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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: March 31, 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 
incorporation or organization)
    
    (I.R.S. Employer
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 oAccelerated filer þNon-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)
    
    53,599,208 as of May 12, 2008




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##### 



CAPSTEAD MORTGAGE CORPORATION
FORM 10-Q/A
FOR THE QUARTER ENDED MARCH 31, 2008
 INDEX
 PagePART I.  FINANCIAL INFORMATIONEXPLANATORY NOTE  RECLASSIFYING RESTATEMENT
    
    
    3ITEM 1. Financial Statements (unaudited)Consolidated Balance Sheets  March 31, 2008 and December 31, 2007
    
    
    5Consolidated Statements of Income  Quarter Ended March 31, 2008 and 2007
    
    
    6Consolidated Statements of Cash Flows Quarter Ended March 31, 2008 and 2007
    
    
    7Notes to Consolidated Financial Statements
    
    
    8ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    20ITEM 3. Qualitative and Quantitative Disclosure of Market Risk
    
    
    40ITEM 4. Controls and Procedures
    
    
    40PART II.  OTHER INFORMATIONITEM 4. Submission of Matters to a Vote of Security Holders
    
    
    41ITEM 6. Exhibits and Reports on Form 8-K
    
    
    42SIGNATURES
    
    
    43Computation of Ratio of Income from Continuing OperationsCertification Pursuant to Section 302(a)Certification Pursuant to Section 302(a)Certification Pursuant to Section 906EX-12EX-31.1EX-31.2EX-32
  -2-




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EXPLANATORY NOTE  RECLASSIFYING RESTATEMENT
    Quarter Ended March 312008
    
    
    2007Interest income:As previously reported
    
    $
    106,351
    
    
    $
    72,142Reclassification
    
    
    804
    
    
    
    62As amended
    
    $
    107,155
    
    
    $
    72,204Interest expense:As previously reported
    
    $
    (69,306
    )
    
    $
    (63,589
    )Reclassification
    
    
    (2,187
    )
    
    
    (2,187
    )As amended
    
    $
    (71,493
    )
    
    $
    (65,776
    )Net interest income:As previously reported
    
    $
    37,045
    
    
    $
    8,553Reclassification
    
    
    (1,383
    )
    
    
    (2,125
    )As amended
    
    $
    35,662
    
    
    $
    6,428Other revenue (expense):As previously reported
    
    $
    (6,963
    )
    
    $
    (2,990
    )Reclassification
    
    
    1,383
    
    
    
    2,125As amended
    
    $
    (5,580
    )
    
    $
    (865
    )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)
 March 31, 2008
    
    
    December 31, 2007(unaudited)Assets:Mortgage securities and similar investments
($7.2 billion pledged under repurchase arrangements)
    
    $
    7,397,593
    
    
    $
    7,108,719Investments in unconsolidated affiliates
    
    
    3,117
    
    
    
    3,117Receivables and other assets
    
    
    140,578
    
    
    
    90,437Cash and cash equivalents
    
    
    101,355
    
    
    
    6,653$
    7,642,643
    
    
    $
    7,208,926Liabilities:Repurchase arrangements and similar borrowings
    
    $
    6,796,290
    
    
    $
    6,500,362Unsecured borrowings
    
    
    103,095
    
    
    
    103,095Interest rate swap agreements at fair value
    
    
    30,052
    
    
    
    2,384Common stock dividend payable
    
    
    25,957
    
    
    
    9,786Accounts payable and accrued expenses
    
    
    34,515
    
    
    
    32,3826,989,909
    
    
    
    6,648,009Stockholders equity:Preferred stock  $0.10 par value; 100,000 shares authorized:$1.60 Cumulative Preferred Stock, Series A,
202 shares issued and outstanding at
March 31, 2008 and December 31, 2007
($3,315 aggregate liquidation preference)
    
    
    2,826
    
    
    
    2,828$1.26 Cumulative Convertible Preferred Stock, Series B,
15,819 shares issued and outstanding at
March 31, 2008 and December 31, 2007
($180,025 aggregate liquidation preference)
    
    
    176,705
    
    
    
    176,705Common stock  $0.01 par value; 100,000 shares authorized:49,918 and 40,819 shares issued and outstanding at
March 31, 2008 and December 31, 2007, respectively
    
    
    499
    
    
    
    408Paid-in capital
    
    
    832,712
    
    
    
