##### 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, 2007
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For
the transition period from ___ to ___
 Commission File Number: 001-08896
 CAPSTEAD MORTGAGE CORPORATION
  Maryland
    
    75-2027937(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)8401 North Central Expressway, Suite 800, Dallas, TX
    
    75225(Address of principal executive offices)
    
    (Zip Code)
 (214) 874-2323
 þ o
  o þ o
 o þ
 APPLICABLE ONLY TO CORPORATE ISSUERS:
  Common Stock ($0.01 par value)
    
    30,921,593 as of October 31, 2007




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##### 



CAPSTEAD MORTGAGE CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2007
 INDEX
 PagePART I. 3⁄4 FINANCIAL INFORMATIONITEM 1. Financial StatementsConsolidated Balance Sheets 3⁄4 September 30, 2007 and December 31, 2006
    
    
    3Consolidated Statements of Operations 3⁄4 Quarter and Nine Months Ended
September 30, 2007 and 2006
    
    
    4Consolidated Statements of Cash Flows 3⁄4 Nine Months Ended
September 30, 2007 and 2006
    
    
    5Notes to Consolidated Financial Statements
    
    
    6ITEM 2. Managements Discussion and Analysis of
Financial Condition and Results of Operations
    
    
    17ITEM 3. Qualitative and Quantitative Disclosure of Market Risk
    
    
    36ITEM 4. Controls and Procedures
    
    
    36PART II. 3⁄4 OTHER INFORMATIONITEM 6. Exhibits and Reports on Form 8-K
    
    
    36SIGNATURES
    
    
    37Computation of Ratio of Income from Continuing OperationsCertification Pursuant to Section 302(a)Certification Pursuant to Section 302(a)Certification Pursuant to Section 906
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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, 2007
    
    
    December 31, 2006(unaudited)
    
    
    (NOTE 2)Assets:Mortgage securities and similar investments
($4.6 billion pledged under repurchase arrangements)
    
    $
    4,781,085
    
    
    $
    5,252,399Investments in unconsolidated affiliates
    
    
    11,121
    
    
    
    20,073Receivables and other assets
    
    
    65,408
    
    
    
    69,869Cash and cash equivalents
    
    
    44,633
    
    
    
    5,661$
    4,902,247
    
    
    $
    5,348,002Liabilities:Repurchase arrangements and similar borrowings
    
    $
    4,445,785
    
    
    $
    4,876,134Unsecured borrowings
    
    
    103,095
    
    
    
    103,095Common stock dividend payable
    
    
    776
    
    
    
    385Accounts payable and accrued expenses
    
    
    22,498
    
    
    
    28,4264,572,154
    
    
    
    5,008,040Stockholders equity:Preferred stock  $0.10 par value; 100,000 shares authorized:$1.60 Cumulative Preferred Stock, Series A,
202 shares issued and outstanding at
September 30, 2007 and December 31, 2006
($3,317 aggregate liquidation preference)
    
    
    2,828
    
    
    
    2,828$1.26 Cumulative Convertible Preferred Stock, Series B,
15,819 shares issued and outstanding at
September 30, 2007 and December 31, 2006
($180,025 aggregate liquidation preference)
    
    
    176,705
    
    
    
    176,705Common stock  $0.01 par value; 100,000 shares authorized:19,393 and 19,253 shares issued and outstanding at
September 30, 2007 and December 31, 2006, respectively
    
    
    194
    
    
    
    192Paid-in capital
    
    
    495,879
    
    
    
    497,418Accumulated deficit
    
    
    (359,165
    )
    
    
    (354,617
    )Accumulated other comprehensive income
    
    
    13,652
    
    
    
    17,436330,093
    
    
    
    339,962$
    4,902,247
    
    
    $
    5,348,002
 See accompanying notes to consolidated financial statements.
 -3-




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##### Table of Contents



CAPSTEAD
MORTGAGE CORPORATION
 
 CONSOLIDATED STATEMENTS OF INCOME  (in thousands, except per share amounts)
(unaudited)
 Quarter Ended
    
    
    Nine Months EndedSeptember 30
    
    
    September 302007
    
    
    2006
    
    
    2007
    
    
    2006Mortgage securities and similar investments:Interest income
    
    $
    74,949
    
    
    $
    62,230
    
    
    $
    222,886
    
    
    $
    172,505Interest expense
    
    
    (66,478
    )
    
    
    (61,066
    )
    
    
    (197,174
    )
    
    
    (163,294
    )8,471
    
    
    
    1,164
    
    
    
    25,712
    
    
    
    9,211Other revenue (expense):Loss from portfolio restructuring
    
    
    (8,276
    )
    
    
    
    
    
    
    (8,276
    )
    
    
    Other revenue
    
    
    274
    
    
    
    63
    
    
    
    1,382
    
    
    
    429Interest expense on unsecured borrowings
    
    
    (2,186
    )
    
    
    (1,747
    )
    
    
    (6,560
    )
    
    
    (4,955
    )Other operating expense
    
    
    (1,678
    )
    
    
    (1,627
    )
    
    
    (4,891
    )
    
    
    (4,876
    )(11,866
    )
    
    
    (3,311
    )
    
    
    (18,345
    )
    
    
    (9,402
    )Income (loss) before equity in earnings of
unconsolidated affiliates
    
    
    (3,395
    )
    
    
    (2,147
    )
    
    
    7,367
    
    
    
    (191
    )Equity in earnings of unconsolidated affiliates
    
    
    247
    
    
    
    654
    
    
    
    1,486
    
    
    
    1,684Net income (loss)
    
    $
    (3,148
    )
    
    $
    (1,493
    )
    
    $
    8,853
    
    
    $
    1,493Net income available (loss attributable) to common
stockholders:Net income (loss)
    
    $
    (3,148
    )
    
    $
    (1,493
    )
    
