**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C.  20549**

 

**FORM 10-Q**

 

**ý**** QUARTERLY REPORT PURSUANTTO SECTION 13 OR 15(d) OFTHE SECURITIES EXCHANGE ACT OF 1934**

 

**For thequarterly period ended June 30, 2005**

 

**or**

 

**o**** TRANSITION REPORT PURSUANT TOSECTION 13 OR 15(d) OFTHE SECURITIES EXCHANGE ACT OF 1934**

** **

**For thetransition period from          to        .**

 

**CommissionFile No. 001-32171**

 

**BIMINI MORTGAGE MANAGEMENT, INC.**

(Exact name of registrant asspecified in its charter)

 
| **Maryland**                                                     | ** ** | **72-1571637**                         |
|------------------------------------------------------------------|------------|----------------------------------------|
| (State or  other jurisdiction  of incorporation or organization) |       | (I.R.S.  Employer  Identification No.) |

 

**3305Flamingo Drive, Vero Beach, Florida 32963**

(Address of principal executiveoffices - zip code)

 

**(772) 231-1400**

(Registrant’s telephone number,including area code)

 

Indicate by check mark whether the registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.  Yes ýNo o

 

Indicate by check mark whether the registrant is an accelerated filer(as defined in Exchange Act Rule 12b-2). Yes o No ý

 

At June 30, 2005, the number of shares outstanding of theregistrant’s Class A Common Stock, $0.001 par value, was 20,385,936; thenumber of shares outstanding of the registrant’s Class B Common Stock,$0.001 par value, was 319,388; and the number of shares outstanding of theregistrant’s Class C Common Stock, $0.001 par value, was 319,388.

 

 

----

 

**BIMINIMORTGAGE MANAGEMENT, INC.**

** **

**INDEX**

** **
| PART I.  FINANCIAL INFORMATION                                  | 3                                                                                           |
|----------------------------------------------------------------------|---------------------------------------------------------------------------------------------|
|                                                                 |                                                                                        |
| ITEM 1. FINANCIAL  STATEMENTS                                        | 3                                                                                           |
|                                                                 |                                                                                        |
| BALANCE SHEETS                                                       | 3                                                                                           |
|                                                                 |                                                                                        |
| STATEMENTS OF INCOME                                                 | 4                                                                                           |
|                                                                 |                                                                                        |
| STATEMENT OF  STOCKHOLDERS’ EQUITY                              | 5                                                                                           |
|                                                                 |                                                                                        |
| STATEMENTS OF CASH  FLOWS                                            | 6                                                                                           |
|                                                                 |                                                                                        |
| NOTES TO  FINANCIAL STATEMENTS                                       | 7                                                                                           |
|                                                                 |                                                                                        |
| ITEM 2.                                                              | MANAGEMENT’S DISCUSSION AND ANALYSIS OF  FINANCIAL CONDITION AND RESULTS OF OPERATIONS | 18 |
|                                                                 |                                                                                        |
| ITEM 3. QUANTITATIVE AND QUALITATIVE  DISCLOSURES ABOUT MARKET RISK  | 26                                                                                          |
|                                                                 |                                                                                        |
| ITEM 4. CONTROLS AND PROCEDURES                                      | 31                                                                                          |
|                                                                 |                                                                                        |
| PART II OTHER INFORMATION                                       | 32                                                                                          |
|                                                                 |                                                                                        |
| ITEM 1. LEGAL PROCEEDINGS                                            | 32                                                                                          |
|                                                                 |                                                                                        |
| ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS | 32                                                                                          |
|                                                                 |                                                                                        |
| ITEM 3. DEFAULTS UPON SENIOR SECURITIES                              | 32                                                                                          |
|                                                                 |                                                                                        |
| ITEM 4. SUBMISSION OF MATTERS TO A VOTE  OF SECURITY HOLDERS         | 32                                                                                          |
|                                                                 |                                                                                        |
| ITEM 5. OTHER INFORMATION                                            | 32                                                                                          |
|                                                                 |                                                                                        |
| ITEM 6. EXHIBITS  AND REPORTS ON FORM 8-K                  | 32                                                                                          |
|                                                                      |                                                                                             |  |

 

2

----

**PART I.        FINANCIALINFORMATION**

 

# **ITEM1.**                                                     FINANCIALSTATEMENTS

 

## **BIMINI MORTGAGEMANAGEMENT, INC.**

BALANCE SHEETS

 
| ** **                                                                                                                                                                                   | ** ** | **(Unaudited)  June 30, 2005** | ** **    | **December 31, 2004** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------|---------------|----------------------------|------------|
| ASSETS                                                                                                                                                                                       |       |                                |          |                       |       |
|                                                                                                                                                                                         |       |                                |          |                       |       |
| MORTGAGE-BACKED SECURITIES:                                                                                                                                                                  |       |                                |          |                       |       |
| Pledged to counterparties, at fair value                                                                                                                                                     |       | $                                   | 3,867,102,548 |                       | $          | 2,901,158,559 |   |
| Unpledged, at fair value                                                                                                                                                                     |       | 9,103,448                           |          | 72,074,338                 |       |
|                                                                                                                                                                                         |       |                                |          |                       |       |
| TOTAL MORTGAGE-BACKED SECURITIES                                                                                                                                                             |       | 3,876,205,996                       |          | 2,973,232,897              |       |
|                                                                                                                                                                                         |       |                                |          |                       |       |
| CASH AND CASH EQUIVALENTS                                                                                                                                                                    |       | 152,770,370                         |          | 128,942,436                |       |
| RESTRICTED CASH                                                                                                                                                                              |       | 2,735,000                           |          | 8,662,000                  |       |
| PRINCIPAL PAYMENTS RECEIVABLE                                                                                                                                                                |       | 17,502,498                          |          | 3,419,199                  |       |
| ACCRUED INTEREST RECEIVABLE                                                                                                                                                                  |       | 16,495,475                          |          | 11,377,807                 |       |
| PROPERTY AND EQUIPMENT, net                                                                                                                                                                  |       | 2,342,533                           |          | 2,050,923                  |       |
| INVESTMENT IN BIMINI CAPITAL TRUST I                                                                                                                                                         |       | 1,550,000                           |          | —                     |       |
| PREPAIDS AND OTHER ASSETS                                                                                                                                                                    |       | 1,885,571                           |          | 732,469                    |       |
|                                                                                                                                                                                         |       |                                |          |                       |       |
|                                                                                                                                                                                         |       | $                                   | 4,071,487,443 |                       | $          | 3,128,417,731 |   |
|                                                                                                                                                                                         |       |                                |          |                       |       |
| LIABILITIES  AND STOCKHOLDERS’ EQUITY                                                                                                                                                   |       |                                |          |                       |       |
|                                                                                                                                                                                         |       |                                |          |                       |       |
| LIABILITIES:                                                                                                                                                                                 |       |                                |          |                       |       |
| Repurchase agreements                                                                                                                                                                        |       | $                                   | 3,717,832,589 |                       | $          | 2,771,162,957 |   |
| Junior subordinated notes due to Bimini  Capital Trust I                                                                                                                                     |       | 51,550,000                          |          | —                     |       |
| Accrued interest payable                                                                                                                                                                     |       | 24,245,991                          |          | 7,980,829                  |       |
| Unsettled security purchases                                                                                                                                                                 |       | 7,169,550                           |          | 65,765,630                 |       |
| Dividend payable                                                                                                                                                                             |       | 8,486,958                           |          | —                     |       |
| Compensation and related costs payable                                                                                                                                                       |       | 163,385                             |          | 87,323                     |       |
| Accounts payable, accrued expenses and  other                                                                                                                                                |       | 503,627                             |          | 458,665                    |       |
|                                                                                                                                                                                         |       |                                |          |                       |       |
| TOTAL LIABILITIES                                                                                                                                                                            |       | 3,809,952,100                       |          | 2,845,455,404              |       |
|                                                                                                                                                                                         |       |                                |          |                       |       |
| COMMITMENTS AND CONTINGENCIES                                                                                                                                                                |       |                                |          |                       |       |
|                                                                                                                                                                                         |       |                                |          |                       |       |
| STOCKHOLDERS’ EQUITY:                                                                                                                                                                   |       |                                |          |                       |       |
| Preferred stock, $0.001 par value; 10,000,000  shares authorized, no shares issued and outstanding                                                                                           |       | —                              |          | —                     |       |
| Class A common stock, $0.001 par  value; 98,000,000 shares designated; issued and outstanding, 20,385,936  shares at June 30, 2005 and 20,368,915 shares at December 31, 2004 |       | 20,386                              |          | 20,369                     |       |
| Class B common stock, $0.001 par  value; 1,000,000 shares designated, 319,388 shares issued and outstanding  each period                                                                |       | 319                                 |          | 319                        |       |
| Class C common stock, $0.001 par  value; 1,000,000 shares designated, 319,388 shares issued and outstanding  each period                                                                |       | 319                                 |          | 319                        |       |
| Additional paid-in capital                                                                                                                                                                   |       | 286,326,504                         |          | 285,174,651                |       |
| Accumulated other comprehensive loss                                                                                                                                                         |       | (23,131,952                         | )             | (1,155,771                 | )          |
| Accumulated deficit                                                                                                                                                                          |       | (1,680,233                          | )             | (1,077,560                 | )          |
|                                                                                                                                                                                         |       |                                |          |                       |       |
| TOTAL STOCKHOLDERS’ EQUITY                                                                                                                                                              |       | 261,535,343                         |          | 282,962,327                |       |
|                                                                                                                                                                                         |       |                                |          |                       |       |
|                                                                                                                                                                                         |       | $                                   | 4,071,487,443 |                       | $          | 3,128,417,731 |   |

 

See notes to financial statements.

 

1

----

 

## **BIMINI MORTGAGEMANAGEMENT, INC.**

STATEMENTS OF INCOME

 
| ** **                                                                                                     | ** ** | **(Unaudited)  Six months ended** | ** ** | **(Unaudited)  Three months ended** | ** ** |
|----------------------------------------------------------------------------------------------------------------|------------|-----------------------------------|------------|-------------------------------------|------------|
| ** **                                                                                                     | ** ** | **June 30, 2005**            | ** ** | **June 30, 2004**              | ** ** | **June 30, 2005** | ** ** | **June 30, 2004** | ** ** |
|                                                                                                           |       |                              |       |                                |       |   |   |   |   |
| Interest income, net of amortization of  premium and discount                                                  |       | $                                 | 67,818,574 |                                | $          | 18,153,131 |   | $ | 36,748,640 |   | $ | 10,959,098 |   |
| Interest expense                                                                                               |       | (46,545,132                       | )          | (7,351,719                          | )          | (26,453,422 | ) | (4,466,014 | ) |
|                                                                                                           |       |                              |       |                                |       |   |   |   |   |
| NET INTEREST INCOME                                                                                            |       | 21,273,442                        |       | 10,801,412                          |       | 10,295,218 |   | 6,493,084 |   |
|                                                                                                           |       |                              |       |                                |       |   |   |   |   |
| GAIN ON SALES OF MORTGAGE-BACKED SECURITIES                                                                    |       | 1,982,382                         |       | —                              |       | — |   | — |   |
|                                                                                                           |       |                              |       |                                |       |   |   |   |   |
| DIRECT OPERATING EXPENSES                                                                                      |       | 623,918                           |       | 237,267                             |       | 283,945 |   | 159,868 |   |
|                                                                                                           |       |                              |       |                                |       |   |   |   |   |
| GENERAL AND ADMINISTRATIVE EXPENSES:                                                                           |       |                              |       |                                |       |   |   |   |   |
| Compensation and related expenses                                                                              |       | 2,522,610                         |       | 640,806                             |       | 1,317,277 |   | 549,461 |   |
| Directors’ fees                                                                                           |       | 176,042                           |       | 73,480                              |       | 84,015 |   | 48,730 |   |
| Directors’ liability insurance costs                                                                      |       | 130,931                           |       | 68,591                              |       | 66,508 |   | 27,509 |   |
| Audit, legal and other professional fees                                                                       |       | 360,600                           |       | 60,260                              |       | 162,595 |   | 26,426 |   |
| Other administrative expenses                                                                                  |       | 315,485                           |       | 210,653                             |       | 162,479 |   | 113,897 |   |
|                                                                                                           |       |                              |       |                                |       |   |   |   |   |
| TOTAL GENERAL AND ADMINISTRATIVE EXPENSES                                                                      |       | 3,505,668                         |       | 1,053,790                           |       | 1,792,874 |   | 766,023 |   |
|                                                                                                           |       |                              |       |                                |       |   |   |   |   |
| NET INCOME                                                                                                     |       | $                                 | 19,126,238 |                                | $          | 9,510,355 |   | $ | 8,218,399 |   | $ | 5,567,193 |   |
|                                                                                                           |       |                              |       |                                |       |   |   |   |   |
| BASIC AND DILUTED INCOME PER CLASS A  COMMON SHARE                                                        |       | $                                 | 0.90       |                                | $          | 1.06 |   | $ | 0.39 |   | $ | 0.62 |   |
| BASIC AND DILUTED INCOME PER CLASS B  COMMON SHARE                                                        |       | $                                 | 0.90       |                                | $          | — |   | $ | 0.39 |   | $ | — |   |
|                                                                                                           |       |                              |       |                                |       |   |   |   |   |
| WEIGHTED AVERAGE NUMBER OF CLASS A  COMMON SHARES  OUTSTANDING USED IN  COMPUTING PER SHARE AMOUNTS: |       |                              |       |                                |       |   |   |   |   |
|                                                                                                           |       |                              |       |                                |       |   |   |   |   |
| BASIC                                                                                                          |       | 20,846,479                        |       | 9,006,353                           |       | 20,896,789 |   | 9,006,353 |   |
| DILUTED                                                                                                        |       | 20,846,479                        |       | 9,006,668                           |       | 20,896,789 |   | 9,006,668 |   |
|                                                                                                           |       |                              |       |                                |       |   |   |   |   |
| WEIGHTED AVERAGE NUMBER OF CLASS B  COMMON SHARES  OUTSTANDING USED IN  COMPUTING PER SHARE AMOUNTS: |       |                              |       |                                |       |   |   |   |   |
|                                                                                                           |       |                              |       |                                |       |   |   |   |   |
| BASIC AND DILUTED                                                                                              |       | 319,388                           |       | —                              |       | 319,388 |   | — |   |
|                                                                                                           |       |                              |       |                                |       |   |   |   |   |
| CASH DIVIDENDS DECLARED PER:                                                                                   |       |                              |       |                                |       |   |   |   |   |
| CLASS A COMMON SHARE                                                                                      |       | $                                 | 0.93       |                                | $          | 0.91 |   | $ | 0.40 |   | $ | 0.52 |   |
|                                                                                                           |       |                              |       |                                |       |   |   |   |   |
| CLASS B COMMON SHARE                                                                                      |       | $                                 | 0.93       |                                | $          | — |   | $ | 0.40 |   | $ | — |   |

 

Seenotes to financial statements.

