Opteum Inc., a Maryland corporation (“Opteum”), was originally formed in September 2003 as Bimini Mortgage Management, Inc. (“Bimini”) for the purpose of creating and managing a leveraged investment portfolio consisting of residential mortgage backed securities (“MBS”).  Opteum’s shares of Class A Common Stock are listed on the New York Stock Exchange and trade under the ticker symbol “OPX.”  Opteum’s website is located at http://www.opteum.com.

On November 3, 2005, Opteum, then known as Bimini, acquired Opteum Financial Services, LLC.  This entity, which was previously referred to as “OFS,” was renamed Orchid Island TRS, LLC (“OFS”).effective July 3, 2007.   Hereinafter, any historical mention, discussion or references to Opteum Financial Services, LLC or to OFS (such as in previously filed documents or Exhibits) now means Orchid Island TRS, LLC or “OITRS.”  Upon closing of the transaction, OFSOITRS became a wholly-owned taxable REIT subsidiary (“TRS”) of Bimini.  Under the terms of the transaction, Bimini issued 3.7 million shares of Class A Common Stock and 1.2 million shares of Class A Redeemable Preferred Stock to the former members of OFS. Bimini also agreed to a contingent earn-out of up to $17.5 million based on the achievement by OFS of certain specific financial objectives. For the period from the date of acquisition through March 31, 2007, such objectives were not met and there were no payments made in respect of the contingent earn-out.OITRS.

On February 10, 2006, Bimini changed its name to Opteum Inc.  At Opteum’s 2006 Annual Meeting of Stockholders, the shares of Class A Redeemable Preferred Stock issued to the former members of OFSOITRS were converted into shares of Opteum’s Class A Common Stock on a one-for-one basis following the approval of such conversion by Opteum’s stockholders.

On December 21, 2006, Opteum sold to Citigroup Global Markets Realty Corp. (“Citigroup Realty”) a Class B non-voting limited liability company membership interest in OFS,OITRS, representing 7.5% of all of OFS’sOITRS’s outstanding limited liability company membership interests, for $4.1 million.  Immediately following the transaction, Opteum held Class A voting limited liability company membership interests in OFSOITRS representing 92.5% of all of OFS’sOITRS’s outstanding limited liability company membership interests.  In connection with the transaction, Opteum also granted Citigroup Realty the option, exercisable on or before December 20, 2007, to acquire additional Class B non-voting limited liability company membership interests in OFSOITRS representing 7.49% of all of OFS’sOITRS’s outstanding limited liability company membership interests.

Opteum has elected to be taxed as a real estate investment trust (“REIT”) under the Internal Revenue Code of 1986, as amended (the “Code”).  As a REIT, Opteum is generally not subject to federal income tax on its REIT taxable income provided that it distributes to its stockholders at least 90% of its REIT taxable income on an annual basis.  OFSOITRS has elected to be treated as a taxable REIT subsidiary and, as such, is subject to federal, state and local income taxation.  In addition, the ability of OFSOITRS to deduct interest paid or accrued to Opteum for federal, state and local tax purposes is subject to certain limitations.

As used in this document, referencesdiscussions related to “Opteum,” the parent company, the registrant, and to REITreal estate investment trust (“REIT”) qualifying activities or the general management of Opteum Inc.’s investmentOpteum’s portfolio of MBSmortgage backed securities (“MBS”) refer solely to “Opteum Inc.”  Further, as used in this document, referencesdiscussions related to “OFS,” Opteum’s taxable REIT subsidiary or non-REIT eligible assets refer solelyto OITRS and its consolidated subsidiaries.  This entity, which was previously referred to as “OFS,” was renamed Orchid Island TRS, LLC effective July 3, 2007.   Hereinafter, any historical mention, discussion or references to Opteum Financial Services, LLC and its consolidated subsidiaries. Referencesor to OFS (such as in previously filed documents or Exhibits) now means Orchid Island TRS, LLC or “OITRS.”  Discussions relating to the “Company” refer to the consolidated entity (the combination of Opteum and OFS on a consolidated basis.OITRS). The assets and activities that are not REIT eligible, such as mortgage origination, acquisition and servicing activities, are conducted by OFS.OITRS.