    $
    8,853
    
    
    $
    1,493Less cash dividends paid on preferred stock
    
    
    (5,064
    )
    
    
    (5,064
    )
    
    
    (15,192
    )
    
    
    (15,192
    )$
    (8,212
    )
    
    $
    (6,557
    )
    
    $
    (6,339
    )
    
    $
    (13,699
    )Basic and diluted earnings (loss) per common
share
    
    $
    (0.43
    )
    
    $
    (0.35
    )
    
    $
    (0.33
    )
    
    $
    (0.73
    )Cash dividends declared per share:Common
    
    $
    0.040
    
    
    $
    0.020
    
    
    $
    0.100
    
    
    $
    0.060Series 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.
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CAPSTEAD
MORTGAGE CORPORATION
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS  (in thousands)
(unaudited)
 Nine Months EndedSeptember 302007
    
    
    2006Operating activities:Net income
    
    $
    8,853
    
    
    $
    1,493Loss from portfolio restructuring
    
    
    8,276
    
    
    
    Noncash items:Amortization of investment premiums
    
    
    17,855
    
    
    
    17,620Depreciation and other amortization
    
    
    171
    
    
    
    76Stock-based compensation
    
    
    673
    
    
    
    392Undistributed earnings of unconsolidated affiliates
    
    
    
    
    
    
    (141
    )Net change in receivables, other assets, accounts payable and
accrued expenses
    
    
    4,968
    
    
    
    (8,768
    )Net cash provided by operating activities
    
    
    40,796
    
    
    
    10,672Investing activities:Purchases of mortgage securities and similar investments
    
    
    (1,737,579
    )
    
    
    (2,130,829
    )Proceeds from sales of mortgage securities
    
    
    803,363
    
    
    
    Principal collections on mortgage securities and similar investments
    
    
    1,371,343
    
    
    
    1,291,089Investments in unconsolidated affiliates:Investment in commercial real estate loan limited partnership
    
    
    (649
    )
    
    
    (12,749
    )Return of investment in commercial real estate loan limited partnership
    
    
    9,601
    
    
    
    2,812Investment in statutory trust formed to issue unsecured borrowings
    
    
    
    
    
    
    (774
    )Net cash (used in) provided by investing activities of continuing operations
    
    
    446,079
    
    
    
    (850,451
    )Net cash used in investing activities of discontinued operation
    
    
    
    
    
    
    (2,884
    )Net cash (used in) provided by investing activities
    
    
    446,079
    
    
    
    (853,335
    )Financing activities:Net increase (decrease) in repurchase arrangements and similar borrowings:Borrowings based on 30-day rates
    
    
    (706,230
    )
    
    
    547,469Borrowings based on greater than 30-day rates
    
    
    275,882
    
    
    
    256,709Unsecured borrowings, net of issue costs
    
    
    
    
    
    
    25,086Settlement payment on early termination of longer-term
repurchase arrangements
    
    
    (2,335
    )
    
    
    Capital stock transactions
    
    
    1,518
    
    
    
    (9
    )Dividends paid
    
    
    (16,738
    )
    
    
    (16,334
    )Net cash provided (used) by financing activities
    
    
    (447,903
    )
    
    
    812,921Net change in cash and cash equivalents
    
    
    38,972
    
    
    
    (29,742
    )Cash and cash equivalents at beginning of period
    
    
    5,661
    
    
    
    33,937Cash and cash equivalents at end of period
    
    $
    44,633
    
    
    $
    4,195
 See accompanying notes to consolidated financial statements.
 -5-




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CAPSTEAD MORTGAGE CORPORATION
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER 30, 2007
 (unaudited)
 NOTE 1 3⁄4 BUSINESS AND RECENT DEVELOPMENTS
    NOTE 2 3⁄4 BASIS OF PRESENTATION
 Interim Financial Reporting and Reclassifications
 
 -6-




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Accounting for Uncertainty in Income Taxes
  Accounting for Acquisitions of Mortgage Securities Seller-Financed using Repurchase Arrangements
 Mortgage securities and similar investments Other
comprehensive income (loss)
  Fair Value Accounting Rule Changes
 Fair Value Measurements The
Fair Value Option for Financial Assets and Financial Liabilities  Including an amendment of FASB
Statement No. 115
 Clarification of the Scope of the Audit and Accounting Guide Investment Companies and
Accounting by Parent Companies and Equity Method Investors for Investments in Investment Companies
 -7-




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Stockholders equity
 NOTE 3 3⁄4 EARNINGS (LOSS) PER COMMON SHARE
  Quarter Ended
    
    Nine MonthsSeptember 30
    
    Ended September 302007
    
    2006
    

    2007
    
    2006Equity awards:Shares issuable under option awards
    
    
    1,020
    
    
    
    875
    
    
    
    1,020
    
    
    
    875Nonvested stock awards
    
    
    281
    
    
    
    124
    
    
    
    281
    
    
    
    124Convertible preferred shares:Series A shares
    
    
    202
    
    
    
    202
    
    
    
    202
    
    
    
    202Series B shares
    
    
    15,819
    
    
    
    15,819
    
    
    
    15,819
    
    
    
    15,819
  Quarter Ended
    
    
    Nine Months EndedSeptember 30
    
    
    September 302007
    
    
    2006
    
    
    2007
    
    
    2006Numerator for basic earnings (loss)
per common share:Net income (loss)
    
    $
    (3,148
    )
    
    $
    (1,493
    )
    
    $
    8,853
    
    
    $
    1,493Less Series A and B preferred share dividends
    
    
    (5,064
    )
    
    
    (5,064
    )
    
    
    (15,192
    )
    
    
    (15,192
    )Income available (loss attributable) to
common stockholders
    
    $
    (8,212
    )
    
    $
    (6,557
    )
    
    $
    (6,339
    )
    
    $
    (13,699
    )Weighted average common shares outstanding
    
    
    19,108
    
    
    