 

2

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## **BIMINI MORTGAGEMANAGEMENT, INC.**

## **STATEMENT OF STOCKHOLDERS’ EQUITY**

**SIX MONTHSENDED JUNE 30, 2005**

## **(UNAUDITED)**

## ** **

| ** **                                                                                 | ** ** | ** **                | ** ** | ** **       | ** ** | ** **        | ** ** | ** **      | ** ** | **Accumulated** | ** ** | ** **  | ** ** | ** **  | ** **  |
|--------------------------------------------------------------------------------------------|------------|---------------------------|------------|------------------|------------|-------------------|------------|-----------------|------------|-----------------|------------|-------------|------------|-------------|-------------|
| ** **                                                                                 | ** ** | **Common  Stock,**        | ** ** | **Additional**   | ** ** | **Other**         | ** ** | ** **      | ** ** | ** **      | ** ** |
| ** **                                                                                 | ** ** | **Amounts  at Par Value** | ** ** | **Paid-in**      | ** ** | **Comprehensive** | ** ** | **Accumulated** | ** ** | ** **      | ** ** |
| ** **                                                                                 | ** ** | **Class A**          | ** ** | **Class B** | ** ** | **Class C**  | ** ** | **Capital**     | ** ** | **Loss**        | ** ** | **Deficit** | ** ** | **Total**   | ** **  |
|                                                                                       |       |                      |       |             |       |              |       |            |       |            |       |        |       |        |        |
| Balances,  December 31, 2004                                                          |       | $                         | 20,369     |             | $          | 319               |       | $               | 319        |            | $          | 285,174,651 |       | $           | (1,155,771  | ) | $ | (1,077,560 | ) | $ | 282,962,327 |   |
|                                                                                       |       |                      |       |             |       |              |       |            |       |            |       |        |       |        |        |
| Issuance of  Class A common shares for board compensation and phantom share exercises |       | 17                        |       |             |       |              |       | 176,025         |       |            |       |        |       | 176,042     |        |
| Cash dividends  declared, March 2005                                                  |       |                      |       |             |       |              |       |            |       |            |       | (11,241,953 | )          | (11,241,953 | )           |
| Amortization of  equity plan compensation                                                  |       |                      |       |             |       |              |       | 1,019,758       |       |            |       |        |       | 1,019,758   |        |
| Stock issuance  costs                                                                      |       |                      |       |             |       |              |       | (43,930         | )          |            |       |        |       | (43,930     | )           |
| Reclassify  unrealized gain on security sales                                              |       |                      |       |             |       |              |       |            |       | (1,982,382      | )          |        |       | (1,982,382  | )           |
| Cash dividends  declared, May 2005                                                    |       |                      |       |             |       |              |       |            |       |            |       | (8,486,958  | )          | (8,486,958  | )           |
| Net income                                                                                 |       |                      |       |             |       |              |       |            |       |            |       | 19,126,238  |       | 19,126,238  |        |
| Unrealized loss  on available for sale securities, net                                     |       |                      |       |             |       |              |       |            |       | (19,993,799     | )          |        |       | (19,993,799 | )           |
| Comprehensive  loss                                                                        |       |                      |       |             |       |              |       |            |       |            |       |        |       | (2,849,943  | )           |
|                                                                                       |       |                      |       |             |       |              |       |            |       |            |       |        |       |        |        |
| Balances,  June 30, 2005                                                              |       | $                         | 20,386     |             | $          | 319               |       | $               | 319        |            | $          | 286,326,504 |       | $           | (23,131,952 | ) | $ | (1,680,233 | ) | $ | 261,535,343 |   |

 

See notes to financialstatements.

 

3

----

 

**BIMINI MORTGAGE MANAGEMENT, INC.**

**STATEMENTSOF CASH FLOWS**

 
| ** **                                                                         | ** ** | **(Unaudited)  Six months ended  June 30, 2005** | ** **  | **(Unaudited)  Six months ended  June 30, 2004** | ** ** |
|------------------------------------------------------------------------------------|------------|-------------------------------------------------------|-------------|-------------------------------------------------------|------------|
| CASH FLOWS FROM OPERATING ACTIVITIES:                                              |       |                                                  |        |                                                  |       |
| Net income                                                                         |       | $                                                     | 19,126,238  |                                                  | $          | 9,510,355 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities: |       |                                                  |        |                                                  |       |
| Amortization of premium and discount                                               |       | 14,844,054                                            |        | 9,290,363                                             |       |
| Stock compensation, depreciation and  amortization                                 |       | 1,269,492                                             |        | 136,981                                               |       |
| Gain on sales of mortgage-backed securities                                        |       | (1,982,382                                            | )           | —                                                |       |
| Changes in certain assets and liabilities:                                         |       |                                                  |        |                                                  |       |
| Accrued interest receivable                                                        |       | (5,117,666                                            | )           | (4,781,100                                            | )          |
| Prepaids and other assets                                                          |       | 363,782                                               |        | (836,803                                              | )          |
| Accrued interest payable                                                           |       | 16,265,162                                            |        | 4,128,564                                             |       |
| Accounts payable, accrued expenses and  other                                      |       | 121,024                                               |        | 157,906                                               |       |
| NET CASH PROVIDED BY OPERATING ACTIVITIES                                          |       | 44,889,704                                            |        | 17,606,266                                            |       |
|                                                                               |       |                                                  |        |                                                  |       |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                              |       |                                                  |        |                                                  |       |
| From available-for-sale securities:                                                |       |                                                  |        |                                                  |       |
| Purchases                                                                          |       | (1,743,844,856                                        | )           | (1,406,864,447                                        | )          |
| Sales                                                                              |       | 172,040,665                                           |        | —                                                |       |
| Principal repayments                                                               |       | 561,313,859                                           |        | 106,282,248                                           |       |
| Purchases of property and equipment                                                |       | (325,523                                              | )           | (116,198                                              | )          |
| NET CASH USED IN INVESTING ACTIVITIES                                              |       | (1,010,815,855                                        | )           | (1,300,698,397                                        | )          |
|                                                                               |       |                                                  |        |                                                  |       |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                              |       |                                                  |        |                                                  |       |
| Decrease in restricted cash                                                        |       | 5,927,000                                             |        | —                                                |       |
| Net borrowings under repurchase agreements                                         |       | 946,669,631                                           |        | 1,272,379,000                                         |       |
| Net proceeds from trust preferred  secruities offering                             |       | 48,443,337                                            |        | —                                                |       |
| Stock issuance costs                                                               |       | (43,930                                               | )           | —                                                |       |
| Proceeds from sales of common stock, net of  costs of issuance                     |       | —                                                |        | 85,112,817                                            |       |
| Cash dividends paid                                                                |       | (11,241,953                                           | )           | (3,903,569                                            | )          |
| NET CASH PROVIDED BY FINANCING ACTIVITIES                                          |       | 989,754,085                                           |        | 1,353,588,248                                         |       |
|                                                                               |       |                                                  |        |                                                  |       |
| NET CHANGE IN CASH AND CASH EQUIVALENTS                                            |       | 23,827,934                                            |        | 70,496,117                                            |       |
|                                                                               |       |                                                  |        |                                                  |       |
| CASH AND CASH EQUIVALENTS, Beginning of the  period                                |       | 128,942,436                                           |        | 18,404,130                                            |       |
|                                                                               |       |                                                  |        |                                                  |       |
| CASH AND CASH EQUIVALENTS, End of the  period                                      |       | $                                                     | 152,770,370 |                                                  | $          | 88,900,247 |   |
|                                                                               |       |                                                  |        |                                                  |       |
| SUPPLEMENTAL DISCLOSURES OF CASH FLOW  INFORMATION:                                |       |                                                  |        |                                                  |       |
| Cash paid during the period for interest                                           |       | $                                                     | 30,279,970  |                                                  | $          | 2,951,882 |   |
|                                                                               |       |                                                  |        |                                                  |       |
| SUPPLEMENTAL SCHEDULE OF NONCASH  INVESTING AND FINANCING ACTIVITIES:         |       |                                                  |        |                                                  |       |
| Cash dividends declared and payable, not  yet paid                                 |       | $                                                     | 8,486,958   |                                                  | $          | 5,369,410 |   |
| Unsettled security purchases                                                       |       | $                                                     | 7,169,550   |                                                  | $          | — |   |

 

See notes to financialstatements.

 

4

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## **BIMINI MORTGAGE MANAGEMENT,INC.**

## **NOTES TO FINANCIAL STATEMENTS**

## **(UNAUDITED)**

**JUNE 30,2005**

** **

**NOTE 1.****                                                 ORGANIZATIONAND SIGNIFICANT ACCOUNTING POLICIES**

 

**Organization and Business Description**

 

Bimini Mortgage Management, Inc. (the “Company”)was incorporated in Maryland on September 24, 2003 and it commenced itsplanned business activities on December 19, 2003, the date of the initialclosing of a private issuance of its common stock.

 

The Company was formed to invest primarily inresidential mortgage related securities issued by the Federal National MortgageAssociation (more commonly known as Fannie Mae), the Federal Home Loan MortgageCorporation (more commonly known as Freddie Mac) and the Government NationalMortgage Association (more commonly known as Ginnie Mae).

 

The Company has elected to be taxed as a realestate investment trust (“REIT”) under the Internal Revenue Code of 1986, asamended. In order to maintain its REIT status, the Company must comply with anumber of requirements under Federal tax law, including that it must distributeat least 90% of its annual taxable net income to its stockholders, subject tocertain adjustments. As a REIT, the Company will routinely distributesubstantially all of its taxable income generated from operations to itsstockholders.  The Company will generallynot be subject to Federal income tax to the extent that it distributes its netincome to the stockholders, and satisfies the ongoing REIT requirementsincluding meeting certain asset, income and stock ownership tests.

 

**Interim Financial Statements**

 

The accompanying interim financial statementsreflect all adjustments, consisting of normal recurring items that, in theopinion of management are necessary for a fair presentation of the Company’sfinancial position, results of operations and cash flows for the periodspresented. These interim financial statements have been prepared in accordancewith 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 financialstatements. The operating results for the interim period ended June 30,2005 are not necessarily indicative of results that can be expected for theyear ended December 31, 2005.  Thefinancial statements included as part of this Form 10-Q should be read inconjunction with the financial statements and notes thereto included in theCompany’s Annual Report on Form 10-K for the year ended December 31,2004. Certain prior year amounts have been reclassified to conform to thecurrent year presentation.

 

**Basis of Presentation and Use of Estimates**

 

The accompanying financial statements areprepared on the accrual basis of accounting in accordance with GAAP. Thepreparation of financial statements in conformity with GAAP requires managementto make estimates and assumptions that affect the reported amounts of assetsand liabilities and disclosure of contingent assets and liabilities at the dateof the financial statements and the reported amounts of revenues and expensesduring the reporting period. Actual results could differ from those estimates.Significant estimates affecting the accompanying financial statements includethe fair values of mortgage-backed securities (“MBS”) and the prepayment speedsused to calculate amortization and accretion of premiums and discounts on MBS.

 

5

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**Securities and Interest Income Recognition**

 

The Company invests primarily in residentialmortgage related securities issued by Fannie Mae, Freddie Mac, and Ginnie Mae.

 

In accordance with GAAP, the Companyclassifies its investments as either trading investments, available-for-saleinvestments or held-to-maturity investments. Management determines theappropriate classification of the securities at the time they are acquired andevaluates the appropriateness of such classifications at each balance sheetdate. Although the Company intends to hold its MBS until maturity, it may, fromtime to time, sell any of its MBS as part of the overall management of thebusiness. The Company currently classifies all of its securities asavailable-for-sale, and assets so classified are carried on the balance sheetat fair value, and unrealized gains or losses arising from changes in marketvalues are excluded from earnings and reported in other comprehensive income orloss as a component of stockholders’ equity. Permanent impairment losses, ifany, are reported in earnings.

 

Securities are recorded on the date thesecurities are purchased or sold, which is generally the trade date. Realizedgains or losses from securities transactions are determined based on thespecific identification method.

 

Interest income is accrued based on theoutstanding principal amount of the securities and their stated contractualterms. Premiums and discounts associated with the purchase of the securitiesare accreted or amortized into interest income over the estimated lives of theassets adjusted for estimated prepayments using the effective interest method. Adjustmentsare made using the retrospective method to the effective interest computationeach reporting period based on the actual prepayment experiences to date, andthe present expectation of future prepayments of the underlying mortgages.

 

**Cash and Cash Equivalents**

 

Cash and cash equivalents include cash onhand and highly liquid investments with original maturities of three months orless. The carrying amount of cash equivalents approximates its fair value at June 30,2005 and December 31, 2004.

 

**Restricted Cash**

 

Restricted cash represents cash held ondeposit as collateral with certain repurchase agreement counter-parties.  Such amounts may be used to make principaland interest payments on the related repurchase agreements.

 

**Credit Risk**

 

At June 30, 2005, the Company hadlimited its exposure to credit losses on its portfolio of securities bypurchasing primarily securities from federal agencies or federally charteredentities, such as, but not limited to, Fannie Mae, Freddie Mac, and Ginnie Mae.The portfolio is diversified to avoid undue loan originator, geographic andother types of concentrations. The Company manages the risk of prepayments ofthe underlying mortgages by creating a diversified portfolio with a variety ofprepayment characteristics.

 

The Company is engaged in various trading andbrokerage activities in which counter-parties primarily include broker-dealers,banks, and other financial institutions. In the event counter-parties do notfulfill their obligations, the Company may be exposed to risk of loss. The riskof default depends on the creditworthiness of the counter-party and/or issuerof the instrument. It is the Company’s policy to review, as necessary, thecredit standing for each counter-party.

 

6

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**Repurchase Agreements**

 

The Company finances most acquisitions of itsMBS through the use of repurchase agreements. Under these repurchaseagreements, the Company sells securities to a lender and agrees to repurchasethe same securities in the future for a price that is higher than the originalsales price. The difference between the sale price that the Company receivesand the repurchase price that the Company pays represents interest paid to thelender. Although structured as a sale and repurchase obligation, a repurchaseagreement operates as a financing under which the Company pledges itssecurities as collateral to secure a loan which is equal in value to aspecified percentage of the estimated fair value of the pledged collateral. TheCompany retains beneficial ownership of the pledged collateral. At the maturityof a repurchase agreement, the Company is required to repay the loan andconcurrently receives back its pledged collateral from the lender or, with theconsent of the lender, the Company may renew such agreement at the thenprevailing financing rate. These repurchase agreements may require the Companyto pledge additional assets to the lender in the event the estimated fair valueof the existing pledged collateral declines. As of June 30, 2005 and December 31,2004, the Company did not have any margin calls on its repurchase agreementsthat it was not able to satisfy with either cash or additional pledgedcollateral.