    702,170Accumulated deficit
    
    
    (358,155
    )
    
    
    (358,155
    )Accumulated other comprehensive income (loss)
    
    
    (1,853
    )
    
    
    36,961652,734
    
    
    
    560,917$
    7,642,643
    
    
    $
    7,208,926
 See accompanying notes to consolidated financial statements.
 -5-




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##### Table of Contents



CAPSTEAD MORTGAGE CORPORATION
CONSOLIDATED STATEMENTS OF INCOME  (in thousands, except per share amounts)
(unaudited)
 Quarter Ended March 312008
    
    
    2007(as Restated, see NOTE 13)Interest income:Mortgage securities and similar investments
    
    $
    106,351
    
    
    $
    72,142Other
    
    
    804
    
    
    
    62107,155
    
    
    
    72,204Interest expense:Repurchase arrangements and similar borrowings
    
    
    (69,306
    )
    
    
    (63,589
    )Unsecured borrowings
    
    
    (2,187
    )
    
    
    (2,187
    )(71,493
    )
    
    
    (65,776
    )35,662
    
    
    
    6,428Other revenue (expense):Loss from portfolio restructuring
    
    
    (1,408
    )
    
    
    Other revenue (expense)
    
    
    39
    
    
    
    809Other operating expense
    
    
    (4,211
    )
    
    
    (1,674
    )(5,580
    )
    
    
    (865
    )Income before equity in earnings of unconsolidated
affiliates
    
    
    30,082
    
    
    
    5,563Equity in earnings of unconsolidated affiliates
    
    
    65
    
    
    
    664Net income
    
    $
    30,147
    
    
    $
    6,227Net income available to common stockholders:Net income
    
    $
    30,147
    
    
    $
    6,227Less cash dividends paid on preferred shares
    
    
    (5,064
    )
    
    
    (5,064
    )$
    25,083
    
    
    $
    1,163Net income per common share:Basic
    
    $
    0.54
    
    
    $
    0.06Diluted
    
    $
    0.53
    
    
    $
    0.06Cash dividends declared per share:Common
    
    $
    0.520
    
    
    $
    0.020Series A Preferred
    
    
    0.400
    
    
    
    0.400Series B Preferred
    
    
    0.315
    
    
    
    0.315
 See accompanying notes to consolidated financial statements.
 -6-




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CAPSTEAD MORTGAGE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS  (in thousands, unaudited)
 Quarter Ended March 312008
    
    
    2007Operating activities:Net income
    
    $
    30,147
    
    
    $
    6,227Noncash items:Amortization of investment premiums
    
    
    7,127
    
    
    
    5,671Depreciation and other amortization
    
    
    53
    
    
    
    63Equity-based compensation costs
    
    
    320
    
    
    
    214Amounts related to interest rate swap agreements
    
    
    186
    
    
    
    Loss from portfolio restructuring
    
    
    1,408
    
    
    
    Net change in receivables, other assets, accounts payable and
accrued expenses
    
    
    (43,543
    )
    
    
    (5,172
    )Net cash (used in) provided by operating activities
    
    
    (4,302
    )
    
    
    7,003Investing activities:Purchases of mortgage securities and similar investments
    
    
    (1,461,893
    )
    
    
    (524,395
    )Proceeds from sales of mortgage securities and similar investments
    
    
    766,800
    
    
    
    Principal collections on mortgage securities and similar investments
    
    
    384,104
    
    
    
    423,150Investment in unconsolidated affiliates
    
    
    
    
    
    
    26Net cash used in investing activities
    
    
    (310,989
    )
    
    
    (101,219
    )Financing activities:Proceeds from repurchase arrangements and similar borrowings
    
    
    17,531,660
    
    
    
    11,044,358Principal payments on repurchase arrangements and similar borrowings
    
    
    (17,235,730
    )
    
    
    (10,944,771
    )Early termination payment on interest rate swap agreement
    
    
    (2,275
    )
    
    
    Capital stock transactions
    
    
    131,189
    
    
    
    19Dividends paid
    
    
    (14,851
    )
    
    
    (5,449
    )Net cash provided by financing activities
    
    
    409,993
    
    
    
    94,157Net change in cash and cash equivalents
    
    
    94,702
    
    
    
    (59
    )Cash and cash equivalents at beginning of period
    
    
    6,653
    
    
    