    18,918
    
    
    
    19,017
    
    
    
    18,895Basic earnings (loss) per common share
    
    $
    (0.43
    )
    
    $
    (0.35
    )
    
    $
    (0.33
    )
    
    $
    (0.73
    )
 -8-




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Quarter Ended
    
    
    Nine Months EndedSeptember 30
    
    
    September 302007
    
    
    2006
    
    
    2007
    
    
    2006Numerator
for diluted earnings (loss) per common share:Net income (loss)
    
    $
    (3,148
    )
    
    $
    (1,493
    )
    
    $
    8,853
    
    
    $
    1,493Less dividends on antidilutive convertible
   preferred shares
    
    
    (5,064
    )
    
    
    (5,064
    )
    
    
    (15,192
    )
    
    
    (15,192
    )Income
available (loss attributable) to common stockholders
    
    $
    (8,212
    )
    
    $
    (6,557
    )
    
    $
    (6,339
    )
    
    $
    (13,699
    )Denominator
for diluted earnings (loss) per common share:Weighted average common shares outstanding
    
    
    19,108
    
    
    
    18,918
    
    
    
    19,017
    
    
    
    18,895Net effect of dilutive equity awards
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net effect
of dilutive convertible preferred shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    19,108
    
    
    
    18,918
    
    
    
    19,017
    
    
    
    18,895Diluted earnings (loss) per common share
    
    $
    (0.43
    )
    
    $
    (0.35
    )
    
    $
    (0.33
    )
    
    $
    (0.73
    )
 NOTE 4 3⁄4 MORTGAGE SECURITIES AND SIMILAR INVESTMENTS
 Mortgage securities and similar investments
 InvestmentPrincipal
    
    
    Premiums
    
    
    
    
    
    
    Carrying
    
    
    Net
    
    
    AverageBalance
    
    
    (Discounts)
    
    
    Basis
    
    
    Amount(a)
    
    
    WAC(b)
    
    
    Yield(b)September 30, 2007Agency Securities:Fannie Mae/Freddie Mac:Fixed-rate
    
    $
    13,794
    
    
    $
    39
    
    
    $
    13,833
    
    
    $
    13,856
    
    
    
    6.62
    %
    
    
    6.40
    %ARMs
    
    
    4,078,136
    
    
    
    58,434
    
    
    
    4,136,570
    
    
    
    4,146,527
    
    
    
    6.49
    
    
    
    5.65Ginnie Mae ARMs
    
    
    565,651
    
    
    
    2,611
    
    
    
    568,262
    
    
    
    571,931
    
    
    
    5.88
    
    
    
    5.624,657,581
    
    
    
    61,084
    
    
    
    4,718,665
    
    
    
    4,732,314
    
    
    
    6.42
    
    
    
    5.65Non-agency Securities:Fixed-rate
    
    
    13,859
    
    
    
    22
    
    
    
    13,881
    
    
    
    13,896
    
    
    
    7.25
    
    
    
    6.98ARMs
    
    
    24,465
    
    
    
    225
    
    
    
    24,690
    
    
    
    24,552
    
    
    
    7.22
    
    
    
    6.9538,324
    
    
    
    247
    
    
    
    38,571
    
    
    
    38,448
    
    
    
    7.23
    
    
    
    6.96Commercial loans
    
    
    5,056
    
    
    
    (14
    )
    
    
    5,042
    
    
    
    5,042
    
    
    
    18.00
    
    
    
    18.62Collateral
for structured financings
    
    
    5,195
    
    
    
    86
    
    
    
    5,281
    
    
    
    5,281
    
    
    
    8.04
    
    
    
    7.91$
    4,706,156
    
    
    $
    61,403
    
    
    $
    4,767,559
    
    
    $
    4,781,085
    
    
    
    6.44
    
    
    
    5.67
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InvestmentPrincipal
    
    
    Premiums
    
    
    
    
    
    
    Carrying
    
    
    Net
    
    
    AverageBalance
    
    
    (Discounts)
    
    
    Basis
    
    
    Amount(a)
    
    
    WAC(b)
    
    
    Yield(b)December 31, 2006Agency Securities:Fannie Mae/Freddie Mac:Fixed-rate
    
    $
    16,819
    
    
    $
    52
    
    
    $
    16,871
    
    
    $
    16,895
    
    
    
    6.63
    %
    
    
    6.29
    %ARMs
    
    
    4,343,740
    
    
    
    61,381
    
    
    
    4,405,121
    
    
    
    4,418,446
    
    
    
    6.14
    
    
    
    5.36Ginnie Mae ARMs
    
    
    752,301
    
    
    
    2,757
    
    
    
    755,058
    
    
    
    758,660
    
    
    
    5.23
    
    
    
    5.205,112,860
    
    
    
    64,190
    
    
    
    5,177,050
    
    
    
    5,194,001
    
    
    
    6.01
    
    
    
    5.34Non-agency Securities:Fixed-rate
    
    
    17,734
    
    
    
    41
    
    
    
    17,775
    
    
    
    17,804
    
    
    
    7.19
    
    
    
    6.83ARMs
    
    
    31,562
    
    
    
    303
    
    
    
    31,865
    
    
    
    32,164
    
    
    
    6.99
    
    
    
    6.8149,296
    
    
    
    344
    
    
    
    49,640
    
    
    
    49,968
    
    
    
    7.06
    
    
    
    6.81Commercial loans
    
    
    2,635
    
    
    
    
    
    
    
    2,635
    
    
    
    2,635
    
    
    
    18.00
    
    
    
    18.00Collateral
for structured financings
    
    
    5,705
    
    
    
    90
    
    
    
    5,795
    
    
    
    5,795
    
    
    
    8.06
    
    
    
    7.58$
    5,170,496
    
    
    $
    64,624
    
    
    $
    5,235,120
    
    
    $
    5,252,399
    
    
    
    6.03
    
    
    
    5.36
 
 (a)
    
    Includes mark-to-market for securities classified as available-for-sale, if applicable (see
NOTE 9).(b)
    
    Net WAC, or weighted average coupon, is presented net of servicing and other fees as of the
indicated balance sheet date. Average Yield is presented for the quarter then ended,
calculated including the amortization of investment premiums and discounts, mortgage
insurance costs on Non-agency Securities and excluding unrealized gains and losses. Yields
averaged 5.58% for the nine months ended September 30, 2007.  NOTE 5 3⁄4 INVESTMENTS IN UNCONSOLIDATED AFFILIATES
   -10-




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NOTE 6 3⁄4 REPURCHASE ARRANGEMENTS AND SIMILAR BORROWINGS
 Mortgage securities and similar investments Repurchase arrangements and similar borrowings
 September 30, 2007
    
    
    December 31, 2006Borrowings
    
    
    Average
    
    
    Borrowings
    
    
    AverageOutstanding
    
    
    Rate*
    
    
    Outstanding
    
    
    Rate*Borrowings with maturities of 30 days or less:Agency Securities
    
    $
    2,742,589
    
    
    
    5.39
    %
    
    $
    2,048,151
    
    
    
    5.30
    %Non-agency Securities
    
    
    32,673
    
    
    
    6.13
    
    
    
    45,764
    
    
    
    5.852,775,262
    
    
    
    5.40
    
    
    
    2,093,915
    
    
    
    5.32Borrowings with maturities greater than 30
days:Agency Securities (31 to 90 days)
    
    
    169,128
    
    
    
    5.21
    
    
    
    1,741,751
    
    
    
    5.16Agency Securities (91 to 360 days)
    
    
    90,000
    
    
    
    5.16
    
    
    
    
    
    
    
    Agency Securities (greater than 360 days)
    
    
    1,406,114
    
    
    
    5.01
    
    
    
    1,034,673
    
    
    
    4.981,665,242
    
    
    
    5.04
    
    
    
    2,776,424
    
    
    
    5.09Structured financings
    
    
    5,281
    
    
    
    7.91
    
    
    
    5,795
    
    
    
    7.58$
    4,445,785
    
    
    
    5.27
    
    
    $
    4,876,134
    
    
    
    5.19
 
 *
    
    Average rate is presented as of the indicated balance sheet date. Repurchase arrangements and similar borrowings
 NOTE 7 3⁄4 UNSECURED BORROWINGS
 Unsecured borrowings
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September 30, 2007
    
    
    December 31, 2006Borrowings
    
    
    Average
    
    
    Borrowings
    
    
    AverageOutstanding
    
    
    Rate
    
    
    Outstanding
    
    
    RateJunior subordinated notes:Capstead Mortgage Trust I
    
    $
    36,083
    
    
    
    8.31
    %
    
    $
    36,083
    
    
    
    8.31
    %Capstead Mortgage Trust II
    
    
    41,238
    
    
    
    8.46
    
    
    
    41,238
    
    
    
    8.46Capstead Mortgage Trust III
    
    
    25,774
    
    
    
    8.78
    
    
    
    25,774
    
    
    
    8.78$
    103,095
    
    
    
    8.49
    
    
    $
    103,095
    
    
    
    8.49
 Receivables and other assets Unsecured borrowings
 NOTE 8 3⁄4 COMPREHENSIVE INCOME (LOSS)
 Accumulated other comprehensive
income Stockholders equity
 Quarter Ended
    
    
    Nine Months EndedSeptember 30
    
    
    September 302007
    
    
    2006
    
    
    2007
    
    
    2006Net income (loss)
    
    $
    (3,148
    )
    
    $
    (1,493
    )
    
    $
    8,853
    
    
    $
    1,493Other comprehensive income (loss):Amounts related to cash flow hedges:Reclassification adjustment for amounts
included in net income (loss)
    
    
    (8
    )
    
    
    (11
    )
    
    
    (31
    )
    
    
    (41
    )Amounts related to securities held
available-for-sale:Reclassification adjustment for amounts
included in net income (loss)
    
    
    5,941
    
    
    
    
    
    
    
    5,941
    
    
    
    Change in valuation of mortgage securities
held available-for-sale
    
    
    (11,803
    )
    
    
    24,287
    
    
    
    (9,694
    )
    
    
    8,313Other comprehensive income (loss)
    
    
    (5,870
    )
    
    
    24,276
    
    
    
    (3,784
    )
    
    
    8,272Comprehensive income (loss)
    
    $
    (9,018
    )
    
    $
    22,783
    
    
    $
    5,069
    
    
    $
    9,765
 -12-




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##### Table of Contents



NOTE 9 3⁄4 DISCLOSURES REGARDING FAIR VALUES OF FINANCIAL INSTRUMENTS
 Mortgage securities and similar
investments Accumulated other comprehensive income
 Gross
    
    
    GrossUnrealized
    
    
    Unrealized
    
    
    FairBasis
    
    
    Gains
    
    
    Losses
    
    
    ValueAs of September 30, 2007Agency Securities
    
    $
    4,705,111
    
    
    $
    19,335
    
    
    $
    5,686
    
    
    $
    4,718,760Non-agency Securities
    
    
    20,121
    
    
    
    42
    
    
    
    165
    
    
    
    19,998$
    4,725,232
    
    
    $
    19,377
    
    
    $
    5,851
    
    
    $
    4,738,758As of December 31, 2006Agency Securities
    
    $
    5,160,508
    
    
    $
    25,160
    
    
    $
    8,209
    
    
    $
    5,177,459Non-agency Securities
    
    
    25,292
    
    
    
    334
    
    
    
    6
    
    
    
    25,620$
    5,185,800
    
    
    $
    25,494
    
    
    $
    8,215
    
    
    $
    5,203,079
  Gross
    
    
    GrossUnrealized
    
    
    Unrealized
    
    
    FairBasis
    
    
    Gains
    
    
    Losses
    
    
    ValueAs of September 30, 2007Collateral released from structured
financings:Agency Securities
    
    $
    13,554
    
    
    $
    227
    
    
    $
    1
    
    
    $
    13,780Non-agency Securities
    
    
    18,450
    
    
    
    113
    
    
    
    61
    
    
    
    18,502Collateral for structured financings
    
    
    5,281
    
    
    
    
    
    
    
    
    
    
    
    5,281$
    37,285
    
    
    $
    340
    
    
    $
    62
    
    
    $
    37,563As of December 31, 2006Collateral released from structured
financings:Agency Securities
    
    $
    16,542
    
    
    $
    306
    
    
    $
    1
    
    
    $
    16,847Non-agency Securities
    
    
    24,348
    
    
    
    328
    
    
    
    15
    
    
    
    24,661Collateral for structured financings
    
    
    5,795
    
    
    
    
    
    
    
    
    
    
    
    5,795$
    46,685
    
    
    $
    634
    
    
    $
    16
    
    
    $
    47,303
  -13-




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##### Table of Contents



September 30, 2007
    
    
    December 31, 2006Fair
    
    
    Unrealized
    
    
    Fair
    
    
    UnrealizedValue
    
    
    Loss
    
    
    Value
    
    
    LossSecurities in an unrealized loss position:One year or greater
    
    $
    827,964
    
    
    $
    3,878
    
    
    $
    837,123
    
    
    $
    6,392Less than one year
    
    
    462,586
    
    
    
    2,035
    
    
    
    487,144
    
    
    
    1,839$
    1,290,550
    
    
    $
    5,913
    
    
    $
    1,324,267
    
    
    $
    8,231
 NOTE 10 3⁄4 LONG-TERM INCENTIVE AND OTHER PLANS
  Weighted AverageNumber of
    
    Grant DateShares
    
    Fair ValueStock awards outstanding as of December 31, 2006
    
    
    321,550
    
    
    $
    8.02Grants issued directors
    
    
    6,000
    
    
    
    9.81Forfeitures
    
    
    (6,250
    )
    
    
    7.97Vested
    
    
    (40,100
    )
    
    
    7.74Stock awards outstanding as of September 30, 2007
    
    
    281,200
    
    
    
    8.10
 -14-




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##### Table of Contents



Number of
    
    Weighted AverageShares
    
    Exercise PriceOption awards outstanding as of December 31, 2006
    
    
    855,552
    
    
    $
    13.02Grants (average fair value $0.89)*
    
    
    220,500
    
    
    
    10.46Expirations
    
    
    (53,520
    )
    
    
    33.77Exercises
    
    
    (2,500
    )
    
    
    7.82Option awards outstanding as of September 30, 2007
    
    
    1,020,032
    
    
    $
    11.39
 
 *
    
    Option awards granted during 2007 were valued with average expected terms of four
years, volatility factors of 27%, dividend yields of 10% and risk-free rates of 4.60%.   -15-




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##### Table of Contents



NOTE 11 3⁄4 NET INTEREST INCOME ANALYSIS
 Mortgage securities and similar investments
 Quarter Ended September 302007
    
    
    2006
    
    
    Related Changes inAverage
    
    
    
    
    
    
    Average
    
    
    AverageAmount
    
    
    Rate
    
    
    Amount
    
    
    Rate
    
    
    Rate*
    
    
    Volume*Interest income
    
    $
    74,949
    
    
    
    5.67
    %
    
    $
    62,230
    
    
    
    5.04
    %
    
    $
    8,122
    
    
    $
    4,597Interest expense
    
    
    (66,478
    )
    
    
    5.25
    
    
    
    (61,066
    )
    
    
    5.20
    
    
    
    579
    
    
    
    4,833$
    8,471
    
    
    
    0.42
    
    
    $
    1,164
    
    
    
    (0.16
    )
    
    $
    7,543
    
    
    $
    (236
    )
 Nine Months Ended September 302007
    
    
    2006
    
    
    Related Changes inAverage
    
    
    
    
    
    
    Average
    
    
    AverageAmount
    
    
    Rate
    
    
    Amount
    
    
    Rate
    
    
    Rate*
    
    
    Volume*Interest income
    
    $
    222,886
    
    
    
    5.58
    %
    
    $
    172,505
    
    
    
    4.78
    %
    
    $
    30,740
    
    
    $
    19,641Interest expense
    
    
    (197,174
    )
    
    
    5.22
    
    
    
    (163,294
    )
    
    
    4.81
    
    
    
    14,422
    
    
    
    19,458$
    25,712
    
    
    
    0.36
    
    
    $
    9,211
    
    
    
    (0.03
    )
    
    $
    16,318
    
    
    $
    183
 
 *
    
    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. -16-




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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
 FINANCIAL CONDITION
 Overview
      -17-




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##### Table of Contents



Risk Factors and Critical Accounting Policies
  Accounting for Acquisitions of Mortgage Securities Seller-Financed using Repurchase Arrangements
  Fair Value Accounting Rule Changes
 Fair Value Measurements The
Fair Value Option for Financial Assets and Financial Liabilities  Including an amendment of FASB
Statement No. 115
 -18-




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##### Table of Contents



Stockholders equity
 Residential Mortgage Investments
  Fully
    
    
    Average
    
    
    Average
    
    
    Average
    
    
    MonthsNet
    
    
    Indexed
    
    
    Net
    
    
    Periodic
    
    
    Lifetime
    
    
    ToARM Type
    
    Basis *
    
    
    WAC
    
    
    WAC
    
    
    Margins
    
    
    Caps
    
    
    Caps
    
    
    RollCurrent-reset ARMs:Agency Securities:Fannie Mae/Freddie Mac
    
    $
    2,531,873
    
    
    