 

Original terms to maturity of the Company’srepurchase agreements generally range from one month to 36 months; however, theCompany is not precluded from entering into repurchase agreements with longermaturities. Should a counter-party decide not to renew a repurchase agreementat maturity, the Company must either refinance elsewhere or be in a position tosatisfy this obligation. If, during the term of a repurchase agreement, alender should file for bankruptcy, the Company might experience difficultyrecovering its pledged assets and may have an unsecured claim against thelender’s assets for the difference between the amount loaned to the Company andthe estimated fair value of the collateral pledged to such lender.  At June 30, 2005, the Company hadamounts outstanding under repurchase agreements with 14 separate lenders with amaximum net exposure (the difference between the amount loaned to the Companyand the estimated fair value of the security pledged by the Company ascollateral) to any single lender of approximately $ 38.0 million. At December 31,2004, the Company had amounts outstanding under repurchase agreements with 12separate lenders with a maximum net exposure to any single lender ofapproximately $29.0 million.

 

7

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At June 30, 2005, the Company’s repurchaseagreements had the following counter-parties, amounts at risk and weightedaverage remaining maturities (unaudited):

 
| **Repurchase Agreement  Counter-parties**  | ** ** | **Amount  Outstanding** | ** **    | **Amount  at Risk(1)** | ** ** | **Weighted  Average  Maturity of  Repurchase  Agreements  in Days** | ** ** | **Percent  of Total  Amount  Outstanding** | ** ** |
|--------------------------------------------|------------|-------------------------|---------------|------------------------|------------|---------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                 | ** ** | **($000)**              | ** **    | **($000)**             | ** ** | ** **                                                          | ** ** | ** **                                 | ** ** |
| Deutsche Bank Securities, Inc.        |       | $                       | 884,438       |                   | $          | 24,341                                                              |       | 203                                        |       | 23.8 | % |
| Nomura Securities International, Inc. |       | 783,805                 |          | 38,041                 |       | 132                                                                 |       | 21.1                                       | %          |
| UBS Investment Bank, LLC                   |       | 387,688                 |          | 16,794                 |       | 15                                                                  |       | 10.4                                       | %          |
| Goldman Sachs                              |       | 367,904                 |          | 13,266                 |       | 43                                                                  |       | 9.9                                        | %          |
| Cantor Fitzgerald                          |       | 330,472                 |          | 15,436                 |       | 126                                                                 |       | 8.9                                        | %          |
| Bear Stearns & Co. Inc.           |       | 299,073                 |          | 9,625                  |       | 37                                                                  |       | 8.0                                        | %          |
| Banc of America Securities, LLC            |       | 159,813                 |          | 8,108                  |       | 46                                                                  |       | 4.3                                        | %          |
| REFCO Securities, LLC                      |       | 116,602                 |          | 4,373                  |       | 24                                                                  |       | 3.1                                        | %          |
| Washington Mutual                          |       | 114,211                 |          | 5,438                  |       | 28                                                                  |       | 3.0                                        | %          |
| Merrill Lynch                              |       | 69,778                  |          | 69                     |       | 22                                                                  |       | 1.9                                        | %          |
| Countrywide Securities Corp.               |       | 68,898                  |          | 2,855                  |       | 25                                                                  |       | 1.9                                        | %          |
| Lehman Brothers                            |       | 57,982                  |          | 1,696                  |       | 113                                                                 |       | 1.6                                        | %          |
| Daiwa Securities America Inc.              |       | 56,350                  |          | 3,154                  |       | 26                                                                  |       | 1.5                                        | %          |
| JP Morgan Securities                       |       | 20,819                  |          | 1,374                  |       | 60                                                                  |       | 0.6                                        | %          |
|                                       |       |                    |          |                   |       |                                                                |       |                                       |       |
| **Total**                                  | ** ** | **$**                   | **3,717,833** | ** **             | **$**      | **144,570**                                                         | ** ** | ** **                                 | ** ** | **100.0** | **%** |

 

----

*(1)**                                                      *Equalto the fair value of securities sold, plus accrued interest income, minus thesum of repurchase agreement liabilities, plus accrued interest expense.

 

At December 31, 2004, the Company’srepurchase agreements had the following counter-parties, amounts at risk andweighted average remaining maturities:

 
| **Repurchase Agreement  Counter-parties**  | ** ** | **Amount  Outstanding** | ** **    | **Amount  at Risk(1)** | ** ** | **Weighted Average  Maturity of  Repurchase  Agreements  in Days** | ** ** | **Percent  of Total  Amount  Outstanding** | ** ** |
|--------------------------------------------|------------|-------------------------|---------------|------------------------|------------|--------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                 | ** ** | **($000)**              | ** **    | **($000)**             | ** ** | ** **                                                         | ** ** | ** **                                 | ** ** |
| UBS Investment Bank, LLC                   |       | $                       | 512,697       |                   | $          | 29,005                                                             |       | 64                                         |       | 18.5 | % |
| Nomura Securities International, Inc. |       | 463,901                 |          | 26,083                 |       | 99                                                                 |       | 16.7                                       |       |
| Banc of America Securities, LLC            |       | 309,270                 |          | 18,079                 |       | 66                                                                 |       | 11.2                                       |       |
| Deutsche Bank Securities, Inc.        |       | 308,645                 |          | 16,246                 |       | 227                                                                |       | 11.1                                       |       |
| Lehman Brothers                            |       | 257,191                 |          | 8,793                  |       | 81                                                                 |       | 9.3                                        |       |
| Bear Stearns & Co. Inc.           |       | 255,229                 |          | 14,068                 |       | 127                                                                |       | 9.2                                        |       |
| Countrywide Securities Corp.               |       | 178,574                 |          | 8,447                  |       | 43                                                                 |       | 6.4                                        |       |
| Morgan Stanley                             |       | 119,659                 |          | 352                    |       | 65                                                                 |       | 4.3                                        |       |
| Daiwa Securities America Inc.              |       | 114,436                 |          | 5,287                  |       | 67                                                                 |       | 4.2                                        |       |
| Goldman Sachs                              |       | 107,822                 |          | 1,706                  |       | 37                                                                 |       | 3.9                                        |       |
| Merrill Lynch                              |       | 83,561                  |          | 2,268                  |       | 172                                                                |       | 3.0                                        |       |
| JP Morgan Securities                       |       | 60,178                  |          | 3,152                  |       | 37                                                                 |       | 2.2                                        |       |
|                                       |       |                    |          |                   |       |                                                               |       |                                       |       |
| **Total**                                  | ** ** | **$**                   | **2,771,163** | ** **             | **$**      | **133,486**                                                        | ** ** | ** **                                 |       | **100.0** | **%** |

 

----

*(1)*                                                       Equalto the fair value of securities sold, plus accrued interest income, minus thesum of repurchase agreement liabilities, plus accrued interest expense.

 

**Stock-Based Compensation**

 

Stock-based compensation is accounted forusing the fair value based method prescribed by Statement of FinancialAccounting Standards (“SFAS”) No. 123, “Accounting for Stock-BasedCompensation.” The adoption of SFAS No. 123(R), “Share-Based Payment,” on January 1,2006 is not expected to have an impact on the Company. For stock andstock-based awards issued to employees, a compensation charge is recordedagainst earnings based on the fair value of the award. For transactions withnon-employees in which services are performed in exchange for the Company’scommon stock or other equity instruments, the transactions are recorded on thebasis of the fair value of the service received or the fair value of the equityinstruments issued, whichever is more readily measurable at the date ofissuance. The Company’s stock-based compensation transactions resulted in anaggregate of $1,195,800 and $641,005 of compensation expense for the six and

 

8

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three months ended June 30, 2005, respectively, and $127,686 and$102,936 of compensation expense for the six and three months ended June 30,2004, respectively.

 

**Earnings Per Share**

 

The Company follows the provisions of SFAS No. 128,“Earnings per Share,” (SFAS 128) and the guidance provided in EITF 03-6, “ParticipatingSecurities and the two-class method under FASB Statement No. 128, EarningsPer Share,” (EITF 03-6) which requires companies with complex capitalstructures, common stock equivalents, or two classes of participatingsecurities to present both basic and diluted earnings per share (“EPS”) on theface of the statement of income. Basic EPS is calculated as income available tocommon stockholders divided by the weighted average number of common sharesoutstanding during the period. Diluted EPS is calculated using the “ifconverted” method for common stock equivalents.

 

Effective July 9, 2004, the shares of Class BCommon Stock, participating and convertible into Class A common stock,became entitled to receive dividends in an amount equal to the dividendsdeclared on each share of Class A Common Stock if, as and when authorizedand declared by the Board of Directors. Following the provisions of EITF 03-6,the Class B Common Stock, beginning in the three-month period ended September 30,2004, is included in the computation of basic EPS using the two-class method,and consequently is presented separately from Class A Common Stock. Priorto July 9, 2004, the Class B shares of common stock are not includedin the basic EPS computation as the conditions to participate in earnings werenot met, and they were not included in the computation of diluted Class AEPS as the conditions for conversion to Class A shares were not met.

 

The Class C common shares are notincluded in the basic EPS computation as these shares do not have participationrights. The Class C common shares totaling 319,388 are not included in thecomputation of diluted Class A EPS as the conditions for conversion to Class Ashares were not met.

 

The table below reconciles the numerators anddenominators of the basic and diluted EPS.

 
| ** **                                                                                | ** ** | **(Unaudited)  Six months ended** | ** ** | **(Unaudited)  Three months ended** | ** ** |
|-------------------------------------------------------------------------------------------|------------|-----------------------------------|------------|-------------------------------------|------------|
| ** **                                                                                | ** ** | **June 30, 2005**            | ** ** | **June 30, 2004**              | ** ** | **June 30, 2005** | ** ** | **June 30, 2004** | ** ** |
| *Basic and diluted EPS per Class A  common share:*                                   |       |                              |       |                                |       |   |   |   |   |
| Numerator: net income allocated to the  Class A common shares                        |       | $                                 | 18,838,279 |                                | $          | 9,510,355 |   | $ | 8,094,686 |   | $ | 5,567,193 |   |
| *Denominator-basic:*                                                                      |       |                              |       |                                |       |   |   |   |   |
| Class A common shares outstanding at  the balance sheet date                         |       | 20,385,936                        |       | 10,012,188                          |       | 20,385,936 |   | 10,012,188 |   |
| Phantom shares issued as of the balance  sheet date                                       |       | 512,072                           |       | —                              |       | 516,961 |   | — |   |
| Effect of weighting                                                                       |       | (51,529                           | )          | (1,005,835                          | )          | (6,108 | ) | (1,005,835 | ) |
| Weighted average shares-basic                                                             |       | 20,846,479                        |       | 9,006,353                           |       | 20,896,789 |   | 9,006,353 |   |
| Basic EPS per Class A common share                                                   |       | $                                 | 0.90       |                                | $          | 1.06 |   | $ | 0.39 |   | $ | 0.62 |   |
|                                                                                      |       |                              |       |                                |       |   |   |   |   |
| *Denominator-diluted:*                                                                    |       |                              |       |                                |       |   |   |   |   |
| Class A common shares outstanding at  the balance sheet date                         |       | 20,385,936                        |       | 10,012,188                          |       | 20,385,936 |   | 10,012,188 |   |
| Phantom shares issued as of the balance  sheet date                                       |       | 512,072                           |       | 313,600                             |       | 516,961 |   | 313,600 |   |
| Effect of weighting                                                                       |       | (51,529                           | )          | (1,319,120                          | )          | (6,108 | ) | (1,319,120 | ) |
| Weighted average shares- diluted                                                          |       | 20,846,479                        |       | 9,006,668                           |       | 20,896,789 |   | 9,006,668 |   |
| Diluted EPS per Class A common share                                                 |       | $                                 | 0.90       |                                | $          | 1.06 |   | $ | 0.39 |   | $ | 0.62 |   |
|                                                                                      |       |                              |       |                                |       |   |   |   |   |
| *Basic and diluted EPS per Class B  common share:*                                   |       |                              |       |                                |       |   |   |   |   |
| Numerator: net income allocated to the  Class B common shares                        |       | $                                 | 287,959    |                                | $          | — |   | $ | 123,713 |   | $ | — |   |
| *Denominator-basic and diluted:*                                                          |       |                              |       |                                |       |   |   |   |   |
| Class B shares outstanding at the  balance sheet date                                |       | 319,388                           |       | 319,388                             |       | 319,388 |   | 319,388 |   |
| Effect of weighting (based on the date the  Class B shares participate in dividends) |       | —                            |       | (319,388                            | )          | — |   | (319,388 | ) |
| Weighted average shares-basic and diluted                                                 |       | 319,388                           |       | —                              |       | 319,388 |   | — |   |
| Basic and diluted EPS per Class B  common share                                      |       | $                                 | 0.90       |                                | n/a        |   | $ | 0.39 |   | n/a |   |

 

9

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**Comprehensive Income (Loss)**

 

In accordance with SFAS No. 130, “ReportingComprehensive Income,” the Company is required to separately report itscomprehensive income. Other comprehensive income refers to revenue, expenses,gains, and losses that under GAAP are included in comprehensive income but areexcluded from net income, as these amounts are recorded directly as anadjustment to stockholders’ equity. Other comprehensive income (loss) arisesfrom unrealized gains or losses generated from changes in market values of itssecurities held as available-for-sale. Comprehensive income (loss) is asfollows:

 
| ** **                                                    | ** ** | **(Unaudited)  Six months ended** | ** ** | **(Unaudited)  Three months ended** | ** ** |
|---------------------------------------------------------------|------------|-----------------------------------|------------|-------------------------------------|------------|
| ** **                                                    | ** ** | **June 30, 2005**            | ** ** | **June 30, 2004**              | ** ** | **June 30, 2005** | ** ** | **June 30, 2004** | ** ** |
|                                                          |       |                              |       |                                |       |   |   |   |   |
| Net income                                                    |       | $                                 | 19,126,238 |                                | $          | 9,510,355 |   | $ | 8,218,399 |   | $ | 5,567,193 |   |
|                                                          |       |                              |       |                                |       |   |   |   |   |
| Realized gain on available for sale  securites, net           |       | (1,982,382                        | )          | —                              |       | — |   | — |   |
|                                                          |       |                              |       |                                |       |   |   |   |   |
| Unrealized gain/(loss) on available for  sale securities, net |       | (19,993,799                       | )          | (9,091,503                          | )          | (454,738 | ) | (12,267,790 | ) |
|                                                          |       |                              |       |                                |       |   |   |   |   |
| Comprehensive (loss) income                                   |       | $                                 | (2,849,943 | )                                   | $          | 418,852 |   | $ | 7,763,661 |   | $ | (6,700,597 | ) |

 

**NOTE 2.                SECURITIES**

 

At June 30, 2005 and December 31,2004, all of the Company’s securities were classified as available-for-saleand, as such, are reported at their estimated fair value. Estimated fair valuewas determined based on the average of third-party broker quotes receivedand/or independent pricing sources when available.