On April 20,18, 2007, the Board of Managers of OFS,OITRS, at the recommendation of the Board of Directors of Opteum, approved the closure of OFS’sOITRS’ wholesale and conduit mortgage loan origination channels in the second quarter of 2007.  Additionally, in MayAlso, during the second quarter of 2007, OFS signed a binding agreementapproval was also given to sell its retail mortgage loan origination channelsubstantially all of the other operating assets of OITRS.   Therefore, OITRS is accounted for as a discontinued operation, all OITRS’s assets are considered as held for sale, and OITRS is reported as a discontinued operation for all periods presented following applicable accounting standards.  For financial statement presentation purposes, as of the quarter ended June 30, 2007, Opteum is now operating in a single business segment, as a REIT.

The Company has obtained committed funding arrangements that provide specified advance rates and funding levels and are available to a third party. The impactfinance our MBS portfolio.   Should our financing be withdrawn and our committed funding agreements not be sufficient to finance all of these decisionsour MBS investments, we may be forced to sell such assets, which may result in losses upon such sales.  While the financing in place for our retained interests, trading held by OITRS is committed through December 20, 2007, the lender on the March 31, 2007 financial statements includes OFS recording impairment charges on goodwillfinancing facility has and may continue to request additional margin be posted in connection with the facility. If we are unable to meet such requests in the future, we may be forced to sell the assets or seek alternative financing.  At present, such alternative financing arrangements for the residual interests, trading may not be available or only available at substantially higher cost to OITRS.  If cash resources are, at any time, insufficient to satisfy the Company’s liquidity requirements, such as when cash flow from operations were materially negative, the Company may be required to pledge additional assets to meet margin calls, liquidate assets, sell additional debt or equity securities or pursue other intangiblefinancing alternatives. Any sale of mortgage-related securities or other assets held for sale at prices lower than the carrying value of such assets would reduce our income.  The Company presently believes that its equity and on certain fixedjunior subordinated debt capital, combined with the cash flow from operations and the utilization of borrowings, will be sufficient to enable the Company to meet its anticipated liquidity requirements. Continued disruptions in market conditions could, however, adversely affect the Company’s liquidity, including the lack of available financing for our MBS assets (as further described below). See Note 19.beyond the capacity of our committed facilities (currently $0.75 billion), increases in interest rates, increases in prepayment rates substantially above expectations and decreases in value of assets held for sale. Therefore, no assurances can be made regarding the Company's ability to satisfy its liquidity and working capital requirements.

The accompanying interim financial statements reflect all adjustments, consisting of normal recurring items that, in the opinion of management, are necessary for a fair presentation of the Company’s financial position, results of operations, statement of stockholders’ equity and cash flows for the periods presented. These interim financial statements have been prepared in accordance with disclosure requirements for interim financial information and accordingly, they may not include all of the information and footnotes required by U.S. generally accepted accounting principles (“GAAP”) for annual financial statements. The operating results for the interim period ended March 31,June 30, 2007 are not necessarily indicative of results that can be expected for the year ended December 31, 2007. The consolidated balance sheet as of December 31, 2006 was derived from audited financial statements included in our 2006 Annual Report on Form 10-K but does not include all disclosures required by accounting principals generally accepted in the United States.  Certain prior year amounts were reclassified to conform to the second quarter of 2007 presentation, including the discontinued operations presentation.  The financial statements included as part of this Form 10-Q should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006.

The accompanying consolidated financial statements are prepared on the accrual basis of accounting in accordance with GAAP. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates affecting the accompanying financial statements include the fair values of MBS, the prepayment speeds used to calculate amortization and accretion of premiums and discounts on MBS, the recording of certain balances related to the discontinued operation, including the realizability of the deferred tax assets and related valuation allowance, the valuation allowance on mortgage loans held for sale, the amount of the impairment charges recorded on certain assets, the valuation of retained interests, trading and the fair value of mortgage servicing rights.

