We present a Ramsey-type atom interferometer operating with an optically trapped sample of 106 Bose-condensed 87Rb atoms. We investigate this interferometer experimentally and theoretically with an eye to the construction of future high precision atomic sensors. Our results indicate that, with further experimental refinements, it will be possible to produce and measure the output of a sub-shot-noise-limited, large atom number BEC-based interferometer. The optical trap allows us to couple the |F=1, mF=0⟩→|F=2, mF=0⟩ clock states using a single photon 6.8 GHz microwave transition, while state selective readout is achieved with absorption imaging. We analyse the process of absorption imaging and show that it is possible to observe atom number variance directly, with a signal-to-noise ratio ten times better than the atomic projection noise limit on 106 condensate atoms. We discuss the technical and fundamental noise sources that limit our current system, and present theoretical and experimental results on interferometer contrast, de-phasing and miscibility.