    6.59
    %
    
    
    6.19
    %
    
    
    1.89
    %
    
    
    4.30
    %
    
    
    10.61
    
    
    
    3.9Ginnie Mae
    
    
    568,262
    
    
    
    5.88
    
    
    
    5.54
    
    
    
    1.54
    
    
    
    1.00
    
    
    
    9.89
    
    
    
    5.5Non-agency securities
    
    
    24,690
    
    
    
    7.22
    
    
    
    7.25
    
    
    
    2.10
    
    
    
    1.69
    
    
    
    11.30
    
    
    
    5.33,124,825
    
    
    
    6.46
    
    
    
    6.08
    
    
    
    1.83
    
    
    
    3.68
    
    
    
    10.48
    
    
    
    4.2Longer-to-reset ARMs:Agency Securities:Fannie Mae/Freddie Mac
    
    
    1,604,697
    
    
    
    6.34
    
    
    
    6.77
    
    
    
    1.72
    
    
    
    3.69
    
    
    
    12.03
    
    
    
    45.5$
    4,729,522
    
    
    
    6.42
    
    
    
    6.31
    
    
    
    1.79
    
    
    
    3.69
    
    
    
    11.01
    
    
    
    18.2
 
 *
    
    Basis represents the Companys investment before unrealized gains and losses. As of
September 30, 2007, the ratio of basis to related unpaid principal balance for the
Companys ARM securities was 101.31.   -19-




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##### Table of Contents



Commercial Real Estate-related Assets
    -20-




---



##### Table of Contents



Mortgage Securities and Similar Investments Yield and Cost Analysis
  Projected
    
    
    Lifetime3rdQuarter Average

    
    As of September 30, 2007
    
    
    4thQuarter
    
    
    RunoffBasis (a)
    
    
    Yield/Cost
    
    
    Runoff
    
    
    Premiums
    
    
    Basis (a)
    
    
    Yield/Cost (b)
    
    
    AssumptionsAgency Securities:Fannie Mae/Freddie Mac:Fixed-rate
    
    $
    14,379
    
    
    
    6.40
    %
    
    
    21
    %
    
    $
    39
    
    
    $
    13,833
    
    
    
    6.42
    %
    
    
    38
    %ARMs
    
    
    4,619,792
    
    
    
    5.65
    
    
    
    30
    
    
    
    58,434
    
    
    
    4,136,570
    
    
    
    5.83
    
    
    
    31Ginnie Mae ARMs
    
    
    601,958
    
    
    
    5.62
    
    
    
    36
    
    
    
    2,611
    
    
    
    568,262
    
    
    
    5.63
    
    
    
    295,236,129
    
    
    
    5.65
    
    
    
    30
    
    
    
    61,084
    
    
    
    4,718,665
    
    
    
    5.81
    
    
    
    31Non-agency Securities:Fixed-rate
    
    
    14,275
    
    
    
    6.98
    
    
    
    24
    
    
    
    22
    
    
    
    13,881
    
    
    
    6.93
    
    
    
    37ARMs
    
    
    25,300
    
    
    
    6.95
    
    
    
    20
    
    
    
    225
    
    
    
    24,690
    
    
    
    6.63
    
    
    
    3839,575
    
    
    
    6.96
    
    
    
    21
    
    
    
    247
    
    
    
    38,571
    
    
    
    6.76
    
    
    
    38Commercial loans
    
    
    4,562
    
    
    
    18.62
    
    
    
    
    
    
    
    (14
    )
    
    
    5,042
    
    
    
    18.37
    
    
    
    Collateral for
structured
financings
    
    
    5,558
    
    
    
    7.91
    
    
    
    22
    
    
    
    86
    
    
    
    5,281
    
    
    
    7.91
    
    
    
    305,285,824
    
    
    
    5.67
    
    
    
    30
    
    
    $
    61,403
    
    
    
    4,767,559
    
    
    
    5.81
    
    
    
    31Related borrowings:30-day interest rates
    
    
    3,395,942
    
    
    
    5.35
    
    
    
    
    
    
    
    
    
    
    
    2,919,365
    
    
    
    4.88>30-day interest
rates
    
    
    1,557,050
    
    
    
    5.00
    
    
    
    
    
    
    
    
    
    
    
    1,521,139
    
    
    
    5.01Structured financings
    
    
    5,558
    
    
    
    7.91
    
    
    
    
    
    
    
    
    
    
    
    5,281
    
    
    
    7.914,958,550
    
    
    
    5.25
    
    
    
    
    
    
    
    
    
    
    
    4,445,785
    
    
    
    4.93Capital employed/
financing spread
    
    $
    327,274
    
    
    
    0.42
    
    
    
    
    
    
    
    
    
    
    $
    321,774
    
    
    
    0.88Return on assets (c)
    
    
    
    
    
    
    0.64
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1.18
 
 (a)
    
    Basis represents the Companys investment before unrealized gains and losses. Asset yields,
runoff rates, borrowing rates and resulting financing spread are presented on an annualized
basis.(b)
    
    Projected annualized yields and borrowing rates reflect managements expectations for fourth
quarter portfolio acquisitions (including approximately $1.2 billion in ARM Agency Securities
acquired with the net proceeds of the Companys recent common equity offering), ARM coupon
resets and runoff rates, assuming no further changes in the federal funds rate beyond the
October 31, 2007 action taken by the Federal Reserve to reduce the federal funds rate to
4.50%. Actual yields realized in future periods largely depend upon (i) changes in portfolio
composition, (ii) ARM coupon resets, which are based on underlying indexes, (iii) near term
runoff and (iv) changes in lifetime runoff assumptions. Interest rates on borrowings that
reset every 30 days are based on a margin over the federal funds rate and therefore largely
depend on changes or anticipated changes in the federal funds rate and market liquidity.(c)
    