    5,661Cash and cash equivalents at end of period
    
    $
    101,355
    
    
    $
    5,602
 See accompanying notes to consolidated financial statements.
 -7-




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CAPSTEAD MORTGAGE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 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 (loss).
  -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 March 312008
    
    
    2007Numerators for basic earnings per common share:Net income
    
    $
    30,147
    
    
    $
    6,227Less Series A and B preferred share dividends
    
    
    (5,064
    )
    
    
    (5,064
    )Income available to common stockholders
    
    $
    25,083
    
    
    $
    1,163Weighted average common shares outstanding
    
    
    46,154
    
    
    
    18,933Basic earnings per common share
    
    $
    0.54
    
    
    $
    0.06Numerators for diluted earnings per common share:Net income
    
    $
    30,147
    
    
    $
    6,227Less dividends on antidilutive convertible preferred shares
    
    
    
    
    
    
    (5,064
    )Income available to common stockholders
    
    $
    30,147
    
    
    $
    1,163Denominator for diluted earnings per common share:Weighted average common shares outstanding
    
    
    46,154
    
    
    
    18,933Net effect of dilutive equity awards
    
    
    441
    
    
    
    121Net effect of dilutive convertible preferred shares
    
    
    9,818
    
    
    
    56,413
    
    
    
    19,054Diluted earnings per common share
    
    $
    0.53
    
    
    $
    0.06
  Quarter Ended March 312008
    
    2007Shares issuable under option awards
    
    
    
    
    
    
    205Convertible preferred shares:Series A shares
    
    
    
    
    
    
    202Series B shares
    
    
    
    
    
    
    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)March 31, 2008Agency Securities:Fannie Mae/Freddie Mac:Fixed-rate
    
    $
    12,162
    
    
    $
    34
    
    
    $
    12,196
    
    
    $
    12,219
    
    
    
    6.64
    %
    
    
    6.41
    %ARMs
    
    
    6,720,211
    
    
    
    98,022
    
    
    
    6,818,233
    
    
    
    6,844,333
    
    
    
    6.12
    
    
    
    5.65Ginnie Mae ARMs
    
    
    468,412
    
    
    
    2,328
    
    
    
    470,740
    
    
    
    474,972
    
    
    
    5.70
    
    
    
    5.457,200,785
    
    
    
    100,384
    
    
    
    7,301,169
    
    
    
    7,331,524
    
    
    
    6.09
    
    
    
    5.64Residential mortgage loans:Fixed-rate
    
    
    6,882
    
    
    
    (5
    )
    
    
    6,877
    
    
    
    6,877
    
    
    
    7.06
    
    
    
    7.10ARMs
    
    
    10,628
    
    
    
    95
    
    
    
    10,723
    
    
    
    10,723
    
    
    
    6.83
    
    
    
    7.0017,510
    
    
    
    90
    
    
    
    17,600
    
    
    
    17,600
    
    
    
    6.92
    
    
    
    7.04Commercial real estate loans
    
    
    43,633
    
    
    
    (295
    )
    
    
    43,338
    
    
    
    43,338
    
    
    
    8.51
    
    
    
    10.82Collateral for structured
financings
    
    
    5,048
    
    
    
    83
    
    
    
    5,131
    
    
    
    5,131
    
    
    
    8.15
    
    
    
    7.96$
    7,266,976
    
    
    $
    100,262
    
    
    $
    7,367,238
    
    
    $
    7,397,593
    
    
    
    6.11
    
    
    
    5.68December 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 WAC, 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
 Mortgage securities and similar investments
 
 -12-




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Repurchase arrangements and similar borrowings
 March 31, 2008
    
    
    December 31, 2007Borrowings
    
    
    Average
    
    
    Borrowings
    
    
    AverageCollateral Type
    
    Outstanding
    
    
    Rate*
    
    
    Outstanding
    
    
    Rate*Borrowings with maturities of 30 days or less:Agency Securities
    
    $
    4,268,212
    
    
    
    2.92
    %
    
    $
    4,963,674
    
    
    
    4.93
    %Residential mortgage loans
    
    
    10,926
    
    
    
    4.10
    
    
    
    14,352
    
    
    
    6.124,279,138
    
    
    
    2.93
    
    
    
    4,978,026
    
    
    
    4.93Borrowings with maturities greater than 30 days:Agency Securities (31 to 90 days)
    
    
    1,001,924
    
    
    
    2.82
    
    
    
    
    
    
    
    Agency Securities (91 to 360 days)
    