 

The following are the carrying values of theCompany’s securities:

 
| ** **                | ** ** | **(Unaudited)  June 30, 2005** | ** **    | **December 31, 2004** | ** ** |
|---------------------------|------------|-------------------------------------|---------------|----------------------------|------------|
| ** **                | ** ** | ** **                          | ** **    | ** **                 | ** ** |
| Floating-Rate CMO’s  |       | $                                   | 68,098,395    |                       | $          | 250,438,730 |   |
| Hybrid Arms and Balloons  |       | 792,197,983                         |          | 569,623,089                |       |
| Adjustable-Rate Mortgages |       | 2,106,746,376                       |          | 1,403,381,666              |       |
| Fixed-Rate Mortgages      |       | 909,163,242                         |          | 749,789,412                |       |
|                      |       |                                |          |                       |       |
|                      |       | $                                   | 3,876,205,996 |                       | $          | 2,973,232,897 |   |

 

The following table presents the componentsof the carrying value of the Company’s MBS portfolio:

 
| ** **                          | ** ** | **(Unaudited)  June 30, 2005** | ** **    | **December 31, 2004** | ** ** |
|-------------------------------------|------------|-------------------------------------|---------------|----------------------------|------------|
| ** **                          | ** ** | ** **                          | ** **    | ** **                 | ** ** |
| Principal balance                   |       | $                                   | 3,784,668,467 |                       | $          | 2,876,568,150 |   |
| Unamortized premium                 |       | 116,222,372                         |          | 98,202,287                 |       |
| Unaccreted discount                 |       | (1,549,702                          | )             | (381,769                   | )          |
| Gross unrealized gains              |       | 7,224,674                           |          | 7,824,313                  |       |
| Gross unrealized losses             |       | (30,359,815                         | )             | (8,980,084                 | )          |
|                                |       |                                |          |                       |       |
| Carrying value/estimated fair value |       | $                                   | 3,876,205,996 |                       | $          | 2,973,232,897 |   |

 

10

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The following table presents for the Company’sinvestments with gross unrealized losses, the estimated fair value and grossunrealized losses aggregated by investment category, at June 30, 2005(unaudited):

 
| ** **                      | ** ** | **Less than 12 Months**   | ** **        | **More than 12 Months** | ** ** | **Total**                 | ** ** |
|---------------------------------|------------|---------------------------|-------------------|-------------------------|------------|---------------------------|------------|
| ** **                      | ** ** | **Estimated  Fair Value** | ** **        | **Unrealized  Losses**  | ** ** | **Estimated  Fair Value** | ** ** | **Unrealized  Losses** | ** ** | **Estimated  Fair Value** | ** ** | **Unrealized  Losses** | ** ** |
| ** **                      | ** ** | ** **                | ** **        | ** **              | ** ** | ** **                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Fixed-Rate Mortgages            |       | $                         | 541,619,221       |                    | $          | (6,958,295                | )          | $ | 179,547,850 |   | $ | (4,981,429 | ) | $ | 721,167,071 |   | (11,939,724 | ) |
| Floating-Rate CMOs              |       | —                    |              | —                  |       | —                    |       | — |   | — |   | — |   |
| Adjustable-Rate Mortgages       |       | 1,136,485,543             |              | (12,937,033             | )          | 27,367,745                |       | (752,408 | ) | 1,163,853,288 |   | (13,689,441 | ) |
| Hybrid Arms & Balloons |       | 561,174,473               |              | (3,182,827              | )          | 88,285,316                |       | (1,547,823 | ) | 649,459,789 |   | (4,730,650 | ) |
| ** **                      | ** ** | **$**                     | **2,239,279,237** | ** **              | **$**      | **(23,078,155**           | **)**      | **$** | **295,200,911** | ** ** | **$** | **(7,281,660** | **)** | **$** | **2,534,480,148** | ** ** | **$** | **(30,359,815** | **)** |
|                                 |            |                           |                   |                         |            |                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The following table presents for the Company’sinvestments with gross unrealized losses, the estimated fair value and grossunrealized losses aggregated by investment category, at December 31, 2004:

 
| ** **                | ** ** | **Less than 12 Months**   | ** **        | **More than 12 Months** | ** ** | **Total**                 | ** ** |
|---------------------------|------------|---------------------------|-------------------|-------------------------|------------|---------------------------|------------|
| ** **                | ** ** | **Estimated  Fair Value** | ** **        | **Unrealized  Losses**  | ** ** | **Estimated  Fair Value** | ** ** | **Unrealized  Losses** | ** ** | **Estimated  Fair Value** | ** ** | **Unrealized  Losses** | ** ** |
| ** **                | ** ** | ** **                | ** **        | ** **              | ** ** | ** **                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Floating-Rate CMOs        |       | $                         | —            |                    | $          | —                    |       | $ | — |   | $ | — |   | $ | — |   | $ | — |   |
| Hybrid Arms and Balloons  |       | 334,918,233               |              | (1,974,605              | )          | 31,954,324                |       | (75,968 | ) | 366,872,557 |   | (2,050,573 | ) |
| Adjustable-Rate Mortgages |       | 479,284,021               |              | (2,930,772              | )          | 9,374,573                 |       | (21,845 | ) | 488,658,594 |   | (2,952,617 | ) |
| Fixed-Rate Mortgages      |       | 519,546,019               |              | (3,950,372              | )          | 11,260,668                |       | (26,522 | ) | 530,806,687 |   | (3,976,894 | ) |
|                      |       |                      |              |                    |       |                      |       |   |   |   |   |   |   |
| ** **                | ** ** | **$**                     | **1,333,748,273** | ** **              | **$**      | **(8,855,749**            | **)**      | **$** | **52,589,565** | ** ** | **$** | **(124,335** | **)** | **$** | **1,386,337,838** | ** ** | **$** | **(8,980,084** | ) |

 

All of the Company’s investments havecontractual maturities greater than two years. Actual maturities of MBSare generally shorter than stated contractual maturities. Actual maturities ofthe Company’s MBS are affected by the contractual lives of the underlyingmortgages, periodic payments of principal, and prepayments of principal.

 

The unrealized losses on the investments arenot considered other-than-temporary, and are therefore not written-down asbeing impaired. The factors considered in making this determination included:the expected cash flow from the investment, the general quality of the MBSowned, any credit protection available, current market conditions, themagnitude and duration of the historical decline in market prices as well asthe Company’s ability and intention to hold such securities owned.  Because management’s assessments are based onfactual information as well as subjective information available at the time ofassessment, the determination as to whether an other-than-temporary declineexists and, if so, the amount considered impaired is also subjective and,therefore, constitutes material estimates that are susceptible to significantchange.  At June 30, 2005 and December 31,2004, the Company had no securities on which an impairment charge had beenmade.

 

**NOTE 3.                REPURCHASEAGREEMENTS**

 

The Company has entered into repurchaseagreements to finance most of its security purchases. The repurchase agreementsare short-term borrowings that bear interest rates that have historically movedin close relationship to LIBOR (London Interbank Offered Rate). At June 30,2005, the Company had an outstanding amount of $3.7 billion with a net weightedaverage borrowing rate of 3.14%, and these agreements were collateralized by MBSwith a fair value of $3.9 billion. At December 31, 2004, the Company hadan outstanding amount of $2.8 billion with a net weighted average borrowingrate of 2.28% and these agreements were collateralized by MBS with a fair valueof $2.9 billion.

 

11

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At June 30, 2005, the Company’srepurchase agreements had remaining maturities as summarized below (unaudited):

 
| ** **                                                                   | ** ** | **OVERNIGHT  (1 DAY OR LESS)** | ** **  | **BETWEEN 2 AND  30 DAYS** | ** ** | **BETWEEN 31  AND  90 DAYS** | ** ** | **GREATER THAN  90 DAYS** | ** **    | **TOTAL** | ** ** |
|------------------------------------------------------------------------------|------------|--------------------------------|-------------|----------------------------|------------|------------------------------|------------|---------------------------|---------------|-----------|------------|
| **Agency-Backed Mortgage-Backed Securities:**                                |       |                           |        |                       |       |                         |       |                      |          |      |       |
|                                                                         |       |                           |        |                       |       |                         |       |                      |          |      |       |
| Amortized cost of securities sold,  including accrued interest receivable    |       | $                              | 137,972,341 |                       | $          | 1,148,954,568                |       | $                         | 1,049,190,324 |      | $          | 1,266,641,052 |   | $ | 3,602,758,285 |   |
| Fair market value of securities sold,  including accrued interest receivable |       | $                              | 138,548,148 |                       | $          | 1,145,386,404                |       | $                         | 1,039,560,024 |      | $          | 1,256,557,078 |   | $ | 3,580,051,654 |   |
| Repurchase agreement liabilities associated  with these securities           |       | $                              | 135,548,000 |                       | $          | 1,177,412,120                |       | $                         | 1,127,145,469 |      | $          | 1,277,727,000 |   | $ | 3,717,832,589 |   |
| Average interest rate of repurchase  agreement liabilities                   |       | 3.06                           | %           | 3.05                       | %          | 3.14                         | %          | 3.23                      | %             | 3.14      | %          |

 

12

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At December 31, 2004, the Company’srepurchase agreements had remaining maturities as summarized below:

 
| ** **                                                                   | ** ** | **OVERNIGHT  (1 DAY OR LESS)** | ** ** | **BETWEEN 2 AND  30 DAYS** | ** ** | **BETWEEN 31 AND  90 DAYS** | ** ** | **GREATER THAN  90 DAYS** | ** **  | **TOTAL** | ** ** |
|------------------------------------------------------------------------------|------------|--------------------------------|------------|----------------------------|------------|-----------------------------|------------|---------------------------|-------------|-----------|------------|
| **Agency-Backed Mortgage-Backed Securities:**                                |       |                           |       |                       |       |                        |       |                      |        |      |       |
| Amortized cost of securities sold,  including accrued interest receivable    |       | $                              | —     |                       | $          | 821,387,879                 |       | $                         | 975,251,727 |      | $          | 1,028,522,165 |   | $ | 2,825,161,771 |   |
| Fair market value of securities sold,  including accrued interest receivable |       | $                              | —     |                       | $          | 823,087,580                 |       | $                         | 975,020,524 |      | $          | 1,025,389,631 |   | $ | 2,823,497,735 |   |
| Repurchase agreement liabilities associated  with these securities           |       | $                              | —     |                       | $          | 797,655,321                 |       | $                         | 968,417,528 |      | $          | 1,005,090,108 |   | $ | 2,771,162,957 |   |
| Average interest rate of repurchase  agreement liabilities                   |       | —                         |       | 2.28                       | %          | 2.11                        | %          | 2.45                      | %           | 2.28      | %          |

 

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**NOTE4.    TRUST PREFERRED SECURITIES**

 

On May 17,2005, the Company completed a private offering of $50.0 million of trustpreferred securities (the “Trust Preferred Securities”) through Bimini CapitalTrust I, a Delaware statutory business trust sponsored by the Company.

 

Bimini CapitalTrust I (“BCTI” or the “trust”) used the proceeds of the private offering,together with the Company’s investment of $1.6 million in the BCTI common securities, to purchase $51.6 millionaggregate principal amount of the Company’s Junior Subordinated Notes withterms that parallel the terms of the Trust Preferred Securities. The TrustPreferred Securities have a fixed rate of interest until March 30, 2010 at7.61% and thereafter the rate will float at a spread of 3.30% over theprevailing three-month LIBOR rate.  TheTrust Preferred Securities require quarterly interest distributions and are redeemableat the Company’s option, in whole or in part and without penalty, beginning March 30,2010 and at any date thereafter.  Thenotes are subordinate and junior in right of payment of all present and futuresenior indebtedness. The proceeds from the private offering net of costs wereapproximately $48.5 million.

 

The trust is avariable interest entity pursuant to FASB Interpretation No. 46, “Consolidationof Variable Interest Entities,” (“FIN 46”) because the holders of the equityinvestment at risk do not have adequate decision making ability over the trust’sactivities. Because the Company’s investment in the trust’s common shares wasfinanced directly by the trust as a result of its loan of the proceeds to theCompany, that investment is not considered to be an equity investment at riskpursuant to FIN 46. Since the Company’s common shares investment in BCTI is nota variable interest, the Company is not the primary beneficiary of the trust.Therefore, the Company will not consolidate the financial statements of BCTIinto its financial statements.  Based onthe aforementioned accounting guidance, the financial statements present thenotes issued to the trust as a liability and the investment in the BCTI as anasset. For financial statement purposes, the Company records interest expenseon the corresponding notes issued to the BCTI on its statements of income.

 

**NOTE 5.****                                                 CAPITALSTOCK**

 

**Issuances of Common Stock**

 

For the six months ended June 30, 2005,the Company issued a total of 12,132 shares of Class A Common Stock to itsfour independent directors for the payment of director fees for servicesrendered.

 

For the three months ended June 30,2005, the Company issued 4,889 shares of its Class A Common Stock to anofficer and director. These shares were issued pursuant to the terms of thephantom share grants (see note 6).

 

**Dividends**

 

On March 9, 2005, the Board of Directorsdeclared a regular quarterly cash dividend of $0.53 per share on the Company’s Class Aand Class B Common Stock for the quarter ending March 31, 2005. Thedividend was paid on April 8, 2005.

 

On May 31, 2005, the Board of Directorsdeclared a regular quarterly cash dividend of $0.40 per share on the Company’s Class Aand Class B Common Stock for the quarter ending June 30, 2005. Thedividend was paid on July 8, 2005.

 

**NOTE 6.                STOCKINCENTIVE PLAN**

 

On December 1, 2003, the Company adoptedthe 2003 Long Term Incentive Compensation Plan (the “2003 Plan”) to provide theCompany with the flexibility to use stock options and other awards as part ofan overall compensation package to provide a means of performance-basedcompensation to attract and retain qualified personnel. The 2003 Plan wasamended and restated in March 2004. Key employees, directors andconsultants are eligible to be granted stock options, restricted stock, phantomshares, dividend equivalent rights and other stock-based awards under the 2003Plan. An initial grant of 313,600 phantom shares was made in June 2004.

 

During the six months ended June 30,2005, the Company granted 203,361 phantom shares to employees. Each phantomshare represents a right to receive a share of the Company’s Class ACommon Stock, and a dividend equivalent right was also granted on each phantomshare.

 

Phantom share awards are valued at the fairvalue of the Company’s Class A Common Stock at the date of the grant, fora total grant date value of $3,097,389. The phantom awards do not have anexercise price. The grant date value is being

 

14

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amortized to compensation expense on a straight-line basis over thevesting period.  The phantom shares vest,based on the employees’ continuing employment, on a quarterly schedule asprovided in the grant agreements, for periods from February 15, 2005 throughNovember 15, 2008.

 

As of June 30, 2005, of all phantomstock awards granted to date, 99,461 shares have fully vested and 417,500shares remain unvested.  No phantom shareawards have expired or been forfeited by the grantee. Of the vested shares, 4,889were distributed to a grantee during the three months ended June 30, 2005,so as of June 30, 2005 there remains 512,072 phantom sharesoutstanding.  Total compensation costrecognized for the six and three months ended June 30, 2005 was $1,019,757and $556,994, respectively. Recognized compensation cost was $57,366 for boththe six and three months ended June 30, 2004.  Dividends paid on phantom shares are chargedto retained earnings when declared.