    The Company generally uses its liquidity to pay down borrowings. Return on assets is
calculated on an annualized basis assuming the use of this liquidity to reduce borrowing
costs.  -21-




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##### Table of Contents



Book Value per Common Share
 
 -22-




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##### Table of Contents



Utilization of Long-term Investment Capital and Potential Liquidity
  Related
    
    
    Capital
    
    
    PotentialInvestments (a)
    
    
    Borrowings
    
    
    Employed (a)
    
    
    Liquidity (a)Residential mortgage securities
    
    $
    4,776,043
    
    
    $
    4,445,785
    
    
    $
    330,258
    
    
    $
    173,717Commercial real estate-related assets
    
    
    13,046
    
    
    
    
    
    
    
    13,046
    
    
    
    80$
    4,789,089
    
    
    $
    4,445,785
    
    
    
    343,304
    
    
    
    173,797Other assets, net of other liabilities
    
    
    
    
    
    
    
    
    
    
    87,565
    
    
    
    44,633Third quarter common dividend
    
    
    
    
    
    
    
    
    
    
    (776
    )
    
    
    (776)
    (b)$
    430,093
    
    
    $
    217,654Balances as of December 31, 2006
    
    $
    5,269,355
    
    
    $
    4,876,134
    
    
    $
    439,962
    
    
    $
    226,330
 
 (a)
    
    Investments are stated at carrying amounts on the Companys balance sheet. Potential
liquidity is based on maximum amounts of borrowings available under existing uncommitted
repurchase arrangements considering managements estimate of the fair value of related
collateral as of the indicated dates adjusted for other sources (uses) of liquidity such as
unrestricted cash and cash equivalents, cash flow (requirements) distributions from
commercial real estate-related assets and dividends payable.(b)
    
    The third quarter 2007 common dividend was declared September 13, 2007 and paid October 19,
2007 to stockholders of record as of September 28, 2007.   -23-




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##### Table of Contents



RESULTS OF OPERATIONS
  Quarter Ended
    
    
    Nine Months EndedSeptember 30
    
    
    September 302007
    
    
    2006
    
    
    2007
    
    
    2006Income statement data:Mortgage securities and similar investments:Agency Securities
    
    $
    8,102
    
    
    $
    989
    
    
    $
    24,795
    
    
    $
    8,716Non-agency Securities
    
    
    155
    
    
    
    110
    
    
    
    455
    
    
    
    430Commercial loans
    
    
    214
    
    
    
    65
    
    
    
    462
    
    
    
    658,471
    
    
    
    1,164
    
    
    
    25,712
    
    
    
    9,211Other revenue (expense):Loss from portfolio restructuring
    
    
    (8,276
    )
    
    
    
    
    
    
    (8,276
    )
    
    
    Other revenue
    
    
    274
    
    
    
    63
    
    
    
    1,382
    
    
    
    429Interest on unsecured borrowings
    
    
    (2,186
    )
    
    
    (1,747
    )
    
    
    (6,560
    )
    
    
    (4,955
    )Other operating expense
    
    
    (1,678
    )
    
    
    (1,627
    )
    
    
    (4,891
    )
    
    
    (4,876
    )(3,395
    )
    
    
    (2,147
    )
    
    
    7,367
    
    
    
    (191
    )Equity in earnings of unconsolidated affiliates
    
    
    247
    
    
    
    654
    
    
    
    1,486
    
    
    
    1,684Net income (loss)
    
    $
    (3,148
    )
    
    $
    (1,493
    )
    
    $
    8,853
    
    
    $
    1,493Diluted loss per common share
    
    $
    (0.43
    )
    
    $
    (0.35
    )
    
    $
    (0.33
    )
    
    $
    (0.73
    )Key portfolio statistics:Average yields:Agency Securities
    
    
    5.65
    %
    
    
    5.02
    %
    
    
    5.56
    %
    
    
    4.76
    %Non-agency Securities
    
    
    6.96
    
    
    
    6.34
    
    
    
    6.83
    
    
    
    6.04Commercial loans
    
    
    18.62
    
    
    
    18.00
    
    
    
    18.28
    
    
    
    18.00Collateral for structured financings
    
    
    7.91
    
    
    
    7.75
    
    
    
    7.94
    
    
    
    7.31Total average yields
    
    
    5.67
    
    
    
    5.04
    
    
    
    5.58
    
    
    
    4.78Average related borrowing rates:30-day interest rates
    
    
    5.35
    
    
    
    5.33
    
    
    
    5.32
    
    
    
    4.95Greater than 30-day interest rates
    
    
    5.00
    
    
    
    4.71
    
    
    
    4.96
    
    
    
    4.32Structured financings
    
    
    7.91
    
    
    
    7.75
    
    
    
    7.94
    
    
    
    7.31Total related borrowing rates
    
    
    5.25
    
    
    
    5.20
    
    
    
    5.22
    
    
    
    4.81Average financing spreads
    
    
    0.42
    
    
    
    (0.16
    )
    
    
    0.36
    
    
    
    (0.03
    )Average portfolio balances:Agency Securities
    
    $
    5,236
    
    
    $
    4,868
    
    
    $
    5,275
    
    
    $
    4,737Non-agency Securities
    
    
    40
    
    
    
    56
    
    
    
    43
    
    
    
    61Commercial loans
    
    
    5
    
    
    
    1
    
    
    
    3
    
    
    
    1Collateral for structured financings
    
    
    5
    
    
    
    6
    
    
    
    6
    
    
    
    85,286
    
    
    
    4,931
    
    
    
    5,327
    
    
    
    4,807Related average borrowings
    
    
    4,959
    
    
    
    4,595
    
    
    
    4,985
    
    
    
    4,471Average capital deployed
    
    $
    327
    
    
    $
    336
    
    
    $
    342
    
    
    $
    336Average portfolio runoff rates
    
    
    30
    %
    
    
    31
    %
    
    
    30
    %
    
    
    31
    %
 -24-




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##### Table of Contents



-25-




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##### Table of Contents



Interest Rate Sensitivity on Operating Results
  Federal
    
    
    10-year U.S.Funds
    
    
    TreasuryRate
    
    
    Rate
    
    
    Immediate Change In:*Down
    
    Down
    
    
    
    
    
    Up
    
    
    Up30-day to one-year rates
    
    
    
    
    
    
    
    
    
    
    1.00
    %
    
    
    1.00
    %
    
    Flat
    
    
    1.00
    %
    
    
    1.00
    %Down
    
    
    
    
    
    Down
    
    
    
    
    
    Up10-year U.S. Treasury rate
    
    
    
    
    
    
    
    
    
    
    1.00
    %
    
    Flat
    
    
    1.00
    %
    
    Flat
    
    
    1.00
    %Projected 12-month
earnings change:September 30, 2007
    
    
    4.75
    %
    
    
    4.59
    %
    
    $
    6,800
    
    
    $
    9,900
    
    
    $
    (6,800
    )
    
    $
    (12,200
    )
    
    $
    (8,800
    )December 31, 2006
    
    
    5.25
    
    
    
    4.70
    
    
    
    11,900
    
    
    
    14,300
    
    
    
    (5,500
    )
    
    
    (24,700
    )
    
    
    (21,700
    )
 
 *
    
    Sensitivity of earnings to changes in interest rates is determined relative to the actual
rates at the applicable date. Note that the projected 12-month earnings change is
predicated on acquisitions of similar assets sufficient to replace runoff. There can be no
assurance that suitable investments will be available for purchase at attractive prices or
if investments made will behave in the same fashion as assets currently held.  -26-




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LIQUIDITY AND CAPITAL RESOURCES
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RISK FACTORS
 An investment in Capsteads debt and equity securities involves various risks. An investor should
carefully consider the following risk factors in conjunction with the other information contained
in this filing before purchasing the Companys 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 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 the Companys business, liquidity, operating results, prospects and
financial condition.
 Risks Related to Capsteads Business
 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.
 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.
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Capsteads use of repurchase arrangements to borrow money may give the Companys lenders greater
rights in the event of bankruptcy.
 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.
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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.
 Capstead may invest in derivatives to mitigate the Companys interest rate risk on its mortgage
securities and similar investments and its related borrowings, which may negatively affect the
Companys liquidity, financial condition or earnings.
 Capstead may be unable to invest the net proceeds raised in a debt or equity offering on acceptable
terms or at all, 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.
 Potential requirements to adopt generally accepted accounting principles for investment companies
may increase Capsteads earnings volatility.
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Commercial real estate-related assets may expose investors to greater risks of loss than
investments in residential mortgage securities.
  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.
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
    
    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.
 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.
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Complying with REIT requirements may force Capstead to borrow to make distributions to
stockholders.
 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.
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Failure to maintain an exemption from the Investment Company Act of 1940 would adversely affect
Capsteads results of operations.
  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 its board of directors
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.
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Capstead may change its policies without stockholder approval.
 CRITICAL ACCOUNTING POLICIES
   
    
    Amortization of Investment Premiums on Financial Assets Investment premiums on
financial assets are recognized in earnings as adjustments to interest income by the
interest method over the estimated lives of the related assets. For most of Capsteads
financial assets, estimates and judgments related to future levels of mortgage prepayments
are critical to this determination. Mortgage prepayment expectations can vary considerably
from period to period based on current and projected changes in interest rates and other
factors such as portfolio composition. Management estimates mortgage prepayments based on
past experiences with specific investments within the portfolio, and current market
expectations for changes in the interest rate environment. Should actual runoff rates
differ materially from these estimates, investment premiums would be expensed at a different
pace.
    
    Fair Value and Impairment Accounting for Financial Assets Most of Capsteads
investments are financial assets held in the form of mortgage securities that are classified
as held available-for-sale and recorded at fair value on the balance sheet with unrealized
gains and losses recorded in Stockholders equityas a component of Accumulated other
comprehensive income. As such, these unrealized gains and losses enter into the calculation
of book value per common share, a key financial metric used by investors in evaluating the
Company. Fair values fluctuate with current and projected changes in interest rates,
prepayment expectations and other factors such as market liquidity. Considerable judgment
is required interpreting market data to develop estimated fair values, particularly in
circumstances of deteriorating credit quality and market liquidity (see NOTE 9 to the
accompanying unaudited consolidated financial statements for discussion of how Capstead
values its financial assets). Generally, gains or losses are recognized in earnings only if
sold; however, if a decline in fair value of an individual asset below its amortized cost
occurs that is determined to be other than temporary, the difference between amortized cost
and fair value would be included in Other revenue (expense)as an impairment charge.
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FORWARD LOOKING STATEMENTS
  
 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 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
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(b)
    
    Reports on Form 8-K:Current Report on Form 8-K dated July 26, 2007 furnishing the press release announcing second
quarter 2007 resultsCurrent Report on Form 8-K dated July 26, 2007 announcing a conference call and audio webcast
to discuss second quarter financial results with the investment community and filing related
investor presentation materialsCurrent Report of Form 8-K dated September 26, 2007 to file the underwriting agreement and
related documents relative to the Companys 11.5 million common share public offering that
closed October 2, 2007
 
 SIGNATURES
  CAPSTEAD MORTGAGE CORPORATION
                            RegistrantDate: October 31, 2007
    
    By:
    
    /s/ ANDREW F. JACOBS

Andrew F. Jacobs
President and Chief Executive OfficerDate: October 31, 2007
    
    By:
    
    /s/ PHILLIP A. REINSCH

Phillip A. Reinsch
Executive Vice President and
Chief Financial Officer
 -37-