    
    763,975
    
    
    
    4.90
    
    
    
    368,694
    
    
    
    4.92Agency Securities (greater than 360 days)
    
    
    732,139
    
    
    
    5.13
    
    
    
    1,127,420
    
    
    
    5.052,498,038
    
    
    
    4.13
    
    
    
    1,496,114
    
    
    
    5.02Similar borrowings:Commercial real estate loans
    
    
    13,983
    
    
    
    4.67
    
    
    
    20,974
    
    
    
    6.88Collateral for structured financings
    
    
    5,131
    
    
    
    8.15
    
    
    
    5,248
    
    
    
    8.14$
    6,796,290
    
    
    
    3.38
    
    
    $
    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 3.50% at March 31, 2008.  Other revenue (expense) Accumulated other comprehensive income (loss) Accumulated other comprehensive income (loss) Interest expense
 -13-




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Repurchase arrangements and similar borrowings
 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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NOTE 9  COMPREHENSIVE INCOME (LOSS)
 Accumulated other comprehensive income (loss) Stockholders equity
 Quarter Ended March 312008
    
    
    2007Net income
    
    $
    30,147
    
    
    $
    6,227Other comprehensive income (loss):Amounts related to cash flow hedges:Change in net unrealized losses
    
    
    (27,544
    )
    
    
    Early termination of interest rate swap agreement
    
    
    (2,275
    )
    
    
    Reclassification adjustment for amounts
included in net income
    
    
    62
    
    
    
    (12
    )Amounts related to available-for-sale securities:Reclassification adjustments for amounts
included in net income
    
    
    1,408
    
    
    
    Change in net unrealized gains
    
    
    (10,465
    )
    
    
    9,466Other comprehensive income (loss)
    
    
    (38,814
    )
    
    
    9,454Comprehensive income (loss)
    
    $
    (8,667
    )
    
    $
    15,681
 NOTE 10  DISCLOSURES REGARDING FAIR VALUES OF FINANCIAL INSTRUMENTS
 Mortgage securities and similar
investments Accumulated other comprehensive income (loss)
  Gross
    
    GrossUnrealized
    
    Unrealized
    
    FairBasis
    
    Gains
    
    Losses
    
    ValueAs of March 31, 2008Agency Securities
    
    $
    7,289,238
    
    
    $
    40,671
    
    
    $
    10,316
    
    
    $
    7,319,593As of December 31, 2007Agency Securities
    
    $
    6,989,619
    
    
    $
    42,023
    
    
    $
    2,611
    
    
    $
    7,029,031
 -15-




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##### Table of Contents



Gross
    
    
    GrossUnrealized
    
    
    Unrealized
    
    
    FairBasis
    
    
    Gains
    
    
    Losses
    
    
    ValueAs of March 31, 2008Collateral released from structured
financings (Agency Securities)
    
    $
    11,931
    
    
    $
    407
    
    
    $
    
    
    
    $
    12,338Collateral for structured financings
    
    
    5,131
    
    
    
    
    
    
    
    
    
    
    
    5,131$
    17,062
    
    
    $
    407
    
    
    $
    
    
    
    $
    17,469As 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
 Mortgage securities and similar investments
 March 31, 2008
    
    
    December 31, 2007Fair
    
    
    Unrealized
    
    
    Fair
    
    
    UnrealizedValue
    
    
    Loss
    
    
    Value
    
    
    LossSecurities in an unrealized loss position:One year or greater
    
    $
    246,222
    
    
    $
    2,768
    
    
    $
    323,751
    
    
    $
    1,856Less than one year
    
    
    2,189,306
    
    
    
    7,548
    
    
    
    382,482
    
    
    
    755$
    2,435,528
    
    
    $
    10,316
    
    
    $
    706,233
    
    
    $
    2,611Commercial and residential loans in
an unrealized loss position:One year or greater
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Less than one year
    
    
    52,598
    
    
    
    1,463
    
    
    
    42,248
    
    
    
    748$
    52,598
    
    
    $
    1,463
    
    
    $
    42,248
    
    
    $
    748
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NOTE 11  LONG-TERM INCENTIVE AND OTHER PLANS
    Weighted AverageNumber of
    
    Grant DateShares
    
    Fair ValueStock awards outstanding as of December 31, 2007
    
    
    431,200
    
    
    $
    9.82Vested
    
    
    (48,751
    )
    