Cash and cash equivalents include cash on hand and highly liquid investments with original maturities of three months or less. The carrying amount of cash equivalents approximates its fair value as of March 31,June 30, 2007 and December 31, 2006.

In accordance with GAAP, the Company classifies its investments in MBS as either trading investments, available-for-sale investments or held-to-maturity investments. Management determines the appropriate classification of the securities at the time they are acquired and evaluates the appropriateness of such classifications at each balance sheet date. Although the Company generally intends to hold its MBS until maturity, it may, from time to time, sell any of its MBS as part of the overall management of the business.business and/or to meet liquidity needs. The Company classifies all of its securities as available-for-sale and assets so classified are carried on the balance sheet at fair value and unrealized gains or losses arising from changes in fair value are reported as other comprehensive income or loss as a component of stockholders' equity.available-for-sale.

When the fair value of an available-for-sale security is less than amortized cost, management considers whether there is an other-than-temporary impairment in the value of the security.   The decision is based on the credit quality of the issue (agency versus non-agency and for non-agency, the credit performance of the underlying collateral), the security prepayment speeds, the length of time the security has been in an unrealized loss position and the Company's ability and intent to hold securities. As of March 31,June 30, 2007, the Company did not hold any non-agency securities in its portfolio. If, in management's judgment, an other-than-temporary impairment exists, the cost basis of the security is written down in the period to fair value and the unrealized loss is recognized in current period earnings.

Property and equipment, net, consisting primarily of computer equipment with a depreciable life of 3 years, office furniture with a depreciable life of 5 to 12 years, leasehold improvements with a depreciable life of 5 to 15 years, land which has no depreciable life and building with a depreciable life of 30 years, is recorded at acquisition cost and depreciated using the straight-line method over the estimated useful lives of the assets. Asset lives range from three years to thirty years depending on the type of asset.

The Company finances the acquisition of its MBS through the use of repurchase agreements. Under these repurchase agreements, the Company sells securities to a repurchase counterparty and agrees to repurchase the same securities in the future for a price that is higher than the original sales price. The difference between the sales price that the Company receives and the repurchase price that the Company pays represents interest paid to the repurchase counterparty. Although structured as a sale and repurchase obligation, a repurchase agreement operates as a financing under which the Company pledges its securities as collateral to secure a loan which is equal in value to a specified percentage of the estimated fair value of the pledged collateral. The Company retains beneficial ownership of the pledged collateral. At the maturity of a repurchase agreement, the Company is required to repurchase the underlying MBS and concurrently receives back its pledged collateral from the repurchase counterparty or, with the consent of the repurchase counterparty, the Company may renew such agreement at the then prevailing rate. These repurchase agreements may require the Company to pledge additional assets to the repurchase counterparty in the event the estimated fair value of the existing pledged collateral declines. As of March 31,June 30, 2007 and December 31, 2006, the Company did not have any margin calls on its repurchase agreements that it was not able to satisfy with either cash or additional pledged collateral.

Original terms to maturity of the Company's repurchase agreements generally, but not always, range from one month to twelve months; however, the Company is not precluded from entering into repurchase agreements with shorter or longer maturities. Repurchase agreement transactions are reflected in the financial statements at their cost, which approximates their fair value because of the short-term nature of these instruments. Should a counterparty decide not to renew a repurchase agreement at maturity, the Company must either refinance elsewhere or be in a position to satisfy this obligation. If, during the term of a repurchase agreement, a counterparty files for bankruptcy, the Company could experience difficulty recovering its pledged assets and may have an unsecured claim against the counterparty's assets for the difference between the amount received by the Company and the estimated fair value of the collateral pledged to such counterparty.