 

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**ITEM 2.****                  MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

The followingdiscussion of our financial condition and results of operations should be readin conjunction with our unaudited interim financial statements and relatednotes included elsewhere in this report.

 

**Introductionand Overview**

 

BiminiMortgage Management, Inc. (“we”, “our” or “Company”) was formed in September 2003to invest primarily in residential mortgage related securities issued by theFederal National Mortgage Association (more commonly known as Fannie Mae), theFederal Home Loan Mortgage Corporation (more commonly known as Freddie Mac) andthe Government National Mortgage Association (more commonly known as GinnieMae). We earn returns on the spread between the yield on our assets and ourcosts, including the interest expense on the funds we borrow. We intend toborrow between eight and 12 times the amount of our equity capital to attemptto enhance our returns to stockholders. For purposes of this calculation wetreat our Trust Preferred Securities as equity capital. We are self-managed andself-advised. We have elected to be taxed as a real estate investment trust, orREIT, for federal income tax purposes commencing with our initial taxable periodended December 31, 2003. As a REIT, we generally are not subject tofederal income tax on the REIT taxable income that we distribute to ourstockholders. In evaluating our assets and their performance, our managementteam primarily evaluates these critical factors: asset performance in differinginterest rate environments, duration of the security, yield to maturity,potential for prepayment of principal, and the market price of the investment.

 

For the sixand three months ended June 30, 2005, we had interest income of$67.8 million and $36.7 million, respectively, and interest expense of$46.5 million and $26.5 million, respectively. As of June 30, 2005,we had a weighted average yield on assets of 3.81% and a net weighted averageborrowing cost of 3.14%. The constant prepayment rate for the portfolio was28.4% for June 2005, which reflects the annualized proportion of principalthat was prepaid. Prepayments on the loans underlying our mortgage relatedsecurities can alter the timing of the cash flows from the underlying loans tothe Company. As a result, we gauge the interest rate sensitivity of our assetsby measuring their effective duration. While modified duration measures theprice sensitivity of a bond to movements in interest rates, effective durationcaptures both the movement in interest rates and the fact that cash flows to amortgage related security are altered when interest rates move. Accordingly,when the contract interest rate on a mortgage loan is substantially aboveprevailing interest rates in the market, the effective duration of securitiescollateralized by such loans can be quite low because of expected prepayments.Although most of the fixed-rate mortgage-backed securities in our portfolio arecollateralized by loans with a lower propensity to prepay when the contractrate is above prevailing rates, their price movements track securities withlike contract rates and therefore exhibit similar effective duration. The valueof our portfolio will change as interest rates rise or fall. See “Qualitativeand Quantitative Disclosures about Market Risk—Interest Rate Risk—Effect onFair Value.”

 

The secondquarter of 2005 was a period when very short term rates went up and longer termrates went down. This phenomenon, which is referred to as a “flattening” of theyield curve, often occurs just prior to a period when the Federal Reservecompletes a “tightening cycle.” Yet, the Federal Reserve is still in atightening mode, having just raised the short term borrowing rate (the “FederalFunds Target Rate”) to 3.25% on June 30, 2005. One year ago, on June 30,2004, the Federal Reserve began a series of Federal Funds Target Rate increaseswhich have to this date resulted in the Federal Funds Target Rate increasingfrom 1.00% to 3.25% as of June 30, 2005. During the second quarter of 2005, the one-month LIBOR rate increased47.0 basis points to 3.340% and the longer 12-month LIBOR rate increased 3.5basis points from 3.845% to 3.880%. The yield of the on-the-run two yearTreasury note decreased 14.2 basis points from 3.775% to 3.633%.  During that same period, the yield of theon-the-run five year Treasury note decreased 47 basis points to 3.698% and theyield of the on-the-run ten year Treasury note decreased 57.0 basis points to3.913%. It should be noted, however, that since the beginning of 2005, of theaforementioned LIBOR and Treasury notes, only the on-the-run Treasury ten yearnote is down in yield. Each of the other notes and indices is up in yield.Continued increases in the Federal Funds Target Rate will inevitably putpressure on earnings to the extent that our funding rates increase faster thanthe income on our adjustable rate mortgage related assets.

 

Thisflattening of the yield curve has affected our financial results as compared toprior periods.  The yields on ourportfolio of mortgage-backed securities are affected by movements in both shortand long term rates. In particular, while yields on our adjustable rate assetswill ultimately move in response to movements in short term rates, they will doso with a lag owing to reset frequencies that are often greater than monthly.Yields on our fixed rate assets and longer resetting hybrids are drivenprimarily by longer term rates. Conversely, our repurchase agreement debtcarries interest rates that are set based on short-term interest rates only(the short end of the yield curve). As the effect of Federal Reserve actionsare reflected in LIBOR rates, our funding costs will increase as our repurchaseagreements mature and are renewed at the then current rates. This will resultin a tightening of our net interest spread.

 

18

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The narrowingof the interest rate spread on our portfolio is evident when our June 30,2005 portfolio data is compared to the March 31, 2005 data. The weightedaverage yield on our assets was 3.81% at June 30, 2005 while the netweighted average cost of borrowings was 3.14%, for a spread of 0.67%.  These same percentages at March 31, 2005were 3.63% for assets and 2.78% for liabilities, or a spread of 0.85%.  These changes in the yield curve are alsoevident when our June 30, 2005 portfolio data is compared to June 30,2004.  These same percentages at June 30,2004 were 2.79% for assets and 1.26% for liabilities, or a spread of 1.53%.

 

This narrowingin the second quarter of 2005 resulted in the following changes in the Company’sfinancial results:  lower net interestincome as compared to the first quarter of 2005 (even though our assetsincreased) and therefore lower net income; reduced quarterly dividends;  anda lower fair market value of the investment portfolio which results in anincrease in the Company’s accumulated other comprehensive loss.

 

**FinancialCondition**

 

All of ourassets at June 30, 2005 were acquired with the proceeds of our commonstock offerings and the Trust Preferred Securities issued during the threemonths ended June 30, 2005, and through the use of leverage. On May 17,2005 we received net proceeds after offering costs of $48.5 million from theissuance of the Trust Preferred Securities. The interest on the Trust PreferredSecurities is fixed for the first five years at 7.61% and then floats at aspread of 3.30% over three-month LIBOR for the remaining 25 years. However, theTrust Preferred Securities are redeemable at the Company’s option at the end ofthe first five year period and at any subsequent date that the Company chooses.We believe that the income generated from available investment opportunities,when the use of leverage is employed for the purchase of assets, will exceedthe cost of the debt.

 

***Mortgage Related Securities***

 

At June 30,2005, we held $3.9 billion of mortgage related securities at fair value.Our portfolio of mortgage related securities will typically be comprised offixed-rate mortgage-backed securities, floating rate collateralized mortgageobligations, adjustable-rate mortgage-backed securities, hybrid adjustable-ratemortgage-backed securities and balloon maturity mortgage-backed securities. Weseek to acquire low duration assets that offer high levels of protection frommortgage prepayments. Although the duration of an individual asset can changeas a result of changes in interest rates, we plan to maintain a portfolio withan average effective duration of less than 2.0. The stated contractual finalmaturity of the mortgage loans underlying our portfolio of mortgage relatedsecurities generally ranges up to 30 years. However, the effect ofprepayments of the underlying mortgage loans tends to shorten the resultingcash flows from our investments substantially. Prepayments occur for variousreasons, including refinancings of underlying mortgages and payoffs associatedwith sales of the underlying homes as people move.

 

In response tothe changing interest rate environment during the last year as the Board of theFederal Reserve voted to raise the Federal Funds Target Rate nine times, or atotal of 2.25 basis points to 3.25% as of June 30, 2005, we began and havecontinued to modify the mix of mortgage related securities in our portfolio.This has been accomplished by purchasing greater percentages of adjustable-rateand hybrid adjustable-rate mortgage related securities and smaller percentagesof fixed-rate mortgage related securities than we owned one year ago. Thisapproach has altered the mix of mortgage related securities in our portfoliosuch that the percentage of adjustable-rate securities whose coupons reset inone year or less had increased to 54.4% on June 30, 2005 from 17.9% on June 30,2004. The percentage of floating rate collateralized mortgage obligations hasdecreased to 1.76% of the portfolio from 34.0% on June 30, 2004 in orderto minimize the potential negative effect of higher LIBOR rates on the 7.5% and8.0% lifetime caps on those securities. We are generally using the proceeds of our monthly mortgage-backedsecurities principal payments to purchase greater percentages ofadjustable-rate and shorter resetting hybrid-adjustable-rate mortgage relatedsecurities and a smaller percentage of fixed-rate mortgage backed pools than weowned one year ago.

 

19

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The followingtables summarize our mortgage related securities as of June 30, 2005:

 
| **Asset   Category**                               | ** ** | **Market  Value** | ** ** | **Percentage  of  Entire  Portfolio** | ** ** | **Weighted  Average  Coupon** | ** ** | **Weighted  Average  Maturity in  Months** | ** ** | **Longest  Maturity** | ** ** | **Weighted  Average Coupon  Reset in Months** | ** ** | **Weighted  Average  Lifetime Cap** | ** ** | **Weighted  Average  Periodic Cap** | ** ** |
|----------------------------------------------------|------------|-------------------|------------|---------------------------------------|------------|-------------------------------|------------|--------------------------------------------|------------|-----------------------|------------|-----------------------------------------------|------------|-------------------------------------|------------|-------------------------------------|------------|
| ** **                                         | ** ** | **($000)**        | ** ** | ** **                            | ** ** | ** **                    | ** ** | ** **                                 | ** ** | ** **            | ** ** | ** **                                    | ** ** | ** **                          | ** ** | ** **                          | ** ** |
| Fixed-Rate  Mortgage-Backed Securities             |       | $                 | 909,163    |                                  | 23.46      | %                             | 6.46       | %                                          | 264        |                  | 1-Jun-35   |                                          | n/a        |                                | n/a        |                                | n/a        |   |
| CMO Floaters                                       |       | 68,098            |       | 1.76                                  | %          | 3.70                          | %          | 327                                        |       | 25-May-34             |       | 0.70                                          |       | 7.78                                | %          | n/a                                 |       |
| Adjustable-Rate  Mortgage-Backed Securities        |       | 2,106,746         |       | 54.35                                 | %          | 4.13                          | %          | 338                                        |       | 1-Dec-42              |       | 4.35                                          |       | 10.64                               | %          | 1.78                                | %          |
| Hybrid Adjustable  Rate Mortgage-Backed Securities |       | 732,348           |       | 18.89                                 | %          | 4.37                          | %          | 343                                        |       | 1-Feb-35              |       | 23.33                                         |       | 9.99                                | %          | 1.57                                | %          |
| Balloon Maturity  Mortgage-Backed Securities       |       | 59,851            |       | 1.54                                  | %          | 4.07                          | %          | 54                                         |       | 1-Feb-11              |       | n/a                                           |       | n/a                                 |       | n/a                                 |       |
| Total Portfolio                                    |       | $                 | 3,876,206  |                                  | 100.00     | %                             | 4.71       | %                                          | 317        |                  | 1-Dec-42   |                                          | 9.05       |                                | 10.41      | %                                   | 1.71       | % |

 
| **Agency**          | ** ** | **Market Value** | ** ** | **Percentage of Entire  Portfolio** | ** ** |
|---------------------|------------|------------------|------------|-------------------------------------|------------|
| ** **          | ** ** | **($000)**       | ** ** | ** **                          | ** ** |
| Fannie Mae          |       | $                | 2,470,045  |                                | 63.72      | % |
| Freddie Mac         |       | 732,960          |       | 18.91                               | %          |
| Ginnie Mae          |       | 673,201          |       | 17.37                               | %          |
|                |       |             |       |                                |       |
| **Total Portfolio** |       | $                | 3,876,206  |                                | 100.00     | % |

 

**Entire Portfolio**

 
| Effective Duration              |   | 0.57 |   |
|---------------------------------|--------|------|--------|
| Weighted Average Purchase Price |   | $    | 102.95 |   |
| Weighted Average Current Price  |   | $    | 102.42 |   |

 

As of June 30,2005, approximately 48.39% of our portfolio of 15-year fixed-rate couponmortgage securities, and 33.09% of our 30-year fixed-rate coupon mortgagesecurities, contained only loans with principal balances of $85,000 or less.Because of the low loan balances on these mortgages, we believe borrowers havea lower economic incentive to refinance and have historically prepaid moreslowly than comparable securities.

 

The table below shows the principal balanceof our investment securities, the net un-amortized premium, amortized cost ofsecurities held, average cost expressed as a price, the fair market value ofour investments and the fair market value expressed as a price for the currentquarter and each of the previous five quarters.

 
| **Quarter  Ended**          | ** ** | **Principal  Balance of  Investment  Securities Held** | ** **    | **Unamortized  Premium (Net)** | ** ** | **Amortized  Cost of  Securities Held** | ** ** | **Amortized  Cost /  Principal Balance  Held** | ** **    | **Fair  Market Value  of Investment  Securities Held** | ** ** | **Fair  Market  Value / Principal  Balance Held** | ** ** |
|-----------------------------|------------|--------------------------------------------------------|---------------|--------------------------------|------------|-----------------------------------------|------------|------------------------------------------------|---------------|--------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                  | ** ** | ** **                                             | ** **    | ** **                     | ** ** | ** **                              | ** ** | ** **                                     | ** **    | ** **                                             | ** ** | ** **                                        | ** ** |
| At June 30,  2005      |       | $                                                      | 3,784,668,467 |                           | $          | 114,672,670                             |       | $                                              | 3,899,341,137 |                                                   | 103.030    |                                              | $          | 3,876,205,996 |   | 102.419 |   |
| At March 31,  2005     |       | $                                                      | 3,212,516,823 |                           | $          | 109,389,703                             |       | $                                              | 3,321,906,527 |                                                   | 103.405    |                                              | $          | 3,299,051,561 |   | 102.694 |   |
| At  December 31, 2004  |       | $                                                      | 2,876,319,085 |                           | $          | 97,753,097                              |       | $                                              | 2,974,072,182 |                                                   | 103.399    |                                              | $          | 2,973,232,897 |   | 103.369 |   |
| At  September 30, 2004 |       | $                                                      | 1,589,828,988 |                           | $          | 48,498,955                              |       | $                                              | 1,638,327,943 |                                                   | 103.051    |                                              | $          | 1,638,264,065 |   | 103.047 |   |
| At June 30,  2004      |       | $                                                      | 1,479,500,209 |                           | $          | 38,033,673                              |       | $                                              | 1,517,533,882 |                                                   | 102.571    |                                              | $          | 1,508,421,270 |   | 101.955 |   |
| At March 31,  2004     |       | $                                                      | 1,473,583,661 |                           | $          | 39,535,014                              |       | $                                              | 1,513,118,676 |                                                   | 102.683    |                                              | $          | 1,516,539,744 |   | 102.915 |   |

 

We hadapproximately $152.8 million of cash and cash equivalents as of June 30,2005. In addition to that amount, $2.7 million in cash was out on margin, whichis temporarily encumbered as it is being used as collateral. This compares to$128.9 million of cash and cash equivalents on hand and $8.7 million of cashout on margin as of December 31, 2004.

 

***Liabilities***

 

In May 2005,the Company issued $50 million of Trust Preferred Securities through BCTI. The interestrate on the Trust Preferred Securities is fixed for the first five years at7.61% and then floats at a spread of 3.30% over three-month LIBOR for theremaining 25 years. However, the Trust Preferred Securities are redeemable atthe Company’s option at the end of the first five year period and at anysubsequent date that the Company chooses. We believe that the income generatedfrom available investment opportunities, when the use of leverage is employedfor the purchase of assets, will exceed the cost of the debt. However, theissuance of debt at a fixed rate for any long-term period, considering the useof leverage, could create an interest rate mismatch if we are not able toinvest at yields that exceed the cost of the Trust Preferred Securities.

 

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We haveentered into repurchase agreements to finance acquisitions of mortgage relatedsecurities. None of the counter-parties to these agreements are affiliates ofus. These agreements are secured by our mortgage related securities and bear interestrates that have historically moved in close relationship to LIBOR. As of June 30,2005, we had 19 master repurchase agreements with various investment bankingfirms and other lenders and had outstanding balances under 14 of theseagreements.

 

At June 30,2005, we had approximately $3.7 billion outstanding under repurchaseagreements with a net weighted average borrowing cost of 3.14%, $135.5 millionof which matures in one day, $1,177.4 million of which matures between twoand 30 days, $1,127.1 million of which matures between 31 and90 days, and $1,277.7 million of which matures in more than90 days. It is our present intention to seek to renew these repurchaseagreements as they mature under the then-applicable borrowing terms of thecounter-parties to our repurchase agreements. At June 30, 2005, therepurchase agreements were secured by mortgage related securities with anestimated fair value of $3.9 billion and a weighted average maturity of318 months.

 

At June 30,2005, our repurchase agreements had the following counter-parties, amountsoutstanding, amounts at risk and weighted average remaining maturities:

 
| **Repurchase Agreement  Counter-parties**  | ** ** | **Amount  Outstanding** | ** **    | **Amount  at Risk (1)** | ** ** | **Weighted  Average  Maturity of  Repurchase  Agreements  in Days** | ** ** | **Percent  of Total  Amount  Outstanding** | ** ** |
|--------------------------------------------|------------|-------------------------|---------------|-------------------------|------------|---------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                 | ** ** | **($000)**              | ** **    | **($000)**              | ** ** | ** **                                                          | ** ** | ** **                                 | ** ** |
| Deutsche Bank Securities, Inc.        |       | $                       | 884,438       |                    | $          | 24,341                                                              |       | 203                                        |       | 23.8 | % |
| Nomura Securities International, Inc. |       | 783,805                 |          | 38,041                  |       | 132                                                                 |       | 21.1                                       | %          |
| UBS Investment Bank, LLC                   |       | 387,688                 |          | 16,794                  |       | 15                                                                  |       | 10.4                                       | %          |
| Goldman Sachs                              |       | 367,904                 |          | 13,266                  |       | 43                                                                  |       | 9.9                                        | %          |
| Cantor Fitzgerald                          |       | 330,472                 |          | 15,436                  |       | 126                                                                 |       | 8.9                                        | %          |
| Bear Stearns & Co. Inc.           |       | 299,073                 |          | 9,625                   |       | 37                                                                  |       | 8.0                                        | %          |
| Banc of America Securities, LLC            |       | 159,813                 |          | 8,108                   |       | 46                                                                  |       | 4.3                                        | %          |
| REFCO Securities, LLC                      |       | 116,602                 |          | 4,373                   |       | 24                                                                  |       | 3.1                                        | %          |
| Washington Mutual                          |       | 114,211                 |          | 5,438                   |       | 28                                                                  |       | 3.0                                        | %          |
| Merrill Lynch                              |       | 69,778                  |          | 69                      |       | 22                                                                  |       | 1.9                                        | %          |
| Countrywide Securities Corp.               |       | 68,898                  |          | 2,855                   |       | 25                                                                  |       | 1.9                                        | %          |
| Lehman Brothers                            |       | 57,982                  |          | 1,696                   |       | 113                                                                 |       | 1.6                                        | %          |
| Daiwa Securities America Inc.              |       | 56,350                  |          | 3,154                   |       | 26                                                                  |       | 1.5                                        | %          |
| JP Morgan Securities                       |       | 20,819                  |          | 1,374                   |       | 60                                                                  |       | 0.6                                        | %          |
|                                       |       |                    |          |                    |       |                                                                |       |                                       |       |
| **Total**                                  | ** ** | **$**                   | **3,717,833** | ** **              | **$**      | **144,570**                                                         | ** ** | ** **                                 | ** ** | **100.0** | **%** |

 

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(1)           Equalto the fair value of securities sold, plus accrued interest income, minus thesum of repurchase agreement liabilities, plus accrued interest expense.

 

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***Equity***

 

Accumulated other comprehensive loss, asreflected in the stockholders’ equity section, increased approximately $22.0million from December 31, 2004 to June 30, 2005.  This is reflective of an overall decline inthe fair value of our portfolio as compared to the original aggregate purchaseprice of the investments.  Changes ininterest rates over time, as described previously in the Introduction andOverview section, is the primary market factor for this value decline;generally, as interest rates rise, the value of long-term interest ratesensitive securities decline. The value of the majority of our assets is drivenby movements in short term rates – rates typically inside two years. Asmentioned above, these rates increased over the six month period. Additionally,as longer term rates decreased, prepayment expectations increased resulting ina widening in the spreads at which our assets are priced.

 

The Company has negative retained earnings(titled “accumulated deficit” in the stockholders’ equity section) at eachbalance sheet date because of the consequences of the Company’s tax status as aREIT.  As is more fully described in the section titled“Future REIT Taxable Income Distributions,” the Company’s dividends are basedon its REIT taxable income, and not on its income computed in accordance withgenerally accepted accounting principles (as reported in the accompanyingfinancial statements).  Therefore, to theextent that the Company’s cumulative REIT taxable income is both (i) greaterthan the cumulative financial statement income, and (ii) is paid-out tothe Company’s stockholders as dividends, the Company will report negativeretained earnings on its balance sheet.

 

**Results ofOperations**

 

We haveexperienced a significant growth in our assets over the past 18 months as wecompleted our private equity raises in January 2004 and February 2004,our public offerings in September 2004 and December 2004, and ourissuance of Trust Preferred Securities in May 2005. This growth in ourcapitalization and assets results in the amounts and components of our incomeand expenses for the three and six month periods ending June 30, 2005 todiffer significantly from the same periods in 2004.

 

As a result ofour issuance of Trust Preferred Securities in May 2005, our assetsincreased substantially in the second quarter of 2005 as compared to the fourthquarter of 2004 and the second quarter of 2004. The proceeds from that offeringwere deployed by the end of June 2005.

 

***Six Months Ended June 30, 2005 Compared to Six Months Ended June 30,2004***

 

For the sixmonths ended June 30, 2005 and 2004, we recorded $19.1 million and $9.5million in net income, respectively.  Ournet interest income for the six months ended June 30, 2005 and 2004 was$21.3 million and $10.8 million, respectively, our net gain on sale ofsecurities was $2.0 million and $0, respectively and our expenses for thoseperiods were $4.1 million and $1.3 million, resulting in net income of$19.1 million or $0.90 per diluted Class A Common Share and $9.5million or $1.06 per diluted Class A Common Share, respectively.

 

(See the table below for results listed on a quarterly basis.)

 

For the sixmonths ended June 30, 2005 and 2004, comprehensive income/(loss) was($2.8) million including the net unrealized loss on the available for salesecurities of ($20.0) million and $0.4 million including the net unrealizedloss on available for sale securities of ($9.1) million, respectively. Thefactors resulting in the unrealized loss on available for sale securities aredescribed above.

 

***Three Months Ended June 30, 2005Compared to Three Months Ended June 30, 2004***

 

For the threemonths ended June 30, 2005 and 2004, we recorded $8.2 million and $5.6million in net income, respectively.  Ournet interest income for the three months ended June 30, 2005 and 2004 was$10.3 million and $6.5 million, respectively, and our expenses for thoseperiods were $2.1 million and $0.9 million, resulting in net income of$8.2 million or $0.39 per diluted Class A Common Share and $5.6million or $0.62 per diluted Class A Common Share, respectively.

 

For the threemonths ended June 30, 2005 and 2004, comprehensive income/(loss) was $7.8million including the net unrealized loss on the available for sale securitiesof ($0.5) million and ($6.7) million including the net unrealized loss onavailable for sale securities of ($12.3) million, respectively. The factorsresulting in the unrealized loss on available for sale securities are describedabove.

 

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The table below shows our average investmentsheld, total interest income, yield on average earning assets, averagerepurchase balances outstanding, interest expense, average cost of funds, netinterest income and net interest spread for the quarter ended June 30,2005 and the five previous quarters.  Wecommenced operations on December 19, 2003 and quarterly results for theperiod ended December 31, 2003 are not meaningful.

 

RATIOS FOR THE QUARTERS HAVE BEEN ANNUALIZED

 
| **Quarter Ended**        | ** ** | **Average  Investment  Securities Held** | ** **    | **Total  Interest Income** | ** ** | **Yield on  Average  Interest Earning  Assets** | ** ** | **Average  Balance of  Repurchase  Agreements  Outstanding** | ** ** | **Interest  Expense** | ** **    | **Average  Cost of  Funds** | ** ** | **Net  Interest  Income** | ** ** | **Net  Interest  Spread** | ** ** |
|--------------------------|------------|------------------------------------------|---------------|----------------------------|------------|-------------------------------------------------|------------|--------------------------------------------------------------|------------|-----------------------|---------------|-----------------------------|------------|---------------------------|------------|---------------------------|------------|
| ** **               | ** ** | ** **                               | ** **    | ** **                 | ** ** | ** **                                      | ** ** | ** **                                                   | ** ** | ** **            | ** **    | ** **                  | ** ** | ** **                | ** ** | ** **                | ** ** |
| June 30,  2005      |       | $                                        | 3,587,628,779 |                       | $          | 36,748,640                                      |       | 4.097                                                        | %          | $                     | 3,449,743,973 |                        | $          | 26,703,422                |       | 3.096                     | %          | $ | 10,045,218 |   | 1.001 | % |
| March 31,  2005     |       | $                                        | 3,136,142,229 |                       | $          | 31,069,934                                      |       | 3.963                                                        | %          | $                     | 2,976,409,157 |                        | $          | 19,841,710                |       | 2.667                     | %          | $ | 11,228,224 |   | 1.296 | % |
| December 31,  2004  |       | $                                        | 2,305,748,481 |                       | $          | 20,463,071                                      |       | 3.550                                                        | %          | $                     | 2,159,890,886 |                        | $          | 10,824,164                |       | 2.005                     | %          | $ | 9,638,907 |   | 1.545 | % |
| September 30,  2004 |       | $                                        | 1,573,342,668 |                       | $          | 11,017,346                                      |       | 2.801                                                        | %          | $                     | 1,504,919,407 |                        | $          | 4,253,337                 |       | 1.131                     | %          | $ | 6,764,009 |   | 1.670 | % |
| June 30,  2004      |       | $                                        | 1,512,480,507 |                       | $          | 10,959,098                                      |       | 2.898                                                        | %          | $                     | 1,452,004,000 |                        | $          | 4,344,012                 |       | 1.197                     | %          | $ | 6,615,086 |   | 1.702 | % |
| March 31,  2004     |       | $                                        | 871,140,453   |                       | $          | 7,194,033                                       |       | 3.303                                                        | %          | $                     | 815,814,500   |                        | $          | 2,736,434                 |       | 1.342                     | %          | $ | 4,457,599 |   | 1.962 | % |

 

As discussedpreviously, actions by the Federal Reserve and the resulting impact on variousmarket interest rates have adversely impacted the net interest spread earned onour portfolio of MBS securities over our repurchase agreement funding.  Management has taken steps to mitigate thecontinued impact of further interest rate movements initiated by the FederalReserve.  As discussed above, our portfolioof MBS securities has been adjusted and now contains a greater proportion ofadjustable rate securities whose coupons reset in 12 months or less.  However, while the coupons on thesesecurities reset frequently and their coupons are tied to the same marketinterest rates impacted by Federal Reserve actions, they do so with a lag andthere is no assurance that our net interest spread will not be compressedfurther.

 

**Liquidityand Capital Resources**

 

Our primarysource of funds as of June 30, 2005 consisted of repurchase agreementstotaling $3.7 billion, with a net weighted average borrowing cost of3.14%. We expect to continue to borrow funds in the form of repurchaseagreements. At June 30, 2005, we had master repurchase agreements in placewith 19 counter-parties and had outstanding balances under 14 of theseagreements. These master repurchase agreements have no stated expiration butcan be terminated at any time at our option or at the option of thecounter-party. However, once a definitive repurchase agreement under a masterrepurchase agreement has been entered into, it generally may not be terminatedby either party. As of June 30, 2005, all of our existing repurchaseagreements mature in less than one year. Increases in short-term interest ratescould negatively impact the valuation of our mortgage related securities, whichcould limit our borrowing ability or cause our lenders to initiate margincalls.

 

In December 2004,the Company entered into contracts and paid commitment fees to three lendersproviding for an aggregate of $900 million in committed repurchase lines at pre-determinedborrowing rates and haircuts for a 364 day period following the commencementdate of each contract. The Company has no obligation to utilize theserepurchase lines. During the second quarter of 2005, the Company increased thesize of one of these lines to $1 billion and extended the maturity of the $1billion line to April 2006. The total amount of committed lines now standsat $1.6 billion. In addition, $100 million of the $1 billion line may be usedto finance principal prepayments due the Company, but not yet received, byGinnie Mae, Fannie Mae, and Freddie Mac. This arrangement, which haspredetermined fees which are due, only if the line is utilized, benefits theCompany by making cash management less dependent of the vagaries of monthly prepays.The Company believes that this principal prepayment funding arrangement isunique in the industry and will benefit the Company greatly, primarily byincreasing liquidity.

 

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For liquidity, we will also rely on cash flowfrom operations, primarily monthly principal and interest payments to bereceived on our mortgage related securities, as well as any primary securitiesofferings authorized by our Board of Directors.

 

We believethat equity capital and the funds from the offering of the Trust Preferred Securities,combined with the cash flow from operations and the utilization of borrowings,will be sufficient to enable us to meet anticipated liquidity requirements.Various changes in market conditions could adversely affect our liquidity,including increases in interest rates and increases in prepayment ratessubstantially above our expectations. If our cash resources are at any timeinsufficient to satisfy our liquidity requirements, we may be required topledge additional assets to meet margin calls, liquidate mortgage relatedsecurities or sell debt or additional equity securities. If required, the saleof mortgage related securities at prices lower than the carrying value of suchassets would result in losses and reduced income.

 

We may in thefuture increase our capital resources by making additional offerings of equityand debt securities, including classes of preferred stock, common stock,commercial paper, medium-term notes, collateralized mortgage obligations andsenior or subordinated notes. All debt securities, other borrowings, andclasses of preferred stock will be senior to the Class A Common Stock in aliquidation of our Company. Additional equity offerings may be dilutive tostockholders’ equity or reduce the market price of our Class A CommonStock, or both. We are unable to estimate the amount, timing or nature of anyadditional offerings as they will depend upon market conditions and otherfactors.

 

**ContractualObligations and Commitments**

 

The followingtable provides information with respect to our contractual obligations at June 30,2005.

 
| ** **                                               | ** ** | **Payment due by period** | ** **    |
|----------------------------------------------------------|------------|---------------------------|---------------|
| **Contractual Obligations**                              | ** ** | **Total**                 | ** **    | **Less than  1 year** | ** ** | **More than  5 Years** | ** ** |
|                                                     |       |                      |          |   |   |   |   |
| Repurchase Agreements                                    |       | $                         | 3,717,832,589 |   | $ | 3,717,832,589 |   | $ | — |   |
| Junior subordinated notes due to Bimini  Capital Trust I |       | 51,550,000                |          | — |   | 51,550,000 |   |
| Total                                                    |       | $                         | 3,769,382,589 |   | $ | 3,717,832,589 |   | $ | 51,550,000 |   |

 

**CriticalAccounting Policies**

 

Our financialstatements are prepared in accordance with U.S. generally accepted accountingprinciples (GAAP). These accounting principles require us to make some complexand subjective decisions and assessments. Our most critical accounting policiesinvolve decisions and assessments which could significantly affect our reportedassets and liabilities, as well as our reported revenues and expenses. Webelieve that all of the decisions and assessments upon which our financialstatements are based were reasonable at the time made based upon informationavailable to us at that time. For a description of all of the accountingpolicies that management believes are the most critical, refer to our AnnualReport on Form 10-K for the year ended December 31, 2004. Certain ofour critical accounting policies are described below:

 

**Classifications of Investment Securities**

 

In accordancewith applicable GAAP, our investments in mortgage related securities areclassified as available-for-sale securities. As a result, changes in fair valueare recorded as a balance sheet adjustment to accumulated other comprehensiveincome (loss), which is a component of stockholders’ equity, rather thanthrough our statement of operations. If available-for-sale securities wereclassified as trading securities, there could be substantially greatervolatility in earnings from period-to-period.

 

**Valuations of Mortgage Related Securities**

 

All investmentsecurities are carried on the balance sheet at fair value. Our mortgage relatedsecurities have fair values determined by management based on the average ofthird-party broker quotes received and/or by independent pricing sources whenavailable. Because the price estimates may vary to some degree between sources,management must make certain judgments and assumptions about the appropriateprice to use to calculate the fair values for financial reporting purposes.Different judgments and assumptions could result in different presentations ofvalue.

 

When the fairvalue of an available-for-sale security is less than amortized cost, managementconsiders whether there is an other-than-temporary impairment in the value ofthe security (for example, whether the security will be sold prior to therecovery of fair value). If, in management’s judgment, an other-than-temporaryimpairment exists, the cost basis of the security is written down to thethen-current fair value, and this loss is realized and charged againstearnings. The

 

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determinationof other than temporary impairment is a subjective process, and differentjudgments and assumptions could affect the timing of loss realization.

 

The decline infair value of investments held in our portfolio at June 30, 2005, and December 31,2004 is not considered to be other than temporary.  Accordingly the write down to fair value isrecorded in other comprehensive loss as an unrealized loss.  The factors considered in making thisdetermination included the expected cash flow from the investment, the generalquality of the mortgage related security owned, any credit protectionavailable, current market conditions, and the magnitude and duration of thehistorical decline in market prices as well as the Company’s ability andintention to hold such securities owned.

 

**Interest Income Recognition**

 

Interestincome on our mortgage related securities is accrued based on the actual couponrate and the outstanding principal amount of the underlying mortgages. Premiumsand discounts are amortized or accreted into interest income over the estimatedlives of the securities using the effective yield method adjusted for theeffects of estimated prepayments based on Statement of Financial AccountingStandards, or SFAS No. 91, “Accounting for Nonrefundable Fees and CostsAssociated with Originating or Acquiring Loans and Initial Direct Costs ofLeases—an amendment of FASB Statements No. 13, 60, and 65 and a rescissionof FASB Statement No. 17.” Adjustments are made using the retrospectivemethod to the effective interest computation each reporting period based on theactual prepayment experiences to date and the present expectation of futureprepayments of the underlying mortgages. To make assumptions as to futureestimated rates of prepayments, we currently use actual market prepaymenthistory for our securities and for similar securities that we do not own andcurrent market conditions. If our estimate of prepayments is incorrect, we arerequired to make an adjustment to the amortization or accretion of premiums anddiscounts that would have an impact on future income.

 

**Future REIT Taxable Income Distributions**

 

In order to maintain our qualification as aREIT, we are required (among other provisions) to distribute dividends to ourstockholders in an amount at least equal to 90% of our “REIT taxable income.” “REITtaxable income” is a term that describes our operating results followingtaxation rules and regulations governed by various provisions of theInternal Revenue Code.  REIT taxableincome is computed differently from our net income as computed in accordancewith generally accepted accounting principles (“GAAP net income”).  Depending on the number and size of thevarious items or transactions being accounted for differently, the differencesbetween REIT taxable income and GAAP net income can be substantial and eachitem can affect several years.  See ourAnnual Report on Form 10-K for the year ended December 31, 2004 for amore extensive description.

 

For the six month period ended June 30,2005, the Company’s REIT taxable income was estimated to be approximately$980,000 greater than the Company’s GAAP net income, and the Company thereforehas declared and paid REIT distributions (dividends) during 2005 based on thishigher amount.  The most significantportion of this amount is attributable to the phantom stock awards, as theseawards result in current charges against GAAP net income that are not currentdeductions for REIT taxable income. The future deduction of phantom stock awardcharges against REIT taxable income is uncertain both to the year and as to theamount.

 

Depending on the actual size of these timingor temporary differences, some of which are not entirely in the Company’scontrol, future REIT distributions (dividends) may be substantially greaterthan or less than the Company’s GAAP net income in any future reporting quarteror year.  Since inception through June 30,2005, the Company’s REIT taxable income is estimated to be approximately $1.9million greater than the Company’s GAAP net income.

 

**Inflation**

 

Virtually all of our assets and liabilitiesare financial in nature. As a result, interest rates and other factorsinfluence our performance far more so than does inflation. Changes in interestrates do not necessarily correlate with inflation rates or changes in inflationrates. Our financial statements are prepared in accordance with accountingprinciples generally accepted in the United States and our distributions aredetermined by our board of directors based primarily on our net income ascalculated for tax purposes; in each case, our activities and balance sheet aremeasured with reference to historical cost and or fair market value withoutconsidering inflation.

 

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**Forward-Looking Statements**

 

When used in thisquarterly report on Form 10-Q, in future filings with the SEC or in pressreleases or other written or oral communications, statements which are nothistorical in nature, including those containing words such as “anticipate,” “estimate,”“should,” “expect,” “believe,” “intend” and similar expressions, are intendedto identify “forward-looking statements” within the meaning of Section 27Aof the Securities Act of 1933, as amended (“Securities Act”) and Section 21Eof the Securities Exchange Act of 1934, as amended (“Exchange Act”), and, assuch, may involve known and unknown risks, uncertainties and assumptions.

 

Theseforward-looking statements are subject to various risks and uncertainties,including, but not limited to, those relating to: changes in the prepaymentrates on the mortgage loans securing the Company’s MBS; changes in interestrates and the market value of the Company’s MBS; the Company’s ability to useborrowings to finance its assets; changes in government regulations affectingthe Company’s business; the Company’s ability to maintain its qualification asa REIT for federal income tax purposes; and changes in business conditions andthe general economy. These and other risks, uncertainties and factors,including those described in reports that the Company files from time to timewith the SEC, could cause the Company’s actual results to differ materiallyfrom those projected in any forward-looking statements it makes. Allforward-looking statements speak only as of the date they are made and theCompany does not undertake, and specifically disclaims, any obligation toupdate or revise any forward-looking statements to reflect events orcircumstances occurring after the date of such statements.

 

**ITEM 3.****                  QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

The Companybelieves the primary risk inherent in its investments is the effect ofmovements in interest rates. This arises because the changes in interest rateson the Company’s borrowings will not be perfectly coordinated with the effectsof interest rate changes on the income from, or value of, its investments. TheCompany therefore follows an interest rate risk management program designed tooffset the potential adverse effects resulting from the rate adjustmentlimitations on its mortgage related securities. The Company seeks to minimizedifferences between the interest rate indices and interest rate adjustmentperiods of its adjustable-rate mortgage-backed securities and those of itsrelated borrowings.

 

The Company’s interestrate risk management program encompasses a number of procedures, including thefollowing:

 

•      monitoringand adjusting, if necessary, the interest rate sensitivity of its mortgagerelated securities compared with the interest rate sensitivities of itsborrowings;

 

•      attemptingto structure its repurchase agreements that fund its purchases ofadjustable-rate mortgage-backed securities to have a range of differentmaturities and interest rate adjustment periods. The Company attempts tostructure these repurchase agreements to match the reset dates on itsadjustable-rate mortgage-backed securities. At June 30, 2005, the weightedaverage months to reset of the Company’s adjustable-rate mortgage-backedsecurities was 4.35 months and the weighted average reset on the correspondingrepurchase agreements was 2.13 months; and

 

•      activelymanaging, on an aggregate basis, the interest rate indices and interest rateadjustment periods of its mortgage related securities compared to the interestrate indices and adjustment periods of its borrowings. The Company’sliabilities under its repurchase agreements are all LIBOR-based, and theCompany, among other considerations, selects its adjustable-ratemortgage-backed securities to favor LIBOR indexes. As of June 30, 2005,over 29.1% of its adjustable-rate mortgage-backed securities were LIBOR-based.

 

As a result, theCompany expects to be able to adjust the average maturities and reset periodsof its borrowings on an ongoing basis by changing the mix of maturities andinterest rate adjustment periods as borrowings mature or are renewed. Through theuse of these procedures, the Company attempts to reduce the risk of differencesbetween interest rate adjustment periods of its adjustable-rate mortgage-backedsecurities and those of its related borrowings.

 

Because theCompany attempts to match its assets and liabilities from an interest rateperspective and hold its assets to maturity, it expects to have limitedexposure to changes in interest rates. However, the Company will be exposed tochanges in interest rates either (i) upon refinancing borrowings thatexpire before the related assets are repaid or (ii) upon reinvesting (andrefinancing) proceeds following the maturity of current investments, ifinterest rates were to rise

 

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substantially.

 

As a further meansof protecting its portfolio against the effects of major interest rate changesthe Company may employ a limited hedging strategy under which it purchasesinterest rate cap contracts (under which it would generally be entitled topayment if interest rate indices exceed the agreed rates). We currently do nothave any such contracts.

 

**Interest Rate Risk**

 

The Company issubject to interest rate risk in connection with its investments in mortgagerelated securities and its related debt obligations, which are generallyrepurchase agreements of limited duration that are periodically refinanced atcurrent market rates. The Company has also issued $50 million of TrustPreferred Securities that has a fixed rate for five years, and then a floatingrate for 25 years thereafter. The Company’s issuance of Trust PreferredSecurities at a fixed rate for five years could create an interest ratemismatch if the Company could not invest at yields that exceed the cost of the TrustPreferred Securities. The Company presently believes that it can invest the TrustPreferred Securities proceeds (considering the use of leverage) at yields thatexceed the cost of the Trust Preferred Securities.

 

**Effect on Net Interest Income**

 

The Company fundsits investments in long-term fixed-rate and hybrid adjustable-ratemortgage-backed securities with short-term borrowings under repurchaseagreements. During periods of rising interest rates, the borrowing costsassociated with those fixed-rate and hybrid adjustable-rate mortgage-backedsecurities tend to increase while the income earned on such fixed-ratemortgage-backed securities and hybrid adjustable-rate mortgage-backedsecurities (during the fixed-rate component of such securities) may remainsubstantially unchanged. This results in a narrowing of the net interest spreadbetween the related assets and borrowings and may even result in losses. TheCompany may enter into interest rate cap contracts or forward fundingagreements seeking to mitigate the negative impact of a rising interest rateenvironment. Hedging techniques will be based, in part, on assumed levels ofprepayments of the Company’s fixed-rate and hybrid adjustable-ratemortgage-backed securities. If prepayments are slower or faster than assumed,the life of the mortgage related securities will be longer or shorter, whichwould reduce the effectiveness of any hedging techniques the Company mayutilize and may result in losses on such transactions. Hedging techniquesinvolving the use of derivative securities are highly complex and may producevolatile returns. The Company’s hedging activity will also be limited by theasset and sources-of-income requirements applicable to it as a REIT.

 

**Extension Risk**

 

The Companyinvests in fixed-rate and hybrid adjustable-rate mortgage-backed securities.Hybrid adjustable-rate mortgage-backed securities have interest rates that arefixed for the first few years of the loan—typically three, five, seven or 10years—and thereafter their interest rates reset periodically on the same basis asadjustable-rate mortgage-backed securities. As of June 30, 2005,approximately 18.9% of the Company’s investment portfolio was comprised ofhybrid adjustable-rate mortgage-backed securities. The Company computes theprojected weighted average life of its fixed-rate and hybrid adjustable-ratemortgage-backed securities based on the market’s assumptions regarding the rateat which the borrowers will prepay the underlying mortgages. In general, when afixed-rate or hybrid adjustable-rate mortgage-backed security is acquired withborrowings, the Company may, but is not required to, enter into interest ratecap contracts or forward funding agreements that effectively cap or fix itsborrowing costs for a period close to the anticipated average life of the fixed-rateportion of the related mortgage-backed security. This strategy is designed toprotect the Company from rising interest rates because the borrowing costs arefixed for the duration of the fixed-rate portion of the related mortgage-backedsecurity. However, if prepayment rates decrease in a rising interest rateenvironment, the life of the fixed-rate portion of the related mortgage-backedsecurity could extend beyond the term of the swap agreement or other hedginginstrument. This situation could negatively impact the Company as borrowingcosts would no longer be fixed after the end of the hedging instrument, whilethe income earned on the fixed-rate or hybrid adjustable-rate mortgage-backedsecurity would remain fixed. This situation may also cause the market value ofthe Company’s fixed-rate and hybrid adjustable-rate mortgage-backed securitiesto decline with little or no offsetting gain from the related hedgingtransactions. In extreme situations, the Company may be forced to sell assetsand incur losses to maintain adequate liquidity.

 

**Adjustable-Rate and HybridAdjustable-Rate Mortgage-Backed Security Interest Rate Cap Risk**

 

The Company alsoinvests in adjustable-rate and hybrid adjustable-rate mortgage-backedsecurities, which are based on mortgages that are typically subject to periodicand lifetime interest rate caps and floors, which limit the amount by which

 

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an adjustable-rate orhybrid adjustable-rate mortgage-backed security’s interest yield may changeduring any given period. However, the Company’s borrowing costs pursuant to itsrepurchase agreements will not be subject to similar restrictions. Hence, in aperiod of increasing interest rates, interest rate costs on the Company’sborrowings could increase without limitation by caps, while the interest-rateyields on the Company’s adjustable-rate and hybrid adjustable-ratemortgage-backed securities would effectively be limited by caps. This problemwill be magnified to the extent the Company acquires adjustable-rate and hybridadjustable-rate mortgage-backed securities that are not based on mortgageswhich are fully indexed. Further, the underlying mortgages may be subject toperiodic payment caps that result in some portion of the interest beingdeferred and added to the principal outstanding. This could result in theCompany’s receipt of less cash income on its adjustable-rate and hybridadjustable-rate mortgage-backed securities than it needs in order to pay theinterest cost on its related borrowings. These factors could lower the Company’snet interest income or cause a net loss during periods of rising interestrates, which would negatively impact the Company’s financial condition, cashflows and results of operations.

 

**Interest Rate Mismatch Risk**

 

The Companyintends to fund a substantial portion of its acquisitions of adjustable-rateand hybrid adjustable-rate mortgage-backed securities with borrowings that haveinterest rates based on indices and re-pricing terms similar to, but ofsomewhat shorter maturities than, the interest rate indices and re-pricingterms of the mortgage related securities it is financing. Thus, the Companyanticipates that in most cases the interest rate indices and re-pricing termsof its mortgage related securities and its funding sources will not beidentical, thereby creating an interest rate mismatch between assets andliabilities. Therefore, the Company’s cost of funds would likely rise or fallmore quickly than would its earnings rate on assets. During periods of changinginterest rates, such interest rate mismatches could negatively impact theCompany’s financial condition, cash flows and results of operations. Inaddition, the Company’s issuance of Trust Preferred Securities at a fixed ratefor five years could create an interest rate mismatch if the Company could notinvest at yields that exceed the cost of the Trust Preferred Securities.

 

**Prepayment Risk**

 

Prepayment ratesfor existing mortgage related securities generally increase when prevailinginterest rates fall below the market rate existing when the underlyingmortgages were originated. In addition, prepayment rates on adjustable-rate andhybrid adjustable-rate mortgage-backed securities generally increase when thedifference between long-term and short-term interest rates declines or becomesnegative. Prepayments of mortgage related securities could harm the Company’sresults of operations in several ways. Some adjustable-rate mortgagesunderlying the Company’s adjustable-rate mortgage-backed securities may bearinitial “teaser” interest rates that are lower than their “fully-indexed” rate,which refers to the applicable index rates plus a margin. In the event thatsuch an adjustable-rate mortgage is prepaid prior to or soon after the time ofadjustment to a fully-indexed rate, the holder of the related mortgage-backedsecurity would have held such security while it was less profitable and lostthe opportunity to receive interest at the fully-indexed rate over the expectedlife of the adjustable-rate mortgage-backed security. The Company currentlyowns mortgage related securities that were purchased at a premium. Theprepayment of such mortgage related securities at a rate faster thananticipated would result in a write-off of any remaining capitalized premiumamount and a consequent reduction of the Company’s net interest income by suchamount. Finally, in the event that the Company is unable to acquire newmortgage related securities to replace the prepaid mortgage related securities,its financial condition, cash flow and results of operations could be harmed.

 

**Effect on Fair Value**

 

Another componentof interest rate risk is the effect changes in interest rates will have on thefair value of the Company’s assets. The Company faces the risk that the fairvalue of its assets will increase or decrease at different rates than that ofits liabilities, including its hedging instruments.

 

The Companyprimarily assesses its interest rate risk by estimating the duration of itsassets and the duration of its liabilities. Duration essentially measures themarket price volatility of financial instruments as interest rates change. TheCompany generally calculates duration using various financial models andempirical data, and different models and methodologies can produce differentduration numbers for the same securities.

 

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The following sensitivityanalysis table shows the estimated impact on the fair value of the Company’sinterest rate-sensitive investments at June 30, 2005, assuming ratesinstantaneously fall 100 basis points, rise 100 basis points and rise 200 basispoints:

 
| ** **                  | ** ** | **Interest Rates Fall  100 BPS** | ** ** | **Interest Rates Rise  100 BPS** | ** ** | **Interest Rates Rise  200 BPS** | ** ** |
|-----------------------------|------------|----------------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| **Adjustable-Rate**         |       |                             |       |                             |       |                             |       |
| Fair Value 2,106,746,376    |       |                             |       |                             |       |                             |       |
| Change in Fair Value        |       | 4,505,306                        |       | (4,505,306                       | )          | (9,010,612                       | )          |
| Change as a % of Fair Value |       | 0.21                             | %          | (0.21                            | )%         | (0.43                            | )%         |
|                        |       |                             |       |                             |       |                             |       |
| **Fixed-Rate**              |       |                             |       |                             |       |                             |       |
| Fair Value 909,163,242      |       |                             |       |                             |       |                             |       |
| Change in Fair Value        |       | 11,827,857                       |       | (11,827,857                      | )          | (23,655,713                      | )          |
| Change as a % of Fair Value |       | 1.30                             | %          | (1.30                            | )%         | (2.60                            | )%         |
|                        |       |                             |       |                             |       |                             |       |
| **CMO Floaters**            |       |                             |       |                             |       |                             |       |
| Fair Value 68,098,395       |       |                             |       |                             |       |                             |       |
| Change in Fair Value        |       | (53,712                          | )          | 53,712                           |       | 107,424                          |       |
| Change as a % of Fair Value |       | (0.08                            | )%         | 0.08                             | %          | 0.16                             | %          |
|                        |       |                             |       |                             |       |                             |       |
| **Hybrid**                  |       |                             |       |                             |       |                             |       |
| Fair Value 732,347,350      |       |                             |       |                             |       |                             |       |
| Change in Fair Value        |       | 4,637,975                        |       | (4,637,975                       | )          | (9,275,950                       | )          |
| Change as a % of Fair Value |       | 0.63                             | %          | (0.63                            | )%         | (1.27                            | )%         |
|                        |       |                             |       |                             |       |                             |       |
| **Balloon**                 |       |                             |       |                             |       |                             |       |
| Fair Value 59,850,633       |       |                             |       |                             |       |                             |       |
| Change in Fair Value        |       | 1,216,417                        |       | (1,216,417                       | )          | (2,432,833                       | )          |
| Change as a % of Fair Value |       | 2.03                             | %          | (2.03                            | )%         | (4.06                            | )%         |
|                        |       |                             |       |                             |       |                             |       |
| **Cash**                    |       |                             |       |                             |       |                             |       |
| Fair Value 152,770,370      |       |                             |       |                             |       |                             |       |
|                        |       |                             |       |                             |       |                             |       |
| **Portfolio Total**         |       |                             |       |                             |       |                             |       |
| Fair Value 3,876,205,996    |       |                             |       |                             |       |                             |       |
| Change in Fair Value        |       | 22,133,843                       |       | (22,133,843                      | )          | (44,267,684                      | )          |
| Change as a % of Fair Value |       | 0.57                             | %          | (0.57                            | )%         | (1.14                            | )%         |

 

29

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The table below reflectsthe same analysis presented above but with the figures in the columns thatindicate the estimated impact of a 100 basis point fall, a 100 basis pointrise, and a 200 basis point rise adjusted to reflect the impact of convexity.

 
| ** **                  | ** ** | **Interest Rates Fall  100 BPS** | ** ** | **Interest Rates Rise  100 BPS** | ** **  | **Interest Rates Rise  200 BPS** | ** **   |
|-----------------------------|------------|----------------------------------|------------|----------------------------------|-------------|----------------------------------|--------------|
| **Adjustable-Rate**         |       |                             |       |                             |        |                             |         |
| Fair Value 2,106,746,376    |       |                             |       |                             |        |                             |         |
| Change in Fair Value        |       | $                                | 851,850    |                             | (11,787,052 | )                                | (33,684,166  | ) |
| Change as a % of Fair Value |       | 0.04                             | %          | (0.56                            | )%          | (1.60                            | )%           |
|                        |       |                             |       |                             |        |                             |         |
| **Fixed-Rate**              |       |                             |       |                             |        |                             |         |
| Fair Value 909,163,242      |       |                             |       |                             |        |                             |         |
| Change in Fair Value        |       | $                                | 5,518,221  |                             | (21,604,240 | )                                | (51,863,923  | ) |
| Change as a % of Fair Value |       | 0.61                             | %          | (2.38                            | )%          | (5.70                            | )%           |
|                        |       |                             |       |                             |        |                             |         |
| **CMO Floaters**            |       |                             |       |                             |        |                             |         |
| Fair Value 68,098,395       |       |                             |       |                             |        |                             |         |
| Change in Fair Value        |       | $                                | (145,275   | )                                | 297,520     |                             | 266,470      |   |
| Change as a % of Fair Value |       | (0.21                            | )%         | 0.44                             | %           | 0.39                             | %            |
|                        |       |                             |       |                             |        |                             |         |
| **Hybrid**                  |       |                             |       |                             |        |                             |         |
| Fair Value 732,347,350      |       |                             |       |                             |        |                             |         |
| Change in Fair Value        |       | $                                | 2,362,251  |                             | (9,065,746  | )                                | (23,277,510  | ) |
| Change as a % of Fair Value |       | 0.32                             | %          | (1.24                            | )%          | (3.18                            | )%           |
|                        |       |                             |       |                             |        |                             |         |
| **Balloon**                 |       |                             |       |                             |        |                             |         |
| Fair Value 59,850,633       |       |                             |       |                             |        |                             |         |
| Change in Fair Value        |       | $                                | 909,622    |                             | (1,377,425  | )                                | (2,873,152   | ) |
| Change as a % of Fair Value |       | 1.52                             | %          | (2.30                            | )%          | (4.80                            | )%           |
|                        |       |                             |       |                             |        |                             |         |
| **Cash**                    |       |                             |       |                             |        |                             |         |
| Fair Value 152,770,370      |       |                             |       |                             |        |                             |         |
|                        |       |                             |       |                             |        |                             |         |
| **Portfolio Total**         |       |                             |       |                             |        |                             |         |
| Fair Value 3,876,205,996    |       |                             |       |                             |        |                             |         |
| Change in Fair Value        |       | $                                | 9,496,669  |                             | (43,536,943 | )                                | (111,432,281 | ) |
| Change as a % of Fair Value |       | 0.24                             | %          | (1.12                            | )%          | (2.87                            | )%           |

 

In addition to changes in interest rates,other factors impact the fair value of the Company’s interest rate-sensitiveinvestments and hedging instruments, such as the shape of the yield curve,market expectations as to future interest rate changes and other marketconditions. Accordingly, in the event of changes in actual interest rates, thechange in the fair value of the Company’s assets would likely differ from thatshown above, and such difference might be material and adverse to the Company’sstockholders.

 

The Company’sliabilities, consisting primarily of repurchase agreements as well as $50million of Trust Preferred Securities, are also affected by changes in interestrates. As rates rise, the value of the underlying asset, or the collateral,declines. In certain circumstances, the Company could be required to postadditional collateral in order to maintain the repurchase agreement position. TheCompany maintains a substantial cash position, as well as un-pledged assets, tocover these types of situations. As an example, if interest rates increased 200basis points, as shown on the prior table, the Company’s collateral as of June 30,2005 would decline in value by approximately $111.4 million. Our cash andun-pledged assets are currently sufficient to cover this level of shortfall.There can be no assurance, however, that the Company will always havesufficient cash or un-pledged assets to cover shortfalls in all situations.

 

30

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# **ITEM 4.**                  CONTROLSAND PROCEDURES

# ** **

The Company maintains disclosure controls andprocedures that are designed to ensure that information required to bedisclosed in the Company’s Exchange Act reports is recorded, processed,summarized and reported within the time periods specified in the SEC’s rules andforms, and that such information is accumulated and communicated to the Company’smanagement, including its Chief Executive Officer and Chief Financial Officer,as appropriate, to allow timely decisions regarding required disclosure basedclosely on the definition of “disclosure controls and procedures” in Rule 13a-14(c).  In designing and evaluating the disclosurecontrols and procedures, management recognized that any controls andprocedures, no matter how well designed and operated, can provide onlyreasonable assurance of achieving the desired control objectives, andmanagement necessarily was required to apply its judgment in evaluating thecost-benefit relationship of possible controls and procedures.

 

Within 90 days prior to the date of thisreport, the Company carried out an evaluation, under the supervision and withthe participation of the Company’s management, including the Company’s ChiefExecutive Officer and the Company’s Chief Financial Officer, of theeffectiveness of the design and operation of the Company’s disclosure controlsand procedures.  Based on the foregoing,the Company’s Chief Executive Officer and Chief Financial Officer concludedthat the Company’s disclosure controls and procedures were effective.

 

There have been no significant changes in theCompany’s internal controls or in other factors that could significantly affectthe internal controls subsequent to the date the Company completed itsevaluation.

 

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# **PART II**                 OTHERINFORMATION

# ** **

# **ITEM 1.**                  LEGALPROCEEDINGS

# ** **

None

 

**ITEM 2.****                  UNREGISTEREDSALES OF EQUITY SECURITIES AND USE OF PROCEEDS**

 

None

 

# **ITEM 3.**                  DEFAULTSUPON SENIOR SECURITIES

# ** **

None

 

# **ITEM 4.**                  SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS

# ** **

# **None**

# ** **

# **ITEM 5.**                  OTHERINFORMATION

# ** **

None

 

# **ITEM 6.**                  EXHIBITS

# ** **

31.1      Certification of ChiefExecutive Officer pursuant to Rule 13a-14(a) of the SecuritiesExchange Act, as amended.

 

31.2      Certification of ChiefFinancial Officer pursuant to Rule 13a-14(a) of the SecuritiesExchange Act, as amended.

 

32         Certifications of ChiefExecutive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350,as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

32

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## **SIGNATURES**

## ** **

Pursuant to the requirements of theSecurities Exchange Act of 1934, the registrant has duly caused this report tobe signed on its behalf by the undersigned thereunto duly authorized.

 

 
|   |               | BIMINI MORTGAGE  MANAGEMENT, INC. |
|--------|--------------------|-----------------------------------|
|   |               |                              |
|   |               |                              |
|   |               | By:                               |   /s/ Robert E. Cauley |   |
|   |               |                              | Robert E. Cauley |
|   |               |                              | Chief Financial Officer and Secretary |
|   |               |                              |
|   |               |                              |
| Date:  | July 25, 2005 |                              |

 

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