    
    8.19Stock awards outstanding as of March 31, 2008
    
    
    382,449
    
    
    
    10.03
  -17-




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Number of
    
    
    Weighted AverageShares
    
    
    Exercise PriceOption awards outstanding as of December 31, 2007
    
    
    948,656
    
    
    $
    11.47Expirations
    
    
    (133,224
    )
    
    
    29.91Exercises
    
    
    (264,057
    )
    
    
    7.57Option awards outstanding as of March 31, 2008
    
    
    551,375
    
    
    $
    8.88
  NOTE 12  NET INTEREST INCOME ANALYSIS
  Quarter Ended March 312008
    
    
    2007Average
    
    
    
    
    
    
    AverageEffective
    
    
    
    
    
    
    EffectiveAmount
    
    
    Rate
    
    
    Amount
    
    
    RateInterest income:Mortgage securities and
similar investments
    
    $
    106,351
    
    
    
    5.68
    %
    
    $
    72,142
    
    
    
    5.50
    %Other
    
    
    804
    
    
    
    3.88
    
    
    
    62
    
    
    
    5.24107,155
    
    
    
    5.66
    
    
    
    72,204
    
    
    
    5.50Interest expense:Repurchase arrangements and
similar borrowings
    
    
    (69,306
    )
    
    
    3.96
    
    
    
    (63,589
    )
    
    
    5.19Unsecured borrowings
    
    
    (2,187
    )
    
    
    8.49
    
    
    
    (2,187
    )
    
    
    8.49(71,493
    )
    
    
    4.03
    
    
    
    (65,776
    )
    
    
    5.26$
    35,662
    
    
    
    1.63
    
    
    $
    6,428
    
    
    
    0.24
 -18-




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##### Table of Contents



Rate*
    
    
    Volume*
    
    
    Total*Interest income:Mortgage securities and
similar investments
    
    $
    2,434
    
    
    $
    31,775
    
    
    $
    34,209Other
    
    
    (20
    )
    
    
    762
    
    
    
    7422,414
    
    
    
    32,537
    
    
    
    34,951Interest expense:Repurchase arrangements and
similar borrowings
    
    
    (17,339
    )
    
    
    23,056
    
    
    
    5,717Unsecured borrowings
    
    
    
    
    
    
    
    
    
    
    (17,339
    )
    
    
    23,056
    
    
    
    5,717$
    19,753
    
    
    $
    9,481
    
    
    $
    29,234
 
 *
    
    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). Interest
income Interest expense. Mortgage securities and
similar investments
  -19-




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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
     -20-




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Risk Factors and Critical Accounting Policies
  Recent Common Equity Offerings
  Book Value per Common Share
  -21-




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Company Response to Recent Credit Market Conditions
    Residential Mortgage Investments
  -22-




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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
    
    $
    3,609,428
    
    
    
    6.09
    %
    
    
    3.94
    %
    
    
    1.85
    %
    
    
    4.33
    %
    
    
    10.32
    %
    
    
    3.8Ginnie Mae
    
    
    470,740
    
    
    
    5.70
    
    
    
    3.03
    
    
    
    1.53
    
    
    
    1.00
    
    
    
    9.94
    
    
    
    5.5Residential
mortgage loans
    
    
    10,723
    
    
    
    6.83
    
    
    
    4.60
    
    
    
    2.06
    
    
    
    1.54
    
    
    
    11.17
    
    
    
    4.94,090,891
    
    
    
    6.05
    
    
    
    3.84
    
    
    
    1.81
    
    
    
    3.94
    
    
    
    10.28
    
    
    
    4.0Longer-to-reset ARMs:Agency Securities:Fannie
Mae/Freddie
Mac
    
    
    3,208,805
    
    
    
    6.15
    
    
    
    4.08
    
    
    
    1.65
    
    
    
    2.83
    
    
    
    11.69
    
    
    
    42.6$
    7,299,696
    
    
    
    6.09
    
    
    
    3.95
    
    
    
    1.74
    
    
    
    3.45
    
    
    
    10.90
    
    
    
    20.9
 
 *
    
    Basis represents the Companys investment before unrealized gains and losses. As of March
31, 2008, the ratio of basis to related unpaid principal balance for the Companys ARM
securities was 101.40. This table excludes $7 million in fixed-rate residential mortgage
loans, $12 million in fixed-rate Agency Securities and $5 million in private residential
mortgage pass-through securities held as collateral for structured financings. -23-