MBS are recorded at cost on the date the MBS are purchased or sold, which is generally the trade date. Realized gains or losses from MBS transactions are determined based on the specific identified cost of the MBS. Interest income is accrued based on the outstanding principal amount of the MBS and their stated contractual terms. Premiums and discounts associated with the purchase of the MBS are amortized or accreted into interest income over the estimated lives of the MBS adjusted for estimated prepayments using the effective interest method. Adjustments are made using the retrospective method to the effective interest computation each reporting period. The adjustment is based on the actual prepayment experiences to date and the present expectation of future prepayments of the underlying mortgages and/or the current value of the indices underlying adjustable rate mortgage securities versus index values in effect at the time of purchase or the last adjustment period.

Comprehensive (loss) is as follows: 

Outstanding shares of Class B Common Stock, participating and convertible into Class A Common Stock, are entitled to receive dividends in an amount equal to the dividends declared on each share of Class A Common Stock if, as and when authorized and declared by the Board of Directors. Following the provisions of EITF 03-6, shares of the Class B Common Stock are included in the computation of basic EPS using the two-class method and, consequently, are presented separately from Class A Common Stock.

The shares of Class C Common Stock are not included in the basic EPS computation as these shares do not have participation rights. The outstanding shares of Class C Common Stock, totaling 319,388 shares, are not included in the computation of diluted EPS for the Class A Common Stock as the conditions for conversion into shares of Class A Common Stock were not met.

Opteum has elected to be taxed as a REIT under the Code. As further described below, Opteum's TRS, OFS,in Note 12, Discontinued Operations, OITRS is a taxpaying entity for income tax purposes and is taxed separately from Opteum. Opteum will generally not be subject to federal income tax on its REIT taxable income to the extent that Opteum distributes its REIT taxable income to its stockholders and satisfies the ongoing REIT requirements, including meeting certain asset, income and stock ownership tests. A REIT must generally distribute at least 90% of its REIT taxable income to its stockholders, of which 85% generally must be distributed within the taxable year, in order to avoid the imposition of an excise tax. The remaining balance may be distributed up to the end of the following taxable year, provided the REIT elects to treat such amount as a prior year distribution and meets certain other requirements.

On November 3, 2005, Opteum acquired 100% of the equity interests of OFSOITRS through a merger with a wholly-owned subsidiary of Opteum. The results of operations of OFSOITRS have been included in the Company's consolidated financial statements since November 3, 2005.

As of March 31, 2007 and December 31, 2006, key economic assumptions and the sensitivity of the current fair value of residual cash flows to the immediate 10% and 20% adverse change in those assumptions are as follows:

The following are the carrying values of Opteum's MBS portfolio as of March 31,June 30, 2007 and December 31, 2006:

(in thousands)

The following table presents the components of the carrying value of Opteum's MBS portfolio as of March 31,June 30, 2007 and December 31, 2006:

(in thousands)

The following table presents for Opteum'sAs a result of the other-than-temporary impairment of MBS as of June 30, 2007, Opteum’s MBS investments with grossare carried on a LOCOM basis and therefore there are no unrealized losses, the estimated fair value and gross unrealized losses aggregated by investment category, as of March 31, 2007:losses.

The following table presents for Opteum's MBS investments with gross unrealized losses, the estimated fair value and gross unrealized losses aggregated by investment category, as of December 31, 2006:

As of December 31, 2006, the Company recorded a $10.0 million loss related to an other-than-temporary impairment on MBS securities identified for sale during the three months ended March 31, 2007.  Subsequent to the release of the Company’s annual report for the year ended December 31, 2006, the Company sold the balance of such assets and recorded an additional net loss of $0.8 million. The $0.8 million loss is classified asincluded in “Loss on sales of Mortgage Backed Securities”mortgage backed securities” in the accompanying StatementStatements of Operations. The Company has the present intent and ability to hold the remaining available for sale assets until their decline in fair market value could be recovered.

As of March 31,June 30, 2007, Opteum's repurchase agreements had the following counterparties, amounts at risk and weighted average remaining maturities:

As of December 31, 2006, Opteum's repurchase agreements had the following counterparties, amounts at risk and weighted average remaining maturities: