
    
    
    
    (50
    )
    
    
    26
    
    
    
    (228
    )Reclassification adjustment for amounts
included in net income
    
    
    (50
    )
    
    
    (52
    )
    
    
    (112
    )
    
    
    (133
    )(27
    )
    
    
    (102
    )
    
    
    (86
    )
    
    
    (361
    )Unrealized gain on debt securities:Change in unrealized gain during period
    
    
    (10,025
    )
    
    
    7,218
    
    
    
    (12,230
    )
    
    
    (4,227
    )Reclassification adjustment for gain
included in net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other comprehensive income (loss)
    
    
    (10,052
    )
    
    
    7,116
    
    
    
    (12,316
    )
    
    
    (4,588
    )Comprehensive income (loss)
    
    $
    (5,437
    )
    
    $
    16,603
    
    
    $
    5,891
    
    
    $
    29,068
 -13-




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##### Table of Contents



NOTE 11 3⁄4 NET INTEREST INCOME ANALYSIS
  Quarter Ended September 302005
    
    
    2004Average
    
    
    
    
    
    
    AverageAmount
    
    
    Rate
    
    
    Amount
    
    
    RateInterest income
    
    $
    32,826
    
    
    
    3.75
    %
    
    $
    21,688
    
    
    
    3.19
    %Interest expense
    
    
    (27,542
    )
    
    
    3.31
    
    
    
    (11,326
    )
    
    
    1.98Net margin on financial assets
    
    $
    5,284
    
    
    
    0.44
    
    
    $
    10,362
    
    
    
    1.21
 Nine Months Ended September 302005
    
    
    2004Average
    
    
    
    
    
    
    AverageAmount
    
    
    Rate
    
    
    Amount
    
    
    RateInterest income
    
    $
    91,938
    
    
    
    3.54
    %
    
    $
    64,777
    
    
    
    3.45
    %Interest expense
    
    
    (71,369
    )
    
    
    2.92
    
    
    
    (28,190
    )
    
    
    2.13Net margin on financial assets
    
    $
    20,569
    
    
    
    0.62
    
    
    $
    36,587
    
    
    
    1.32
  Quarter Ended September 30, 2005Rate*
    
    
    Volume*
    
    
    TotalInterest income
    
    $
    5,056
    
    
    $
    6,082
    
    
    $
    11,138Interest expense
    
    
    (12,453
    )
    
    
    (3,763
    )
    
    
    (16,216
    )Net margin on financial assets
    
    $
    (7,397
    )
    
    $
    2,319
    
    
    $
    (5,078
    )
 Nine Months Ended September 30, 2005Rate*
    
    
    Volume*
    
    
    TotalInterest income
    
    $
    4,747
    
    
    $
    22,414
    
    
    $
    27,161Interest expense
    
    
    (31,294
    )
    
    
    (11,885
    )
    
    
    (43,179
    )Net margin on financial assets
    
    $
    (26,547
    )
    
    $
    10,529
    
    
    $
    (16,018
    )
 
 *
    
    The change in interest 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.
 -14-




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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
 FINANCIAL CONDITION
 Overview
     -15-




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##### Table of Contents



Risk Factors and Critical Accounting Policies
  Book Value per Common Share
   Mortgage Securities and Similar Investments
   -16-




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##### Table of Contents



3rdQuarter Average(a)
    
    
    As of September 30, 2005
    
    
    Projected
    
    
    LifetimeActual
    
    
    Actual
    
    
    Premiums
    
    
    
    
    
    
    4th Quarter
    
    
    RunoffBasis
    
    
    Yield/Cost
    
    
    Runoff
    
    
    (Discounts)
    
    
    Basis(a)
    
    
    Yield/Cost(b)
    
    
    AssumptionsAgency Securities:Fannie Mae/Freddie Mac:Fixed-rate
    
    $
    27,065
    
    
    
    6.26
    %
    
    
    30
    %
    
    $
    97
    
    
    $
    25,743
    
    
    
    6.38
    %
    
    
    39
    %ARMs
    
    
    2,397,408
    
    
    
    3.65
    
    
    
    38
    
    
    
    48,252
    
    
    
    2,576,497
    
    
    
    4.09
    
    
    
    32Ginnie Mae ARMs
    
    
    926,712
    
    
    
    3.63
    
    
    
    40
    
    
    
    5,442
    
    
    
    913,160
    
    
    
    4.21
    
    
    
    293,351,185
    
    
    
    3.67
    
    
    