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Commercial Real Estate-related Assets
   -24-




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Utilization of Long-term Investment Capital and Potential Liquidity
  Related
    
    
    Capital
    
    
    PotentialInvestments(a)
    
    
    Borrowings
    
    
    Employed(a)
    
    
    Liquidity(a)Residential mortgage securities
    
    $
    7,354,255
    
    
    $
    6,782,307
    
    
    $
    571,948
    
    
    $
    311,087Commercial real estate-related assets
    
    
    43,338
    
    
    
    13,983
    
    
    
    29,355
    
    
    
    (6,991
    )$
    7,397,593
    
    
    $
    6,796,290
    
    
    
    601,303
    
    
    
    304,096Other assets, net of other liabilities
    
    
    
    
    
    
    
    
    
    
    177,366
    
    
    
    101,355First quarter common dividend
    
    
    
    
    
    
    
    
    
    
    (25,957
    )
    
    
    (25,957
    )(b)$
    752,712
    
    
    $
    379,494Balances 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. Potential
liquidity is based on maximum amounts of borrowings available under existing uncommitted
repurchase arrangements considering managements estimate of the fair value of related
collateral as of the indicated dates adjusted for other sources (uses) of liquidity such as
near-term scheduled payments on related borrowings not expected to be immediately replaced,
unrestricted cash and cash equivalents, and dividends payable.(b)
    
    The first quarter 2008 common dividend was declared March 10, 2008 and paid April 21, 2008
to stockholders of record as of March 31, 2008.  Accounting for Seller-Financed Acquisitions of Mortgage Securities
  -25-




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-26-




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RESULTS OF OPERATIONS
  Quarter Ended March 312008
    
    
    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
    
    $
    36,247
    
    
    $
    8,433Commercial real estate investments
    
    
    798
    
    
    
    12037,045
    
    
    
    8,553Other interest income
    
    
    804
    
    
    
    62Interest expense on unsecured borrowings
    
    
    (2,187
    )
    
    
    (2,187
    )35,662
    
    
    
    6,428Other revenue (expense):Loss from portfolio restructuring
    
    
    (1,408
    )
    
    
    Other revenue
    
    
    39
    
    
    
    809Other operating expense
    
    
    (4,211
    )
    
    
    (1,674
    )(5,580
    )
    
    
    (865
    )Equity in earnings of unconsolidated affiliates
    
    
    65
    
    
    
    664Net income
    
    $
    30,147
    
    
    $
    6,227Net income available to common stockholders,
after payment of preferred share dividends
    
    $
    25,083
    
    
    $
    1,163Net income per common share:Basic
    
    $
    0.54
    
    
    $
    0.06Diluted
    
    $
    0.53
    
    
    $
    0.06Weighted average common shares outstanding:Basic
    
    
    46,154
    
    
    
    18,933Diluted
    
    
    56,413
    
    
    
    19,054Key portfolio statistics(excludes overnight balances and
unsecured borrowings):Average yields:Residential mortgage investments
    
    
    5.65
    %
    
    
    5.49
    %Commercial real estate investments
    
    
    10.82
    
    
    
    18.00Total average yields
    
    
    5.68
    
    
    
    5.50Average rate of related borrowings
    
    
    3.96
    
    
    
    5.19Average financing spread
    
    
    1.72
    
    
    
    0.31Average portfolio balances:Residential mortgage investments
    
    $
    7,451
    
    
    $
    5,247Commercial real estate investments
    
    
    43
    
    
    
    37,494
    
    
    
    5,250Average related borrowings
    
    
    6,923
    
    
    
    4,901Average capital deployed
    
    $
    571
    
    
    $
    349Average portfolio runoff rate
    
    
    19
    %
    
    
    28
    %
  -27-




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-28-




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Interest Rate Sensitivity on Operating Results
   Federal
    
    10-year U.S.Funds
    
    TreasuryRate
    
    Rate
    
    Immediate Change In:*30-day to one-year rates
    
    
    
    
    
    
    
    
    
    Down1.00%
    
    Down1.00%
    
    Flat
    
    Up1.00%
    
    Up1.00%10-year U.S. Treasury rate
    
    
    
    
    
    
    
    
    
    Down1.00%
    
    Flat
    
    Down1.00%
    
    Flat
    
    Up1.00%Projected 12-month
earnings change:March 31, 2008
    
    
    2.25
    %
    
    
    3.41
    %
    
    $
    6,300
    
    
    $
    11,700
    
    
    $
    (11,100
    )
    
    $
    (13,900
    )
    
    $
    (8,000
    )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.  -29-




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LIQUIDITY AND CAPITAL RESOURCES
    -30-




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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.
 -31-




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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.
 -32-




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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.
 -33-




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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.
 -34-




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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.
 -35-




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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.
 -36-




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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.
  -37-




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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
  -38-




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##### Table of Contents




    
    Amortization of Investment Premiums on Financial Assets Investment premiums on
financial assets are recognized in earnings as adjustments to interest income by the
interest method over the estimated lives of the related assets. For most of Capsteads
financial assets, estimates and judgments related to future levels of mortgage prepayments
are critical to this determination. Mortgage prepayment expectations can vary considerably
from period to period based on current and projected changes in interest rates and other
factors such as portfolio composition. Management estimates mortgage prepayments based on
past experiences with specific investments within the portfolio, and current market
expectations for changes in the interest rate environment. Should actual runoff rates
differ materially from these estimates, investment premiums would be expensed at a different
pace.
    
    Fair Value and Impairment Accounting for Financial Assets Most of Capsteads
investments are financial assets held in the form of mortgage securities that are classified
as held available-for-sale and recorded at fair value on the balance sheet with unrealized
gains and losses recorded in Stockholders equityas a component of Accumulated other
comprehensive income. As such, these unrealized gains and losses enter into the calculation
of book value per common share, a key financial metric used by investors in evaluating the
Company. Fair values fluctuate with current and projected changes in interest rates,
prepayment expectations and other factors such as market liquidity 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
 -39-




---



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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
  -40-




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PART II. OTHER INFORMATION
 
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 (a)
    
    The annual meeting of stockholders was held on May 1, 2008.
 (b)
    
    The board members included in (c) below were elected to Capsteads board of directors
(constituting the entire Board of Directors).(c)
    
    The following items were voted on at the annual meeting:
 Withheld/
    
    BrokerFor
    
    Against
    
    Abstentions
    
    Non-votes
    
    Election of board members:Jack Biegler
    
    43,012,610
    
    
    
    1,862,742
    
    Andrew F. Jacobs
    
    43,013,483
    
    
    
    1,861,869
    
    Gary Keiser
    
    43,012,711
    
    
    
    1,862,641
    
    Paul M. Low
    
    41,027,784
    
    
    
    3,847,568
    
    Christopher W. Mahowald
    
    43,017,063
    
    
    
    1,858,289
    
    Michael G. ONeil
    
    43,016,574
    
    
    
    1,858,778
    
    Mark S. Whiting
    
    43,027,475
    
    
    
    1,847,877
    
    
    
    Approval of an amendment to the
Capstead Mortgage Corporation
Articles of Incorporation to increase
common shares authorized for issuance
from 100 million shares to 250 million
shares
    
    26,939,766
    
    16,400,502
    
    1,535,084
    
    
    
    Ratify Appointment of Ernst &
Young LLP as the Companys independent
registered public accounting firm for
2008
    
    41,222,089
    
    2,154,014
    
    1,499,249
    
    
    
    Other matters (no other matters)
 -41-




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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
 (a)
    
    Exhibits: The following Exhibits are presented herewith: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 January 28, 2008 to file the underwriting agreement and a
related legal opinion relative to the Companys 8.0 million common share public offering that
closed February 1, 2008.Current Report on Form 8-K dated February 7, 2008 furnishing the press release announcing
fourth quarter 2007 results.Current Report on Form 8-K dated February 8, 2008 to file a legal opinion related to the
partial exercise of the underwriters over-allotment option relative to the Companys 8.0
million common share public offering that closed February 1, 2008.Current Report on Form 8-K dated February 11, 2008 to file investor presentation materials
pertaining to the Companys fourth quarter earnings conference call.Current Report on Form 8-K dated March 10, 2008 to file the sales agreement with Brinson
Patrick Securities Corporation, sales manager for the Companys continuous offering program
and related legal opinion.Current Report on Form 8-K dated March 10, 2008 to file under Item 8.01 the Recent
Developments section included in the Companys prospectus supplement to its registration
statement on Form S-3 (File No. 333-143390) for its continuous offering program.
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##### Table of Contents



SIGNATURES
  CAPSTEAD MORTGAGE CORPORATION
RegistrantDate:  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 -43-