    39
    
    
    
    53,791
    
    
    
    3,515,400
    
    
    
    4.14
    
    
    
    31Non-agency Securities:Fixed-rate
    
    
    29,455
    
    
    
    6.36
    
    
    
    36
    
    
    
    84
    
    
    
    28,285
    
    
    
    6.76
    
    
    
    38ARMs
    
    
    51,056
    
    
    
    4.46
    
    
    
    42
    
    
    
    545
    
    
    
    48,528
    
    
    
    4.99
    
    
    
    3780,511
    
    
    
    5.15
    
    
    
    41
    
    
    
    629
    
    
    
    76,813
    
    
    
    5.64
    
    
    
    37CMBS  adjustable-rate
    
    
    50,746
    
    
    
    4.55
    
    
    
    1
    
    
    
    6
    
    
    
    50,671
    
    
    
    5.26
    
    
    
    1CMO collateral
    
    
    13,269
    
    
    
    13.37
    
    
    
    26
    
    
    
    152
    
    
    
    9,939
    
    
    
    6.00
    
    
    
    303,495,711
    
    
    
    3.75
    
    
    
    37
    
    
    $
    54,578
    
    
    
    3,652,823
    
    
    
    4.19
    
    
    
    31Related borrowings:30-day LIBOR
    
    
    2,514,095
    
    
    
    3.49
    
    
    
    
    
    
    
    
    
    
    
    2,498,234
    
    
    
    4.06>30-day LIBOR
    
    
    727,686
    
    
    
    2.61
    
    
    
    
    
    
    
    
    
    
    
    866,148
    
    
    
    3.08Collateral mortgage
obligations (CMOs)
    
    
    13,246
    
    
    
    7.29
    
    
    
    
    
    
    
    
    
    
    
    9,939
    
    
    
    6.003,255,027
    
    
    
    3.31
    
    
    
    
    
    
    
    
    
    
    
    3,374,321
    
    
    
    3.85Capital employed/
financing spread
    
    $
    240,684
    
    
    
    0.44
    
    
    
    
    
    
    
    
    
    
    $
    278,502
    
    
    
    0.34Return on assets (c)
    
    
    
    
    
    
    0.60
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.54
 
 (a)
    
    Basis represents Capsteads investment before unrealized gains and losses. Actual asset
yields, runoff rates, borrowing rates and resulting financing spread are presented on an
annualized basis.(b)
    
    Projected annualized yields reflect ARM coupon resets and lifetime runoff assumptions as
adjusted for expected acquisitions and runoff over the next three months, as of October 20,
2005. Actual yields realized in future periods will largely depend upon (i) changes in
portfolio composition, (ii) ARM coupon resets, (iii) actual runoff and (iv) any changes in
lifetime runoff assumptions. Interest rates on borrowings that reset every 30 days at the
30-day London Interbank offered Rate (LIBOR) reflect the
25 basis point increases in the federal funds rate on September 20, 2005 and November 1, 2005
and expectations for an additional 25 basis point increase at the December 13, 2005 Federal Reserve meeting.(c)
    
    The Company uses its liquidity to pay down borrowings. Return on assets is calculated on an
annualized basis assuming the use of this liquidity to reduce borrowing costs (see
Utilization of Capital and Potential Liquidity).
 -17-




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##### Table of Contents



Investment in Subordinate Commercial Real Estate Loan Partnership (Redtail Capital)
   -18-




---



##### Table of Contents



Issuance of Junior Subordinated Notes
  Real Estate Held For Lease
  YearProperty
    
    Location
    
    Units(a)
    
    Occupancy(b)
    
    OpenedChambrel at Roswell
    
    Roswell, GA
    
    280 (256 IL; 24 AL
    )
    
    98.6
    %
    
    
    1987Chambrel at Pinecastle
    
    Ocala, FL
    
    161 (120 IL; 41 AL
    )
    
    100.0
    
    
    
    1987Chambrel at Island Lake
    
    Longwood, FL
    
    269 (229 IL; 40 AL
    )
    
    95.5
    
    
    
    1985Chambrel at Montrose
    
    Akron, OH
    
    169 (137 IL; 32 AL
    )
    
    97.6
    
    
    
    1987Chambrel at Williamsburg
    
    Williamsburg, VA
    
    255 (200 IL; 55 AL
    )
    
    99.6
    
    
    
    1987Chambrel at Club Hill
    
    Garland, TX
    
    260 (192 IL; 68 AL
    )
    
    91.9
    
    
    
    1987Total
    
    
    
    1,394  (1,134 IL; 260 AL
    )
    
    97.0
 
 (a)
    
    IL refers to independent living units. AL refers to assisted living units.(b)
    
    As of September 30, 2005.
  -19-




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##### Table of Contents



Utilization of Capital and Potential Liquidity
  Capital
    
    
    PotentialAssets(a)
    
    
    Borrowings
    
    
    Employed
    
    
    Liquidity(a)Mortgage securities and similar investments:Agency Securities
    
    $
    3,526,747
    
    
    $
    3,246,307
    
    
    $
    280,440
    
    
    $
    179,873Non-agency Securities
    
    
    77,233
    
    
    
    70,124
    
    
    
    7,109
    
    
    
    1,500CMBS
    
    
    50,697
    
    
    
    47,951
    
    
    
    2,746
    
    
    
    (146
    )CMO collateral
    
    
    9,939
    
    
    
    9,939
    
    
    
    
    
    
    
    3,664,616
    
    
    
    3,374,321
    
    
    
    290,295
    
    
    
    181,227Real estate held for lease (b)
    
    
    138,876
    
    
    
    119,830
    
    
    
    19,046
    
    
    
    Investments in unconsolidated affiliates
    
    
    4,501
    
    
    
    
    
    
    
    4,501
    
    
    
    46$
    3,807,993
    
    
    $
    3,494,151
    
    
    
    313,842
    
    
    
    181,273Other assets, net of other liabilities
    
    
    
    
    
    
    
    
    
    
    4,282
    
    
    
    4,334
    (c)Third quarter common dividend
    
    
    
    
    
    
    
    
    
    
    (381
    )
    
    
    (381)
    (d)Targeted liquidity reserves
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (174,004
    )$
    317,743
    
    
    $
    11,222Balances as of December 31, 2004
    
    $
    3,579,480
    
    
    $
    3,341,795
    
    
    $
    332,539
    
    
    $
    9,783
 
 (a)
    
    Assets are stated at carrying amounts on the Companys balance sheet which, particularly
related to real estate held for lease and certain other assets, does not reflect fair
value. Potential liquidity is based on maximum borrowings available under existing
uncommitted repurchase arrangements and similar borrowings on directly-held financial
assets considering the fair value of related collateral as of the indicated dates, adjusted
separately for targeted liquidity reserves. Also included in potential liquidity are
distributions from unconsolidated affiliates expected within 30 days and common dividends
declared for the current quarter.(b)
    
    Real estate held for lease includes related assets and is net of accumulated depreciation
and other related liabilities.(c)
    
    Represents unrestricted cash and cash equivalents as of September 30, 2005.(d)
    
    The third quarter 2005 common dividend was declared September 15, 2005 and paid October 20,
2005 to stockholders of record as of September 30, 2005.
  -20-




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##### Table of Contents



RESULTS OF OPERATIONS
  Quarter Ended
    
    
    Nine Months EndedSeptember 30
    
    
    September 302005
    
    
    2004
    
    
    2005
    
    
    2004Mortgage securities and similar investments:Agency Securities
    
    $
    4,636
    
    
    $
    9,285
    
    
    $
    18,501
    
    
    $
    32,114Non-agency Securities
    
    
    296
    
    
    
    766
    
    
    
    1,292
    
    
    
    3,394CMBS
    
    
    151
    
    
    
    146
    
    
    
    431
    
    
    
    508CMO collateral
    
    
    201
    
    
    
    165
    
    
    
    345
    
    
    
    571Net margin on financial assets
    
    
    5,284
    
    
    
    10,362
    
    
    
    20,569
    
    
    
    36,587Real estate held for lease:Lease revenue net of related interest expense
    
    
    1,395
    
    
    
    1,428
    
    
    
    4,157
    
    
    
    4,241Real estate depreciation
    
    
    (927
    )
    
    
    (927
    )
    
    
    (2,781
    )
    
    
    (2,781
    )Net margin on real estate held for lease
    
    
    468
    
    
    
    501
    
    
    
    1,376
    
    
    
    1,460Other revenue (expense):Gain on CMO redemption
    
    
    156
    
    
    
    
    
    
    
    156
    
    
    
    Other revenue
    
    
    321
    
    
    
    200
    
    
    
    732
    
    
    
    516Other interest expense
    
    
    (41
    )
    
    
    
    
    
    
    (41
    )
    
    
    Other operating expense
    
    
    (1,531
    )
    
    
    (1,576
    )
    
    
    (4,543
    )
    
    
    (4,907
    )Total other revenue (expense)
    
    
    (1,095
    )
    
    
    (1,376
    )
    
    
    (3,696
    )
    
    
    (4,391
    )Equity in earnings (losses) of unconsolidated
affiliates
    
    
    (42
    )
    
    
    
    
    
    
    (42
    )
    
    
    Net income
    
    
    4,615
    
    
    
    9,487
    
    
    
    18,207
    
    
    
    33,656Less cash dividends paid on preferred shares
    
    
    (5,064
    )
    
    
    (5,064
    )
    
    
    (15,192
    )
    
    
    (15,195
    )Net income available (loss attributable) to
common stockholders
    
    $
    (449
    )
    
    $
    4,423
    
    
    $
    3,015
    
    
    $
    18,461Net income (loss) per common share:Basic
    
    $
    (0.02
    )
    
    $
    0.27
    
    
    $
    0.16
    
    
    $
    1.20Diluted
    
    
    (0.02
    )
    
    
    0.27
    
    
    
    0.16
    
    
    
    1.19Regular common dividends declared per share
    
    
    0.02
    
    
    
    0.33
    
    
    
    0.30
    
    
    
    1.36
   -21-




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##### Table of Contents



Quarter Ended
    
    Nine Months EndedSeptember 30
    
    September 302005
    
    2004
    
    2005
    
    2004Agency Securities:Portfolio
    
    $
    3,351
    
    
    $
    2,542
    
    
    $
    3,301
    
    
    $
    2,281Runoff rates (annualized)
    
    
    38.63
    %
    
    
    31.74
    %
    
    
    33.13
    %
    
    
    27.47
    %Yields
    
    
    3.67
    
    
    
    2.95
    
    
    
    3.48
    
    
    
    3.10Borrowing rates:30-day LIBOR
    
    
    3.47
    
    
    
    1.47
    
    
    
    3.00
    
    
    
    1.21Great than 30-day LIBOR
    
    
    2.61
    
    
    
    2.20
    
    
    
    2.54
    
    
    
    2.20Total
    
    
    3.27
    
    
    
    1.56
    
    
    
    2.90
    
    
    
    1.29Financing spreads
    
    
    0.40
    
    
    
    1.39
    
    
    
    0.58
    
    
    
    1.81Non-agency Securities:Portfolio
    
    $
    81
    
    
    $
    105
    
    
    $
    82
    
    
    $
    136Runoff rates (annualized)
    
    
    40.55
    %
    
    
    34.50
    %
    
    
    32.91
    %
    
    
    37.85
    %Yields
    
    
    5.15
    
    
    
    4.42
    
    
    
    4.98
    
    
    
    4.62Borrowing rates
    
    
    3.99
    
    
    
    1.84
    
    
    
    3.43
    
    
    
    1.58Financing spreads
    
    
    1.16
    
    
    
    2.58
    
    
    
    1.55
    
    
    
    3.04CMBS:Portfolio
    
    $
    51
    
    
    $
    55
    
    
    $
    51
    
    
    $
    67Runoff rates (annualized)
    
    
    1.32
    %
    
    
    33.64
    %
    
    
    1.28
    %
    
    
    13.42
    %Yields
    
    
    4.55
    
    
    
    2.61
    
    
    
    4.08
    
    
    
    2.31Borrowing rates
    
    
    3.59
    
    
    
    1.66
    
    
    
    3.14
    
    
    
    1.39Financing spreads
    
    
    0.96
    
    
    
    0.95
    
    
    
    0.94
    
    
    
    0.92
   
 -22-




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##### Table of Contents



LIQUIDITY AND CAPITAL RESOURCES
    
 -23-




---



##### Table of Contents



EFFECTS OF INTEREST RATE CHANGES
 Interest Rate Sensitivity on Operating Results
 Other revenue (expense)
 10-year30-day
    
    
    U.S.LIBOR
    
    
    TreasuryRate
    
    
    Rate
    
    
    Immediate Change In:*30-day LIBOR rate
    
    
    
    
    
    
    
    
    
    Flat
    
    Up 1.00%
    
    Up 1.00%
    
    Up 2.00%10-year U.S. Treasury rate
    
    
    
    
    
    
    
    
    
    Down 1.00%
    
    Flat
    
    Up 1.00%
    
    Up 2.00%Projected 12-month
earnings change:September 30, 2005
    
    
    3.88
    %
    
    
    4.33
    %
    
    $
    (3,141
    )
    
    $
    (17,173
    )
    
    $
    (16,227
    )
    
    $
    (36,876
    )December 31, 2004
    
    
    2.40
    
    
    
    4.22
    
    
    
    (2,297
    )
    
    
    (12,760
    )
    
    
    (11,793
    )
    
    
    (29,259
    )
 
 *
    
    Sensitivity of earnings to changes in interest rates is determined relative to the
actual rates at the applicable date. Note that the projected 12-month earnings change is
predicated on acquisitions of similar assets sufficient to replace runoff. There can be
no guarantee 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.
  General Discussion of Effects of Interest Rate Changes
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Average
    
    
    Average
    
    
    Average
    
    
    MonthsCoupon
    
    
    Periodic
    
    
    Lifetime
    
    
    ToARM Type
    
    Basis *
    
    
    Rate
    
    
    Cap
    
    
    Cap
    
    
    RollAgency
Securities:Fannie Mae/Freddie
Mac:Current-reset
    
    $
    1,857,805
    
    
    
    4.70
    %
    
    
    2.32
    %
    
    
    10.87
    %
    
    
    6.0Longer-to-reset
    
    
    718,691
    
    
    
    5.01
    
    
    
    4.94
    
    
    
    10.91
    
    
    
    26.1Ginnie Mae
    
    
    913,160
    
    
    
    4.22
    
    
    
    1.00
    
    
    
    9.93
    
    
    
    5.1Non-agency Securities
    
    
    48,528
    
    
    
    5.04
    
    
    
    1.73
    
    
    
    11.28
    
    
    
    5.4$
    3,538,184
    
    
    
    4.64
    
    
    
    2.51
    
    
    
    10.64
    
    
    
    9.9
 
 *
    
    Basis represents the Companys investment before unrealized gains and losses.
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Risks Associated With Credit-Sensitive Investments
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##### Table of Contents



RISKS ASSOCIATED WITH OWNING REAL ESTATE
  
    
    The risk that changes in economic conditions or real estate markets may adversely affect the value of the properties.
 
    
    During inflationary periods, which are generally accompanied by rising interest rates, increases in operating costs and
borrowing rates may be greater than increases in lessee revenues from operating properties. Over an extended period of
time, this could result in lessee defaults.
 
    
    The risk that a deterioration of local conditions could adversely affect the ability of a lessee to profitably operate
a property. For instance, an oversupply of senior living properties could hamper the leasing of senior living units at
favorable rates. This could ultimately affect the value of the properties.
 
    
    Changes in tax, zoning or other laws could make properties less attractive or less profitable.
 
    
    An owner cannot be assured that lessees will elect to renew their leases when the terms expire. If a lessee does not
renew its lease or otherwise defaults on its lease obligations, there is no assurance the owner can obtain a substitute
lessee on acceptable terms. If the owner cannot obtain another qualified operator to lease a property, the owner may
be required to modify the property for a different use, which may involve significant capital expenditures and delays
in re-leasing the property.
 
    
    The risk that lessees will not perform under their leases, reducing the owners income from the leases or requiring the
owner to assume costs (such as real estate taxes, insurance, utilities and maintenance) that are the lessees
responsibility under net-leases. In the case of special-purpose real estate such as senior living facilities,
compliance with licensing requirements could complicate or delay the transfer of operational control of such
properties. This could lead to a significant cash flow burden for the owner to service the debt and otherwise maintain
the properties.
 
    
    Net-leases generally require the lessee to carry comprehensive liability, casualty,
workers compensation and rental loss insurance. The required coverage is typical of the type
and amount
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##### Table of Contents



customarily obtained by an owner of similar properties. However, there are some types of
losses, such as catastrophic acts of nature, for which insurance cannot be obtained at a
commercially reasonable cost. If there is an uninsured loss or a loss in excess of insurance
limits, the owner could lose both the revenues generated by the affected property and the
capital invested in the property. The owner would, however, remain obligated to repay any
mortgage indebtedness or other obligations related to the property.
 
    
    Investments in real estate are subject to various federal, state
and local regulatory requirements including the Americans with
Disabilities Act (the ADA). The ADA requires that public
accommodations reasonably accommodate individuals with
disabilities and that new construction or alterations be made to
commercial facilities to conform to accessibility guidelines.
Failure to comply with the ADA can result in injunctions, fines,
damage awards to private parties and additional capital
expenditures to remedy noncompliance. Existing requirements may
change and compliance with future requirements may involve
significant unanticipated expenditures. Typically these
expenditures would be the responsibility of the lessee under the
terms of net-leases; however, if lessees fail to perform these
obligations, the owner may be required to do so.
 
    
    Under federal, state and local environmental laws, the owner may
be required to investigate and clean up any release of hazardous
or toxic substances or petroleum products at its properties,
regardless of its knowledge or actual responsibility, simply
because of current or past ownership of the real estate. If
unidentified environmental problems arise, the owner may have to
make substantial payments, which could adversely affect cash flow
and the ability to make distributions to stockholders. This is
because:
 1.
    
    The owner may have to pay for property damage and for investigation and clean-up
costs incurred in connection with the contamination.2.
    
    The law may impose clean-up responsibility and liability regardless of whether the
owner or operator knew of or caused the contamination. Even if more than one person is
responsible for the contamination, each person who shares legal liability under
environmental laws may be held responsible for all of the clean-up costs.3.
    
    Governmental entities and third parties may sue the owner or operator of a
contaminated site for damages and costs.
 
    
    In investigating the acquisition of real estate, environmental
studies are typically performed to establish the existence of any
contamination. In addition, net-leases generally require lessees
to operate properties in compliance with environmental laws and to
indemnify the owner against environmental liability arising from
the operation of such properties.
 
    
    An owner may desire to sell a property in the future because of
changes in market conditions or poor lessee performance or to
avail itself of other opportunities. An owner may also be
required to sell a property to meet debt obligations or avoid a
default. Unlike investments in mortgage securities, real estate
cannot always be sold quickly, and there can be no assurance that
a property can be sold at a favorable price or that a prospective
buyer will view existing lease or operating arrangements
favorably. In addition, a property may require restoration or
modification before it is sold.
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REGULATORY MATTERS
 Tax Status
    Investment Company Act of 1940
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##### Table of Contents



CRITICAL ACCOUNTING POLICIES
   
    
    Amortization of Premiums and Discounts on Financial Assets
Premiums and discounts 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.
 
    
    Fair Value and Impairment Accounting for Financial Assets Most
of Capsteads financial assets are classified as held
available-for-sale and recorded at fair value on the balance sheet
with unrealized gains and losses recorded in stockholders equity
as a component of Accumulated other comprehensive income. As
such, these unrealized gains and losses enter into the calculation
of book value per common share. Fair values fluctuate with
current and projected changes in interest rates, prepayment
expectations and other factors, such as market liquidity.
Considerable judgment is required interpreting market data to
develop estimated fair values, particularly in circumstances of
deteriorating credit quality and market liquidity (see NOTE 9 to
the accompanying consolidated financial statements for discussion
of how Capstead values its financial assets). Generally, gains or
losses are recognized in earnings only if sold; however, if a
decline in fair value of an individual asset below its amortized
cost occurs that is determined to be other than temporary, the
difference between amortized cost and fair value would be included
in Other revenue (expense)as an impairment charge.
 
    
    Impairment Accounting for Real Estate held for Lease Real estate
is carried at cost, less accumulated depreciation. If a
significant adverse event or change in circumstances occurs,
management would assess if the values of the Companys real estate
properties have become impaired. If estimated operating cash
flows (undiscounted and without interest charges) of a property
over its remaining useful life are less than its net carrying
value, the difference between net carrying value and fair value
would be included in Other revenue (expense)as an impairment
charge. Considerable judgment is required in determining useful
lives of components of real estate properties and in estimating
operating cash flows, particularly during periods of changing
circumstances.
 FORWARD LOOKING STATEMENTS
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISKS
  
 ITEM 4. CONTROLS AND PROCEDURES
  
 PART II.  OTHER INFORMATION
 
 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
 (a)
    
    Exhibits: The following Exhibits are presented herewith:Exhibit 12  Computation of Ratio of Earnings 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 September 26, 2005 announcing the completion of the sale of
$35 million of trust preferred securities through Capstead Mortgage Trust I, a newly-formed
statutory trust.
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SIGNATURES
  CAPSTEAD MORTGAGE CORPORATIONRegistrantDate: November 7, 2005
    
    By:
    
    /s/ ANDREW F. JACOBSAndrew F. JacobsPresident and Chief Executive OfficerDate: November 7, 2005
    
    By:
    
    /s/ PHILLIP A. REINSCHPhillip A. ReinschSenior Vice President and Chief Financial Officer
 -32-